REItS: REAL ESTATE INVESTMENT TRUSTS

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REItS REAL ESTATE INVESTMENT TRUSTS

• Ray Henderson
• Janie Penfield
• Karen Peterson

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What is a reit?

• Real Estate Investment Trust unites capital of
  many into a single economic enterprise to produce
  income through commercial real estate ownership
  and finance
• Purpose enables small investors to make
  investments in large-scale, income producing real
  estate (i.e. apartments, shopping centers,
  warehouses, etc.)
• Created by Congress in the Real Estate Investment
  Trust Act of 1960

www.nareit.com The REIT Story
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DETAILS

• Roughly 300 in the US with assets over 300B
• Both domestic and international ownership
• Operates like public companies (board of
  directors, shareholders, monitored by the SEC,
  etc.)
• 2/3 traded on major stock exchanges
• Required to pay 90 of taxable income to
  shareholders each year
• Growth generated by
• Issuing new shares
• Internal money, i.e. rent
• Pay property and other taxes
• One level of taxation

www.nareit.com The REIT Story
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Types of reits

• Equity REITs
• Own and operate income-producing real estate,
  including leasing, development of property and
  tenant services
• REIT must acquire and/or develop to operate
• Cannot resell properties once they are developed
• Mortgage REITs
• Direct lending to real estate owners and
  operators
• Indirect lending through mortgage-backed
  securities
• Extend mortgage credit only on existing
  properties
• Hybrid REITs
• Own properties
• Make loans to real estate owners and operators

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Types of properties

• Shopping Centers
• Apartments
• Warehouses
• Office Buildings
• Hotels
• Healthcare Facilities

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Why invest in reits?

• Benefits
• Liquidity
• Security
• Diversification
• Limitations
• Lower than market returns

• Hedge against volatility and underperformance
• Consistent payout
• Tends to track inflation
• Low correlation with market
• Boost returns and reduce risks

REITS Low Correlation to Other Stocks and Bonds
is Key Factor for Portfolio Diversification
NAREIT Want to Invest in Real Estate? Consider
REIT www.suntimes.com
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DIVERSIFICATION

• The return increases and risk decreases with the
  addition of REITs to a portfolio

REITS Low Correlation to Other Stocks and Bonds
is Key Factor for Portfolio Diversification
NAREIT
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Comparative returns
REITS Low Correlation to Other Stocks and Bonds
is Key Factor for Portfolio Diversification
NAREIT
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Historical returns
REITS Low Correlation to Other Stocks and Bonds
is Key Factor for Portfolio Diversification
NAREIT
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Terms you should know

• Funds from Operations (FFO)
• Common measure of REIT performance
• FFO is similar to NOI
• Excludes gains/losses from sales of property
• Adds back real estate depreciation
• Cash Available for Distribution (CAD)
• Measure of cash available for dividends after
  capital expenditures

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Tax implications

• Dividend distributions are taxed at different
  rates
• Ordinary income
• Capital gains
• Return of capital
• Part of dividend that exceeds the REITs taxable
  income

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What should I look for in a reit?

• Potential for earnings growth
• Companies with properties in which rents are
  below current market rents
• Strong operating characteristics
• Management team with proven success
• New sources of funding (indication of lender
  confidence)
• Check Morningstar.com for analyst report
• Competitive valuation (multiple of FFO, etc)

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Strategy

• Hold REITs as small percentage of diversified
  portfolio
• Consider mutual funds with REITs in variety of
  locations and industries for increased
  diversification
• Choose targeted approach only if you want to
  streamline investment on a specific
  characteristic(s)

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Resources

• www.InvestInREITS.com
• www.Morningstar.com
• www.NAREIT.com
• www.REITnet.com