What are REITs?

1. What are REITs? • REITs established by legislation passed in 1960 providing small investors access to real estate investment • Operating companies which own and manage commercial real estate • Assets consist of, and revenues primarily come from, real estate investments • Can selectively operate ancillary businesses

2. REITs • Pass through at least 90% of income • 226 traded on NYSE - $1.014 trillion in assets • 20% of US institutional quality real estate • 1,100 filed tax returns • Dividends – currently about 4.4% average • Local REITS

3. REIT Types • Equity (90%) • Own real estate assets • Revenues come principally from rents • Mortgage (10%) • lend to real estate owners • acquire loans or mortgage-backed securities

4. What Makes a REIT Different?Asset and Revenue Test • 75 percent of assets must be invested in: • Equity ownership of real property • Mortgages • Other REIT shares • 75 percent of revenue must come from • Rents from real property • Mortgage interest • Gains from sale of real property

5. Taxable REIT Subsidiaries (TRSs) • Allows REITs to more effectively compete with other real estate owners • May provide services to tenants to third parties such as landscaping, cleaning and concierge • Investments in TRSs limited to 20 percent of REIT’s assets • TRSs must pay taxes at the corporate level

6. Private • 1) Institutional investors – large positions • 2) Packaged with other services offered by a financial professional • 3) Incubator – start up hoping eventually to go public

7. Shares are traded like a stock • Commercial or residential property • REIT mutual funds

12. Why REITs instead of direct investment? • Property sector and geographic diversification • Professional and experienced management • Real-time pricing • Low transaction costs • Liquidity

13. REIT advantages • Stable earnings from long-term leases • Attractive dividend yield • Competitive risk-adjusted returns • Diversification

18. Stable earnings • Long-term leases, typically 5 to 15 years • Stable revenues – lease duration of 10 years, only 10% of leases expire in a year • Expense reimbursements – leases for commercial property structures so tenants pay increases in expenses and taxes over life of lease

19. Real Estate (REITS) • www.reit.com • www.investinreits.com

20. Closed-end Funds • 613 funds (2017) - $239 billion • 60% are bond funds • Fixed number of shares • Shares sell like stock • Generally hold less liquid assets • A lot are country funds

22. NAV versus price • Generally sell at a discount (10%) • (Price – NAV) / NAV • Can sell at a premium • Why? • Taxes • Management fees • Investor sentiment

23. Distinctions from Open end • Less liquid – no redemption • Fewer shareholders services • Leverage can increase returns • Don’t have to hold cash • No inflows or outflows • Can invest in less liquid securities

24. Raising Capital • Rights offer to existing shareholders • Leverage – commonly used • Sell new shares

25. Dividend returns • NAV = $10, Price = $9 • Dividend yield = $1/$9 = 11.11%, not 10% • Closed end fund dividend yield generally higher than open end, all else the same

26. www.closed-endfunds.com