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The following is a glossary of terms often referenced in REIT literature. Many of the definitions are courtesy of NAREIT. Find more information on REITs at www.nareit.com.
Cash Available for Distribution (CAD)
We calculate CAD by subtracting from Funds from Operations (FFO) both (1) normalized recurring expenditures that are capitalized by the REIT and then amortized, but that are necessary to maintain a REIT's properties and its revenue stream (e.g., new carpeting and drapes in apartment units, leasing expenses and tenant improvement allowances) and (2) “straight-lining” of rents. This calculation also is called Adjusted Funds from Operations (AFFO) or Funds Available for Distribution (FAD).
Capitalization Rate
Capitalization rate (or “cap” rate) for a property, determined by dividing the property’s net operating income by its purchase price. Generally, high cap rates indicate higher returns and greater perceived risk.
Cost of Capital
Cost to a company, such as a REIT, of raising capital in the form of equity (common or preferred stock) or debt. The cost of equity capital generally is considered to include both the dividend rate as well as the expected equity growth either by higher dividends or growth in stock prices. The cost of debt capital is merely the interest expense on the debt incurred.
DownREIT
Structured much like an UPREIT, but the REIT owns and operates properties other than its interest in a controlled partnership that owns and operates separate properties.
EBITDA
Earnings before interest, taxes, depreciation, and amortization. This measure is sometimes referred to as Net Operating Income (NOI).
Equitization
Process by which the economic benefits of ownership of a tangible asset, such as real estate, are divided among numerous investors and represented in the form of publicly traded securities.
Equity Market Cap
Market value of all outstanding common stock of a company.
Equity REIT
REIT which owns, or has an “equity interest” in, rental real estate (rather than making loans secured by real estate collateral).
Funds from Operations (FFO)
Most commonly accepted and reported measure of REIT operating performance. Equal to a REIT’s net income, excluding gains or losses from sales of property, and adding back real estate depreciation. (See page 50 for a discussion of FFO.)
Hybrid REIT
REIT that combines the investment strategies of both equity REITs and mortgage REITs.
Implied Equity Market Cap
Market value of all outstanding common stock of a company plus the value of all UPREIT partnership units as if they were converted into the REIT’s stock. It excludes convertible preferred stock, convertible debentures, and warrants even though these securities have similar conversion features.
Leverage
Amount of debt in relation to either equity capital or total capital.
Mortgage REIT
REIT that makes or owns loans and other obligations that are secured by real estate collateral.
Net Asset Value (NAV)
Net “market value” of all of a company’s assets, including but not limited to its properties, after subtracting all of its liabilities and obligations.
Positive Spread Investing (PSI)
Ability to raise funds (both equity and debt) at a cost substantially less than the initial returns that can be obtained on real estate transactions.
Real Estate Investment Trust Act of 1960
Federal law that authorized REITs. Its purpose was to allow small investors to pool their investments in real estate in order to get the same benefits as might be obtained by direct ownership, while also diversifying their risks and obtaining professional management.
Real Estate Investment Trust (REIT)
Company dedicated to owning, and in most cases, operating income-producing real estate, such as apartments, shopping centers, offices, and
Securitization
Process of financing a pool of similar but unrelated financial assets (usually loans or other debt instruments) by issuing to investors security interests representing claims against the cash flow and other economic benefits generated by the pool of assets.
Straight-Lining
Real estate companies such as REITs “straight line” rents because generally accepted accounting principles require it. Straight-lining averages the tenant’s rent payments over the life of the lease.
Tax Reform Act of 1986
Federal law that substantially altered the real estate investment landscape by permitting REITs not only to own, but also to operate and manage, most types of income-producing commercial properties. It also stopped real estate
“tax shelters” that had attracted capital from investors based on the amount of losses that could be created.
Total Market Cap
Total market value of a REIT’s (or other company’s) outstanding common stock and indebtedness.
Total Return
A stock’s dividend income plus capital appreciation, before taxes and commissions.
UPREIT
In the typical UPREIT, the partners of the Existing Partnerships and a newly formed REIT become partners in a new partnership termed the Operating Partnership. For their respective interests in the Operating Partnership (“Units”), the partners contribute the properties from the Existing Partnership and the REIT contributes the cash proceeds from its public offering. The REIT typically is the general partner and the majority owner of the Operating Partnership Units.
