Investing in REITsInvesting in REITs(Real Estate Investment Trusts)(Real Estate Investment Trusts)September 8, 2012September 8, 2012

Don StewartDon StewartRegistered Investment Advisor & REIT InvestorRegistered Investment Advisor & REIT Investor

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REIT OverviewREIT 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 OverviewREIT Overview(Continued)(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 HistoryREIT 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.

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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

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REIT SubsectorsRETAIL Simon Property Group SPGAPARTMENT Equity Residential Properties EQROFFICE Boston Properties BXP

HEALTH CARE Health Care Property HCPINDUSTRIAL Prologis Trust PLDTIMBER Plum Creek Timber PCL OTHER American Tower AMT

MORTGAGE Annaly Capital Management NLY 13% yieldMORTGAGE Thornburg Mortgage (went bankrupt))

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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

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REIT Research Resources

• National Association of REITs REIT.comExtensive information about REIT history and operationsLists of public and private REITS, real estate mutual funds and ETFsFree 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 LibrariesValue Line & Standard & Poors data basesSanta Clara City LibraryValue Line & Morningstar data bases

• Discount Brokers Vanguard, TD Ameritrade, Fidelity, SchwabStandard & Poors and other analyst reports

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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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