by NAREIT
The Investor’s Guide to REITs
NAREIT’s Guide to the Real Estate Investment Trust Industry
Contents:
p2. REIT Basics
p2. REITs in the S&P Indexes
p3. Fundamentals of REITs
p4. Returns Delivered by REITs
p4. Characteristics of REIT Investment
p6. REIT Valuation
p6. Benefits of Real Estate in Portfolios
p7. REIT Sectors
p8. The REIT Story in Brief
© Copyright 2011
National Association of Real Estate Investment Trusts®
REITs: Building Dividends and Diversification®
1875 I Street, NW, Suite 600, Washington, D.C. 20006-5413 • 202-739-9400, 800-3NAREIT • 202-739-9401 fax • REIT.com
The Investor’s Guide to REITs
NAREIT NewsBrief
NAREIT’s Guide to the Real Estate Investment Trust Industry
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REIT Basics
Real estate investment trusts (REITs) are Investors can choose to benefit from the
companies that own and most often actively opportunities in the REIT market by purchasing the
manage income-producing commercial real stocks of individual REITs or investing in REIT
estate. Some REITs make or invest in loans and mutual funds or ETFs. Actively managed mutual
other obligations that are secured by real estate funds are run by portfolio managers with a high
collateral. The shares of most large REITs are degree of expertise in the real estate industry.
publicly traded.
REITs in the S&P Indexes
The U.S. Congress created the legislative
framework for REITs in 1960 to enable the The inclusion of REITs in 2001 in the Standard &
investing public to benefit from investments in Poor’s Indexes, the most widely followed
large-scale, commercial real estate enterprises. investment performance benchmarks for the U.S.
equity markets, underscored the importance of
Commercial real estate equity investment through REITs in public capital markets and
REITs has much to offer institutional and retail acknowledged the integral role they play in the
investors. REIT stocks provide superior dividend economy and in diversified investment portfolios.
income along with the potential for long-term
capital gains through share price appreciation, The ongoing success of the REIT model is a
and can also serve as a powerful tool for portfolio reflection of many things, from its income
diversification. generating and growth potential, to the proven
portfolio diversification benefits of owning REIT
Research by Ibbotson Associates, an investment shares; and from the benefits of active and
research unit of Morningstar, Inc., demonstrates professional management of real estate
the multi-faceted benefits of investing in REITs: properties, to the transparency and management
accountability that are essential components of
• The ownership of REIT shares over time has
REIT corporate governance.
historically increased investors’ total return
and/or lowered the overall risk in both equity
and fixed-income portfolios over time.
• Dividend growth rates for REIT shares have
outpaced inflation over the last decade.
Page Two The Investor’s Guide to REITs
The Investor’s Guide to REITs
NAREIT NewsBrief
NAREIT’s Guide to the Real Estate Investment Trust Industry
NAREIT’s Monthly Newsletter
Fundamentals of REITs Disclosure Obligation
Publicly traded REITs are vital companies that Publicly traded REITs, like other public companies
offer investors the benefits of commercial real in the U.S., are required to make regular financial
estate investment along with the advantages of disclosures to the investment community,
investing in a publicly traded stock. including quarterly and yearly audited financial
results with concomitant filings with the Securities
Liquidity and Exchange Commission.
Investors can purchase or sell shares in REITs as
easily as they purchase or sell shares in any other No Shareholder Liability
publicly traded company. REIT shares are traded As is the case with equity investments in other
on all of the major stock exchanges in the U.S., publicly traded companies, shareholders have no
including the New York Stock Exchange (NYSE), personal liability for the debts of the REITs in
Nasdaq, American Stock Exchange (AMEX), as which they invest.
well as various after-hours markets.
Low Leverage
Shareholder Value Like most other publicly traded companies, REITs
Just like investors in other public companies, tend to use moderate levels of debt in their capital
REIT shareholders can receive value in the form of structures. In fact, the average REIT debt ratio has
both dividend income and share value been below 55 percent for much of the last
appreciation. decade.
Active Management/Corporate Governance
Publicly traded REITs generally are actively and
professionally managed corporations. They
Investors can purchase
adhere to the same corporate governance shares in REITs as easily
principles that apply to all major public
companies. as they purchase shares
They have a senior management team that is
in any other publicly
headed by a chief executive officer (CEO) who traded company. REIT
actively manages the overall strategic vision and
equity of the enterprise. The board of directors shares are traded on all
appoints the CEO, which in turn is elected by and
accountable to the shareholders of the REIT.
major stock exchanges.