After a period of time (often one year), the partners may enjoy the same liquidity of the REIT shareholders by tendering their Units for either cash or REIT shares (at the option of the REIT or Operating Partnership). This conversion may result in the partners incurring the tax deferred at the UPREIT’s formation. The Unitholders may tender their Units over a period of time, thereby spreading out such tax. In addition, when a partner holds the Units until death, the estate tax rules operate in a such a way as to provide that the beneficiaries may tender the Units for cash or REIT shares without paying income taxes.
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Addendum
Important Disclosures
Apartment Investment and Management Company (AIV), CB Richard Ellis (CBG), AMB Property Corporation (AMB): Bear Stearns is affiliated with the specialist that makes a market in the common stock of this issuer, and such specialist may have a position (long or short) and may be on the opposite side of public orders in such common stock.
For important disclosure information regarding the companies in this report, please contact your registered representative at 1-800-999-2000, or write to Sandra Pallante, Equity Research Compliance, Bear, Stearns & Co. Inc., 383 Madison Avenue, New York, NY 10179.
Ratings for Stocks (vs. analyst coverage)
Outperform (O) — Stock is projected to outperform analyst’s industry coverage universe over the next 12 months.
Peer Perform (P) — Stock is projected to perform approximately in line with analyst’s industry coverage universe over the next 12 months.
Underperform (U) — Stock is projected to underperform analyst’s industry coverage universe over the next 12 months.
Ratings for Sectors (vs. regional broader market index)
Market Overweight (MO) — Expect the industry to perform better than the primary market index for the region (S&P 500 in the U.S.) over the next 12 months.
Market Weight (MW) — Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months.
Market Underweight (MU) — Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) over the next 12 months.
Bear, Stearns & Co. ratings distribution as of September 30, 2007 (% rated companies/% banking client in the last 12 months):
Outperform (Buy): 44.5% / 15.6%
Peer Perform (Neutral): 48.4% / 9.3%
Underperform (Sell): 7.1% / 6.5%
For individual coverage industry data, please contact your account executive or visit www.bearstearns.com.
Addendum
Important Disclosures Analyst Certification
The Research Analyst(s) who prepared the research report hereby certify that the views expressed in this research report accurately reflect the analyst(s) personal views about the subject companies and their securities. The Research Analyst(s) also certify that the Analyst(s) have not been, are not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report.
Ross L. Smotrich
The costs and expenses of Equity Research, including the compensation of the analyst(s) that prepared this report, are paid out of the Firm’s total revenues, a portion of which is generated through investment banking activities.
This report has been prepared in accordance with the Firm’s conflict management policies. Bear Stearns is unconditionally committed to the integrity, objectivity, and independence of its research.
Bear Stearns research analysts and personnel report to the Director of Research and are not subject to the direct or indirect supervision or control of any other Firm department (or members of such department).
This publication and any recommendation contained herein speak only as of the date hereof and are subject to change without notice. Bear Stearns and its affiliated companies and employees shall have no obligation to update or amend any information or opinion contained herein, and the frequency of subsequent publications, if any, remain in the discretion of the author and the Firm.
Other Disclaimers
This report has been prepared by Bear, Stearns & Co. Inc., Bear, Stearns International Limited or Bear Stearns Asia Limited (together with their affiliates, “Bear Stearns”), as indicated on the cover page hereof. This report has been adopted and approved for distribution in the United States by Bear, Stearns & Co. Inc. for its and its affiliates’
customers. If you are a recipient of this publication in the United States, orders in any securities referred to herein should be placed with Bear, Stearns & Co. Inc. This report has been approved for publication in the United Kingdom by Bear, Stearns International Limited, which is authorized and regulated by the United Kingdom Financial Services Authority. Private Customers in the U.K. should contact their Bear, Stearns International Limited representatives about the investments concerned. This report is distributed in Hong Kong by Bear Stearns Asia Limited, which is regulated by the Securities and Futures Commission of Hong Kong. Additional information is available upon request.
Bear Stearns and its employees, officers, and directors deal as principal in transactions involving the securities referred to herein (or options or other instruments related thereto), including in transactions which may be contrary to any recommendations contained herein. Bear Stearns and its employees may also have engaged in transactions with issuers identified herein. Bear Stearns is affiliated with a specialist that may make a market in the securities of the issuers referred to in this document, and such specialist may have a position (long or short) and may be on the opposite side of public orders in such securities.
