A real estate investment trust or REIT is a corporation that combines the capital of many investors to acquire or provide financing for real estate. It offers the benefits of a real estate portfolio under professional management and generally does not pay corporate federal income tax. Distributions of at least 90 percent of taxable income must be paid to investors to retain REIT tax status. If a REIT fails to qualify or maintain its qualification as a REIT for any taxable year, the REIT will be subject to federal income tax on taxable income at regular corporate rates resulting in a decrease in net earnings for investment or distributions.
- Why Invest in Non-traded REITs?
- How Does a Non-traded REIT Work?
- Evaluating Non-traded REITs
Why Invest in Non-traded REITs?
Real estate has the potential to provide portfolio diversification. By having low historical low correlation to stocks and bonds, its inclusion may offset fluctuations of other securities in a portfolio as the economy and market conditions fluctuate, and may serve as a hedge against inflation. It is important to note that low correlation does not guarantee against losses.
The indices used for real estate and private debt differ from non-traded REITs and BDCs in many ways, including not incorporating brokerage fees or taking into account market valuation in the event of a public offering. Capital gains and dividends received may be taxed in the year received. The real estate index reflects investment-grade, income-producing properties typically acquired on behlaf of institutional tax-preferred investors and returns are depicted net of property-level management fees. The private debt index reflects a 50/50 combination of institutional leveraged loans and the broad high yield loan market. Diversification does not eliminate the risk of experiencing investment losses. An investment cannot be made directly in an index.
How Does a Non-traded REIT Work?
Investors interested in diversifying through real estate may purchase shares in a non-traded REIT. The REIT uses that money to acquire real estate properties and other real estate-related assets. The REIT obtains income from property tenants through rent and/or interest payments, and then passes that income along to its investors through distributions.
Distributions are not guaranteed and may consist of income offering proceeds and borrowings. When paid from sources classified as return of capital or borrowings, it may reduce the number of acquisitions, lower overall returns and not be sustainable.
Evaluating Non-traded REITs
With so many non-traded REITS available in the market today, Financial Advisors must look beyond the traditional deciding factor: the distribution rate. Carefully review return characteristics, asset locations, management experience, performance, property portfolio makeup and liquidity framework.
This neither an offer to sell nor a solicitation of an offer to buy the securities described herin. An offer may be made only throuh the prospectus. This sales and advertising literature must be read in conjunction with the prospectus in order to fully understand all of the implications and risks of the offering of securities to which it relates.
Morningstar Chart Dataset Information (1992-2012):
Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while returns in stocks, direct real estate, private debt, private equity and REITs are not guaranteed. The Real Estate Index trades in a private asset market, which is different in structure and function compared to the publicly-traded REIT market. The Real Estate Index differs from non-public REITs in many ways, as it does not incorporate brokerage fees, take into account market valuation in the event of public offering or reflect liquidity constraints. Real estate investment options are subject to certain risks, such as risks associated with general and local economic conditions, interest rate fluctuation, credit risks, liquidity risks and corporate structure. International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and financial standards.
Private Debt – equally weighted composite made up of 50% Credit Suisse Leveraged Loan Index and 50% Bank of America-Merrill Lynch U.S. High Yield Master II Index.
U.S. Aggregate Bond Index – Barclays U.S. Aggregate Bond Index which measures investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS, ABS, and CMBS.
Domestic Stocks – Standard and Poor’s 90® index from 1950 through February 1957 and the S&P 500 index thereafter.
International Stocks – Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE®) Index.
Traded REITs – FTSE NAREIT All Equity REIT Index ®
Private Equity – Cambridge U.S. Private equity index which is compiled from 883 U.S. private equity funds (buyouts, growth equity, private equity energy and mezzanine funds), including fully liquidated parnerships, formed between 1986 and 2010.
Real Estate Index – Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate from March 1985 to December 2010 and NCREIF Transaction Based Index (NTBI) thereafter.
Correlations are based on annual frequency. The data assumes reinvestment of all income and does not account for taxes or transaction costs. An investment cannot be made directly in an index.
Disclaimer: The underlying index series and weightings used to represent the private debt composite were requested by CNL Financial Group. The 1992 start date for this analysis is constrained by the maximum available historical data for the private debt composite.