Investing in real estate can be a risky business. Individual investors who bought property in the wrong place and at the wrong time, or saw the real estate market take an unexpected plunge, can attest to the difficulties of this investment. Developers who have tried to line up financing for real estate projects are also affected by the unpredictability of the market.
Real estate investment trusts (REITs) provide an alternative that many experts say is an easier and safer way to invest in property. REITs, which have had strong returns in recent years, are also a valuable source of financing for developers and have played a role in Nevada’s growth.
More than $300 billion is invested in the domestic REIT market, with 25 percent in industrial and office buildings and a nearly equal amount in retail stores, market analyst Timothy Middleton said in a recent article in MSN Money. Apartments account for 15 percent, with hotels and other sectors of real estate comprising the remainder.
Nearly 90 percent of real estate investment trusts are equity REITs that own property. Other REITs provide mortgage funding and some are hybrid REITs that do both.
The National Association of Real Estate Investor Trusts (NAREIT), the
trade group for the industry, has 195 member trusts that trade on the stock exchanges. The industry also includes a large number of private, nontradable REITs, but the exact number is not available.
Publicly traded REITs “share characteristics of both stocks and mutual funds,” authors Rich Mintzer and Annette Racond wrote in The Everything Investing Book. REITs, which were created by Congressional legislation in 1960, trade in shares, but are managed in a way similar to mutual funds. REITs do not give investors ownership in property, but are required to pay out at least 90 percent of their profits in dividends. REITs don’t have to pay corporate taxes; plus, they get tax breaks from depreciation, but investors are taxed on returns. Many mutual funds and retirement accounts include REITs. Private REITs and those that don’t trade on the exchanges usually have a minimum investment requirement of at least $1,000, but the minimum requirement for other REITs is one share.
“Look back in time and you’ll discover that real estate stocks have outperformed the S&P 500, the Dow Jones Industrial Average and Nasdaq on a compound annual total return basis over the past 30 years,” said NAREIT Senior Vice President Michael Grupe.
Information about specific trusts can be obtained from brokerage houses or from company reports and business publications. The NAREIT.com Web site provides further information, and the organization also publishes indexes that track the industry.
Nevada REITs
One of the most aggressive retail REITs operating in Las Vegas is Pan Pacific Retail Properties Inc. It now owns eight retail centers in Las Vegas totaling 1.8 million square feet after buying the 80,000-square-foot Alamosa Place (Desert Inn and Pecos roads) in March.
The Vista, Calif.-based company owns Cheyenne Commons, Sahara Pavilion North, Sahara Pavilion South, Rainbow Promenade, Winterwood Pavilion and Decatur Meadows in Las Vegas and the Green Valley Town & Country Center in Henderson. In Northern Nevada, Pan Pacific owns retail centers Mira Loma, Caughlin Ranch and North Reno Plaza in Reno, Elko Junction in Elko, West Town in Winnemucca and Eagle Station in Carson City.
The company is the largest operator of shopping centers in the West with 137 centers and plans to add 14 or 15 more. Nevada figures prominently in its expansion plans, said President and Chief Executive Officer Stuart Tanz.
“There is an ocean of capital out there when it comes to real estate, which will continue to drive growth and stock prices,” said Tanz, who foresees a strong market for REITs in the long term. “There is very strong retail tenant demand in Nevada and very strong rent growth.” Pan Pacific’s total return on its assets has been 16 percent over 10 years, but has risen to 35 percent over the past three years, he said.
General Growth Properties, a Chicago-based company listed on the New York Stock Exchange, owns or has an interest in more than 200 regional malls in 44 states, making it the second largest retail mall REIT in the United States. In Southern Nevada, it owns the Fashion Show, Boulevard and Meadows malls and the Grand Canal Shoppes at the Venetian. General Growth Property’s merger with The Rouse Co. a year ago added 37 regional malls to its portfolio.
