TABLE OF CONTENTS

Chapter 1: What is a REIT? ...................... 1

Chapter 2: Why Invest in REITs? .............. 5

Chapter 3: Where to Find REITs .............. 10

Chapter 4: When to Invest in REITs ........ 13

Chapter 5: How to Invest in REITs........... 25

About Brad Thomas ................................ 28

 CHAPTER 1

WHAT IS A REIT?

A real estate investment trust, or REIT, is a legally recognized business structure that makes
money by owning or financing property.

If that sounds like any old apartment complex, don’t worry. It’s a little more noteworthy than that.
Actually, it’s a lot more noteworthy than that – particularly if you’re an investor looking to build up
safe, secure income toward your retirement.

REITs can center around apartment complexes, it’s true. But they can just as easily involve
medical facilities, office buildings, shopping centers, and utilities. Plus, they come with an
extremely specific tax structure built to benefit both them and their investors.

Let’s explain…

First legally created decades ago through the Real Estate Investment Trust Act of 1960, REITs do
not pay any corporate income tax.

This special treatment does come with a catch, however. In order to escape the normal business
tax burden, these entities have to pay out at least 90% of their otherwise taxable income to
investors in the form of dividends.

That’s the most well-known – and tempting – attribute about REITs. But there are other
requirements they must meet in order to qualify. According to the U.S. Securities and Exchange
Commission (SEC), a REIT must also:

• Be an otherwise taxable corporation

• Be governed by a board of directors or trustees

• Have fully transferable shares

• Include no less than 100 shareholders after its first full year of existence as a REIT

• Have no less than 75% of its total assets invested in real estate and cash

• Get no less than 75% of its gross income from real estate and real estate-related aspects,
such as real property rent and interest from mortgages that finance real property

1
• Derive no less than 95% of its gross income from real estate and real estate-related aspects

• Have no more than 25% of its assets consist of non- qualifying securities or stock in taxable
REIT subsidiaries.

Plus, REITs are specifically set up to keep them from being any one person or elitist group’s tax-
evasion effort. No more than 50% of their shares can be held by five or less people during the
last half of their taxable year.

While those regulations do keep REITS in a well-defined box, there’s

still plenty of room in there for smaller categories, classifications and even a growing number of
interpretations.

MORTGAGE REITS VS. EQUITY REITS

The idea of real estate investment trusts has certainly expanded over the years, but there still
remain only two broad categories: equity REITs and mortgage REITs. These classifications are
based on the types of investments they make and the source of their revenue.

Broken down to their most simplistic definition, mortgage REITs lend money to real estate owners
in one of two different ways. This can come in the form of direct funding through mortgages or in
a more indirect manner by buying up existing loans or mortgage-backed securities.

Also known as mREITs, most of them focus their businesses on issuing commercial mortgage
loans or making investments into real estate instruments. To a significant degree, they’re like
banks that lend almost exclusively to commercial real estate developers and landlords.

The major difference to point out here is that mREITs don’t borrow from customer deposits to
lend out to others. They instead raise capital by issuing private and public debt, as well as equity
in capital markets. As a result, their revenue comes from both the principal and interest payments
on their investments.

Equity REITs, or eREITs, on the other hand, are more “traditional.” The majority of their revenue
comes right from their tenants, whether those tenants are businesses or households.

Most of them buy up pieces of property to develop or already developed property, often using a
portion of their existing debt to help finance the purchases – rather like how new homeowners
buy a new house. Very few REITs can afford these assets outright; they put down what they can
and let an mREIT back the rest through a standard mortgage (known as property-level debt) or
corporate-level bonds (known as senior or unsecured debt).

Some never intend to outright buy the land in question. Instead, they rent it out from some other
individual or entity in much the same way they turn around and rent out the building space on top
of that land.
2
 This is known as a ground lease and is usually signed for several decades at a time. Hardly a
short-term agreement, this kind of transaction can cut into a REIT’s revenue and even its
stability, making the profit it offers its shareholders less appealing as well.

A DELVE INTO THE DIFFERENT KINDS OF EQUITY REITS

By definition and in practice, mortgage REITs are fairly standard. Other than acknowledging
them as being small-cap or large-cap opportunities, or by whether they fund commercial or
residential property managers, it’s hard to break them down into too many subcategories.

Not so much with their equity counterparts.

More often than not, the various kinds of equity REITs are referred to by the type of commercial
properties they own and/or operate. This makes perfect sense considering how that's the factor
that so often determines how a REIT is going to perform– a topic we’ll further address in the
following chapters.

For now, let’s just get familiar with the trusts themselves…

• As their name implies, healthcare REITS mostly make money by leasing space to healthcare
providers such as senior housing communities, assisted living or rehabilitation facilities, clinics,
medical office buildings (MOBs), labs and hospitals.

• Office REITs are similarly easy to understand. Catering to businesses of all shapes and sizes,
they can own anything from high-rises in major cities to single-story spaces in smaller
markets, which they rent out as workplace facilities.

• Industrial REITs also serve the business community, though in a much different capacity.
These entities offer space for distribution warehousing, light manufacturing and research and
development purposes.

• For their part, lodging/resort REITs can be boiled down to one word: hotels. The majority
of hotel names recognized in the U.S. are REIT-owned national or international brands.

• Next up, we’ve got residential REITs, which encompass three different categories: apartment
REITs (including campus housing), manufactured housing (i.e., mobile and fabricated homes)
REITs and single- family home rental REITs.

• Retail REITs is another category that holds its own subsets. There are shopping center REITs,
mall REITs and freestanding-retail REITs.

