What exactly is a REIT? (loan, real estate, loan, properties)

[Rose Red]

I've seen this written but what exactly is it? I think the acronym is for Real Estate Investment Trust. I could be wrong. What is it and how does it work?

[golfgod]

You're right on the acronym. They operate similar to a mutual fund, pooled money to invest in RE instead of stocks or bonds. There are some specific rules enacted by the Federal Trade Commission regarding how much of the income stream MUST be passed through to the "owners". This prevents a lot of shenanigans about putting the manager's wife, kids and idiot nephews on the payroll as "advisors".

IMO the best REITs are NOT the one offered through your "typical" mutual funds company like Fidelity, T. Rowe Price etc. They are offered through "fee charging" equity sales companies. The ones I talking about generally own PAID FOR real estate in the form of commercial property.

As it's paid for the returns are better because there's no debt service. The tenants in those buildings tend to be Fortune 500 companies who rent their real estate and put their money into developing, producing and marketing whatever their core product or service is.

golfgod

[Rose Red]

Interesting. thanks for posting.

[Jamesww]

Originally Posted by Rose Red

Interesting. thanks for posting.

Legislation was passed in 1960 to allow for REIT's, however, they did not catch on until the mid 80's and saw a huge boom during the savings and loan crisis during the early 90's. They have expanded very rapidly since and started offering IPO's during the tech bubble or what I like to call the IPO bubble. More recently they have been consolidating and delisting from the exchanges. Only 200 are still publically traded.

They have a number of tight guidelines for opperation but pay no federal tax. They must pay out 90% of GAAP figured earnings and so on average since 1991 have paid out 7.74% per year in dividends. 75% of all earnings must be from real estate related assets and 90% must come from either real estate related assets or interest based income like MMA. To qualify to be a REIT the trust must not have any set of 5 owners own more than 50% of the trust. And the trust can not have more than 30% of revenue come from the sale of property held for less than 5 years. Over the last 20 years they have crushed all other asset classes in returns giving the investor an average of 12.94% returns per year.

Most REIT's are privately held and so do not trade on the stock indexes. They come in three forms: first holding solely physical properties, second carrying solely mortgage back securities, and finally a hybrid of the two. Most all REIT's invest only in properties. Some are very diverse in the properties they hold and others specialize in only one type of property. I really like REIT's and have 30% of my portfolio vested in them. Right now my favorite are ones that specialize in medical buildings like hospitals and physician pavillions. The current darling in my opinion has the ticker symbol MPW. On April 11th they paid out a annualized divedend of 1.08 per share for the sixth quarter in a row. And the stock is trading at just over 12.00 a share. That gives a divedend return of 8.91%.

A very well known REIT that you may have heard of is Starwood Group they own multiple hotel chains and resorts like Marriot, Crowne Plaza and the like.

You can find complete reports of these properties from the balance sheets to analyst takes from all the major investment banks on SNL.com. Hope you find this post helpful and if you have any further questions feel free to ask.

[Rose Red]

^^
I appreciate the info. I'm going to check that out. Thanks.

[pghquest]

Originally Posted by Rose Red

^^
I appreciate the info. I'm going to check that out. Thanks.

Just be careful with REIT's.. They pay great, because by law they have to distribute 90% of their profits to their investors, but when they dont make money.. their stock becomes pretty worthless...

[Sgoldie]

True, true. The money I invested in one a few years back went down to practically zero.