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Real Estate Investment Trusts (REIT)

Written By Brian Hicks

Posted December 4, 2008

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When it comes to real estate investing, not many people can follow in the footsteps of a Sam Zell or a Donald Trump. Be it by either genetics or a lack of savvy, they just don’t have the time, money, or knowledge it takes to be among the best.

And make no mistake about it, without any one of the three of those things, real estate investing can be a feast or famine routine. As we have seen, the bursting of the housing bubble has bankrupted enough real estate geniuses to nearly topple the entire system.

However, the good news is there are investments that can put you into the real estate arena without buying a fixer-upper and finding good tenants. It’s called a real estate investment trust or REIT for short.

What is a Real Estate Investment Trust?

Simply put, a REIT is a way for everyday investors to pool their resources with others and invest in large-scale commercial real estate ventures. That means it only requires money to partner-up with people that actually know what they are doing. The best part is they won’t call you at dinner time to complain about the toilet running. (What’s so tough about a little jiggle on the handle anyway?

The most common of these REITs are those invest in commercial real estate, apartments, condominiums, homes and other types of property. There are mortgage REITs, but they account for less than 10% of the market.

However, what all REITs share together are the following requirements to qualify. By law they must:

  • Be structured as corporation, business trust, or similar association
  • Be managed by a board of directors or trustees
  • Offer fully transferable shares
  • Have at least 100 shareholders
  • Pay dividends of at least 90 percent of the REIT’s taxable income (most REITs actually payout nearly 100 percent)
  • Have no more than 50 percent of its shares held by five or fewer individuals during the last half of each taxable year
  • Hold at least 75 percent of total investment assets in real estate
  • Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries

In addition, at least 75 percent of a REIT’s income must come from certain real estate transactions, including rents, gains from  sales or income derived from the foreclosure of property.

But beyond buying into a partnership with saavy investors, REIT’s also offer up the one thing that is lacking right now for investors in real property. That is liquidity.

Because if there is one thing that will ruin your real estate investment today, it is an illiquid market. However, because shares of a REIT are bought and sold just like stocks, there is always a market for them. That makes moving in and out these partnerships as easy as making a trade.  Just try to do that with the flip your brother-in-law talked you into.

Moreover, unlike that fixer-upper you’ve pinned your hopes to, the fortunes of a REIT aren’t tied to a single property. All REIT’s are diversified spreading out the risk involved with them.

REIT’s in a Down Market

Now I must admit talking up real estate investment trusts in today’s markets is something of a hard sell. And if you are familiar at all with General Growth Properties (GGP) then you know what I mean.

GGP has fallen hard of late, losing over 97% of its share price in less that year. In fact, it has gotten so bad for General Growth Properties that bankruptcy might be its only option if it is unable to rework a $58 billion note due on December 11.

But that doesn’t mean that all REIT’s are bad anymore than one failing bank makes them all worthless. With REIT’s as with the financials, there are good ones and ones that are kind of horrible.  For investors— as always—the payoff is in knowing the difference between the two. So it’s monumentally important to know who you partner up with these days.

For that there is no better measure than a track record that performs in good times and bad. After all, real estate is a cyclical as is gets.

As for General Growth Properties, their problem is pretty simple to me. They own too many very costly mega-malls and when the tenants in these marble canyons stumble it turns into a mega-headache for its owners.

And I don’t know if you have been to the mall lately but I can tell you that there are more and more empty stores in it. In fact, mine feels kind of like a black hole every time I walk into it and on the door there is a GGP sticker.

The Teflon REIT

Of course, when the broader markets sell off so hard and companies like GGP tetter on the brink it takes the good down right along with the bad. That has been the case lately, with my own favorite real estate investment. It’s one I call the “Teflon REIT” because bad news simply doesn’t stick to it for long.

That has given investors the chance to buy this REIT on the dips adding shares on the cheap. Again, this is not you’re average REIT.

In fact, while GGP was going down the tubes and trying to refinance its debt, the Teflon REIT was retiring debt and paying dividends. Along the way it retired over $100 million in debt with cash on hand, pushing out its next maturing notes to 2013.

Meanwhile, its monthly dividend program just kept chugging along as the company declared its 461st consecutive monthly dividend in its 39-year operating history. And in this market dividends definitely matter.

But one of the best aspects about this commercial real estate investment trust is this: It doesn’t own a single mall-not even one. Instead, they own more than 2,355 freestanding properties all over the country leased to retail chains under long-term net-lease agreements. In total, the company owns properties containing some 18.5 million leasable sq. ft. in 49 states.

Moreover, these properties are leased to just one tenant (as opposed to a number of tenants in the same building) and that tenant is responsible for all of the taxes, maintenance and insurance on the properties, in most cases, hence the term “net-lease.”

What this means is they own the types of commercial properties that are unlike all of the others. Their properties are located on busy street corners or on separate parcels and all they do is collect rent on them.  And while individually these properties could come under pressure the reality is that their properties are 97% leased.  

And here’s the kicker. The company only employs 74 people. By comparison GGP has over 4,000.

So if you want to own a piece of a real estate empire without the hassles, a REIT may be the investment that can give you all of the benefits without a tortured stint as a landlord.       

Just be careful to choose your new partners wisely.

Your bargain-hunting analyst,

 steve sig


Steve Christ, Investment Director

The Wealth Advisory

PS. To learn more about the Wealth Advisory and the portfolio the Teflon REIT is a dynamic part of click here. These safe harbor savings accounts may just be exactly what you’re looking for. Just like our REIT, the all pay safe and steady dividends which can provide you with a steady monthly income stream.