REIT – Real Estate Investment Trusts

September 26th, 2010 · 39 Comments · Buying or Selling Your Property, REIT

Are Your Real Estate Investments Stable ?

I’ve discussed at length the difficulties that small landlords face. The bottom line is that they are usually competing with residential consumers for rental properties. Homeowners will pay more for houses than landlords. Landlords can’t pay high prices if they want to own a sustainable property that doesn’t require substantial cash “donations” from the owner. Unfortunately, prices on investment properties start to be anchored to their income generating capacity at the $1 million mark. (In Toronto) this is far beyond the ability of the average landlord to fund. You’ll need roughly $400,000 to buy an apartment building at this price point. What if you don’t know anything about managing property?

Canadian Apartment Investment Conference

I recently went to CAIC, an event for owners, investors, property managers and other professionals who operate buildings. There were a number of very well informed, knowledgeable and relevant speeches about many different issues that challenge the industry.The first panel I got to discussed REITs and how they work. It was fascinating to get an inside look at the industry.

How Do REIT’s Work?

REITs get money from investors and buy buildings. Using the income from those buildings they pay their investors distributions. (Interest) There’s a lot more to it. You have to know how to manage a building so it makes money. I’ve seen some of the problems related to owner operated buildings and what happens when they don’t have any idea how to professionally manage their buildings. Real Estate is not an easy business.

Publicly Traded REITs

Publicly traded REITs get their money from investors on the stock market. They issue shares and use the money raised to go buy more buildings. I discussed this kind of REIT and why I think there’s a serious risk with these companies. Basically, because they are on the stock market, investors can sell their shares at any time. This worries me, specifically because it is my belief that in Canada we are looking a serious readjustment in the residential real estate market. A lot of what follows is depending on if the general public starts to panic or not. Because if John Q Public starts to panic any investment with Real Estate in the name is going to take a hit. Let’s face it ,John isn’t that bright and he’ll sell his shares because the “Real Estate Market Is Tanking”. So what happens if prices just go down and nobody panics? Nothing, unless the entire stock market drops precipitously for some other reason. In this case, the price of the units is dependent on what someone want to pay for them on the stock market rather than what the buildings are worth.

Private REITs

The price of the units of a private REIT is determined by the value of the building. There are some very standard calculations used to say how much a building is worth and these are used to determine the value of the building. For example if your building is worth $1,000,000 and you have 100,000 units, your units are worth $10. It’s not really that simple because there will be more than one building in the portfolio and the chances of a nice round number are slim, however that’s the basics.

What’s the Catch?

If you want to avoid stock market risk by buying into a Private REIT, you have to be an accredited investor. This means either investing over $150,000 or having net worth over $400,000, or income over $200,000 (singly) or $300,000 (jointly). If you are an accredited investor qualified by income or income the minimum investment is $5000. These criteria apply to Ontario, the other provincial requirements are lower.

The other catch is, because a REIT uses your money to buy a building, you have to wait to get your money out. Read the fine print on the Offering Memorandum for more details.

Who Would Benefit From a Publicly Traded REIT?

Publicly Traded REITs are easier to buy than private REITs. You just go into your trading account or call your broker and buy them on the open market. Just like any other stock you have trading risks involved.

Who Would Benefit From a Private REIT?

The private REIT is harder to buy, it will take more time and investigation. However for those investors who don’t want to have anything to do with the stock market but want higher returns than 2% from their savings account, a private REIT is a great alternative.Usually Private REITs pay about 1 to 3% more in distributions.

Greg Romundt – President, CEO and Trustee of Centurion Apartment REIT

I wrote up my coverage of CAIC for Million Dollar Journey. After I did, I emailed all the speakers just to verify that all my facts were 100% accurate. Greg Romundt of Centurion Apartment REIT was the only exec who replied directly. I did get another reply which I will post here later. I also emailed him six questions I had following the event with the goal of explaining REITs better for investors. My email interview with Mr. Greg Romundt will be appearing next Wednesday and Friday in two parts. Furthermore he is willing to respond to any questions about REITs that readers may have.

I’m impressed first of all for his willingness to answer my questions and the depth and breadth with which he did so. Another thing he mentioned was that if you are making a substantial investment in a private REIT, you should ask if it is possible to meet the people who are going to be managing your money and subsequent investment. This type of transparency is extremely valuable. I’d go even further if I were investing a large sum and suggest going to visit any properties in your area before you invest any money in any REIT (Publicly traded or Private) this way you can judge if you want to be involved in the company.

Real Estate Investment Trusts

I’ve been concerned about REITs. I wrote about the concerns I had in REITs and the Real Estate Market. Private REITs address the concerns I addressed in that article because they are not publicly traded and based on the value of the buildings. The other factor is a more personal observation about Greg Romundt in particular. He’s accessible, willing to talk and explain and seems like an honest guy. Those are all very important for the investor because it suggests a commitment to transparency, sustainability and ethical business practices. Furthermore, if he has the decency to answer a relatively unknown blogger’s questions, he’ll answer investor questions too.

