Real Estate Investment Trusts (REITS)
How does a company qualify as a REIT?
•Invest at least 75 percent of its total assets in real estate •Derive at least 75 percent of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate •Pay at least 90 percent of its taxable income in the form of shareholder dividends each year; as a result, REITs may not generally retain their earnings •Be an entity that is taxable as a corporation •Be managed by a board of directors or trustees •Have a minimum of 100 shareholders •Have no more than 50 percent of its shares held by five or fewer individuals
What are the fees for a non-traded REIT that incurred during the management phase?
Asset Management Fee (0.75% - 1% per year) of property in the portfolio at cost or fair market value Dealer Manager Fee (0% - 0.6% range per year) Property Management Fee (varies based on market conditions)
What is the timeline for a non-traded REIT at the Disposition Stage?
Between 0 - 2 years.
What is the timeline for a non-traded REIT Asset Raise Stage?
Between 2-4 years.
What is the timeline for a non-traded REIT at the Management Stage?
Between 4 - 6 years.
What is the most important measure over the entire life of the REIT?
Cash flow.
What does the initial fees for a non-traded REIT consist of?
Commission (6.5% - 7% for brokerage accounts) Other Offering and Organizational Costs (3% - 5%) Acquisition Fees (0% - 5%) Financing Fees (0.5% - 0.75%)
What are REITS?
Companies that buy, develop, manage and sell real estate assets. They allow participants to invest in a professionally-managed portfolio of properties.
What are the different categories of sectors in a non-traded REIT?
Core and satellite.
What is the core sector for a non-traded REIT?
Core sectors make up the largest part of the investable universe and tend to be the largest component of a real estate portfolio for many institutional real estate investors. Because of the market size and allocation within many institutional portfolios, and their more liquid nature, the core sectors tend to be less risky than other types of real estate.
What are the risks with the "loan to own" strategy?
Credit risk based on poor or aggressive underwriting standards is the most substantial risk with this type of REIT strategy. Interest rate risk is moderate, as most of these types of loans are variable rate.
What is the disadvantage to the pricing transparency benefit of Daily NAV REITS?
Daily NAV REITs will have to continually re-appraise properties in their portfolios to be able to determine a reasonable NAV so frequently. These additional appraisals and associated monitoring needs will increase REIT expenses and create a slight drag on returns. The premise is that the greater liquidity and transparency will be worth the cost to investors.
What are potential benefits to Daily NAV REITS?
Daily pricing of shares offers greater transparency into the underlying value of the real estate than traditional nontraded REITs. Daily liquidity allows investors to redeem shares on a regular basis. Daily NAV REIT share prices will be more volatile than traditional non-traded REITs, but less volatile than traded REITs. In order to provide daily liquidity, these REITs will hold up to 20% in cash and liquid securities. This may create a drag on returns.
What is the volatility of a publicly traded REIT?
Daily volatility that is linked to the real estate markets and the stock markets.
What is the diversified sector in a non-traded REIT?
Diversified REITs invest in a combination of different sectors, including both core and satellite. The diversification across sectors reduces sector risk, as the sectors tend to respond to the economy in different ways. Therefore, owning multiple sectors reduces the risk that all of the properties in the portfolio will lose value at the same point in the market cycle. In theory a diversified REIT also gives management more options for an exit strategy, as they could look to sell individual properties or groups of properties at different times. However, this may limit management from listing the REIT on a public exchange, as there is very little acceptance of diversified REITs on Wall Street at this time.
What are factors to consider before investing in Healthcare REITS?
Diversified group of customers, investments in a number of different property types, companies whose healthcare experience is significant, whose balance sheets are strong and whose access to low-cost capital is high.
What are the different types of sector strategies for a non-traded REIT?
Diversified, Single sector non-traded REITS that focus on the core sectors, and Single sector non-traded REITS that focus on the satellite sectors.
What is dividend coverage?
Dividend coverage refers to a REITs ability to cover its dividend through operating income (rent).
What are the three options in a mortgage REIT that acquire distressed debt?
Foreclose, re-structure, and discounted payoff.
