REIT Modelling - Balance Sheet

Question 1

How do you model B/S items?

Answer 1

1. BOP” beginning of period. take the last historical end of period balance to serve as the BOP balance of the first projected year
2. Increases/decreases in the balance
3. EOP: end of peiord, this is the result which you link back to the balance sheet

Question 2

Investment in rental properties

Answer 2

represents the carrying value of the REIT’s stabilised real estate assets
- usually the biggest asset for a REIT

Question 3

What increases Investment in rental properties?

Answer 3

1. Developments that have stabilized during the priod
2. Capital and rehabilitation expenditures
3. Acquisitions

Question 4

What decreases Investment in rental properties?

Answer 4

dispositions

Question 5

Construction in progress (CIP)

Answer 5

• REIT properties that are currently under development
• separate asset from the completed properties - Investment in real estate
• once assets in the CIP category are completed, they are removed from CIP and reclassified in Investments in Real Estate

Question 6

What increases CIP?

Answer 6

1. developement spending ( spending on the creation of stabilized properties)
2. transfers to CIP from land under development ( after you buy the land you start building in it, so it is removed from land under development to CIP, then once the construction is complete it is removed from CIP and moves into Investment in Real Estate)

Question 7

What decreases CIP?

Answer 7

prior developments moved to stabilized properties

Question 8

Accumulated Depreciation

Answer 8

contra asset (negative assets) that shows how much depreciation the company's real estate assets have accumulated
- it is a cumulative account. it is credited each year as the value of the asset is written off, and remains in the books until the asset is sold. Each year the asset is depreciated by say 5,000 that amount is added to this account

Question 9

What increases Accumulated Depreciation?

Answer 9

depreciation expense during the period

Question 10

What decreases Accumulated Depreciation?

Answer 10

accumulated depreciation from dispositions

Question 11

Where do you find historical depreciation?

Answer 11

in the C/F statement

Question 12

Calculate future depreciation expense

Answer 12

depreciable assets/ average useful life

Question 13

Calculate depreciable assets

Answer 13

investments in rental properties+CIP

Question 14

How do you estimate useful life?

Answer 14

1. use the historical useful life ( REITs often disclose a useful life range)
2. When unavailable, estimate by dividing latest historical depreciable assets by the most recent actual depreciation expense

Question 15

What increases ‘Land under development’?

Answer 15

New purchases of land

Question 16

What decreases ‘Land under development’?

Answer 16

reclassification into CIP

Question 17

Joint Ventures (JV) and affiliate investments

Answer 17

a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests

Question 18

Joint Ventures (JV) and affiliate investments in the B/S

Answer 18

captures the carrying value of Real estate assets that the company shares ownership of with other entities, normally the company has 20-50% operational and strategic control

Question 19

Where does rental income from Joint Ventures (JV) and affiliate investments go?

Answer 19

goes in the I/S under ‘ Income from unconsolidated entities’ representing JV income

Question 20

What increases ‘Joint Ventures (JV) and affiliate investments’?

Answer 20

proportionate share in JV’s net income

Question 21

What decreases ‘Joint Ventures (JV) and affiliate investments’?

Answer 21

1. dividends issue to company by JV/affiliate

2. sales of JV/affiliate interests

Question 22

Accounts Payable

Answer 22

epresents a company’s obligation to pay off a short-term debt to its creditors or suppliers. It appears on the balance sheet under the current liabilities

Question 23

What increases Account Payable?

Answer 23

real estate expenses

Question 24

Noncontrolling interests (NCI)

Answer 24

equity owned by OP unit holders

Question 25

How do you account for NCI?

Answer 25

using the consolidated method, the REIT consolidates the assets(and liabilities) owned by the NCI on the b/S, but records a NCI equity account to reflect that there is equity in the consolidated business that is owned by NCI ' Redeemable noncontrolling interests'

Question 26

Redeemable noncontrolling interest in income

Answer 26

represents income attributed to NCI, to OP unit holders, net of all their assets and expenses - an expense in the I/S, decreasing net income. Once is it subtracted from net income, it leaves net income attributable to controlling interests - an addition in the B/S to redeemable non controlling interests because it is an increase in income for NCI

Question 27

Net income attributable to controlling interests

Answer 27

- in the I/S - its the net income attributed to shareholders Net income attributable to controlling interests = net income - redeemable non controlling interest in income

Question 28

Distributions paid and accrued to redeemable noncontrolling interest

Answer 28

decrease to Redeemable non controlling interests in the B/S represents the amount NCI got paid via dividends normally equals the redeemable non controlling interest in income, because NCI receives in dividends the income that they made

Question 29

Conversion/redeemption activity

Answer 29

refers to OP unit holders that converted their OP units to common stock, so they became shareholders. decrease to redeemable non controlling interests

Question 30

Change in redemption value of redeemable non controlling interests

Answer 30

refers to remaining OP unit holders that did not convert their OP units to common stock, and the value of their OP units went down in value because share price went down

Question 31

NCI dividends

Answer 31

seen under ' Distributions to other redeemable non controlling interests' - a reduction to C/F/S because cash needs to leave the company to pay those dividends - reduces the NCI equity balance

Question 32

Changes in redemption values of NCI

Answer 32

- NCI account reflects changes in the value of the account - because NCI in REITs can convert to REIT common stock 1:1, the redemption value can be marked up/down based on the REIT share price

Question 33

What increases NCI?

Answer 33

1. NCI in income (w/ corresponding expense on the I/S, decreasing retained earnings) 2. increase in value of NCI (w/ corresponding debit to common stock)

Question 34

What decreases NCI?

Answer 34

1. Distributions (w/ corresponding credit to cash) | 2. Redemptions (w/ corresponding credit to common stock

Question 35

Roll-forward logic of NCI

Answer 35

Noncontrolling Interest (BOP) Plus: NCI in income (w/ corresponding expense on the I/S, decreasing retained earnings) Less: Distributions (w/ corresponding credit to cash) Less: Redemptions (w/ corresponding credit to common stock Plus: Increase in value of NCI (w/ corresponding debit to common stock) Equals: Noncontrolling Interests (EOP)

Question 36

Roll-forward logic of Common stock & APIC

Answer 36

Common stock & APIC (BOP) Plus: New common stock issuances (w/ corresponding debit to cash) Plus: Stock based compensation (w/ corresponding credit to retained earnings) Plus: Conversion of OP units to common stock ( w/ corresponding debit to NCI Less: Increase in redemption value of NCI (w/ corresponding credit to NCI) Equals: Common Stock & APIC (EOP)

Question 37

APIC

Answer 37

additional paid in capital - profit on common stock - amount above the par value (cost of the share)

Question 38

Retained Earnings

Answer 38

the amount of net income left over for a business after it has paid out dividends to its shareholders RE = B RE + Net income (or loss) - stock dividends - cash dividends

Question 39

Roll-forward logic Retained Earnings

Answer 39

``` Retained Earnings balance (BOP) Plus: Net income Less: Common Dividends Less: Preferred dividends Equals: Retained Earnings balance (EOP) ```

Question 40

balloon loan

Answer 40

type of loan that does not fully amortize over its term Let's say a person takes out a $200,000 mortgage with a seven-year term and a 4.5% interest rate. Their monthly payment for seven years is $1,013. At the end of the seven-year term, they owe a $175,066 balloon payment.