3
• There are also self-storage REITs, which are solely involved in renting out self-storage space
to individuals and small- to mid-sized businesses that need it.

• There are a growing number of specialty REITs that include prisons, cell towers, data centers,
billboards, infrastructure, farming and gaming.

• Last but not least, we have diversified REITs, which invest in two or more types of
commercial property at a time. This focus can make them much more stable than some of the
other kinds of specialty REITs mentioned above.

Between the mortgage side of this investment vehicle and the multi- armed equity angle, it’s
clear that REITs have a lot of room to work with. Which means that REIT investors have a lot of
ground to cover, both figuratively and literally.

4
CHAPTER 2

WHY INVEST IN REITS?

There are two simple and easy answers to be had… diversification and dividend income. Both
are crucial to a balanced portfolio.

Speaking on diversification, famous British investor, banker and fund manager Sir John Marks
Templeton, who happens to have dozens of investment opportunities named after him, declared
that:

“The only investors who shouldn’t diversify are those who are right 100% of the time.”

Called “the world’s greatest stock picker of the century” by Money magazine, Templeton was
still only right about 66% of the time. Hence the reason he was such a stalwart defender of the
practice of diversification.

While that word can obviously be applied to so many areas of life in general, when it comes to
investing, diversification is the slightly artistic science of organizing your portfolio to keep it
growing at a long-term sustainable and satisfactory rate.

While everyone’s ideal asset allocation model does differ to some extent or another, most
experts agree that real estate should take up a significant sliver of your investment space.

A common line of thinking is to delegate 5%-10% of your portfolio to real estate. And, to be sure,
that’s a good start. However, six major studies done between 2005 and 2015 have bumped those
figures as high as 20%.
5
To cite one study in particular, look no further than the 2016 Wilshire Associates’ study
commissioned by Nareit, a REIT lobbying firm. Its results, published as “The Role of REITs and
Listed Real Estate Equities in Target Date Fund Asset Allocations” in the “2016 Wilshire Report,”
found that 17% of an optimal portfolio should be dedicated to real estate investment trusts.

According to its findings, adding REITs to an already diversified portfolio resulted in nine less
basis points (0.09%) of risk. And it generated 33 basis points (0.33%) of additional return.

Those percentages might not seem like big deals when stated in a sterile report. But don’t
discount them in practice. The compound annual total return on the FTSE-Nareit All Equity
REITs index in the 25-year period through January 2019 was over 10.3%, a full percentage
point higher than the total return on the S&P 500 over the same period.

In short, holding onto REITs can make a big difference in your long- term financial health.

That’s because real estate represents one of the three fundamental investment asset classes,
the other two being stocks (aka, equities) and bonds. Each one of those categories involves its
own unique cycles, influences and outcomes. So, while bonds might have a bad year, real
estate could be booming. And while bonds are booming, stocks might lag.

It’s all about properly balancing risk and reward to achieve the most worthwhile, profitable,
stable returns.

ADDITIONAL INCOME THROUGH DIVIDEND PAYOUTS

We’ll discuss stability further in the next segment. First though, since we’ve already covered
diversification, let’s address the other D-term incentive for investing in REITs: dividend income.

Dividend income is one of the biggest and best reasons to include REITs in your portfolio.

Historically speaking, real estate investment trusts offer higher yields than either U.S. Treasurys
or the S&P 500 Index. Just as long as they feature conservatively leveraged balance sheets
alongside well-located and competitively managed assets, REITs can open up extremely
attractive opportunities for anyone looking for additional annual income or further funds to
invest.

The best REITs can not only sustain their dividend payouts but grow them every year,
demonstrating their overall health and continuing commitment to their shareholders.

The best of the best can do that even in the worst of times. That’s a big deal.

6
THERE’S SOMETHING TO BE SAID FOR STABILITY
Anyone who was burned by the 2008-2009 financial crisis can’t be blamed for being on edge
about real estate. After all, it was caused by an enormous real estate-blown bubble popping
loudly enough to send shockwaves through the global economy.

That situation bankrupted many a house flipper, it’s true. Then again, house flipping and other
forms of property transactions have made many a fortune as well. There’s a reason why people
go into the business.

There’s a lot of room for revenue generation and loss.

But investors don’t have to actually own any physical property in order to take advantage of the
real estate sector’s many benefits. They can leave that to much better leveraged, much better
managed real estate investment trusts – and still turn a profit in the process.

Now, REITs are hardly a perfect investment. Going back to what Templeton both practiced and
preached, nothing ever has been a perfect investment, nothing is perfect right now, and nothing
ever will be.

Remember all that talk about “too big to fail” we heard back in the day? Hopefully, we’ve learned
our lesson since then. Any man-made entity can fail... with no exceptions, substitutions or get-
out-of-jail free cards to be had.

With that established, let’s look at how REITs performed in the already slowing market of 2007
and the utter chaos of 2008.

An overall picture does show that they significantly underperformed in 2007, offering intense
warning signs about the economy that most everyone somehow managed to ignore. Then, in
2008, REITs were neither the worst performer nor the best, dropping 37.3% on average
compared to the Nasdaq’s 40% plunge and the Dow’s more “decent” 31.9% fall from grace.

But come 2009, only the Nasdaq did better. And REITs were the clear reigning champs
between 2010 and 2012.

For further proof that REITs can be an integral aspect of a healthy portfolio, at a 30-year chart
comparing them to the major U.S. indexes. When you do, you’ll see almost instant proof that they
provide a whole new profitable approach to diversification.

Of course, you shouldn’t just go out and buy up shares of any old REIT. Investors are always –
always! – encouraged to do their due diligence. And there are certain REIT categories that are
indeed less long-term advisable than others. So, don’t rush headlong into anything just yet.