What is the foreclose option in a mortgage REIT that acquire distressed debt?
Foreclosing on a borrower and end up owning a property. If done correctly, this type of strategy can create significant value, but it can also be difficult and lengthy.
What are the front-end fees for publicly traded REITS?
Front-end underwriting fees in the form of a discount may be 7% or more of the offering proceeds. Investors who buy shares in the open market pay a brokerage commission.
What is Funds from Operations (FFO)?
Funds from Operations (FFO) starts with Net Income, adds back non cash depreciation, and adjusts for non-recurring charges.
What are the different measures that the investor should consider when analyzing dividend coverage?
Funds from Operations (FFO). Modified Funds from Operations (MFFO). Cash available for distribution.
What are the risks to non-traded REITS?
High fees that range between 10 and 18%. Dividends are not guaranteed and may be decreased or increased depending on the health of the real estate market. The underlying real estate is tied to the economy and may lose value in a real estate downturn. Offering prices may not be reflective of the underlying Net Asset Value (NAV). Non-traded REITs are largely illiquid investments that should be considered illiquid for the life of the program.
What are factors to consider before investing in Residential REITS?
Home affordability is low, large urban centers, population, and job growth.
What are the satellite sectors in a non-traded REIT?
Hotels, medical office, student housing, golf courses, resorts and storage.
How is the dividend yield for an income-oriented non-traded REIT different from a traded REIT?
Income-oriented non-traded REITs tend to pay yields that are higher and more consistent than their traded REIT peers. This is because most nontraded REITs invest only in properties, and are not looking to actively trade properties during the life of the REIT or reinvest dividends in development activities.
What is income-producing class for a non-traded REIT?
Income-producing real estate (also referred to as "core") tends to be fully or almost fully occupied, with investment grade or stable tenants and a minimal likelihood of lease rollover where tenants could terminate their leases. Triple net, long-term contractual leases are characteristic of this style. Because they are more stabile, income-producing real estate has minimal operating risk and requires the least amount of management oversight. Income-producing real estate is sensitive to economic changes, but is the least sensitive on the operating risk spectrum. This type of real estate also tends to pay higher current income, with lower potential for appreciation.
What is the risk of a REIT acquiring properties?
Investors should be aware of the point in the market cycle that a REIT is acquiring properties. Those properties acquired when the market has appreciated may have greater principal and income risk than those acquired after the market has softened.
How does the "loan to own" strategy generate returns?
Investors should be aware that the majority of the returns from these types of REITs will come from the yield, with minimal capital appreciation potential.
What is the anticipated source of return for a publicly traded REIT?
Investors typically seek capital appreciation based on prices at which REITs' shares trade on an exchange. REITs also may pay distributions to shareholders.
How are Retail REITS assessed?
It is important that the retailer have good profits, strong balance sheets and as little debt as possible, especially the short-term kind.
What are Mortgage REITS?
Mortgage REITS invest primarily in real estate debt such as mortgages.. Approximately 10% of REIT investments are in mortgages as opposed to the real estate itself.
How does a Mortgage REIT obtain their capital?
Mortgage REITs get a considerable amount of their capital through secured and unsecured debt offerings.
What is the NAV for a non-traded REIT at the Asset Raise Stage?
NAV is the offering price (usually $10/share).
What is the NAV for a non-traded REIT at the Management Stage?
NAV is the offering price until 18 months after the close of the offering stage. Portfolio is appraised at this point and NAV is set at the appraised value. Portfolio is re-appraised every year thereafter and NAV is re-set to the most current appraisal.
What is the NAV for a non-traded REIT at the Disposition Stage?
NAV will be set at the most current appraisal, and will be adjusted down if needed to reflect any asset sales during this time period.
What is the volatility of a non-traded REIT?
No daily volatility in share price until shares are re-priced 18 months after the close of an offering period. However, the underlying value of the real estate is linked to the real estate markets and can fluctuate up or down upon re-pricing.
What are non-traded REITS?
Non-traded REITs are considered public, in that they are required to register with and report regularly to the SEC.
