Know Your REITs
In today's market not all real estate investment trusts are the same.
oday's almost-instantaneous access to financial information along with
corporate governance improvements have dramatically altered the commercial real
estate landscape for investors interested in diversifying through real estate
investment trusts. This additional capital has put non-exchange traded REITs on competitive footing with publicly traded
REITs for acquisitions in recent years. Publicly traded REITs' initial public
offerings have increased slightly, but their overall acquisition appetite has
been less than that of non-traded REITs at times.
When working with publicly traded or private REITs, real estate
professionals must keep the public or private nature of the entity in mind. For
example, if it is raising capital exclusively from suitable individuals, a
private REIT may have greater difficulty in fulfilling the equity requirement
of a given transaction due to the much smaller pool from which it is sourcing
equity. Younger public entities, often with smaller asset bases, focused on
acquisitions may have less flexibility in a given transaction as a result of
the regulations and restrictions of their public filing schedule. To benefit
from working with non-traded REITs, brokers must understand different REIT
classifications and structures.
Private vs. Public REITs
The National Association of Real Estate Investment Trusts divides REITs
into three classifications: private, publicly traded, and non-exchange traded.
Private REITs, which are not registered with the Securities and Exchange
Commission, raise equity from individuals, trusts, or other entities that are
accredited under federal securities laws. While the laws governing this
qualification are quite specific, an accredited investor generally is a
sophisticated individual or entity with a net worth that is well above the
nation's median income and asset levels. Private REITs generally are subject to
less regulation, with the exception of guidelines associated with maintaining
Publicly traded and publicly registered non-exchange traded REITs
generally raise capital from a much broader investor base, although this does
vary from company to company and between exchange-traded and
non-exchange-traded stock offerings. While many institutional entities, such as
insurance companies or pension plans, certainly meet accredited investor
standards, the tax advantages of a REIT structure are not always attractive or
necessary. Some institutions are placing capital or making investments through
their own tax-preferred structure, and Internal Revenue Service REIT rules can
be too restrictive.
Publicly traded and publicly registered non-traded REIT companies must
file regular audited financial updates with the SEC. Both existing and
potential investors, analysts, the media, and other interested parties can use
these detailed and regulated filings to compare and contrast the operations of
certain companies and draw conclusions about recent market conditions. However,
traditional investment bank analysts limit their actual analysis and research
reporting to publicly traded REITs. Private REITs are not required to practice
this level of financial transparency.
Traded vs. Non-Traded
By trading on an exchange each day, publicly traded REITs provide
investors with the ability to buy or sell their investment in a particular
REIT's stock with relative ease. Non-exchange traded REITs lack this
market-driven liquidity. Investors in non-traded REITs, whether publicly
registered or private, generally rely upon the ability and willingness of the
company itself to provide redemption programs for investors.
Investors often seek a balance between liquidity, yield, and volatility.
Traded REITs are more directly subject to the volatility of the exchange on
which they are listed and broader equity markets in general, while non-traded
REITs are separated from the daily volatility of the equity markets and are
more closely associated with the underlying value of the real estate in their
portfolio. At any given time, traded REITs can have stock prices that are above
or below the net asset value of their portfolio. Non-traded REITs, while
illiquid, generally are valued by the underlying real estate in their life
cycle after their equity offerings have concluded and independent appraisals
Public REITs, both traded and non-traded, are governed by state
regulations and broadly by North American Securities Administrators Association
standards. Although some state suitability requirements may vary, non-traded
REITs generally are available to individuals with a net worth of $150,000 or
with both a $45,000 annual income and a $45,000 net worth. Traded REITs
generally are available to those that meet minimum investment requirements for
traded securities, which are exempt from NASAA regulations.
Capital and Exit Strategies
In theory, publicly traded REITs are designed to be
infinite life investments with daily liquidity. This outlook may influence the
way traded REITs' managers handle portfolio decisions. For example, the
management of a traded REIT may be motivated to make decisions to support
current yield with less concern for the capital appreciation component of their
individual asset investments. On the other hand, non-traded REITs with finite
lives generally are able to pursue total return goals that include current
yield and capital appreciation.
Publicly traded REIT investors must time their liquidity to match what
they believe to be the most advantageous stock price given their individual
hold strategy. This is unlike many non-traded REITs where investors have
subscribed to a management team's philosophy of executing an exit strategy at
the proper time for the entire portfolio.
Traded REITs do not necessarily exit, although
recently some have either been sold or merged with other REITs, investment
funds, pension funds, or other significant real estate investors. Non-traded
REITs typically seek an exit for its investor base by listing the corporation
on a stock exchange, selling the portfolio to another significant real estate
investor, or selling off the assets in an orderly disposition.
In sourcing acquisitions for public or private REITs, brokers should
know a company's particular acquisition strategy and the speed at which it is
willing to move. Publicly traded REITs' regular filings often provide insights
into their particular acquisition strategies. Publicly traded and publicly
registered non-exchange traded REITs regularly inform the market via filings on
their financial condition and their acquisition or corporate positioning goals.
Keeping track of a company's dividends and charting historical dividends as
they relate to particular leases at particular assets give professionals an
advantage. Providing acquisition candidates or working on significant lease
transactions that help a REIT's portfolio meet desired dividend rates increases
the likelihood of future business with that entity.