Investing in REITs (Real Estate Investment Trusts)

September 8, 2012

Don Stewart

Registered Investment Advisor & REIT Investor

AAII Silicon Valley Chapter [email protected]

REIT Overview

• • • • • Adding REIT ’s to your portfolio can increase returns and reduce volatility. (Ibbotson study) A 10 to 15% portfolio allocation is suggested.

REIT ’s own & manage commercial real estate properties, or hold real estate mortgages.

If they pay out their taxable income to shareholders, they pay no corporate income taxes.

Dividends received do not get the 15% qualified dividend rate. Consider holding REITs in retirement a/c ’s. Long term capital gains distributions do qualify for the 15% tax rate. 1/13 Fiscal Cliff???

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REIT Overview

(Continued) • • • There are about 200 public listed REIT ’s with total market capitalization of about $560 Billion.

There are also many unlisted REIT ’s. Be wary of them. There are more than 100 real estate mutual funds, etfs, and closed end funds.

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REIT History

• REITs were created by Congress in 1960 to allow ordinary investors to invest in commercial real estate along with the billionaires. • The original rules were difficult and REITs were slow to grow until after 1986 when rules were simplified. • In 1990 total REIT Market Capitalization was $8.7 Billion, less than 2% of the sector today. • Standard & Poors started adding REITs to their S&P 500 Index in 2001. There are now 15 REITs in the index. • REITs were severely impacted by the financial/real estate crash in 2008-9, but they have recovered very strongly since then. The commercial real estate recovery has been much stronger than the residential real estate market.

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REIT Performance

• Over the last 42 years, 1970-2011, REITs were the best performing asset class with an annualized return of 11.38%/year versus 9.8% for the S&P 500 • Index REIT correlation to S&P 500 was only .51.

• For the last 10 years to 6/30/12, FTSE NAREIT All Equity Index had an annual total return of 10.32%, versus 5.33% for the S & P 500. AAII Silicon Valley Chapter

Seven Core Assets

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REIT Key Factors

• Location, Location, Location • Diversification • Rental & Vacancy Rates • Average Lease Term • P/E: Price/Earnings Ratio, EQR 177-WOW • P/FFO: Price/Funds From Operations, EQR 22-OK • FFO = EPS + Depreciation Exp.- Capital Gains • Dividend Rate • Debt Management AAII Silicon Valley Chapter

RETAIL APARTMENT OFFICE

REIT Subsectors

Simon Property Group SPG Equity Residential Properties EQR Boston Properties BXP HEALTH CARE INDUSTRIAL TIMBER OTHER MORTGAGE MORTGAGE Health Care Property HCP Prologis Trust PLD Plum Creek Timber PCL American Tower AMT Annaly Capital Management NLY 13% yield Thornburg Mortgage (went bankrupt)) AAII Silicon Valley Chapter

REIT Investing Strategies

KISS (Keep It Simple Stupid): Buy a few Real Estate mutual funds and/or ETFs KICS (Keep it Complicated Smartypants): Build up a portfolio of individual REITs and mutual funds/ETFs AAII Silicon Valley Chapter

REIT Research

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Resources

National Association of REITs REIT.com

Extensive information about REIT history and operations • • • • • Lists of public and private REITS, real estate mutual funds and ETFs Free subscription to REIT Magazine Individual REITs & funds: on line web sites, and print reports mailed Value Line: 34 REITs and thousands of other stocks Morningstar: Many REITs, mutual funds, ETFs, and newsletters Standard and Poors: Many REITs, and other stocks Libraries have some print editions of their publications. More extensive reports available on line: Santa Clara County Libraries Value Line & Standard & Poors data bases Santa Clara City Library Value Line & Morningstar data bases • Discount Brokers Vanguard, TD Ameritrade, Fidelity, Schwab Standard & Poors and other analyst reports AAII Silicon Valley Chapter

Largest REIT Funds

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Sample Morningstar Report

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Sample Morningstar Report

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Largest REITs

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Sample Value Line Report

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