What is the investment timeframe for a non-traded REIT?
Non-traded REITs should be considered illiquid investments, appropriate only for clients who do not need liquidity from the investment for 8-12 years.
What is the financing risk of a non-traded REIT?
Non-traded REITs that use leverage to enhance returns are subject to interest rate risk and liquidity risk, which could limit their ability to make distributions or increase NAVs, and could force them to sell properties at a loss if funds are needed to pay off debt in a downturn. If a REIT is unable to sell properties to pay down debt, they could be forced into default or bankruptcy.
What are Office REITS?
Office REITs invest in office buildings. They receive rental income from tenants who have usually signed long-term leases.
What are the "Big Four" core sectors in a non-traded REIT?
Often referred to as the "Big Four," core consists of office, retail, industrial, and multi-family.
What is the drawback with Modified Funds from Operations?
One drawback of MFFO is that it allows for discretion when it comes to revenue recognition by removing the adjustment for straight-line rent.
What is the minimum investment for publicly traded REITS?
One share.
What two basic characteristics determine the level of risk in a non-traded REIT?
Operating risk and sector risk.
What is operating risk for a non-traded REIT?
Operating risk refers to the stability of the income generated by the real estate and the level of management needed to stabilize the income.
What is opportunistic class for a non-traded REIT?
Opportunistic real estate tends to be non-income producing real estate that has severe vacancy or construction issues or a combination of both caused by poor management, debt issues, or market declines. Property development falls under this category. Opportunistic properties require significant asset management in order to stabilize them and produce little to no current income. They are the most susceptible to recessions when investors look for stability, but they have the highest potential for capital appreciation if they are managed and sold properly.
What are the fees for a non-traded REIT at the disposition stage?
Performance Fee (around 15% of returns above some hurdle rate — usually 6%) Internalization Fee (may be charged if REIT becomes publicly listed to purchase the advisor from the sponsor) Disposition and Commission Fees (0% - 3%)
How are private REITS differ from publicly traded REITS and non-traded REITS?
Private REITS carry significant risk to investors. Not only are they unlisted, making them hard to value and trade, but they also generally are exempt from Securities Act registration. As such, private REITs are not subject to the same disclosure requirements as public non-traded REITs. The lack of disclosure documents makes it extremely difficult for investors to make an informed decision about the investment.
What is the activity for a non-traded REIT at the Disposition Stage?
REIT advisor looks to do one of 3 options: sell individual properties and return principal and any gains/losses to investors over time, sell the entire portfolio or merge with another REIT, or list on a public exchange.
How are REITS taxed?
REITS are first taxed at the trust level, then to the unitholders.
How are REITS taxed at the trust level?
REITS skip corporate taxation at the trust level.
How are REITS taxed?
REITs are pass-through entities which, in congruence with conduit theory, distribute the majority of income cash flows to investors without taxation at the corporate level.
What is the liquidity risk for a non-traded REIT?
REITs can terminate this provision during real estate downturns, so that they are not forced to sell properties at the wrong time to fund redemptions. This potential illiquidity should be considered a risk for non-traded REITs, but the ability to hold assets and sell them at a more opportune time should be considered a benefit. Selling properties at the wrong time creates a permanent loss of capital.
What are Residential REITS?
REITs that own and operate multi-family rental apartment buildings as well as manufactured housing.
What are the different types of mortgage REITS?
REITs that use leverage to buy and sell high quality government-backed loans. REITs that act like a bank by originating private loans to non-investment grade borrowers. REITs that purchase high risk distressed loans and work with the debtor to increase the chances of repayment.
What is the re-structure option in a mortgage REIT that acquire distressed debt?
Re-structuring a loan with a borrower, so that the borrower is able to pay debt payments based on a reduced interest rate, reduced par value, or a combination of both.
What are Daily NAV REITS?
Real estate funds that own and manage commercial real estate properties. They are not listed on an exchange, but are valued daily through on-going property appraisals. The theory is that they should be considered a "hybrid" strategy, with attributes of both traded and non-traded REITs.
What are the different types of REITS?
Retail, Residential, Healthcare, Office, and Mortgage.
