REIT – Real Estate Investment Trust – California REIT – Apartment REIT

REITs (Real Estate Investment Trust)

Studies in Real Estate trends, such as from the National Association of Real Estate Investment Trusts have shown that returns on investments in commercial real property generally, and non-listed real estate investments in particular, tend to be negatively correlated to returns on other common investments such as stocks and bonds. This means that, generally, when stock and/or bond returns are lower, private real estate investment fund returns tend to be higher and vice versa.

AMBAR believes that exchange listed REITs can be a suitable investment that should be considered as an element of a properly diversified investment portfolio. However, there are significant distinctions between listed REITs and non-listed REITs. The most important difference between the performance characteristics of a listed REIT stock and a non-listed real estate investment is the listed REIT's higher level of volatility.

In 2007, the Stanger Report, a newsletter published by Robert A. Stanger & Co. a nationally recognized investment banking firm specializing in valuations of real estate, REITs and direct participation programs, came out with a special suppliment on Non-Traded Public REITs. In this special issue they reported the following:

Until now, gauging the investment performance of the "new generation" of publicly registered, non-traded REITs has been a guessing game. When seven of these programs went full-cycle in 2006 and 2007, the appreciation component of the investment become known.

"Financial advisors who recommended these REITs to clients can hold their heads high, as all the investment objectives have been successfully attained while avoiding the volatility of the stock market." The typical investor received an internal rate of return (IRR) of 12.5% over a 5 year period. If the investor participated in the dividend reinvestment program, the IRR rose to 13.6% over the same period. IRRs among individual programs ranged from a high of 16.6% to a low of 7.4%. No program lost money.

REITs delivered a consistent flow of income - an attribute attractive to those seeking a haven from the volatility of the stock market.

AMBAR had clients in 4 of the 7 REIT programs in the Stanger Report study. Some things to keep in mind about the study: it covered only 7 REITS and is not indicative of all real estate investments made over the study's time frame. Not all investors received the returns mentioned above, and past performance is no assurance of future performance. Future results could be materially different than the past, and it is possible for an investor to lose money investing in real estate. Non-traded public REIT's are illiquid investments and may not be suitable for all investors.

REIT Definition

A corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT). They are also granted special tax considerations as they are not taxed at the corporate level as long as 90% of the income is passed on to investors.

Background on REITs

According to the Stanger Report, the modern non-traded REIT industry began to emerge in the late 1990s and grew dramatically after the dot com bust in 2001. REIT programs have significant differences from their Partnership cousins of the 1980s. Some of these differences include:

Improved Governance – REIT boards of directors are elected by shareholders with a majority of independent representatives vs. a strong general partner removable only by a virtual coup d’état.

Income Orientation – The focus of a REIT program vs. a partnerships’ reach for capital growth or tax advantages.

Lower Leverage/Risk Profile – Todays REITs' generally target a leverage amount up to 65% of the value of the property vs. partnership levels above 70%

Improved Interim Liquidity – REITs use their dividend reinvestment plan to make interim liquidity available for between 3-5% of the investors per year vs. No mechanism available in the partnerships of the 1980’s.

Additional Exit Alternatives – There are currently two additional exits in a non-traded REIT program which include listing on a major national exchange or merging with a larger REIT vs. the traditional exit of selling the portfolio.

Larger Capitalization – During the 1980’s, the typical size of a real estate partnership was less than $300 Million. Today, modern REITs average over $2 Billion in equity. With larger capitalization comes the added benefits of larger diversification and improved access to lower-cost financing.

Sponsor Experience, Strength and Quality – The new generation of REITs were initially offered by the sponsors who navigated the turmoil of the 1980s. As the market has grown, major institutional real estate advisors with outstanding experience credentials and strong financial condition have begun to sponsor non-traded public REIT programs. Examples of these companies given in the Stanger Report are Inland and CNL.

Keep in mind the attributes and risks associated with real estate investing. These include the long term nature of the investment, the risks involved (including economic & environmental risks among others), the fees, costs and expenses associated with the investment, and the potential for changes in tax laws concerning real estate and how they could impact the real estate market in general and your investment in particular. Always read the offering documents for a real estate investment carefully before investing.

Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC. Advisory services offered Pacific West Financial Consultants, Inc. A Registered Investment Advisor. AMBAR Financial Group is independent of Pacific West Securities, Inc.