For those who want to invest in Real Estate, but avoid the stock market, and who believe that Appreciation = Speculation in real estate a private REIT may just be what you’re looking for.

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39 Comments so far ↓

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  • Thomas Beyer

    This is great insight.

    Missing though is the fact that some private REITs set their unit value arbitrarily and are not as reliably correct as a freely trading public stock/REIT.

    Private REITs can be better investments if the management is honest which cannot always be said for the exempt market they work in .. as recent lawsuits against and blowups of real estate syndications have shown.

    Some comments on mistakes to avoid in real estate syndications are listed here:

    http://www.prestprop.com/8mistakes.html

    • Rachelle

      Yeah I heard something about League REIT hiring some extremely reputable real estate appraisers then firing them, then hiring another company to finish the appraisal.

  • MontierFan

    This article reads like a PR piece drawn up by the guys behind private REITs! And has many inaccuracies.

    Number one – a REIT distribution is NOT interest. It is a return on equity and a return of capital.

    You say that public REITs worry you becasue of a readjustment in the residential real estate market. I don’t follow the connection there since there are no public REITs in Canada in the business of buying and selling homes as that type of income would disqualify the entity from being a REIT.

    “In this case, the price of the units is dependent on what someone want to pay for them on the stock market rather than what the buildings are worth.” True and not true. Public REITs typically trade around their Net asset value and are priced as a function of the underlying asset value. REITs adjust more quickly than appraisals so you may believe that your private REIT value is unchanged when actually it is just that the appraisal value lag transaction values.

    “The price of the units of a private REIT is determined by the value of the building.” The value of the building according to whom? Management picks the cap rate and tells you what it is worth in many cases. Is it a fair valuation? Is it by a qualified appraiser?

    “Usually Private REITs pay about 1 to 3% more in distributions.” What about capital appreciation?

    I enjoy your landlord tips but your REIT posts lack substance.

    • Rachelle

      The reason I believe that publicly traded REIT’s are headed for a downturn is not because there is a correlation between the residential real estate market but because of the influence of the residential real estate market on PUBLIC PERCEPTION. Frankly if residential house values drop 10 to 20% every stock with real estate in the name will be affected.

      It is also a good point you make about NAV values as well, there was in fact a controversy a while back with League Private REIT and their announcement to use a very respected appraiser only to fire them once they received their report and hire another linked with a real estate company.

      I personally do not count appreciation as it is not predictable. Furthermore, as interest rates rise building values fall. You count your appreciation when you sell not before.

      I enjoy your comments but not the ones about REITS ūüėČ

  • MontierFan

    “Frankly if residential house values drop 10 to 20% every stock with real estate in the name will be affected. ”

    Actually studies show the correlation between house prices and REITs is very low, in the range of about 0.25. Housing and commercial property have very different drivers.

    “Furthermore, as interest rates rise building values fall.” Not necessarily… the relationship is more complicated than that and there are many instances of rising rate environments where real estate has done very well. You have to consider inflation in th equation as well.

  • Douglas Thiessen

    Personally, I can’t see why someone would invest in a private REIT unless the yield was substantially higher than a public one, and that doesn’t seem to be the case. And if the yield is REALLY high, than it is a bit of a red flag, isn’t it? I mean, with a private REIT there’s no liquidity, you’re usually locked in for at least 5 years (and in some cases virtually forever), whereas with a public REIT you can sell whenever you want.
    Of course, it may not be the optimum time to sell, but at least you CAN sell. The assets in a private REIT may have suffered just as badly as in a public one, you just don’t have it flashing up on a screen every 2 seconds.
    There’s definitely a place for private equity – but I think it justifiably demands higher returns.

    • Rachelle

      Well the payout on most private REIT’s is usually higher than public REITS, also the cash out period for private REITs is 30 days. The important thing to keep in mind is that REIT’s must be sustainable. Public or Private if they are paying out more than they take in, there will be problems over time.

      Thing is the price of a unit should reflect the Net Asset Value of the building. Apartment buildings don’t go up an down in value like a flag in the breeze. Publicly traded REITs are much more vulnerable to piublic sentiment and who’s dumping or buying a bunch of stock on a daily basis.

      Of course public or private, if the principals are dishonest it’s a big problem.

    • walter schultz

      Doug
      skyline reit is private and pays 9% and money back in 30-60 days no problem and the unit price is a lot more stable

  • MKB

    I just found this article. Its Fantastic. I have been following this new blog about Canadian REITs from League Assets Corp. : http://league.ca/education/the-basics . Its got daily market summaries and market analysis has helped me understand the in’s and out’s of REIT investing.
    hope that helps someone.

    • Rachelle

      You understand that League is one of the worst offenders in the REIT space with their anecdotal stories and Blue Book. Then there was that little incident where they fired one of the most respected building valuation companies after crowing about how they valuate their buildings.