What is sector risk for a non-traded REIT?
Sector risk refers to the sector and combination of sectors in which a non-traded REIT invests in.
What is the Single sector non-traded REITs that focus on the core sectors in a non-traded REIT?
Single sector non-traded REITs that focus on the core sectors have more sector risk than diversified REITs because there is a greater chance that all of the properties will either gain or lose value at the same point in the market cycle.
What is the Single sector non-traded REITs that focus on the satellite sectors in a non-traded REIT?
Single sector non-traded REITs that focus on the satellite sectors have the most sector risk in that the less liquid satellite sectors can lose more value when they are out of favor as opposed to core sectors that are more liquid. However, some of the satellite sectors may offer diversification because their values respond differently than core sectors to economic growth or weakness.
What are the risks to owning a mortgage REIT?
The value of real estate loans tends to be more volatile than the value of real estate properties. There is more risk that a mortgage loan REIT's NAV will fluctuate once it is required to be priced, 18 months after the close of the offering. The mortgage REIT markets can tighten quickly. Loans that are levered and in default are nearly impossible to sell, and could cause permanent damage to a REIT's balance sheet and NAV. Underwriting risk is substantial for all mortgages, but especially for origination and distressed strategies.
What are the fees for a non-traded REIT
There are multiple fees that investors should understand and analyze before investing in a non-traded REIT, including up front, disposition, and on-going fees. Total fees are typically between 10 and 18% of total share price.
How are Daily NAV REITS differ from traditional non-traded REITS?
They introduce greater liquidity by allowing for up to 20% of outstanding shares to be redeemed per year (higher than the 5% afforded by most standard REITs). While there is still no guarantee that liquidity will always be available and the REITs will still have the option to discontinue the share redemption program at any time, this additional liquidity is seen as valuable to many investors.
Why invest in REITS?
They provide greater diversification, potentially higher total returns and/or lower overall risk. In short, their ability to generate dividend income along with capital appreciation make them an excellent counterbalance to stocks, bonds and cash.
What is Modified Funds from Operations (MFFO)?
This measure allows for more comparability between REITs in different life stages due to the exclusion of acquisition expenses.
How does the fees work for a non-traded REIT?
Total fees incurred during the lifecycle of a REIT usually amount to between 10 - 18% of the share price. The remaining 82 - 90% goes "into the ground", which is to say it is invested in real estate.
What is liquidity for a non-traded REIT at the Asset Raise Stage?
Typically limited liquidity, with redemption programs that vary by company and usually have a minimum 12 month lockup.
What is the liquidity for a non-traded REIT at the Disposition Stage?
Typically limited or no liquidity until properties are sold, or the portfolio is merged, sold, or listed on an exchange. If a REIT is listed, shares are usually liquid in a tiered manner, with typically one-quarter to one-third of shares immediately liquid with the remaining becoming liquid over 12 - 18 months.
How are non-traded REITS managed?
Typically the company has no employees and is managed by a third party pursuant to a management contract (externally managed).
How are publicly traded REITS managed?
Typically the managers are employees of the company(internally managed).
How are Mortgage REITS differ from equity REITS?
Unlike equity REITs, which make money on rents, mortgage REITs make money on interest payments and the spread between lending and borrowing costs, with moderate capital appreciation potential if loans are bought or sold, or if they are bought at distressed levels.
What is the advantage of REITS over traditional real estate?
Unlike traditional real estate, many REITs are traded on stock exchanges. You get the diversification real estate provides without being locked in long term. Liquidity matters.
What is value-added class for a non-traded REIT?
Value-added real estate tends to have a moderate level of operating risk through significant lease rollover, vacancies, un stable tenants, or minor construction needed to attract new tenants. These types of properties may produce a moderate level of income but have the potential to appreciate in value if an experienced manager can solve some of the vacancy, lease rollover, or construction issues. Value-added real estate has a lower current yield but the potential for greater capital appreciation.
What is the discounted payoff option in a mortgage REIT that acquire distressed debt?
Where a borrower would pay off a reduced par value to the REIT immediately, rather than over time.
