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Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is a security that invests in real estate directly either through properties or mortgages. Generally, REITs can be publicly or privately held. Publicly held REITs can be sold on an exchange and publicly traded. Non-traded REITs are sold through broker-dealers and are private. REITs are generally classified as equity, mortgage, or hybrid.

Equity REITs invest in and own property. The revenue for equity REITs come principally from the rent roll from the properties they own. Mortgage REITs invest and own property mortgages. Mortgage REITs loan money for mortgages to real estate owners, purchase existing mortgages, or mortgage-backed securities (MBS). The revenues for Mortgage REITs are earned through the interest that they earn on mortgage loans. Hybrid REITs combine investment strategies from equity REITs and mortgage REITs and invest in property and mortgages.

REITs are generally valued and examined using the net asset value (NAV), funds from operations (FFO), and adjusted funds from operations (AFFO).

Increased volatility in stock markets has led many investors to look for investment products that are more stable. Some non-traded REITs have claimed to offer stable returns in the volatile real estate market. As the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) have recently noted, these products may not be as safe and stabile as advertised. As the SEC noted, a common sales tactic of broker-dealers that sell non-traded REITs is to claim they are able to eliminate volatility. However, the problem is that the REIT determines the value of its assets and therefore investors may simply not know about the volatility.

The team at Palmieri & Co., have extensive experience arbitrating REIT cases. If you invested in a REIT and need to evaluate your investment and determine if it was appropriately recommended, contact us.

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