WHAT IS A REIT?

It is with great joy and excitement that I write this article. The kind of happiness I have inside is enough to go hungry for days and not feel it. I am sure you are wondering what angle is ‘Debo coming from this time. Don’t worry, I won’t keep you guessing for too long.

Finally our opportunity to join the big league of developed and serious minded developing countries has come, the most talked about Real Estate Investment Trust (R.E.I.T) scheme is birthed and the first organisation to break the ice is Union Homes Savings and Loans Plc.

For the sake of those of us who have not been following my write ups and seminars and may not know what REIT is all about, I will like to give some basic explanation in a question and answer format:

What is the meaning of a REIT?

REIT is an acronym for Real Estate Investment Trust. It is a vehicle that invests in the ownership and management of a pool of real estate assets and mortgages, and packages them as tradable securities into which individual investors can subscribe.

It is a collective investment scheme having special features such non-payment of corporate taxes and regular distribution of profits in terms of dividends.

How do REIT’S operate?

REITS rely mainly on external funding as their key source of capital. Just like other stock offerings, publicly traded REITS collect fund via an initial public offering (IPO). Those funds are used to buy, develop and manage real estate assets. The IPO works just like other security offerings except that instead of purchasing stock in a single Company, the buyer will own a portion of a managed pool of real estate.

REITS are required to distribute 90% of their taxable income to investors. When a REIT pays out its dividends, they’re equally distributed among shareholders as a percentage of paid-out taxable income.

How do they generate their income?

Income is generated through renting, leasing, or selling the properties and is distributed directly to the REIT holder on a regular basis.

Who can invest in REITS?

Anyone eligible to invest in shares on the Nigerian Stock Exchange can invest in REIT unit.

What are the benefits to?

(a)Investors, steady dividend distribution of 90% or more of income generated through a diversified real estate portfolio.

(b)Market, inclusion of securitised real estate instrument that guarantees strong performance both in bullish and bearish seasons.

(c)Government, ensures private partnership in financing housing units as a basic welfare need.

What makes REITS a good investment?

REITS can serve as a powerful tool for portfolio balancing and diversification by increasing investor’s total return and/or lowering the overall risk in both equity and fixed income portfolios. Research has shown that when REIT shares were added to an already diversified portfolio, the maximum expected return for each given level of risk increased and the level of expected return reduced.

In addition, the dividend growth rates for REIT shares have proven to outpace inflation in the past ten years (NAREITS 2003). These characteristics make REITS better investments.

How Does an Entity Qualify as a REIT?

In order for an entity to qualify as a REIT, it must comply with certain provisions within the Securities and Exchange Commission. A REIT must:

· Be managed by a board of directors or Trustees;

· Invest at least 75 percent of its total assets in real estate and real estate related assets;

· Derive at least 75 percent of its gross income from rents from real estate property or interest on mortgages on real property;

· Pay annually at least 90 percent of its taxable income in the form of units holders dividends;

What types of REITS exist?

· Equity REITS: Equity REITS invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues are primary derived from rental value.

· Mortgage REITS: is a REIT which invests in mortgages, this type of REITS pools funds in order to create mortgage loans for perspective mortgagors. The revenues are generated primarily by the interest that they earn on the mortgage loans.

· Hybrid REITS: is a REIT which generates income from rent, and capital gains, like an equity REIT as well as interest payments on a mortgage REIT. A hybrid REIT incorporates both Mortgages and Equity REITS.

What Types of Properties do REITS invest in?

REITS invest in a variety of property types: shopping centers, apartments, warehouses, office buildings, hotels, and others. Most REITS specialise in one property type only, such as shopping malls, self-storage facilities or factory outlet stores. Health care REITS specialise in health care facilities, including acute care, rehabilitation and psychiatric hospitals, medical office building, nursing homes and assisted living centres.

How are REIT Units Valued?

Like all companies whose stocks are publicly traded, REIT units are priced everyday in the market and give investors an opportunity to value their portfolios daily. To assess the investment value of REIT shares, typical analysis involves one or more of the following criteria:

· Management quality and corporate structure;

· Anticipated total return from the stock, estimated from the expected price change and the prevailing dividend yield;

· Current dividend yields relative to other yield oriented investment (eg bonds, utility stocks and other high income investments);

· Dividend payout ratios as a percent of REIT funds from operations;

· Anticipated growth in earnings per unit;

· Underlying assets values of the real estate and /or mortgages, and other assets.

Why Should I Invest in REITS?

REITS are total return investment. They typically provide high dividends plus the potentials for the moderate, long term capital appreciation. Long term total returns of REIT unit are likely to be somewhat less than the returns of higher risk high growth stocks and somewhat more than the returns of lower risks bonds. Because most REITS also have a small to medium equity market capitalisation, their returns should be comparable to other small to mid sized companies.

What do REITS offer Investors?