We’ve still got more to cover first…

7
PRIVATE VS. PUBLIC REITS
Here’s where we draw a much-needed distinction between private or otherwise unlisted real
estate investment trusts and those that are publicly listed. Both are available to the average
investor, and both do operate under the same technical and legal structure.

But there are distinct differences that need to be addressed, particularly when it comes to
liquidity, transparency and ultimate costs.

Liquidity: Public non-listed REITs (PNLRs) and private REITs will often advertise their lack of
volatility as a selling point. And they’re right about that. Their investors don’t have to worry
nearly so much about tracking daily price movements.

While, no, they acknowledge, they’re not going to make any major unexpected gains that way,
they’re also not going to take any major unexpected hits. It’s peace of mind at its best, they
claim.

The semblance of stability that PNLRs and private REITs offer come at the constant cost of
liquidity. In other words, when you invest in anything other than a publicly traded entity, you’re
stuck to an uncomfortable degree. It can take weeks or even months to redeem an investment
should you want or need to do so.

That’s not meant to insult non-listed investments. It’s simply the nature of the beast.

Shareholders of publicly traded REITs, however, get to own liquid investments that can be sold
instantly on the stock market. This offers a set of SWAN (sleep well at night) style benefits that,
in our opinion, are ultimately priceless.

Transparency: As already mentioned, all REITs have to abide by a list of very specific IRS
rules. Those regulations do not change based on whether the investment in question is privately
traded, publicly traded or publicly traded on a non-standard exchange.

However, as with any list of even the most specific IRS rules, there are ways around them that
can and do affect the way they operate.

Publicly traded REITs – which are the kind that iREIT researches and recommends – have the
additional business burden of filing quarterly and annual statements with the SEC. These can
then be accessed by analysts and investors as they see fit.

This serves to keep management more accountable to their shareholders, which, more often
than not, benefits everyone.

While this benefit does hold true for PNLRs, privately traded REITs have no such requirements.

8
As such, they can be run by ethical, reasonable and competent people. Or they may not be.

Either way, it’s more difficult for investors to determine what they’ve really gotten themselves
into.
Cost: What isn’t at all difficult is determining that private REITs and PNLRs come with profit-
sucking fees.

These entities are almost always externally advised and externally managed, which means
they’re more expensive to run. For their legal owners, at least, it’s a tradeoff between time and
expertise expenditures vs. money spent. And the way they look at it, it’s worthwhile to cut into
their financial intake. Moreover, they’re not necessarily wrong about that assessment.

That’s because they’re not the ones who end up paying the price of that decision. Investors do
through a series of fees. There can be upfront fees of 12% or more once you factor in buying and
managing properties and paying involved advisors.

Ever since the Financial Industry Regulatory Authority (FINRA), addressed the matter in 2015,
management does have to directly address those additional expenses. They can’t bury them
like they did before. However, those additional expenses still do exist.

PUBLICLY TRADED REITS

Then there are publicly-traded REITs, the vast majority of which operate with their own
in-house advisors and managers. So, when you buy into them, those costs have already
been factored in.

That makes the vast majority of publicly-traded REITs worth at least a look. Though not all of
them. There is a small population out there that still operates with external management and
advisors.

One final negative aspect about externally managed REITs: they can too easily lead to
conflicts of interest between the people running a REIT and the people investing in it. And
when it does, you’d better believe that the people investing in it are going to come out on
the losing side.

The bottom line is this: Externally advised and managed REITs tend to underperform their
same-sector peers. So, while there are so many reasons to invest in REITs in general, make
sure you’re clear about the specifics of the ones you consider.

At least that’s the SWAN way of approaching them. And iREIT wouldn’t have it any other way.

9
CHAPTER 3

WHERE TO FIND REITS

We already technically touched on the topic of where to find REITs in Chapter 2. Some of them
are private. Some are public yet non-listed. And some are both public and listed, which means
you can find them on major market indexes.

Those are the bare-bottom details. And they’re good to know. But the specific subject of publicly
traded REITs is worth exploring quite a bit further considering how many exist.

According to [Link] (accessed on January 25, 2019):

“The Internal Revenue Service shows that there are about 1,000
U.S. REITs that have filed tax returns.

There are more than 225 REITs in the U.S. registered with the SEC that trade on one of the
major stock exchanges – the majority on the NYSE. These REITs have a combined equity
market capitalization of more than $1 trillion.”

This isn’t to say that each real estate investment trust holds an equal portion of that
mouthwatering amount of wealth. REITs are hardly all created equal. Never forget that they come
in a wide variety of shapes and sizes, with different dividend yields, market caps, financial data
and track records to consider.

And, in general, the publicly listed ones do trade according to those differentiations.

Some are available for under $10 a share – which, depending on who you ask – makes them
penny stocks. Others come nowhere close to that humble designation, with price tags set above
$100, $200 or $300.

Those REITs might not be Google (NYSE: GOOG) sized, but they can hold their own
nonetheless.

There are even real estate investment trusts deemed important enough to include in major
listings such as the S&P 400, 500, and 600. In those cases, it only makes sense that they’re
more high-profiled that way. Since more people know they exist, more people invest in them,
helping them to outperform their peers.

It’s how the game works.

10
For that matter, it’s how the game works the world around. The U.S. is no longer unique in
offering real estate investment trusts. Australia was an early-in proponent of establishing them,
and the trend took off from there.

Right now, every one of the G7 countries (Canada, France, Germany, Italy, Japan, the U.K., and
U.S.) offer REITs. Thirty-eight countries have enacted REIT legistration.

