WHAT IS A REIT?
A Real Estate Investment Trust - or "REIT" - is a professionally managed company that mainly owns, and in most cases operates, income-producing real estate. REITs pool the money of numerous investors to purchase a portfolio of properties that the typical investor might not otherwise be able to purchase individually. The properties owned by a REIT create income that may be passed to investors as distributions. In fact, REITs are required by law to pass at least 90 percent of taxable income to stockholders.
REITS AND TODAY'S INVESTMENT LANDSCAPE
Ongoing concerns about market volatility, coupled with a desire for investments that offer the potential for a predictable stream of income, continue to influence long-term investment strategies. These same issues have fueled a growing interest in REITs.
Why? Because REITs offer investors the opportunity to diversify their portfolios beyond publicly traded stocks, bonds, and mutual funds. Equally important, they may also be a suitable choice for investors seeking:
TYPES OF REITS
While all REITs invest in real estate, exactly how they invest varies. Some REITs directly own the real estate in their portfolios, while others hold mortgages on their properties. Additionally, some REITs are publicly traded on a national securities exchange and others are not, which affects how investors can purchase shares in the REIT.
REITS CAN BE PROPERTY OWNERS OR MORTGAGE HOLDERS
Equity REITs purchase, own, and manage income-producing real estate properties. Investors in equity REITs have the potential to earn dividends through rental income from the property and capital gains from any appreciation in the property’s value when it is sold.
Mortgage REITs lend money directly to real estate owners and their operators, or acquire loans that are secured by real estate. These REITs generate revenue through the interest that they are paid on the loans.
Hybrid REITs are a combination of equity and mortgage REITs. Their income-producing potential comes from rent and capital gains (like an equity REIT) as well as interest payments (like a mortgage REIT).
（The buildings in the photographs contained herein are examples of properties that a REIT may own.）
Different REITs tend to feature different investment objectives and may vary in the types of properties they focus on:
REITS CAN BE TRADED OR NON-TRADED
Traded REITs are bought and sold just like traditional exchange-traded stocks. As such, they are subject to the same sort of market fluctuations as exchange-traded stocks. Traded REITs are registered with and regulated by the U.S. Securities and Exchange Commission (SEC).
Non-traded REITs are also registered with and regulated by the SEC, but they are not bought or sold on a national stock exchange. Some investors view non-traded REIT shares as more stable than traded REITs and stocks in general. However, non-traded REITs do not offer the liquidity of traded REITs. Investors in non-traded REITs are typically seeking income from distributions over a period of years. Upon liquidation, return of capital may be more or less than the original investment, depending on the value of assets. Investors must meet minimum suitability requirements to invest in non-traded REITs.
Private (or private-placement) REITs do not trade on an exchange. They are not registered with the SEC, nor are they subject to the same disclosure requirements as traded and non-traded REITs. Investors in private REITs must be “accredited investors” as defined by federal securities law.
INCORPORATING NON-TRADED REITS INTO A LONG-TERM INVESTMENT PORTFOLIO
Investing for the long term requires a well-crafted plan of action that will weather all sorts of changing market conditions—determining an appropriate asset allocation mix is a key step in this process. Including a non-traded REIT in a long-term investment portfolio offers the potential for:
Increased portfolio diversification through participation in a market cycle that historically has behaved differently from stocks and bonds and, therefore, may help increase overall returns.
Preservation of capital through investment in tangible assets that are in high-demand locations. Non-traded REITs also have reduced exposure to market volatility since they are not traded on an exchange—although this feature makes them less liquid than traded REITs.
Monthly income through the payment of distributions. Non-traded REITs must distribute at least 90 percent of annual taxable income to shareholders to qualify as a REIT for federal income tax purposes. In addition, there is the potential for payments to increase if the REIT’s revenue levels increase.
Capital appreciation through increases in the value of the properties in a REIT’s portfolio upon its sale or liquidation. REITs may identify, purchase and operate properties in a way that builds income and growth potential for investors over time.
LIFECYCLE OF A NON-TRADED REIT
KEY TERMS FOR ASSESSING REITS
NET LEASE: Generally, a lease in which the tenant pays for base rent as well as property taxes. The Landlord typically pays for all other expenses associated with the property.
TRIPLE NET LEASE: A property lease in which the tenant pays all expenses normally associated with ownership, such as utilities, maintenance, repairs, insurance, and taxes.
ABSOLUTE NET LEASE: Lease in which the tenant pays all operating expenses, real estate taxes, insurance and repairs and maintenance costs in addition to a requirement to maintain the roof and structure. These obligations are in addition to their base rental obligation.
GAAP: Generally Accepted Accounting Principles. The common set of accounting principles, standards and procedures used to compile financial statements. GAAP are a combination of authoritative standards (set by policy boards) and are the commonly accepted ways of recording and reporting accounting information.
STRAIGHT-LINING: Real estate companies “straight-line” rents because GAAP require it. Straight lining averages the rent payments over the life of the lease.