The Investor’s Guide to REITs Page Three
The Investor’s Guide to REITs
NAREIT NewsBrief
NAREIT’s Guide to the Real Estate Investment Trust Industry
NAREIT’s Monthly Newsletter
Returns Delivered by REITs Characteristics of REIT Investment
REITs Deliver Income & Long-term Growth In addition to the investment performance and
The special investment characteristics of portfolio diversification benefits available from
income-producing real estate provide REIT investing in REITs, REITs offer several advantages
investors with competitive long-term rates of not found in companies across other industries.
return that complement the returns from other These benefits are part of the reason that REITs
stocks and from bonds. have become increasingly popular with investors
over the past two decades:
High Dividend Yield
REITs are required to distribute at least 90 percent Predictable Revenue Stream
of their taxable income to shareholders annually in REITs’ reliable income is derived from rents paid to
the form of dividends. Significantly higher on the owners of commercial properties whose
average than other equities, the industry's tenants often sign leases for long periods of time,
dividend yields historically have produced a or from interest payments from the financing of
steady stream of income through a variety of those properties.
market conditions.
Earnings Transparency
Share Price Appreciation Most REITs operate along a straightforward and
Approximately one-third of the total return from easily understandable business model: By
REIT stocks since 1972 came from moderate, increasing property occupancy rates and rents
long-term growth in share prices. over time, higher levels of income may be
produced. When reporting financial results, REITs,
like other public companies, must report earnings
per share based on net income as defined by
generally accepted accounting principles (GAAP).
Dividend Yields: FTSE NAREIT Equity Return Components
FTSE NAREIT All REIT Index vs. S&P 500 Returns (%)
(Percent change, as of December 31, 2010)
(Year-end dividend yields, 1990-2010)
Price Average Annual Total Returns: 13.75%
Income
Average Annual Income Returns: 8.30%
12
FTSE NAREIT All REIT Index
10 S&P 500
0
90
92
94
96
00
02
98
04
08
10
06
08
04
00
96
92
88
84
80
76
72
19
19
19
19
20
20
19
20
20
20
20
20
20
20
19
19
19
19
19
19
19
Source: NAREIT® and Standard and Poor’s. Source: NAREIT®
Page Four The Investor’s Guide to REITs
The Investor’s Guide to REITs
NAREIT NewsBrief
NAREIT’s Guide to the Real Estate Investment Trust Industry
NAREIT’s Monthly Newsletter
Another way year-to-year financial progress can
be gauged is by comparing levels of Funds From REITs Outperform
Operations (FFO). FFO, the industry’s Leading U.S. Benchmarks
30-Year Compound Annual Total Returns
supplemental performance measure, differs
Data as of December 31, 2010
mainly from net income by excluding depreciation
and amortization of real estate assets and gains
4
.8
.7
.0
92
and losses from most property sales.
11
10
10
8.
12
Given the broad range of real estate property
sectors and business lines, there also are a
number of additional earnings metrics, which are
used by REITs in order to provide investors with a 10
greater level of insight into their performance.
Total Return
8
The combination of income returns from
dividends and capital gains from share price
appreciation can result in healthy overall returns
for REIT investors. Analysis by Ibbotson 6
Associates demonstrates that the combination of
dividends and share price appreciation has made
REIT returns competitive with other major
investments, including a broad range of large-cap 4
stocks, small-cap stocks and fixed-income
securities.
In short, REITs over time have demonstrated a 2
historical track record providing a high level of
current income combined with long-term share
price appreciation, inflation protection, and
prudent diversification for investors across the
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The Investor’s Guide to REITs Page Five
The Investor’s Guide to REITs
NAREIT NewsBrief
NAREIT’s Guide to the Real Estate Investment Trust Industry
NAREIT’s Monthly Newsletter
REIT Valuation Benefits of Real Estate in Portfolios
Many factors affect the value of a REIT’s share price Given the investment strengths and historical
beginning with the earnings tied to generally performance of REITs, it is no surprise that REIT
predictable and growing streams of rental revenue shares are commonly viewed as a good investment
and a price-earnings multiple assigned by the for all long-term, diversified investors.
marketplace.
Clearly, the inclusion of REIT shares in any investment
The level and growth of rents are largely determined portfolio is a prudent investment decision:
by economic fundamentals of supply and demand in
real estate markets. These fundamentals include Market Variability Balance
demographic factors such as population size, First, the variability of market returns over time and
population growth, employment growth, across all economic sectors makes it clear that
construction and the level of overall economic diversification is the key to long-term investment
activity. While differing from region to region, all of success. Integral to diversification is the inclusion of
these factors typically have a direct impact on rents equities representing all sectors of the economy,
and occupancy rates, which affect projected including real estate.
earnings and property values.
