What are REITs?
What are REITs? REIT is an acronym for Real Estate Investment Trust (REIT), which can be defined as a company that owns and operates real estate that is income producing, as well as owning assets relating to real estate. In 1960, Congress established REITs to allow investors and individuals the ability to invest in wide-ranging and large-scale income producing properties. REITs differ from other real estate investment types because REITs are required to develop and acquire investment properties with the purpose of operating them as part of an owned investment portfolio, whereas typical real estate investors resell properties after they have been developed or renovated, and/or after holding an investment for a profitable period. Income producing properties own and operated by REITs include a range of property types, such as apartments, shopping malls, hotels, manufacturing warehouses, office buildings, in addition to mortgages and mortgage-backed securities. Majority of REITs prefer to specialize in a specific property type, for instance, retail properties. There are multifamily REITs, office REITs, Retail, and REITs that specialize in healthcare facilities, in addition to others. REITs provide a way in which individual investors can reap the benefit of earning a portion of income produced through the ownership of commercial properties, without having to go through the process of purchasing one.
Types of REITs
REITS can be categorized as mortgage, equity, or hybrid. Most REITs are equity REITs, which normally operate and own income producing properties. Conversely, mortgage REITs provide real estate owners and managers with money directly as loans or mortgages, or indirectly as the purchase of mortgage-backed securities. Mortgage REITs on average, rely on more leverage than equity REITs, as they rely more on borrowed capital. In addition, mortgage REITs typically manage their own credit risks and interest rates through derivatives and other types of “hedging” techniques. Hybrid REITs are companies that utilize a mixture of investment type strategies from mortgage and equity REITs.
Public REITs, whether mortgage, equity, or hybrid are registered with the U.S. Securities and Exchange Commission (SEC) and are traded publicly on the stock exchange. REITs that are registered with the SEC but are not publicly traded are called non-traded REITs or non-exchange traded REITs.
Publicly Traded REITs
Publicly traded REITs differ from non-listed REITs in several ways. Publicly traded REITs are also referred to as listed REITs and are more liquid because REIT shares are traded and listed publicly on popular stock exchanges. Brokerage commissions are also the same as for other public traded stocks, and rules governing stock exchange require directors to be separate from management. In addition, Nasdaq and NYSE rules require independent nominating, compensation committees, and fully independent audit. In addition, the minimum investment amount for a listed REIT is one share and market prices are publicly available in real-time, as well as a range of analytic reports. Public REITs are also managed by company employees, and specific exchange rules are in a corporate governance.
Public Non-Traded REITs
A public non traded REIT files with the SEC, but their shares are not publicly traded on stock exchanges and are also referred to as non listed REITs. This causes shares to be more illiquid and share redemption programs do differ with respect to the company and are very limited on average. Individual investors typically must wait a number of years (typically 10) to receive a return on their investment until the company chooses to engage in a public transaction, such as listing shares on a stock exchange or liquidating company assets. Public non traded REITs broker commission differs as well. Fees are a typical 9% to 10% of the investment, as well as other upfront costs, management fees, and back-end fees may also be charged. Public non traded REITs also typically have no employees, a third party manages the company, and corporate governance is subject to North American Securities Administrators Association (NASAA) guidelines and state guidelines. In addition, many states have adopted NASAA guidelines and require majority directors to be separate from management. Public non-traded REIT share values are not transparent. Independent information concerning share values is typically not available. Although, companies may provide share values one and a half years after an offer has transpired.
Non traded REITs performance has been under scrutiny over recent years due to its illiquid nature, lack of valuations, and governance issues. According to the Gilbert, Ariz., a research company that tracts non-traded REITs, asserts that 2017 marks the lowest capital-raising activity over the last 14 years. According to Commercial Real Estate Direct, non traded REITs performance was up 11.3% during the fourth quarter, from the third quarter of 2017, bringing capital rising for 2017 to $3.9 billion, per the “Summit Investment Research” company. In contrast to 2016, in which non traded REITs raised $4.8 billion, approximately 23% more than 2017 figures.
Private REITs, also known as a private-placement REIT are non-traded and non listed REITs that are typically associated with strong risks. Private REIT requirements differ from other REITs because they are exempt from registration according to the Securities Act and are not subject to the same disclosure and requirements that non-traded REITs are subject to, making it very difficult for investors to get a sense of value or make an informed investment decision. Accredited investors and investors with an excess net of $1 million are generally the only groups that can buy private REITs, which makes them least popular. Private REIT requirements differ from listed REIT investments as they are less strenuous and unlike public REITs, such as venture capital funds and hedge funds, which do not necessarily have to give prescribed disclosures to accredited investors. The concept behind an accredited investor relies on the ability of a private REIT investor to bear any economic risk of investing in unregistered securities.
REIT Investment Caution
Like with any investment, with REIT investments one should take one’s own financial situation into account, consult a financial adviser, and do thorough research prior to making any type of investment. Public REITs’ quarterly and annual reports, offering prospectus, and disclosure filings are available for review at www.sec.gov. Public non-traded REIT investments that are listed on major stock exchanges can be purchased through a stockbroker, as with other publicly traded stocks. Non-traded shares can also be purchased from brokers, but brokers must have been engaged in the participation of the REIT offering. REIT exchange-traded fund and REIT mutual funds are also an option for investment. It is important that one understand the risks associated with different investment strategies prior to backing an investment in any type of REIT.