REITs on the Menu — Real-Estate Income, Traded Liquidity & Non-Traded Heat

What is a REIT? How do publicly traded, public non-traded and private REITs differ? Does a large REIT dividend represent sustainable income—or could leverage, fees and limited liquidity be hiding beneath the surface?

In Taco Tuesday Episode #10, Donald Johns takes investors inside the diverse world of Real Estate Investment Trusts.

REITs can provide exposure to income-producing properties without requiring investors to purchase and personally manage an entire building. But apartments, warehouses, shopping centers, hotels, hospitals, self-storage facilities, cell towers and data centers can respond very differently to economic conditions.

Inside This Episode

• How Real Estate Investment Trusts work
• Major property sectors within the REIT market
• Equity REITs versus mortgage REITs
• Publicly traded REITs and exchange liquidity
• Public non-traded REITs and redemption limitations
• Private REITs, eligibility and transfer restrictions
• Dividends, distributions and return of capital
• Funds from operations—FFO
• Adjusted funds from operations—AFFO
• Net asset value—NAV
• Debt, leverage and refinancing risk
• Fees, conflicts, property values and interest-rate exposure
• Bull versus Bear: access and income versus risk and illiquidity

PUBLICLY TRADED REITs

Publicly traded REITs generally provide continuously available market pricing and can normally be bought or sold through an exchange. However, liquidity does not guarantee a favorable selling price, and shares may experience substantial volatility.

PUBLIC NON-TRADED REITs

Public non-traded REITs may be registered with the SEC and file public reports, but their shares do not trade on a national securities exchange. Investors may depend on share-repurchase programs that can be limited, oversubscribed, reduced or suspended.

A stable-looking valuation may reflect periodic appraisal-based pricing—not the absence of economic risk.

PRIVATE REITs

Private REITs are generally exempt from SEC registration and do not trade on national exchanges. Access, disclosure, valuation, fees, transferability and liquidity can differ substantially among offerings.

The Reit Scorecard

Before evaluating a REIT, investigate

• Properties or mortgages owned
• Occupancy and tenant concentration
• Lease expirations
• FFO and AFFO per share
• Distribution coverage and sources
• Debt levels and maturity schedules
• Fixed versus floating-rate financing
• Management fees and conflicts
• NAV methodology
• The investor’s actual exit mechanism

Never inspect only the size of the distribution. Inspect the financial kitchen producing it.

The advertised yield is only the menu price. The real cost may be hiding in the leverage, fees, valuation process or exit restrictions.