Transcript Mutual Funds - Belmont University

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Real Estate (REITS)
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www.nareit.com
www.investinreits.com
REITs
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75% of assets in real estate
Pass through at least 90% of income
198 traded - $475 billion in assets
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20% of US institutional quality real estate
Dividends – currently about 7%
average
What are REITs?
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REITs established by legislation passed
in 1960 providing small investors access
to real estate investment
Operating companies which own and
manage commercial real estate
Assets consist of, and revenues
primarily come from, real estate
investments
Can selectively operate ancillary
businesses
REIT Types
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Equity (90%)
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Mortgage (8%)
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Own real estate assets
Revenues come principally from rents
lend to real estate owners
acquire loans or mortgage-backed
securities
Hybrid (2%)
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Combination of equity and mortgage REITs
What Makes a REIT Different?
Asset and Revenue Test
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75 percent of assets must be invested
in:
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Equity ownership of real property
Mortgages
Other REIT shares
75 percent of revenue must come from
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Rents from real property
Mortgage interest
Gains from sale of real property
Taxable REIT Subsidiaries
(TRSs)
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Allows REITs to more effectively
compete with other real estate owners
May provide services to tenants to third
parties such as landscaping, cleaning
and concierge
Investments in TRSs limited to 20
percent of REIT’s assets
TRSs must pay taxes at the corporate
level
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Private
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1) Institutional investors – large positions
2) Packaged with other services offered by
a financial professional
3) Incubator – start up hoping eventually
to go public
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Shares are traded like a stock
Commercial or residential property
REIT mutual funds
Why REITs instead of direct
investment?
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Property sector and geographic
diversification
Professional and experienced
management
Real-time pricing
Low transaction costs
Liquidity
REIT advantages
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Stable earnings from long-term leases
Attractive dividend yield
Competitive risk-adjusted returns
Diversification
Stable earnings
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Long-term leases, typically 5 to 15 years
Stable revenues – lease duration of 10 years,
only 10% of leases expire in a year
Expense reimbursements – leases for
commercial property structures so tenants
pay increases in expenses and taxes over life
of lease
Closed-end Funds
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About 700 funds
Fixed number of shares
Shares sell like stock
Generally hold less liquid assets
A lot are country funds
NAV versus price
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Generally sell at a discount (10%)
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(Price – NAV) / NAV
Can sell at a premium
Why?
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Taxes
Management fees
Investor sentiment
Distinctions from Open end
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Less liquid – no redemption
Fewer shareholders services
Leverage can increase returns
Don’t have to hold cash
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No inflows or outflows
Can invest in less liquid securities
Raising Capital
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Rights offer to existing shareholders
Leverage – commonly used
Sell new shares
Dividend returns
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NAV = $10, Price = $9
Dividend yield = $1/$9 = 11.11%, not
10%
Closed end fund dividend yield
generally higher than open end, all else
the same
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www.closed-endfunds.com