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REITs: who runs them, how they are valued and what moves them

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Two REITs can own similar buildings and still differ in who runs them, how their value is measured, how you get out, and what spending and interest rates do to them.

The ruleNon-traded REITs: usually an external manager whose fees can conflict with shareholders; value is an estimate, often from appraisals; limited redemption programs the REIT can end; judge total return, not the payout; filings on EDGAR. Every REIT: risk follows its property type and can move with interest rates.

Managers, values and exits

Most non-traded REITs have no employees. An external manager runs them and may be paid fees based on the property the REIT buys and the assets it manages. Those fees grow as the REIT grows, whether or not shareholders gain, so the SEC flags them as a conflict. The manager may also run or be tied to companies that compete with the REIT, or that the REIT pays for property management or leasing.

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A listed REIT has a market price anyone can see. A non-traded REIT does not: any per-share value is an estimate, and where it rests on periodic or annual appraisals, it may not be accurate or timely. Getting out early is limited. A share redemption program, where one exists, has significant limits, may be ended at the REIT’s discretion without notice, and may redeem at a discount. Otherwise investors wait for the REIT to list its shares or liquidate, which might be more than ten years away.

A high early distribution is not proof of earnings. A non-traded REIT often declares distributions before it has bought much property, and may pay them from offering proceeds or borrowing, which lowers the value of the shares. The SEC tells investors to weigh total return: capital appreciation plus distributions. A registered non-traded REIT files a prospectus and supplements, and quarterly 10-Q and annual 10-K reports, on EDGAR. A private REIT does not regularly file reports with the SEC.

Most REITs specialize in one property type, and their rents follow their tenants’ spending. Office and industrial REITs are tied to business spending; retail and residential REITs to consumer spending. Mortgage REITs lend rather than own, tend to use more borrowed money, and many hedge with derivatives. REITs may also be sensitive to interest rates, in different ways for different REITs, and higher CD and savings rates can draw yield-seeking investors away from REIT dividends.

Exam terms (5)
External manager
An outside firm that runs a REIT with no employees of its own, often paid on acquisitions and assets managed.
Share redemption program
A non-traded REIT’s limited early-exit offer, which the REIT can end and may price at a discount.
Estimated value per share
A non-traded REIT’s per-share figure, set by estimate (often from periodic appraisals) rather than by market trades.
Total return
Capital appreciation plus distributions; the measure to use instead of payout alone.
Mortgage REIT
A REIT that lends on real estate or buys mortgage-backed securities; it tends to use more leverage.

Listed and non-traded REITs side by side

Listed REITNon-traded REIT
Who runs itOften its own staffUsually an outside manager
ValueMarket priceAn estimate, not a price
Getting outSell on the exchangeLimited program; listing or liquidation
Reports10-Q and 10-K on EDGARProspectus, 10-Q, 10-K on EDGAR
Both file with the SEC; only one has a price and an easy exit.

Try it: Cover the lesson. For a non-traded REIT you are offered, write one question for each of four things: who runs it and how they are paid, how the per-share value is set, how you could get out early, and where its latest results are filed. Then name its property type and whose spending drives the rents.

Check yourself

Try a question, then read the explanation to review the rule.

Opening your study record…

Worked example

Valentijn Osterhagen is offered a non-traded REIT in its first year. It pays a high distribution, is run by an outside manager paid on assets under management, and has a share redemption program.

  1. The manager’s pay rises with the assets it manages, so growth helps the manager whether or not it helps him. That is a conflict to weigh.
  2. The REIT bought few buildings before it began paying, so the distribution may come from investors’ money or borrowing. He looks at total return instead.
  3. The statement value will be an estimate rather than a market price, and the redemption program can be limited, ended or priced at a discount. He plans to hold until a listing or liquidation.
  4. He reads the prospectus, its supplements and the latest 10-Q on EDGAR, and notes that the REIT owns office buildings, whose rents follow business spending.

Same rule, new context

Opening your study record…

The closest contrast

Listed REIT: a price.

Non-traded REIT: an estimate.

This decides questions about value and exits. A listed REIT can normally be sold on the exchange on any trading day at the prevailing market price, which can fall. A non-traded REIT’s figure is an estimate, and getting out depends on the REIT’s program or a later listing or liquidation.

Summary

  • Non-traded REITs are usually externally managed; fees based on acquisitions and assets managed are a conflict to weigh.
  • A non-traded REIT’s value is an estimate, often from appraisals that may lag; a listed REIT has a market price.
  • Redemption programs are limited, can be ended without notice and may redeem at a discount; full liquidity waits for a listing or liquidation.
  • Judge a high early payout by total return, and read the prospectus, 10-Q and 10-K on EDGAR.
  • Office and industrial REITs follow business spending, retail and residential REITs consumer spending; REITs can move with interest rates.

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