  • Joe Ross

    I get highly suspicious of any so-called investment that posts Youtube videos with titles like ‚ÄúIs League Assets REIT a Scam?‚ÄĚ, along with other fake blogs with similar titles, and tiny Google ads all over the place promising 14% ‚ÄúROI.‚ÄĚ This does not strike me as a method by which a legitimate investment would be marketed.

  • Advisor

    There is a more recent discussion of the League REIT situation here:

    http://leaguereviewed.wordpress.com/2011/10/20/colwood-city-centre-lp-impact-on-igw-reit/

    The picture does not look very good at all.

    • Rachelle

      Very interesting! So the plot thickens. How can these people market this ponzi scheme to new investors? It’s thievery at it’s most outlandish.

  • Emanuel Arruda

    Me again.

    I just wanted to clear something up about why we switched from Altus to Colliers for our property appraisals…

    We wanted more than just property appraisals, we wanted an independent valuation for our REIT Units themselves. Altus was not able to provide that Colliers was.

    The story was explained and posted here:

    http://league.ca/updates/2009-05-01-Colliers_Joins_In_IGW_REIT_Value_Certification.html

    I hope this helps reverse your previous conclusions and that you’ll remove the posts made by a visitor on this thread about “ponzi schemes” the financialwebring website (which was seeded by the same disgruntled individual as multiple posters on that thread) and “anecdotal stories.”

    If you have any questions or concerns, I invite you to call me anytime at 250-920-6269

    Regards,

    Emanuel.

    • walter schultz

      who would want to phone and talk to the likes of him.hes so full of himself its sickning and hes so full of shit its pathetic

  • Rich

    The fine print of a private REIT that was mentioned in this report reads strictly that there is risk and that your principal may or may not be returned.

    • Rachelle

      Yeah that’s any REIT or stock public or private. That’s why they call it risk, because there’s no sure thing in life. But you may well get hit by a bus tomorrow so don’t dwell on it, enjoy yourself.

  • Joe Ross

    The League REIT appears to have suspended distributions on its “investments” and slashed NAV:

    http://www.vibrantvictoria.ca/forum/archive/index.php/t-5785.html

    Who are the marks that typically get duped into buying this type of garbage? Seniors, uneducated investors likely. The marketing glop dispensed by this organization wouldn’t impress any serious investor, and the internet shills promoting this scheme on sites like Vibrant Victoria are another huge red flag.

  • Keith M

    I had a very long, very interesting meeting with a fellow who had about $30M invested in the Colwood Corners project. He (luckily) got his money out, and League promptly stopped distributions and pulled their website down, ostensibly for changes. They got a $31M loan from another company (Firm Capital) who I believe is now in control of the project. League has raised over $1B to date, and all of that money is at serious risk. They have done nothing overtly illegal, as their OMs cover their behinds, but moral? Ethical? Not. That is what is so fascinating with Manny’s marketing drivel…the code of ethics, the golden rule…and that phony coat of arms.

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  • walter

    I have money in the league.The only bad project that I got unwitingly involved in was the Duncan mall.The rest seems to be doing fine.the league pays ok at 7-8%
    The BEST REIT in canada right now bar NONE is Skyline.pays 9% ROC and NO term has been in business since 1990
    Very very upfront honest and sincere group of men.iam happy with the league and am staying but think skyline is better although they are strickly buy ,hold and lease so no real potential for capitol gain where as league does both.some buy,hold and lease and some develop and resell for a gain(hopefully) Obviously Duncan has no gain though but lots of the other projects have done very well

    • Rachelle

      Personally I’d be much more comfortable with people who intend to keep the assets as there will be less speculation.

      • steve

        With respect, Rachelle, Mr Arruda from League gave you a very specific and courteous reply, and offered to make himself available. You appear to have totally ignored this. It reduces your blog to a rather infantile diatribe.

        • Rachelle

          Steve get Mr. Arruda to call his 165th victim and discuss it with him. That guy left me a message last week. And you can tell Mr Arruda that unless he wants to have me looking into his dirty laundry and posting it all over this website and others, he’s better to stop threatening me with libel lawsuits. He’s a bully but just like the last bunch of bullies who messed around he won’t enjoy the results. I’m not scared of his stupid threats because truth is a defense my friend.

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  • Jean Paul L

    I thing you are confusing a) replacing first investors with new ones with b) paying investor profits from new moneys. B is panzi, a is not.

    if b were happens, the audit would show it to everyones. I think so

    • Rachelle

      Yes well I think you overestimate most people’s ability to read financial statements. For instance once funds start being commingled from one company to the other it’s a little harder to keep track of. I doubt anyone except a forensic auditor with full access will be able to figure out where the investors monies are

  • Michael

    WOW! It looks to me like Rachelle was the only person in Canada who possessed the scruples to see that the emperor was wearing no clothes. Everyone else was either drinking the Kool Aid or selling it. One year later and her last comment has an eerily prophetic quality.

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