REIT Operating Model Part 1: Revenues and Costs. We are going to be building a detailed operating model for a case study real estate investment trust in the residential REIT sector. The first thing that we're going to do before we start building the model is ensure that our iterative calculations are turned off. This is a modeling best practice to make sure that we don't create any unintentional circular references. So I'm going to go to Alt + F + T, into the formulas, and make sure that my iterative calculation is unchecked. Hit OK, and now we can begin. Like most REITs, it is a complicated corporate structure that has revenues coming from a number of different sources. We are going to model it in a detailed a manner as possible to create the most amount of flexibility. On the Calculations tab, we will break the revenues down into its various segments. As we can see, this particular REIT has revenues coming from established communities, from other communities that have achieved stabilized rents, but it also has revenues from acquired properties, from developed properties, from redeveloped properties, and in addition, we will be modeling the revenues that it's lost from properties that it has disposed. Let's have a look down at the bottom of the Calculations tab for the detail on the various segments. Because it's impossible to model a REIT by its individual buildings, typically what happens is you will break the revenues down into some kind of segment. For this particular REIT, the revenues have been broken down by geographic sector. Southern California, Northern California, and the Seattle and Portland area. We have some assumptions that have been given, and we're going to apply these assumptions to build the forecast for the established communities. We're using growth rates, so the formulas will be one plus the growth rate, times the previous year. And since the row structure is the same up top as it is down here where the assumptions are, we can copy this down.

Typically, when we build a model, we like to get one year correct before we copy across. But since we're going to be building this in various pieces, I'm going to do a quick sanity check of my numbers and then I will copy across into the outer years. For this particular REIT, the annual report has given us operating income by segment, so we're going to forecast the operating income and then actually back into the operating expenses. The operating income assumptions, likewise, are below. Those are a percentage of sales.

Once again, I can copy down, and as a sanity check, I'm going to take the net operating income total as a percentage of my total revenue, that looks in line with the previous year, and I copy that across. We're also going to forecast the other stabilized communities. It appears for this particular segment that there is actually a loss in revenue of 10%.

The operating income, same as above, is going to be a percentage of the revenue. Now that we have the established communities and the stabilized communities, we can actually go and populate the top portion of our revenue model. In the top portion of our revenue model, we are taking the totals from each section, so we'll be using just the total established revenue.

Likewise for the stabilized revenue.

Now, we want to display our property expenses by segment, but we forecast by the income, so we're going to have to back into the property expense figure by taking the revenues from the segments and subtracting the operating income, and then doing the same for the other stabilized.

And now we've completed the established community and other stabilized community revenues and expenses.