REIt S : REAL ESTATE INVESTMENT TRUSTS Ray Henderson Janie Penfield Karen Peterson

What is a reit? Real Estate Investment Trust: unites capital of many into a single economic enterprise to produce income through commercial real estate ownership and finance Purpose: enables small investors to make investments in large-scale, income producing real estate (i.e. apartments, shopping centers, warehouses, etc.) –Created by Congress in the Real Estate Investment Trust Act of The REIT Story

DETAILS Roughly 300 in the US with assets over $300B –Both domestic and international ownership Operates like public companies (board of directors, shareholders, monitored by the SEC, etc.) 2/3 traded on major stock exchanges Required to pay 90% of taxable income to shareholders each year Growth generated by: –Issuing new shares –Internal money, i.e. rent Pay property and other taxes One level of taxation The REIT Story

Types of reit s Equity REITs –Own and operate income-producing real estate, including leasing, development of property and tenant services –REIT must acquire and/or develop to operate Cannot resell properties once they are developed Mortgage REITs –Direct lending to real estate owners and operators –Indirect lending through mortgage-backed securities –Extend mortgage credit only on existing properties Hybrid REITs –Own properties –Make loans to real estate owners and operators

Types of properties Shopping Centers Apartments Warehouses Office Buildings Hotels Healthcare Facilities

Why invest in reit s ? Benefits: –Liquidity –Security –Diversification Limitations –Lower than market returns Hedge against volatility and underperformance Consistent payout Tends to track inflation Low correlation with market Boost returns and reduce risks “REITS’ Low Correlation to Other Stocks and Bonds is Key Factor for Portfolio Diversification” NAREIT “Want to Invest in Real Estate? Consider REIT”

DIVERSIFICATION The return increases and risk decreases with the addition of REITs to a portfolio “REITS’ Low Correlation to Other Stocks and Bonds is Key Factor for Portfolio Diversification” NAREIT

Comparative returns “REITS’ Low Correlation to Other Stocks and Bonds is Key Factor for Portfolio Diversification” NAREIT

Historical returns “REITS’ Low Correlation to Other Stocks and Bonds is Key Factor for Portfolio Diversification” NAREIT

Terms you should know Funds from Operations (FFO) –Common measure of REIT performance –FFO is similar to NOI Excludes gains/losses from sales of property Adds back real estate depreciation Cash Available for Distribution (CAD) –Measure of cash available for dividends after capital expenditures

Tax implications Dividend distributions are taxed at different rates: –Ordinary income –Capital gains –Return of capital Part of dividend that exceeds the REIT’s taxable income

What should I look for in a reit? Potential for earnings growth –Companies with properties in which rents are below current market rents Strong operating characteristics Management team with proven success New sources of funding (indication of lender confidence) Check Morningstar.com for analyst report –Competitive valuation (multiple of FFO, etc)

Strategy Hold REITs as small percentage of diversified portfolio Consider mutual funds with REITs in variety of locations and industries for increased diversification Choose targeted approach only if you want to streamline investment on a specific characteristic(s)

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