Source: NAREIT

And from global market to global market, the rules have stayed fairly consistent so far.

In addition, Argentina, Cambodia, China, Ghana, Indonesia, Malta, Nigeria, Poland, Portugal,
Sweden and Tanzania are considering implementing them as well. So, there’s not only a large
swath of the world that’s already REIT-friendly… but there’s still plenty of room to grow from
there.

At this point in the discussion, it’s only fair to note how nervous the topic of foreign investments
can make people, particularly those in the U.S. That’s understandable and even reasonable to a
degree considering how each country has its own reporting rules, reporting language, and
presentation styles for that reporting.

International investments can also pose a whole slew of risks on top of the “normal” hazards
associated with investing. There are political risks, tax risks and currency-related risks, not to
mention equally real risks concerning liquidity and risks concerning transparency.

U.S. News had this to say about it “way back” in 2016:

“Executing trades on foreign exchanges can be daunting, though some foreign issues are traded
in the U.S. Most experts say ordinary U.S. investors should rely on mutual funds and exchange-
traded funds.

11
Some experts recommend index-style funds, with allocations mirroring foreign markets’ shares of
global stock assets. Some index funds focus on specific regions and countries, and others
specialize in developed markets or emerging ones.

Other experts believe that some volatile, under-scrutinized foreign markets harbor enough
bargains – and risks – to justify the higher expenses of actively managed funds.”

That remains decent analysis in 2019 for any kind of foreign investment. And when it comes to
foreign investments in real estate in particular, there definitely are exchange-traded funds
available.

iREIT analysts have recommended some of them in the past and will no doubt recommend some
of them again. But for the purpose of this report, we’re sticking with more generic information
crafted to help you understand the nature of real estate investment trusts.

REIT-based ETFs often don’t offer traditional dividend yields. So, while investors are (hopefully)
reaping the benefits of holding foreign real estate, they’re not necessarily getting the full REIT
effect.

Oftentimes, for a more global reach, it’s better for at least U.S.-based investors to find U.S.-based
REITs that involve foreign holdings. That way, those big businesses with their big-name accountants
and high-power attorneys can handle all the international ins and outs.

You just get to focus on collecting incoming dividends and enjoying any upward movement the
stock itself takes along the way.

12
CHAPTER 4

WHEN TO INVEST IN REITS

Now.

That’s the answer to the question of when’s the best time to invest in REITs. Right now. The
overall sector is ripe for the picking.

That’s about as evergreen an investment statement as you’re going to get.

Here’s the thing… People worry too much about timing the markets. It’s even safe to say they
obsess over timing the markets, getting in and out according to any and every hiccup the
various indexes might have.

This makes their efforts both exhausting and futile.

Mark W. Riepe, CFA and senior vice president for the Schwab Center for Financial Research,
had this to say on the subject, as published on Charles Schwab’s site:

“Our research shows that the cost of waiting for the perfect moment to invest exceeds the
benefits of even perfect timing. And because timing the market perfectly is, well, about as likely
as winning the lottery, the best strategy for most of us mere mortal investors is not to try to
market-time at all. Instead, make a plan and invest as soon as possible…”

To drive that point home, let’s go back a chapter or two to our talk on diversification, specifically
in relation to Sir John Templeton. Despite being a powerhouse investor, he still got his stock
picks wrong a whopping third of the time.

Yet despite those blemishes on his otherwise very impressive track record, Templeton still
amassed an entire investing empire. And you’d better believe it wasn’t by taking all his money
out of the markets whenever things got a little shaky and putting it all back in whenever the sun
came out again.

Proper portfolio diversification isn’t a fair-weather friend. It stays consistent over the long term.
Just as long as you do.

None of that’s to say you shouldn’t have a proper exit plan for individual investments gone
wrong. You should. The main takeaway here is that, as a sector, REITs are worth maintaining a
permanent spot for in your portfolio.

It’s only a matter of finding the best ones to buy into at, yes, the best times. Once you get to the
macro side of investing in REITs, then we have something to talk about concerning “timing the
markets.”

13
And we’ll talk about it in detail.

GETTING DOWN TO THE DETAILS

Recognizing which specific REITs to buy at what specific times is a much different topic than
market timing. Reality requires us to acknowledge that certain sectors do better under certain
conditions. And intelligence requires us to handle that reality appropriately.

For instance, mall REITs used to seem utterly dependable. Then the internet came along to
shake things up, forcing investors to be a bit more selective about them now. Nor is that the only
kind of change to be aware of.

In try to determine the best time to invest in individual REITs, it’s best to know something
significant about the categories they fall into.

Many investors make the mistake of buying into specific real estate investment trusts because
they like the literal look of the buildings they own and operate. Or perhaps they know someone
who works at one of those properties.

There’s a lot more to it than that.

On the one hand, if a REIT has a superior set of properties, a conservatively leveraged
balance sheet, and a management team with a proven track record of prudently allocating
capital, it’s likely going to be a good investment. That’s overall accurate advice even if the REIT’s
price per share isn’t “cheap” or deeply discounted.

On the other hand, it never hurts to know as much about where you’re putting your money as
possible…

It only makes sense that each real estate category would be associated with distinct supply-and-
demand fundamentals that, in turn, assign certain risks and rewards to the landlords’ expected
income. Although these risks and rewards become most apparent during economic booms and
busts, they constantly govern the profitability of different property types and, by extension, affect
stock-price performance as well.

Understanding how, why and when different kinds of REITs have traded in the past can lead to
more worthwhile predictions about how, why, and when they’ll act up or down in the future.

So, let’s get right to it.