FUNDS FROM OPERATIONS (FFO): FFO is a non-GAAP performance measure applicable to REITs that has become widely used and adopted. FFO is calculated by adjusting net income (loss) (computed in accordance with GAAP, including non-recurring items) for gains (or losses) from sales of properties, real estate related depreciation and amortization, and after adjustment for similar items in unconsolidated partnerships, joint ventures and preferred distributions. However, industry observers have increasingly acknowledged certain shortcomings in FFO due in part to changes in accounting rules recognized under GAAP and to the continuing evolution of REIT activities. Although the measure continues to be widely used, it is more frequently supplemented with additional disclosures to clarify performance.
MODIFIED FUNDS FROM OPERATIONS (MFFO): MFFO is a performance measure that was adopted by the Investment Program Association (IPA), a leading industry association, in 2010 and has become the standard for supplemental FFO reporting among Non-Traded REITs since that time. The IPA-defined MFFO is designed to promote mechanisms for the assessment of operating performance reflecting both the stage of investment and the underlying financial results of the Non-Traded REIT; The starting point for MFFO is FFO to which an analyst would adjust for the following items included in the determination of GAAP Net Income:
• Acquisition-related expenses from real property transactions; • Amounts relating to “straight-line” rents and amortization of above or below market lease assets and liabilities; • Accretion of discounts and amortization of premium on debt investments; • Non-recurring impairments of real estate-related investments; • Mark-to-market adjustments; • Non-recurring gains or losses; • Unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis
ADJUSTED FUNDS FROM OPERATIONS (AFFO): AFFO is a financial performance measure primarily used in the analysis of traded REITS. The intention of AFFO as a supplemental performance measure is to make certain adjustments to the definition of FFO to provide a computation and measure by which analysts and investors can measure a real estate company’s cash flow generated by operations. AFFO is usually calculated by subtracting from FFO both (1) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT’s underlying assets and its revenue stream and (2) “straight-lining” of rents. This calculation is also referred to as Cash Available for Distribution (CAD) or Funds Available for Distribution (FAD).
BUILD-TO-SUIT: A property that is commissioned and custom-built to meet a specific tenant’s needs.
CAPITALIZATION RATE: The capitalization rate (“cap rate”) is the rate at which net operating income is discounted to determine the value of a property. It is a method that is used to estimate property value. Generally, higher cap rates indicate higher expected returns and higher perceived risk. The cap rate is determined by dividing the property’s net operating income by its purchase price.
CLASS "A" PROPERTY: A building that possesses exceptional location, high quality tenancy and superior maintenance. Building must be superior construction and finish, relatively new or competitive with new buildings, and providing professional on-site management.
Talk with your financial advisor to learn more about Real Estate Investment Trusts, if they align with your financial strategy, and if they would complement your existing portfolio.
IMPORTANT INFORMATION ABOUT NON-TRADED REITS
An investment in shares of a non-traded real estate investment trust (REIT) is subject to risks. The following is a summary of some of these risks. A more detailed description of the risks associated with this type of investment are included in a prospectus.
There is no public trading market for shares of non-traded REITs and there may never be one; therefore, it will be difficult to sell your shares.
Because non-traded REITs are typically “blind pool” offerings, stockholders will not have the opportunity to evaluate the investments that are made with the proceeds of the offerings before shares are purchased.
If a non-traded REIT pays distributions from sources other than the REIT’s cash flow from operations, it will have fewer funds available for the acquisition of properties, and the overall return to stockholders may be reduced. Typically, non-traded REITs may use an unlimited amount from any source to pay distributions.
Distribution declarations are at the sole discretion of the REIT’s board of directors and are not guaranteed.
If a REIT is unable to raise substantial funds, it will be limited in the number and type of investments it may make, and the value of any investment will fluctuate with the performance of the specific properties the REIT acquires.
A non-traded REIT’s ability to operate profitably will depend upon the ability of its advisor to efficiently manage day-to-day operations.
A non-traded REIT’s advisor will face conflicts of interest relating to the incentive fee structure under the REIT’s advisory agreement, which could result in actions that are not necessarily in the long-term best interests of the REIT’s stockholders.
Payment of substantial fees and expenses to the REIT’s advisor and its affiliates will reduce cash available for investment and distribution.
A non-traded REIT may not be able to sell properties at a price equal to, or greater than, the price for which it purchased such properties, which may lead to a decrease in the value of its assets.
Adverse economic conditions may negatively affect property values, returns and profitability.
Increases in interest rates could increase the amount of debt payments and adversely affect a REIT’s ability to make distributions.
Disruptions in the credit markets and real estate markets could have a material adverse effect on a REIT’s results of operations, financial condition and ability to pay distributions.
Failure to qualify as a REIT would adversely affect operations and the ability to make distributions due to additional tax liabilities.
You may have tax liability on distributions you elect to reinvest in the REIT’s common stock.
Special considerations apply to employee benefit plans, IRAs, or other tax favored benefit accounts investing in non-traded REITs.
Some non-traded REITs have limited prior operating history or established financing sources.
THIS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SECURITIES. AN OFFERING IS MADE ONLY BY A PROSPECTUS.
An investment in any products offered by any investment institutes involves a high degree of risk and there can be no assurance that the investment objectives of the program will be attained.