This publication does not constitute an offer or solicitation of any transaction in any securities referred to herein. Any recommendation contained herein may not be suitable for all investors. Although the information contained in the subject report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This publication and any recommendation contained herein speak only as of the date hereof and are subject to change without notice. Bear Stearns and its affiliated companies and employees shall have no obligation to update or amend any information or opinion contained herein.
This publication is being furnished to you for informational purposes only and on the condition that it will not form the sole basis for any investment decision. Each investor must make their own determination of the appropriateness of an investment in any securities referred to herein based on the tax, or other considerations applicable to such investor and its own investment strategy. By virtue of this publication, neither Bear Stearns nor any of its employees nor any data provider or any of its employees shall be responsible for any investment decision. This report may not be reproduced, distributed, or published without the prior consent of Bear Stearns. ©2007. All rights reserved by Bear Stearns. Bear Stearns and its logo are registered trademarks of The Bear Stearns Companies Inc.
This report may discuss numerous securities, some of which may not be qualified for sale in certain states and may therefore not be offered to investors in such states. This document should not be construed as providing investment services. Investing in non-U.S. securities including ADRs involves significant risks such as fluctuation of exchange rates that may have adverse effects on the value or price of income derived from the security. Securities of some foreign companies may be less liquid and prices more volatile than securities of U.S. companies. Securities of non-U.S. issuers may not be registered with or subject to Securities and Exchange Commission reporting requirements;
therefore, information regarding such issuers may be limited.
NOTE TO ACCOUNT EXECUTIVES: For securities that are not listed on the NYSE, AMEX, or Nasdaq National Market System, check the Compliance page of the Bear Stearns Intranet site for State Blue Sky data prior to soliciting or accepting orders from clients.
CIR 230 Disclaimer
Bear Stearns does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
In order for Bear Stearns to comply with Internal Revenue Service Circular 230 (if applicable), you are notified that any discussion of U.S. federal tax issues contained or referred to herein is not intended or written to be used, and cannot be used, for the purpose of: (A) avoiding penalties that may be imposed under the Internal Revenue Code; nor (B) promoting, marketing or recommending to another party any transaction or matter discussed herein.
Bear, Stearns & Co. Inc.
Accounting & Tax Policy Janet Pegg, CPA (212-272-4191) Chris Senyek, CFA, CPA (212-272-2509) Dane Mott, CPA (212-272-4080) Economics
David Malpass (212-272-4293) Tim Kearney, Ph.D. (212-272-5981) Sandy Batten, Ph.D. (212-272-8428) Emy Shayo (5511-3457-3206) Ritu Kochhar (212-272-0120) Investment Strategy
Jonathan Golub, CFA (212-272-5115) Chip Miller, CFA (212-272-5072) Small Companies
Peter J. Barry (212-272-6090) Antonio Antezano, CFA (212-272-2357) Washington Research
David Malpass (212-272-4293)
U.S.RESEARCH BASIC MATERIALS Chemicals
G. Scott Burk, CFA (212-272-7519) Engineering & Construction/
Precious Metals
Michael S. Dudas, CFA (212-272-2289) Metals & Mining
Anthony B. Rizzuto, Jr. (212-272-4269)
CAPITAL GOODS/INDUSTRIALS Aerospace & Defense Electronics Steve Binder, CFA (212-272-4235) Airfreight & Surface Transportation Edward M. Wolfe (212-272-7048) Business/Professional Services
G. Scott Burk, CFA (212-272-7519) Railroads
Edward M. Wolfe (212-272-7048) Transportation Equipment H. Peter Nesvold, CFA (212-272-4576)
CONSUMER Airlines
Frank Boroch, CFA (212-272-7869) Auto & Auto Parts