· Current, stable dividend income

· High dividend yields

· Dividend growth that has consistently exceeded the rate of consumer price inflation

· Liquidity: units of REIT are readily converted into cash because they will be traded on the Nigerian Stock Exchange

· Professional management

· Portfolio diversification, which reduces risk

· Disclosure obligations: REITS whose securities are registered with the SEC are required to make regular SEC disclosures, including quarterly and yearly financial reports.

What should I look for when investing in a REIT?

The market usually rewards companies that demonstrate consistent earnings and dividend growth with higher price-earnings multiples. Thus, investors should look for REITS and publicly traded real estate companies with the following characteristics:

A demonstrated ability to increase earnings in a reliable manner. For example, look at companies with properties in which rents are below current market levels. Such properties provide upside potential in equilibrium markets and downside protection when economic growth slows. Management teams able to quickly and effectively reinvest available cash flow.

The ability to consistently complete new projects on time and within budget. Creative management teams with sound strategies for developing new revenue opportunities.

Strong operating characteristics, including effective corporate governance procedures, conservative leverage, wisely accepted accounting practices, strong tenant relationships and a clearly defined operating strategy for succeeding in competitive markets.

What factors contribute to REIT Earnings?

Growth in earnings typically comes from several sources, including higher revenues, lower costs and new business opportunities. The most immediate sources of revenue growth are higher rates of building occupancy and increasing rents. As long as the demands for new properties remain well balanced with the available supply, market rents tend to rise as the economy expands. Low occupancy in underutilized buildings can be increased when skilled owners upgrade facilities, enhance building services and more effectively market properties to new type of tenants. Property acquisition and development programs also create growth opportunities, provided the economic returns from these investments exceed the cost of financing. Like other public companies, REITS and publicly traded real estate companies also increase earnings by improving efficiency and taking advantage of new business opportunities.

THE UNION HOMES REAL ESTATE OFFER What is the Union Homes Offer?

It is a hybrid REIT offer for subscription of 970,873,787 units of N50 each at N51.50per unit.

What kind of earnings per unit should I expect?

A minimum of 154k/per unit in the year 1.

What are the major advantages of the Union Homes REIT?

· Investors will enjoy over 90%dividend pay out in earnings annually.

· Dividend growth rates have proven to outpace inflation

· Investors can trade the Union Homes REIT on the Nigerian Stock Exchange.

· Investors will enjoy multiple streams of income generation rental, sales mortgages interest, money market returns and equity price appreciation.

· 70% of the offer is guaranteed by Union Bank of Nigeria Plc.

· Access to long tenor mortgages (25-30 years) at marginal interest rates.

· A REIT is a powerful tool for portfolio balancing and diversification.

· REITS have proven to have increased investors’ total return.

· REITS have proven to lower overall risk in both equity and fixed income portfolios.

Who determines a REIT’s investment?

A REIT’s investment is determined by its board of directors or trustees. In the Union Homes REIT, the REIT’s investments are determined by the investment committee.

Is there any minimum investment required in the Union Homes Offer?

Yes. There is a minimum investment of N51, 500 in the Union Homes REIT offer. After you have satisfied the minimum investment requirement, any additional purchase must be in increments of at least N5, 150.

Will I be notified of how my investment is doing? Yes, the fund manager will provide you with periodic updates on the performance of your investment, including:

· detailed quarterly reports;

· quarterly financial reports

· an annual report

The fund manager will provide this information to you via one or more of the following methods, in discretion and with your consent, if necessary:

· NIPOST mail or other courier;

· facsimile; or

· Electronic delivery.

Who can help answer my questions about the offering?

If you have more questions about the Union Homes REIT Offer, or if you would like to buy into the offer or if need additional copies of the prospectus, you should contact:

REALTY POINT LIMITED

ONIGBAGBO HOUSE (3^RD FLOOR)

29, Mobolaji Bank-Anthony Way, Ikeja,

Within Bola Memorial Anglican Church Compound, Beside GTBank,

Before Etiebet’s, place at Abule Bus-Stop .Ikeja,

Lagos.

Tel: 08033074913, 07028201929, 07028386923

Email:realtypointoffice@yahoo.com

Website: www.realtypointltd.com

I hope I have not spoken over your head on all of these. Suffice to say that this is an opportunity you don’t want to miss. Is the first of it’s kind and competition can only make it better.

Call in immediately to invest.

QUOTE(S)“The ideals which have lighted me on my way and time after time given me new courage to face life cheerfully, have been Truth, Goodness, and Beauty. . . . The ordinary objects of human endeavour — property, outward success, luxury — have always seemed to me contemptible” — Albert Einstein

“If I have been of service, if I have glimpsed more of the nature and essence of ultimate good, if I am inspired to reach wider horizons of thought and action, if I am at peace with myself, it has been a successful day.” – Alex Noble

“The happiest man is he who learns from nature the lesson of worship” – Ralph Waldo Emerson