14
WHAT YOU NEED TO KNOW ABOUT HEALTHCARE REITS
Population growth, aging demographics and seemingly small or drastic shifts in consumer
preference have all fueled the growth in non-hospital healthcare locations and therefore in
healthcare REITs.

The industry these specific REITs revolve around has been growing significantly for decades
now, thanks in large part to the aging Baby Boomer populace. As such, many of these REITs
have shown strong performances for a while now, with more of that still to come.

There is such thing as oversupply, of course. To be clear, that could become an issue in this
sector, especially with the increase in urgent care centers around the country. So, investors
should be aware of this potential risk when evaluating where different healthcare REITs are
building and buying facilities.

Another potential problem – or bargain buying opportunity – to watch out for are any changes to
Medicare and Medicaid reimbursement plans. Most in-the-know establishments limit their
exposure to such government whims by leasing to tenants that emphasize private-pay care
instead. However, not all of them do, making it an issue to stay aware of when analyzing this
segment of real estate investing.

One final factor (though not always a negative one) to keep in mind is that healthcare REITs
normally employ what’s known as long-term triple-net leases. These involve the tenant footing the
bill for all or nearly all upkeep and maintenance bills for the building(s) in question. And that’s on
top of the rent.

Because these business agreements fall so far out of the tenant’s favor, they’re typically cheaper
than they otherwise would be. They’re also not going to rise as much even when they end and
need to be renegotiated.

This more often than not leads to very stable dividend production. Some might even call them
boring, and the same goes for their actual share prices.

Being such very armored securities, healthcare REIT stocks tend to move slower than other
kinds. Then again, they also tend to drop less in tumultuous times, which – on top of their
dividend potential – makes them worthwhile considerations more often than not.

WHAT YOU NEED TO KNOW ABOUT OFFICE REITS

You no doubt know the old adage that the three key considerations when dealing with real
estate are location, location and location.

Though it’s not the whole story, there's a lot of truth to that saying.

Naturally then, the same thing applies to real estate investment trusts, including office REITs.
Within each individual market, the “where” factor plays a major role in determining current rental
15
rates, future rent increases and property occupancy.

For instance, properties located in a city’s central business district (CBD) may garner higher
rental rates than a suburban location due to less easy-access foot traffic by way of walking, trains or
buses.

Those are the most obvious considerations here, but you’ll also want to assess other aspects
such as building quality (i.e., construction specifics and materials used), mechanical and
structural elements, and if the location(s) in question feature any in-building amenities such as
gyms or eateries. Basically, is a REIT building or acquiring high-end or lower-end properties?
Class A, Class B or Class C?

Newer buildings are typically classified as Class-A holdings, whereas older, non-updated, and/or
less visually attractive structures fall into the Class-B or Class-C categories. Since the terms
“older,” “non-updated” and “less visually attractive” can be subjective terms depending on the
exact location, take all that into account while evaluating an office REIT.

As a general rule, however, the classification system offers a helpful step in better
understanding these trusts and how they do business.

When it comes to their lease structures, office REITs most often work with full-service
agreements, meaning that they’re responsible for the properties’ entire operating expenses,
from landscaping to real estate taxes to insurance.

At first glance, that might make office REITs sound unattractive to buy into at any time. But
most of them include built-in financial clauses that account for those additional fees throughout
the contracted term (which typically start out at five or seven years). In addition, office leases
commonly come with annual rent escalations known as bumps or step-ups to protect them from
rising inflation.

Based on those new details, office REITs could sound intensely and consistently attractive. Keep
in mind, however, how cyclical they are in nature due to the human tendency to go overboard
with the good stuff. Oversupply inevitably turns office space into a buyer’s market, forcing related
REITs to compete with each other over price points, thereby driving down their profitability.

To be fair, that isn’t always management’s fault, since there can be a two-year lag or more
between assessing an area’s growing needs and having a completed building to offer in that
location. And, let’s face it, a lot can change in two years.

A lot has certainly changed in the last two decades – changes that, 30 years ago, nobody saw
coming.

For example, the ability for traditionally office-bound jobs to not be so office-bound after all has
definitely forced office REITs to rethink their business models. So too have businesses’ specific
cost-cutting attempts, including densification.

16
Densification is the trend to pack more people into smaller spaces. Back in 2000, employers
generally budgeted 250 square feet per employee. But by 2015, that number had dropped to an
average of 175. While the tendency has since seemed to taper off, it’s doubtful that it will go so
far as to reverse any time soon.

WHAT YOU NEED TO KNOW ABOUT INDUSTRIAL REITS

Industrial property (used as warehouses, light manufacturing and research and development
facilities) is among the most stable, least- volatile real estate asset classes in the United States.

Occupancy is simply not a problem in this neck of the real estate world, with 88%-92% of
appropriate buildings leased out at any given time. Better yet, when new buildings go up, it’s
because the country’s gross domestic product (GDP) has gone up.

The more demand for consumer goods, the greater the need for warehouses to store and
distribute them. This is true no matter if those offerings are being purchased online or at
traditional malls and shopping centers.

Businesses need space to store their supplies no matter what.

And the good news keeps coming from there, since these spaces don’t need to be anywhere as
sophisticated or aesthetically pleasing as the typical office space. Their first and foremost
purpose is to hold items, not house people. So, they require far less time to be constructed,
making oversupply an even smaller problem to worry about.

That kind of intense stability does come with a tradeoff. Of course. So industrial REITs’ share
prices probably won’t rise at any more than a steady, expected pace. But many investors find
that factor a more-than-reasonable price to pay for SWAN-style stability.