What is the liquidity risk of a non-traded REIT?
While most non-traded REITs have liquidity provisions that allow investors to request liquidity after a certain period of time, these share redemption programs (SRPs) are not guaranteed. SRPs can and have been eliminated by REIT boards in order to preserve value in a downturn. Investors should be prepared to have no liquidity for the entire investment period outlined in a REIT's offering documents.
When does a non-traded REIT progress towards covering its dividend through operations?
Within 2 - 4 years from beginning its capital raise, and should be fully covering the yield once it moves to the asset management and disposition stages. Insufficient dividend coverage can reduce share value over time.
What are the two unique features of a REIT?
A REITS primary business is managing groups of income-producing properties and it must distribute most of its profits as dividends.
What is the disadvantage of a Mortgage REIT?
An increase in interest rates would translate into a decrease in mortgage REIT book values, driving stock prices lower.
What are Retail REITS?
Approximately 24% of REIT investments are in shopping malls and freestanding retail. Retail REITs make money from the rent they charge tenants.
What are the three stages of a non-traded REIT?
Capital raise and acquisition, management, and disposition.
What are Healthcare REITS?
Healthcare REITs invest in the real estate of hospitals, medical centers, nursing facilities and retirement homes.
What is the "loan to own" strategy in a mortgage REIT?
Mortgage REITs that originate debt tend to own the loans to maturity, or until a sale of a portfolio to another owner. This requires significant underwriting skills.
How does a non-traded REIT pay dividends to their investors?
Most non-traded REITs begin their lifecycle paying a yield that is not covered through operating income, and instead is paid through proceeds from the capital raise.
Who is allowed to invest in a private REIT?
Private REITS generally can be sold only to accredited investors, for instance those with a net worth in excess of $1 million.
What are the different classification of operating risk in a non-traded REIT?
Properties tend to be classified on an operating risk spectrum as either income-producing (lowest operating risk), value-added (moderate operating risk), or opportunistic (high operating risk).
What is the activity for a non-traded REIT at the Management Stage?
REIT advisor is managing the properties and completing any required capital expenditures.
What is the activity for a non-traded REIT at the Asset Raise Stage?
REIT sponsor is raisingcapital and REIT advisor is acquiring properties.
What are factors to consider before investing in Office REITS?
State of the economy, unemployment rate, vacancy rates, area economy, how much capital does it have for acquisitions.
What is the disadvantage to the liquidity benefit of Daily NAV REITS?
The REITs will maintain a liquid sleeve that may be invested in real estate securities, debt securities, and cash. In most cases, this will create a slight drag on overall returns. It may also result in a portion if the portfolio being exposed to nonreal estate related assets and greater volatility.
What are the best known Mortgage REITS?
The best known but not necessarily the greatest investments are Fannie Mae and Freddie Mac, government-sponsored enterprises that buy mortgages on the secondary market.
How does mortgage REITS that acquire distressed debt strategy generate returns?
The majority of returns for this type of REIT will come from appreciation at the end, with minimal current income.
What are the differences beween a publicly traded REIT and a non-traded REIT?
The primary difference between publicly traded and non traded REITs is that publicly traded REITs trade daily on a national exchange. This gives investors greater liquidity, along with higher volatility. Other differences include the timing of the capital raise, costs, minimum investments, and share price transparency.
What is the satellite sector for a non-traded REIT?
The satellite sectors are those that make up a smaller part of the investable universe. These sectors tend to be less liquid which makes them more risky than the core sectors, but they may also sell at a premium because there are fewer portfolios available to institutional investors.
What is the minimum investment for a non-traded REIT?
Typically $1,000-$2,500.
What is the investment objective of a publicly traded REIT?
Typically focused on appreciation of share value and income.
What is the investment objective of a non-traded REIT?
Typically focused on providing consistent income, with appreciation of share value secondary (with the exception of Opportunistic REITs).
What is the liquidity for a non-traded REIT at the Management Stage?
Typically limited liquidity, with a greater risk of the redemption program being shut off as the manager looks to optimize the portfolio.
