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What Are the Structural Factors That Boost Long-Term REIT Performance?

July 24, 2018

What Are the Structural Factors That Boost Long-Term REIT Performance?

July 23, 2018 | Calvin Schnure | Nareit

REITs have provided investors solid returns over the years, despite short-term zigs and zags along the way, in part because of structural features of the REIT model. Let’s take a look at two of them. First, REITs are an efficient, low-cost structure for managing commercial real estate, and second, most REITs align the incentives of management closely with shareholders’ interests, which motivates them to maximize value for the shareholders.

Most of the costs of owning and operating a portfolio of commercial buildings are reported under general and administrative expenses, or G&A. G&A represented 89 basis points of total book assets for the median REIT in 2017, according to their financial filings with the SEC. To get an idea of whether these total costs of less than one percent of assets are large or small, consider the management fees charged under the private equity real estate “2 & 20” model. Managers of these real estate funds typically take fees of up to two percent of assets under management (AUM), plus their incentive based on performance (often 20 percent of the return above a hurdle rate).

While the total fees for private equity real estate differ from year to year and from fund to fund, on average they charge as much as three times what REITs require to manage the same types of properties. Over the long haul, REITs avoid paying the extra one to two percent of assets that goes to the managers of a private equity fund, providing a strong tailwind for performance for REIT investors.

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Loreen M. Gilbert, CIMA, AIF, CRC, CLTC – President, WealthWise Financial Services
Blue Vault
July 6, 2016

Our firm has been using Blue Vault from the first year it was available.

We have found it to be a valuable tool to verify what wholesalers tell us and to dig deep into how the reported investments are really performing.

We appreciate that Blue Vault has expanded its services from initially covering REIT's to now also including BDC's.

Our clients also appreciate that we conduct this additional due diligence on their behalf.