Considering their slow but steady attributes, it should come as no surprise that industrial REITs,
like healthcare REITs, tend to employ triple-net leases. That or modified-gross leases, where
they'll pay basic property taxes and insurance costs alone.

Either way, they’ll no doubt include rent bumps to factor in inflation along the way.

Moreover, these real estate investment trusts will tailor themselves to the markets they operate
within. As such, they can offer lease lengths as short as a year for small-space users with local
distribution needs, all the way up to ten-year contracts or more.

Regardless, tenant renewal rates remain rather strong at 65% or higher, since, once again,
businesses need storage space. It’s as simple as that.

17
WHAT YOU NEED TO KNOW ABOUT LODGING/RESORT REITS
One-star dives… Five-star resorts…

Most of us are familiar with the concept of rating hotels according to what they offer and don’t
offer. When talking REITs specifically though, these properties are classified less by stars and
more by titles such as luxury, upper-upscale, upscale, midscale or economy; and by their location,
such as urban, suburban, resort or airport.

Location and quality levels are obviously big indicators in how much revenue a hotel can bring
in. How close is it to desirable business centers or tourist attractions? Is it near a beach, a large
university, or some other “hotspot?”

Those answers will automatically factor into a hotel’s maximum revenue per available room
(RevPAR), which can be calculated by multiplying the establishment’s average daily room rate
(ADR) by its occupancy rate.

The closer it is to places people deem worth visiting, the better it’s going to do.

Because lodging REITs involve less-than steady year-long income, they do differ from other
REITs in several significant structural and legal ways. For one thing, these hotel owners have to
hire an outside source to operate their properties.

That third-party individual or entity has to be in charge of all the establishment’s working parts,
from proper maintenance to hiring and managing employees, to revenue collection and
distribution.

In exchange, the operations manager typically receives 2%-4% of the hotel’s revenue, plus
any agreed-upon bonuses based on milestones reached.

That’s one added expense that lodging REITs have to factor in. And many of them bring in an
asset manager on top of that to oversee the initial expense, creating another profitability
consideration to take into account.

This is all on top of the fact that hotel demand of any kind comes and goes with economic
output, making them extremely volatile holdings as REITs go. During economic booms or in
anticipation of such excess, their share prices can shoot up. During harder times, they’ll
plummet.

On the plus-side, they’re as little tied to interest rates as a REIT can be. But the bigger-picture
scope shows a lot of potential volatility you’d better know you have the stomach for before you
buy in.

18
WHAT YOU NEED TO KNOW ABOUT RESIDENTIAL REITS
As mentioned in Chapter 1, there are three kinds of residential REITs: apartment, manufactured
housing (i.e., prefabricated and mobile homes), and single-family home.
They each have the same purpose in providing housing opportunities outside of
traditional ownership, but since they operate within different markets, they do deserve
their own analyses.

Let’s start with apartment REITs.

In the past, apartment REITs were limited exclusively to traditional apartment buildings for
families, young professionals, retirees, and the like. But the designation has expanded to include
student housing apartment complexes as well.

In any case, we’re right back to categorizing properties as Class A, B or C, with the former
encompassing newer buildings in prime locations. The older the property, the fewer amenities,
and the less desirable the location, the further down the alphabet the apartment will naturally
fall.

Apartments can also be grouped as garden-style or high-rise, though that designation doesn’t
factor into their class designations. For the record, garden-style buildings can be up to four
stories tall and typically consist of multiple structures spread out across a larger property.
Whereas high-rise structures are normally built in cities where real estate is harder to come by.

Like office space, demand for apartments is highly connected to employment trends – though not
in the exact same way. While improved or improving jobs numbers in specific areas can and do
lead to more people looking for apartment space, declining employment opportunities can have
the same effect.

Think about it: Dream homes are what you buy when you’ve got steady income. Apartments are
what you rent when you’re not so sure.

Well aware of that sweet spot they’re in, apartment-owning REITs make sure to take advantage
of whichever trend they happen to find themselves in. When unemployment rises, apartment
landlords tend to decrease monthly rents and/or offer tempting concessions.

Ultimately, this brings in more business, which positively affects profits.

Then, during upswings, they'll raise those rents. Which… guess what? Positively affects profits.

The only real potential downside is the possibility of oversupply. If REITs or their stand-alone
competitors get too enthusiastic about an area, it could become oversaturated, leading
apartment complexes to consistently deplete each other’s profitability.

19
Now on to manufactured housing REITs…

Manufactured housing, or mobile homes, involves home ownership without property ownership.
This allows landowners to rent out what they have by way of designated plots in designated
communities, commonly known as mobile home parks.

Prefabricated (or prefab) communities, which are made up of more traditional-looking homes
that are still technically movable, also fall into this category.

The word “technically” is key here for manufactured housing REITs. Because while mobile
homes or prefab homes do afford the option of literally “picking up and moving on” to varying
degrees, that doesn’t mean they’re easy moves to make. Once a mobile home is situated on its
concrete slab or otherwise designated position, most owners stay there for the long haul.

In other words, manufactured housing REITs enjoy very low turnover rates, keeping them nice,
stable investments. Boring, perhaps, but stable nonetheless.

Our last residential category is the single-family REIT, a newer idea that largely stemmed from
the Great Recession. They say that necessity is the mother of all invention, and this particular
line of thinking definitely did emerge from a time of necessity.

What it involves is REITs buying up traditional houses and then renting them out, either to their
previous owners or new tenants as they come along.