Attractive Risk/Reward Balance
Other factors include: Second, REIT shares have proven to offer an
attractive risk/reward balance in investment
Net Asset Value Calculation portfolios. Asset allocation analysis from Ibbotson
Many REIT analysts look at net asset value (NAV) as Associates has found that adding REIT shares to a
a reference point for the valuation of a company. diversified portfolio historically has increased total
NAV equals the estimated market value of a REIT’s portfolio returns or lowered overall portfolio risk.
total assets (mostly real property) minus the value of
all liabilities. When divided by the number of In fact, Ibbotson’s research shows that, when REIT
common shares outstanding, the net asset value per shares are added to an already diversified portfolio,
share is viewed by some as a useful guideline for the efficient frontier of the portfolio is raised. When
determining the appropriate level of share price. portfolio investments are efficient, risk-averse investors
can expect to realize higher portfolio returns with the
Property Portfolio Enhancements low level of portfolio risk they prefer, while
The value of a REIT’s property portfolio can be risk-tolerant investors can expect to realize lower
maintained or enhanced through consistent capital risk along with the high level of returns they seek.
expenditures. This is significant because strategic
property portfolio enhancements help to maintain or Ultimately, a more efficient portfolio is something
increase NAVs and can provide the basis for price that all investors – from those looking for value or
appreciation of a REIT’s shares. income, to those who are more growth-oriented –
will find attractive.
Page Six The Investor’s Guide to REITs
The Investor’s Guide to REITs
NAREIT NewsBrief
NAREIT’s Guide to the Real Estate Investment Trust Industry
NAREIT’s Monthly Newsletter
REIT Sectors
With a very diverse profile, the REIT industry offers REITs regularly explore new opportunities
investors many alternatives across a broad range of for income growth, from new acquisitions
specific real estate property sectors, including: or development to providing income-producing
• Apartment communities leasing or tenant services. Regardless of specific
• Office properties business lines, REITs acquire and develop their
• Shopping centers properties primarily to actively manage and operate
• Regional malls them as income-producing, ongoing businesses.
• Storage centers
• Industrial parks and warehouses
• Lodging facilities, including
hotels and resorts
• Health care facilities
• Natural resources.
REITs Invest In All Property Types
(as of March 31, 2010)
Mixed
2.1%
Freestanding Retail
Industrial 1.7%
4.6% Manufactured
Self Storage Homes
5.3% 0.6%
Regional Malls
Lodging/Resorts 13.9%
5.9%
Apartments
Timber
13.3%
6.3%
Diversified
7.5%
Health Care
11.4%
Shopping Centers
7.8%
Mortgage
8.4%
Office Buildings
11.2%
The Investor’s Guide to REITs Page Seven
The Investor’s Guide to REITs
NAREIT NewsBrief
NAREIT’s Guide to the Real Estate Investment Trust Industry
NAREIT’s Monthly Newsletter
The REIT Story in Brief NAREIT Officers
Bryce Blair, Chair
REIT shares clearly can benefit most investors, AvalonBay Communities, Inc.
whether value-driven or growth-oriented, individual
or institutional. Donald C. Wood, First Vice Chair
Federal Realty Investment Trust
They offer the benefits of ongoing current income,
with the potential for long-term capital appreciation
W. Edward Walter, Second Vide Chair
that historically has met or exceeded inflation.
Host Hotels & Resorts, Inc.
They are equities that derive a large part of their
value from tangible, hard assets and the effective Ronald L. Havner, Jr., Treasurer
management of those assets. Public Storage
And they have been proven to bring the benefits of NAREIT Executive Staff
balance, diversification and greater risk/reward
Steven A. Wechsler, President & CEO
efficiency to a broad range of investment portfolios.
Tony M. Edwards, Exec. VP & General Counsel
We invite you to further explore what the REIT Sheldon M. Groner, Exec. VP, Finance & Operations
sector can offer you. Michael R. Grupe, Exec. VP, Research & Investment Affairs
The Investor’s Guide to REITs
NAREIT’s Guide to the Real Estate Investment Trust Industry
NAREIT does not intend this publication to be a solicitation related to any particular company, nor does it
intend to provide investment, legal or tax advice. Investors should consult with their own investment, legal
or tax advisers regarding the appropriateness of investing in any of the securities or investment strategies
discussed in this publication. Nothing herein should be construed to be an endorsement by NAREIT of any
specific company or products or as an offer to sell or a solicitation to buy any security or other financial
instrument or to participate in any trading strategy. NAREIT expressly disclaims any liability for the
accuracy, timeliness or completeness of data in this publication. Unless otherwise indicated, all data are
derived from, and apply only to, publicly traded securities. All values are unaudited and subject to revision.
Any investment returns or performance data (past, hypothetical, or otherwise) are not necessarily indicative
of future returns or performance. © Copyright 2011 National Association of Real Estate Investment Trusts®
NAREIT® is the exclusive registered trademark of the National Association of Real Estate Investment Trusts.
Page Eight The Investor’s Guide to REITs
