A REIT is an investment company that owns, operates and manages income-producing real estate assets. These assets can range from office buildings, apartment buildings and shopping malls to hotels, student housing complexes and industrial warehouses.
Investors may buy shares in a REIT as a way to diversify their portfolios or earn income from the real estate market (although they do require a significant upfront investment). And because there are no public or private shareholders in these companies, investors never have to share profits with anyone but the company’s management team.
REIT:
Real Estate Investment Trust. An investment company that owns and manages physical property. REITs must distribute at least 90% of their taxable income to shareholders in the form of dividends. REITs are required to maintain specified levels of liquidity, as measured by current ratios, debt-to-equity ratios and interest coverage ratios, as well as a minimum net worth and a specified amount of equity per share.
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Transaction:
A REIT is a corporation whose market value will be included in the “fair market value” of its shares in the stock exchange and may be traded through an exchange. The main attributes to consider when evaluating a REIT are whether it is publicly listed, how many shares are being traded, what are its asset values, what MANAGEMENT focuses on and whether it is deemed attractive to investors.
This article deals with the prices of real estate investment trusts (REITs) on three major stock exchanges (NASDAQ Stock Exchange, New York Stock Exchange and Chicago Board Options Exchange). As of the close of business on May 18, 2015, the total market cap for REITs was about $386 billion.
The article also discusses how to accurately value REITs by comparing their assets to their liabilities, as well as how to calculate the liquidation value (fair market value) of REITs in order to compare their investment values with market prices.
A REIT is a corporate form that is similar in many respects to an ordinary corporation. For example, a company can issue stock, receive dividends and even pay tax on its income. They differ from corporations in that the income they generate does not go to shareholders. Instead, the income from real estate is mainly used for paying taxes and buying back shares; this is known as “dividends”.
Investors typically purchase shares, either directly (through a stock brokerage or broker/dealer) or indirectly (through mutual funds or a financial planner). REITs are among the least liquid of all investments. One REIT share is worth about one-third as much as a single share of Apple Inc. whereas 10 shares of Apple will be worth less than one-sixtieth that amount. In other words, that same $10,000 invested in 10 shares of Apple will be much more valuable than the same $10,000 invested in 100 shares of an REIT.
REITs are built around real estate: office buildings, apartment buildings and shopping malls as well as hotels, student housing complexes and industrial warehouses. The income they generate can be used to purchase additional properties, securities or even a piece of a large corporate entity.
When purchasing real estate assets through a REIT, the investor is not buying shares in the company that owns the property. Instead, he or she is buying shares in what is known as an “asset-backed security”. A security backed by real estate is typically issued by a REIT to investors (with actual physical properties serving as the underlying asset). The underlying asset backing is covered by another security (a bond) issued by the REIT itself. Like all bonds, these are totally backed by the property being invested in.
Asset-backed securities are not fixed to a specific property. They can also be used to invest in other types of assets, such as mortgages and corporate bonds. The main reason for including a REIT in an investment portfolio is that it is less volatile than most other common stocks.
In the event of the REIT’s liquidation, the return of investors’ principal is guaranteed by a specified value per share. Regardless of how well (or even if) the real estate business performs, investors will always receive this “guaranteed return”. In addition, investors should have some expectation that they will receive an additional return on their investment. For example, they may have paid 20% to invest in a REIT, but if the real estate business were not performing well and did not achieve its investment objectives, then the shares could be worth less than 20% of their original cost.
Investors who want to take advantage of the income generated by their REIT’s real estate holdings can do so by renting out these properties. However, it should be noted that an REIT will likely have to allocate more funds towards rental income over time. This is because rental income is affected by numerous factors that are hard for an REIT to control (such as a downturn in the economy). On the other hand, the growth of a company’s stock price is directly tied to an increase in its profitability. Therefore, investors can expect their investment returns to be higher than they would have otherwise received had they invested in the stock without any real estate income.
Most REITs sell their properties through a full-service institutional process. This means that a company representative will visit the property being purchased and interview management to determine whether it is “investment-grade” (rated high on certain criteria such as occupancy rates or management quality). If it passes these criteria, then an offer will be made to purchase it. These offers are usually governed by strict confidentiality agreements.
The process of selling real estate is known as “selling off” the property. Usually, a rich mixture of buyers are interested in purchasing a particular property. As such, the price paid for a particular property is negotiated with each potential buyer. The price is usually hammered out across an extended period of time, often months or even years; this is known as being “negotiated”.
If an acquisition agreement (or lease) cannot be reached between the buyer and seller, then it will be referred to as “unsold” or “offered for sale”. The method for determining what price will be paid for a particular piece of real estate varies from company to company and even from individual to individual.