As Nareit described in a May 2017 article:

“According to research from the Joint Center for Housing Studies of Harvard University, record
demand growth spurred an influx of more than 8 million new units of rental housing stock in the
United States in the decade between 2005 and 2015. Conversions of single-family houses from
owner-occupied to rental accounted for roughly 80% of the increase, as the single-family share
of the total rental stock climbed from 34% to 40% in the ten-year period.

“This growth is notable not only because it is so substantial, but also because institutional
investors have taken a much more active role in this market than in the past,” the Harvard
researchers reported. “By creating large portfolios of homes across many markets, large-scale
investors are testing the waters for a new model of owning and operating scattered-site
properties that could expand the range of housing options available to renters.”

As most investors know, the markets don’t tend to take kindly to anything brand-spanking new.
They like to see a strong success story before they deem something worth backing.

20
Yet that stand-back phase seems to have ended fairly quickly for single-family REITs thanks to
an initially intense demand for their offerings. That doesn’t mean, however, that we’re buying
what they’re selling.

Single-family real estate investment trusts involve high costs of operation, which cut into their
profits and then cut into the legitimate yields they can offer. Buying houses is expensive in and of
itself, but so is fixing them up and keeping them properly maintained.

With apartment complexes, they can hire a full-time maintenance staff to address issues as they
arise. But that’s because the homes in question are contained within a very specific area.

That’s not the case for landlords who own properties spread out across a whole entire city,
whole entire state or whole entire country. They have to work with third parties, which aren’t
always convenient in such cases and are almost never as cost-effective.
I think, these properties are just not that worthwhile to buy into, comparatively speaking.

WHAT YOU NEED TO KNOW ABOUT RETAIL REITS

As with residential REITs, retail REITs come in enough shapes and sizes to be arranged into
their own subsets. Also, similarly, those subsets don’t always respond to the same risks due to the
different kinds of establishments they host.

With that said, yes, e-commerce has taken its toll on each and every one of them to some
degree or another. This has forced retail REITs to rethink, re-evaluate, and restructure how
they do business. They’ve shuttered less productive, less trafficked locations, and gotten pickier
about what and who they lease to.

How they’ll fare from here depends greatly on those choices.

For example, shopping center REITs can hold anything from grocers to fast-food chains to
specialty stores. The sky might not be the limit here, but the ceiling is pretty high nonetheless.

According to the International Council of Shopping Centers (ICSC), shopping centers can range
in size from 30,000 square feet to 150,000. And when they’re well-situated, the REITs that own
them can be extremely defensive buys that stay strong no matter what the larger economic or
shopping trends may be.

That’s because many of these properties will feature some consumer staple as their main anchor
point: oftentimes a grocer or drugstore. Since people always need food and often need
medicine or the kind of conveniently grabbed items drugstores will offer, that makes for
immediate traffic that other retailers want a piece of.

21
The result is typical occupancy rates between 89% and 94% – which is nothing to sneeze at in
any real estate universe, much less the digital-happy world we reside in right now.

Now, it most certainly needs to be noted that even the most well-situated shopping center REIT
can fall out of favor for some reason or another. For instance, one of its main draws could be a
big-store name that goes out of business. That happened a few times over after the Great
Recession.

For that matter, it happened a few times before as well. Remember Borders, the one-time book-
selling giant?

Even in cases where such retail chains hang in for the long haul, they more often than not offer
non-necessity products. So, during harder times, people can and do bypass them.

Those are the overarching risks of buying into a shopping center REIT. Though you may find that
the rewards are more than worth the potential downside.

Mall REITs, meanwhile, used to be such a safe bet, and with very good reason. They were not
only shopping but social hotspots that brought in dependable revenue during tougher times and
excellent revenue when the economic sun was shining. Then came e-commerce to cloud the
picture.

This isn’t to say that mall REITs can’t have a part in your portfolio anymore. Anything but.
However, we’re acknowledging the great and good along with the bad and ugly in this report in
order to give you your best shot at building a bountiful retirement.

And, to do that, you have to know as much as possible about your investments.

By themselves, malls are classified as regional or super-regional structures depending on how

large they are and what population base they serve. According to ICSC, regional malls fall
between 400,000 and 800,000 square feet in size and feature two or more anchor tenants such
as Nordstrom (NYSE: JWN).

Or Sears. Or J.C. Penney (NYSE: JCP), neither of which are doing great right now. Even
Macy’s (NYSE: M) hasn’t been offering the same strong numbers we used to expect from retail
establishments of its size and weight.

Then there are super-regional malls, which are at least 800,000 square feet and have at least
three anchor tenants, one or more of which have to offer luxury or high-end goods.

Along with those designations, malls can be deemed Class-A or Class-B institutions based on
location, the exact anchor tenants involved – which often don’t rent out their allocated space at
all but buy it wholesale – and the average household income in the surrounding area.

22
Therefore, the surrounding area had better be worthwhile.

Last but not least in the retail REIT category are freestanding retail REITs, which are
comprised of exactly that – standalone structures that real estate investment trusts rent out to
other businesses.

Those other businesses can be drugstores, fast-food chains, sit-down restaurants, movie theaters,
daycare services, automotive centers, or even gas stations… a wide range of offerings, to be
sure.

Because of the independent nature of these structures, it only makes sense for freestanding retail
REITs to use triple-net leases. That way, the tenants can run their establishments as they see fit,
staying open all night or moderating their hours as they so choose.

Once upon a time, businesses were much more likely to buy out the entire property and build
their own stores, taking full ownership over their establishments. However, that trend has been
shifting enough that several formerly private freestanding retail REITs have gone public over the
last ten years.

Certainly, there’s still the pride aspect of owning what you run. That does still exist. But there’s
an increasing drive toward the comfort that renting entails. So much so, in fact, that many
businesses are selling their buildings over to REITs to rent from there.

