When evaluating a REIT, one critical factor to consider is to find out actually what the REIT owns and where the properties are located

In this Part 1, this article looks at WHAT the REIT owns.

What the REIT owns falls into two (2) categories namely:

(a) the TYPE of property:

• office,apartment,industrial,regional mall shopping center,hotel and healthcare,
• mixed real estates portfolio ( like Vornado Realty which owns office, industrial and retail property and
• unusual properties like entertainment properties, movie theatres, capital automotive (owns car dealership)

What is it so important to understand this?
Some reasons are:

• It is crucial as average lease lengths vary from property sector to another. For example, regional mall REITs and industrial REITs had leases for 10 years or longer, whilst apartment leases are on annual basis. Lease length important because the longer a REIT’s leases are, the more predictable will be its CASH FLOWS! The more predictable a REIT’s cashf flows are, the easier to estimate its intrinsic value.

• Knowing the type of REIT is also important as all REITs are sensitive to basic economic conditions and the degree of sensitivity varies depending on the property sector. For example, regional mall are very sensitive to changes in consumer spending level whist office REITs are impacted directly by changes in the growth rate of office employment.

(b) Knowing the Quality And Diversity Of the REITs customers/tenants

• The quality and predictability of cash flows will be higher if a REIT has leases with diverse set of well-run tenants -Kentucky Fried Chicken,Subway,DHL etc). Vice versa, if a REIT depends heavily on a small number of tenants, on a single tenant or has tenants sufereing financial distress this will therefore lower the quality of the cash flows.

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