Crescent Real Estate Equities Co., based in Fort Worth, Texas, has big plans for Hughes Center, a complex with 10 office buildings and nine retail outlets in the heart of Las Vegas at a strategic location (Flamingo and Paradise roads) near McCarran International Airport. Because of the strength of the Las Vegas economy, the company is adding 250,000 square feet office of Class A office space to the center, scheduled for completion in November 2006. It also has plans for further expansion, said Keira Moody, vice president of investor relations.
The REIT, which is traded on the New York Stock Exchange, has had an annual return of 12.4 percent in the 10 years since it went public. Its return surged to 16.8 percent last year. The company has 60 percent of its assets in the office market in the Southeast, Southwest and on the West Coast, but also invests in the development of vacation homes and resorts, said Jane Page, managing director of asset management.
Crescent finances East West Partners, which is developing high-end single-family homes, condominiums and townhomes in Colorado and the Lake Tahoe area for people who want to buy vacation homes in resort areas. It also finances the Canyon Ranch resorts and an offshoot of the operation, Canyon Ranch Spa Clubs, which has a spa in the Venetian Hotel. Moody said Crescent is impressed with Las Vegas because it is attracting more national companies that continue to need more office space to grow.
Some of the other public REITs with property in Nevada include Houston-based Camden Property Trust, which owns 199 Oasis apartment complexes, including 17 in Las Vegas, and Bedford Property Investors Inc., which owns the Russell Commerce Center and Northport Business Center in North Las Vegas. Bedford, based in Lafayette, Calif., operates more than 90 industrial and suburban office buildings in California and four other western states, including the U.S. Bank Centre in Reno.
Las Vegas-based Vestin Group has a different strategy in the real estate trust market. Vestin is applying to the Securities and Exchange Commission to change two of its investment funds from limited liability companies into mortgage REITs. The two funds combined are valued at $430 million and have about 7,000 investors, said Chief Financial Officer John Alderfer.
The change must be approved by 51 percent of the funds’ investors. Alderfer said Vestin has received positive feedback from its investor focus groups, and he is hoping the conversion can be made by the end of the year or sooner. The main reason for the change is to allow investors more freedom to convert their investments into cash. Limited liability companies allow only 10 percent of their funds to be taken out in a given year. REITs do not have this restriction.
Vestin has invested heavily in the West, but has mortgages in property in other areas of the country. Typically, it provides short-term funding for commercial projects that have trouble obtaining financing from other lenders, Alderfer explained. The developers usually take out longer-term, lower-interest loans after they have cash flow and a balance sheet that qualifies them for conventional financing.
Although REITs are usually not the type of investments that finance gaming projects, Vestin funds provided a loan for The Cannery Casino Hotel, which was built in North Las Vegas five years ago.
REITs as Investments
Despite the advantages of REITs, investment experts point out real estate is not for the fainthearted. A plunging real estate market can hurt investors. Investment advisers say the risk falls somewhere between the volatility of stocks and the steadiness of bonds. The financial performance of REITs and the track record of fund managers should be checked before investing.
Las Vegas Certified Financial Planner Deborah Danielson fears the volatility of the markets and a dip in real estate values could affect real estate investment trusts. However, she is still high on REITs for the long run, even though she does not believe 20 percent returns will continue. She is placing more of her clients’ money in non-tradable REITs, which are protected from the unpredictably of the markets. She invests about 20 percent of a typical portfolio in REITs, with about three-fourths of the amount in the non-tradable variety.
Danielson, president of Danielson Financial Group, points out that non-tradable REITs do not have the liquidity of publicly traded trusts, but they often have exit strategies, such as buyback clauses. Typically, clients hold non-tradable REITs for five to seven years and can expect steady returns of about 9 percent.
Mike Cruz of the investment firm Courtland Financial Group in Newport Beach, Calif., advises investors to place a quarter of their portfolio in REITs, but he also believes they should have direct ownership of property in cities with strong economic potential for growth. Cruz said, “I’m a big believer in the REIT market both now and in the long run.”