By doing so, they free up immediate capital to further invest in their operations, while still
maintaining fundamental control over what they do and how they do it.

WHAT YOU NEED TO KNOW ABOUT SELF-STORAGE REITS

Similar to apartment housing, self-storage demand is mainly driven by population growth, jobs
growth, and the like. It can also be attributed to archiving property for future generations, or a
simple desire to hoard.

With that in mind, it only makes sense that homeowners are less likely to rent out self-storage
space than apartment owners. They have more room to work with. As such, location is just as
important with these properties as with any other kind of equity REIT.

The perks of leasing out storage space is that the units themselves are simple structures that
require little capital input other than what’s needed to create and maintain the structures and
parking lots. So, they’re both cheap and efficient to run.

The downside is that they’re rented out on a month-to-month basis, which can create volatility in
everything from rental rates to rental availability. In addition, the fact that they are so easy to
build and maintain makes them prime victims of oversupply.

23
Partially due to this, many small self-storage companies have been swallowed up by bigger
REITs. This has led to better management of demand. The less competitors there are, the less
infighting there will be. Or so it seems to be working for self-storage REITs right now.

WHAT YOU NEED TO KNOW ABOUT MORTGAGE REITS

All the real estate investment trust types mentioned above are types of equity REITs. They offer
up physical property and physical buildings in exchange for rental fees.

As discussed in Chapter 1 though, mortgage REITs, or mREITs, are different. They bankroll
equity REITs directly or indirectly, acting as REIT-specific financial institutions who’s only income
(or the vast majority of such) comes from those establishments.

Because they themselves borrow money at one rate and lend it out at another, their profitability
is directly tied to interest rate changes. Like the banks they’re related to, mREITs almost always
bring in more revenue when interest rates are high, since it’s easier to widen the spread between
what they’re buying and what they’re selling.

However, there are times when interest rates can rise too quickly or unexpectedly for an
mREIT’s good, leaving it squeezed between a rock and a hard place.

Understanding that risk, management teams try to be very careful about timing their loans
receivable with their loans payable. Even so, the larger circumstances they operate under can
make it difficult for investors to tell exactly how good or bad they’ve played the system until
everything is said and done.

That’s not as much of a problem with falling interest rates, though not in a “potential positive
surprise” way. In those environments, it only makes sense for businesses to take advantage of
the situation and refinance their debt. Which can dampen mREITs’ profits.

As such, they aren’t necessarily great buy-and-hold positions. They’re much more fair-weather
friends when push comes to shove.

To find out the top REITs in each category, subscribe to Forbes Real Estate Investor.

24
CHAPTER 5

HOW TO INVEST IN REITS

While most REITs, in theory, are great defensive portfolio picks, they’re not all created equal.
Far from it, as we’ve already shown.

So, while the “how” of buying into them can be as simple as opening up a brokerage account
and adding the appropriate ticker symbols into the appropriate boxes, there’s a lot that should
go in between those first and final steps.

It’s best to have – or get – an understanding of how REITs operate and how they report those
operations, which can get tricky. While every publicly traded REIT files a quarterly Form 10-Q
and then an annual Form 10-K with the SEC, the way they fill out those reports isn’t exactly
streamlined.

It’s true that each company provides information about its history and current financial
performance. And the facts and figures they list do follow generally accepted accounting
principles, also known as GAAP.

Yet one company may ultimately report how it calculated its funds from operation (FFO) into its
adjusted funds from operation (AFFO)… while another may leave those details out. (More on
them shortly.)

Then there are the supplemental information packages. (Investors are also advised to get
these.) REITs often file them with the SEC as a Form 8-K. They’re not always entirely
mandatory, but most real estate investment trusts do fill them out nonetheless.

The calculations these filings contain aren’t always in accordance with GAAP standards. But
they can be exceptionally helpful in understanding what a REIT has been through and what it
might be in for still, whether good or bad.

25
If a company does file a Form 8-K, it should be listed on its corporate website.

SOME IMPORTANT TERMS TO TAKE WITH YOU

There’s a lot of lingo to know when it comes to analyzing a REIT. In fact, it takes up an entire
chapter of my book, The Intelligent REIT Investor.

While there isn’t enough room to fit it all here, let’s go ahead and define the key operating
metrics you especially want to know…

Net Operating Income, commonly shortened to NOI, is very much like gross profit margin. It’s
found by adding rental revenue from properties with any tenant reimbursement revenue, minus
any and all property operating expenses (which includes third-party fees, taxes, and insurance).
In short, it measures how profitable a piece or group of properties are by themselves without
factoring in the REIT’s corporate-specific expenses.

Same-Store (Organic) Earnings typically refers to revenue, operating expenses and net
operating income, though only from property a REIT has owned for a year or more. This allows
investors to see how well newer acquisitions may fare under the same management team.

FFO Growth is equivalent to a regular company’s earnings growth. It’s just that traditional C-
corporations (i.e., corporations that are taxed separately from their owners) measure their
growth in EPS, or earnings per share. Whereas REITs measure theirs by how much they take in
through funds from operations.

FFO is calculated very simply by adding same-store growth with any external growth from
developed or otherwise acquired properties, minus that from any properties sold.

26
FINALS THOUGHTS ON BUYING REITS
While it’s tempting to get into bed with any REIT that has a high yield, that would be exceptionally
foolish. Always look at the fundamentals and whether the dividend is secure.

Dividend safety is MUCH more important than dividend yield. And it’s more important every single
time.

(Yield is calculated as the current quarterly dividend multiplied by four, divided by the current
share price.)

27