By Diana Hill, Online Trading Academy Real Estate Investor Instructor
We've talked about the basics of REITs (Real Estate Investment Trust) before; I'd like to take a more in-depth look at the characteristics of Publicly Traded REITs, Non Exchange Traded REITs and Private REITs. We'll also look at one of the basic evaluation models used to value these companies.
Here is an overview of the three REITs:
Publicly Traded: Is a REIT that files with the SEC and whose shares are traded on the national stock exchanges. The shares are highly liquid, brokers fees are the same as any other stock and a minimum of one share of stock can be purchased. These Publicly Traded REITs are governed by specific stock exchange rules and corporate governance. They are required to make regular financial disclosure to the investment community, including quarterly and yearly audited financial results with accompanying filing to the SCE. These REITs also have numerous independent performance benchmarks available for tracking the industry. There are a wide range of analyst reports available to the public, which means these REITs are highly transparent.
Non Exchange Traded: Is a REIT that files with the SEC, but whose shares don't trade on the national stock exchange. Programs vary from company to company. Generally, there is a minimum holding period for these REITs. An investor’s exit strategy is generally linked to a required liquidation after some period of time (often 10 years), or the stock may then be listed on the national stock exchange. Typically, the minimum investment is $1,000 to $2,500. Fees range from 10-15 percent of the investment; these are charged as broker-dealer commissions and there can be additional up-front cost. Ongoing management fees and expenses are typical and there can even be back-end fees. These Non Exchange Traded REITs are subject to state and North American Securities Administrators Association (NASAA) regulations. They are required to make regular disclosures to the SEC. There isn't an independent source of performance for tracking these REITs. Non Exchange Traded REITs have a little less transparency and there is a larger commitment of time and money. These REITs have seen more activity in terms of new deals (192 properties), than publicly traded REITs (174 properties), through the first half of 2010, according to analysis at SNL Financial.
Private: Is a REIT that is not registered with the SEC and whose shares do not trade on national stock exchanges. The typical investment is a minimum of $1,000 to $25,000. Up front fees can run anywhere from 10-16 percent. These REITs aren't very liquid and the redemption period can be a minimum of two to three years. Private REITs are only really required to disclose the initial offering and file registration with the SEC. However, the more transparent these Private REITs, the more it lends to the investor's confidence, security, and credibility in them as an investment. These REITs are designed for the institutional investor, therefore, requiring a much higher minimum investment.
Which one of these three is doing the best in the industry you may ask? Here is some data and highlights of Non Exchange Traded and Publicly Traded REITs over the last six months.
Non Exchange Traded REIT:
- There are a total of 49 Non Exchange Traded REITs, with 32 currently raising capital
- 17 are closed to new investment
- They have assets totaling $64.8 billion
- They raised $1.8 billion just in the first Q of 2010
- 36 of the 49 declared dividends that averaged 6.10 percent
Publicly Traded REIT:
- They raised $2.7 billion from just 20 of the publicly traded REITs
- The FTSE NAREIT index (made up of 106 REITs) declared a dividend of 3.86 percent
- Raised capital by reinvestment of dividends in 2009 and 2010
Okay, now you've decided to diversify your portfolio with REITs, how do you value them? There are many factors that affect the value of a REITs share price; it all begins with earnings that are tied to predictable and growing streams of rental revenue.
Many REIT analysts look at net asset value (NAV) as a reference point for the valuation of a company. NAV equals the estimated market value of a REIT's total asset (mostly real property) minus the value of all the liabilities. When divided by the number of common shares outstanding, the NAV per share is viewed by many as a useful guideline.
I hope this gives you a little more insight into different kinds of REITs and how they can best fit into your financial plan and portfolio. If you want more information on how to research different REITs, attend the Professional Real Estate Investor class.
Great Fortune,
- Diana Hill dhill@tradingacademy.com
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