H. Peter Nesvold, CFA (212-272-4576) Beverages
Justin Hott (212-272-2970) Cosmetics, Household & Personal Care Products
Justin Hott (212-272-2970) Food
Terry Bivens (212-272-6782) Gaming & Lodging
Joseph R. Greff (212-272-4305) Restaurants
Joseph T. Buckley, CFA (212-272-4263) Retailing/Broadlines & Department Stores
Christine K. Augustine (212-272-2276) Retailing/Food & Drug Chains Robert Summers (212-272-3757) Retailing/Hardlines
Christopher Horvers, CFA (212-272-4007)
ENERGY Coal
Michael S. Dudas, CFA (212-272-2289) Integrated Oil
Nicole L. Decker (212-272-3962) Oil & Gas Exploration & Production Ellen K. Hannan (212-272-4199) Oil Services & Equipment Robin Shoemaker (212-272-6475)
FINANCIAL SERVICES Banks/Large-Cap David Hilder (212-272-7507) Banks/Mid-Cap
Salvatore J. DiMartino (212-272-2219) Insurance/Non-Life
David Small (212-272-4491) Mortgage Finance/Specialty Finance David Hochstim, CFA (212-272-4243) REITs
Ross L. Smotrich (212-272-8046)
HEALTH CARE
Biotechnology/Large- & Mid-Cap Mark Schoenebaum, M.D. (212-272-6299) Biotechnology/Small- & Mid-Cap Akhtar Samad, M.D., Ph.D. (212-272-2722) Health Care Facilities
Jason Gurda, CFA (212-272-3401) Health Care Technology & Distribution Stephen Unger, CFA (212-272-5173) Managed Care
John F. Rex (212-272-4242) Medical Supplies & Devices Frederick A. Wise, CFA (212-272-4265) Orthopedic/Ophthalmic Diversified Raj Denhoy (212-272-1033) Pharmaceuticals/Major John T. Boris (212-272-4174)
Pharmaceutical Services/Life Sciences Stephen Unger, CFA (212-272-5173) Pharmaceuticals/Specialty John T. Boris (212-272-4174)
MEDIA Cable & Satellite
Spencer Wang (212-272-6857) Education Services
Jennifer L. Childe, CFA (212-272-7051) Entertainment
Spencer Wang (212-272-6857) Information Services
Michael Meltz, CFA (212-272-2037) Interactive Entertainment Edward Urban, CFA (212-272-2101) Publishing & Advertising Agencies Alexia Quadrani (212-272-2149) Radio & TV Broadcasting Victor B. Miller IV (212-272-4233)
TECHNOLOGY
Computer Services & IT Consulting James F. Kissane (212-272-2832) Electronics Manufacturing Services Kevin M. Kessel, CFA (212-272-5731) Internet
Robert S. Peck, CFA (212-272-6665) IT Hardware
Andrew J. Neff (212-272-4247) Semiconductor Capital Equipment
Data Networking & Wireline Equipment Phil Cusick, CFA (212-272-9078) Telecom Equipment / Wireless Phil Cusick, CFA (212-272-9078) Telecom Services / Wireless Phil Cusick, CFA (212-272-9078) Telecom Services / Wireline Mike McCormack, CFA (212-272-4117) Wireless Transmission Towers Jim Ballan (212-272-8024)
LATIN AMERICA / EMEARESEARCH Director of LatAm Research F. Rowe Michels, CFA (212-272-2429) Aerospace & Transport
Sara Delfim (5511-3457-3204)
Business Services & Electronic Platforms Paulo Ribeiro (212-272-9742)
Economics
Tim Kearney, Ph.D. (212-272-5981) Emy Shayo (5511-3457-3206) Financial Services Saul Martinez (212-272-3528) Oil & Conglomerates
Marc McCarthy, CFA (212-272-7822) Portfolio Strategy
Thierry Wizman, Ph.D. (212-272-7527) Marianna Kozintseva, Ph.D. (212-272-6367) Retailing
Francisco J. Chevez, CFA (212-272-5929) Utilities
F. Rowe Michels, CFA (212-272-2429)
ASIA RESEARCH Bear, Stearns Asia Ltd.
Regulated by the Securities and Futures Commission of Hong Kong
U.S. investors please contact your Bear, Stearns & Co. Inc. registered representative at 1-800-999-2000 Evan Erlanson, CFA
Emerging Markets Portfolio Strategy Thierry Wizman, Ph.D.
Insurance Evan Erlanson, CFA Telecom Equipment Evan Erlanson, CFA Thermal Coal Adam Q. Clarke
EUROPEAN RESEARCH Bear, Stearns International Ltd.
Authorized and regulated by the United Kingdom Financial Services Authority U.S. investors please contact your Bear, Stearns & Co. Inc. registered representative at 1-800-999-2000 Director of European Research Roger Hirst FINANCIAL SERVICES Banks
Emerging Markets Portfolio Strategy Thierry Wizman, Ph.D.
SPECIAL SITUATIONS David Lewis, CFA TELECOMMUNICATIONS EMEA Telecom Alexander Kuznetsov, CFA Network Technologies Maurice Patrick Wireline Jonathan Dann