How to Calculate REIT Capital Structure Preferred Stock

by Bryan Keythman

A real estate investment trust (REIT) is a company that owns and operates commercial real estate, such as hotels or apartment buildings. A REIT’s capital structure is the makeup of its different sources of funding, such as bank loans, preferred stock and common stock. Preferred stock has priority in receiving dividends over common stock. It also has priority in getting paid over common stock if a REIT files bankruptcy. However, it has a lower priority than creditors. You can find preferred stock on a REIT’s balance sheet, and determine its portion of the REIT’s capital structure.

1. Find a public REIT’s balance sheet in either its 10-Q quarterly report or in its 10-K annual report. You can obtain these reports from the investor relations section of a REIT’s website, or online from the U.S. Securities and Exchange Commission’s EDGAR database.

2. Find the amount of total stockholders’ equity, listed on the balance sheet. Stockholders’ equity is the value of all stockholders’ interest in the REIT, including preferred stock. For example, assume a REIT has \$1.5 million in total stockholders’ equity.

3. Identify the amount of preferred stock, listed in the stockholders’ equity section. In this example, assume a REIT’s balance sheet shows \$200,000 in preferred stock.

4. Identify the amounts of debts the REIT lists in its liabilities section of its balance sheet, such as mortgages and unsecured debt. Add them together to determine its total debt. In this example, if a REIT shows \$500,000 in mortgages and \$500,000 in unsecured debt, add \$500,000 and \$500,000 to get \$1 million in total debt.

5. Add total stockholders’ equity and total debt to calculate the REIT’s total capital. Divide preferred stock by the total capital to determine the percentage that is preferred stock. In this example, add \$1.5 million to \$1 million to get \$2.5 million in total capital. Divide \$200,000 in preferred stock by \$2.5 million in total capital to get 0.08, or 8 percent. This means the preferred stock makes up 8 percent of the REIT’s capital structure.

Tip

• Compare the percentage of a REITâ€™s capital structure that consists of preferred stock with the percentages of its competitors to determine an acceptable level it should have.

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