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What are REITs?

What are REITs?. REITs established by legislation passed in 1960 providing small investors access to real estate investment Operating companies which own and manage commercial real estate Assets consist of, and revenues primarily come from, real estate investments

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What are REITs?

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  1. What are REITs? • REITs established by legislation passed in 1960 providing small investors access to real estate investment • Operating companies which own and manage commercial real estate • Assets consist of, and revenues primarily come from, real estate investments • Can selectively operate ancillary businesses

  2. REITs • Pass through at least 90% of income • 226 traded on NYSE - $1.014 trillion in assets • 20% of US institutional quality real estate • 1,100 filed tax returns • Dividends – currently about 4.4% average • Local REITS

  3. REIT Types • Equity (90%) • Own real estate assets • Revenues come principally from rents • Mortgage (10%) • lend to real estate owners • acquire loans or mortgage-backed securities

  4. What Makes a REIT Different?Asset and Revenue Test • 75 percent of assets must be invested in: • Equity ownership of real property • Mortgages • Other REIT shares • 75 percent of revenue must come from • Rents from real property • Mortgage interest • Gains from sale of real property

  5. Taxable REIT Subsidiaries (TRSs) • Allows REITs to more effectively compete with other real estate owners • May provide services to tenants to third parties such as landscaping, cleaning and concierge • Investments in TRSs limited to 20 percent of REIT’s assets • TRSs must pay taxes at the corporate level

  6. Private • 1) Institutional investors – large positions • 2) Packaged with other services offered by a financial professional • 3) Incubator – start up hoping eventually to go public

  7. Shares are traded like a stock • Commercial or residential property • REIT mutual funds

  8. Why REITs instead of direct investment? • Property sector and geographic diversification • Professional and experienced management • Real-time pricing • Low transaction costs • Liquidity

  9. REIT advantages • Stable earnings from long-term leases • Attractive dividend yield • Competitive risk-adjusted returns • Diversification

  10. Stable earnings • Long-term leases, typically 5 to 15 years • Stable revenues – lease duration of 10 years, only 10% of leases expire in a year • Expense reimbursements – leases for commercial property structures so tenants pay increases in expenses and taxes over life of lease

  11. Real Estate (REITS) • www.reit.com • www.investinreits.com

  12. Closed-end Funds • 613 funds (2017) - $239 billion • 60% are bond funds • Fixed number of shares • Shares sell like stock • Generally hold less liquid assets • A lot are country funds

  13. NAV versus price • Generally sell at a discount (10%) • (Price – NAV) / NAV • Can sell at a premium • Why? • Taxes • Management fees • Investor sentiment

  14. Distinctions from Open end • Less liquid – no redemption • Fewer shareholders services • Leverage can increase returns • Don’t have to hold cash • No inflows or outflows • Can invest in less liquid securities

  15. Raising Capital • Rights offer to existing shareholders • Leverage – commonly used • Sell new shares

  16. Dividend returns • NAV = $10, Price = $9 • Dividend yield = $1/$9 = 11.11%, not 10% • Closed end fund dividend yield generally higher than open end, all else the same

  17. www.closed-endfunds.com

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