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Private investors use UITs to buy into retail REITs

By Phyllis Feinberg

Public real estate investment trusts (REITs) have been obtaining capital for their companies from a variety of sources -- public equity markets, public debt, and the private debt and equity markets.

One of the most popular financing methods recently has been unit investment trusts (UITs). UITs are closed-end investment funds that are marketed to retail (individual) investors.

A real estate-related UIT is comprised of stock from a variety of REITs representing all the major sectors, including retail REITs.

UITs are generally comprised of stocks that have high current income and long-term growth potential. Clearly, REITs fit very well into this pattern, since they pay a higher dividend than most other common stocks.

About $1.5 billion of REIT UITs had been publicly offered from late January through the time this article went to press in late March.

"The investment bankers seem to feel that there's a demand out there. If they can sell them, they'll continue to offer them," says Barry Vinocur, editor of Realty Stock Review, Shrewsbury, N.J.

Many investment bankers have put together UITs, including Merrill Lynch, Salomon Smith Barney, both of New York, Legg Mason Wood Walker of Baltimore and Wheat First Union of Richmond, Va.

"REITs tend to need capital in bite-sized chunks," said Legg Mason research director Robert Frank. Through the UITs, "chunks" of stock in a variety of REITs can be put together and offered to investors.

UITs generally have a life of about two years (a few have a four-year life) after which they are liquidated and the shares distributed to the unit holders. The time period for UITs is planned to give investors an exit strategy, although most firms have a redemption policy which will allow shareholders to sell their shares in a UIT before the planned liquidation.

Although UITs have a fixed number of shares, the share prices can fluctuate with the prices of the underlying REIT stocks.

Since retail investors usually have far less money to invest than institutions, UITs can give them a diversified portfolio of REIT stocks for less money.

"It's a good way for REITs to target individual investors," said William Atcheson, retail REIT analyst for Salomon Smith Barney, which has put together two UITs.

Though REIT shares are traded by individual investors, it is difficult for any but the most wealthy to diversify their holdings in the same manner as large institutions. A UIT helps level the playing field.

The minimum purchase for the Salomon UITs was $300, making it affordable to just about any investor.

"The main advantage for retail investors is that they can get a diversified portfolio of REITs which they couldn't get on their own," said Mr. Atcheson.

It has become typical for investment bankers putting together REIT stock UITs to go to the individual REITs and buy stock "off the shelf."

Stock that is on "the shelf" has already been registered and approved for sale by the Securities & Exchange Commission, so there is no waiting time required before the stock can be sold.

One major advantage of stock bought off the shelf is that it usually can be purchased at a discount to the price of publicly traded stock. When stock is bought off the shelf, companies don't have to pay underwriting fees to the investment banks, so the firms will generally sell the stock to them at a 4% to 5% discount.

This difference between the discounted price and the public price of the stock provides the underwriter (investment banker) its fee, so there is no sales charge with a UIT as there usually is with a typical mutual fund.

"Buying stock off the shelf is a new wrinkle used by the UITs," said Mr. Frank. "It's good because the UIT can be sold with no sales charge for the individual investor."

Some of the most prominent retail REITs have put stock into UITs, including Simon DeBartolo Group, Indianapolis; General Growth Properties, Chicago; The Macerich Co., Santa Monica, Calif.; and Developers Diversified Realty Corp., Cleveland.

"It's a quick way to sell stock with little work on our part and a way to highlight the company," said General Growth CFO Bernard Freibaum.

"You can point to the UIT and say that the people who put the UIT together included you because they think you're one of the best mall companies," adds Mr. Freibaum.

General Growth is one of three retail REITs included in the first UIT put together last September by Salomon Smith Barney. Simon DeBartolo and Developers Diversified also are among the 12 stocks selected.

Cohen & Steers and Merrill Lynch are putting together the largest UIT ever done, which will contain about $1 billion of stock from a variety of high quality REITs.

The "Cohen & Steers Realty Majors Portfolio" plans to live up to its name, including stock from the "major" REITs in its portfolio. Companies with a large market capitalization and strong earnings are generally well-regarded by Wall Street.

Although the UIT is now in registration, Simon DeBartolo, General Growth and Kimco Realty Trust, New Hyde Park, N.Y., are reported to be among the REITs stocks being sought. And in a coup for the underwriters, Vornado Realty Trust, Saddle Brook, N.J., has agreed to sell stock to the UIT, the first time it has gone into a UIT.

Although UITs have become an efficient way for REITs to sell stock, some concerns exist.

"When the REIT stock prices are down and there is more supply than demand, how do you get companies to put their stock into these UITs?" said Mr. Vinocur.

The concern is that with the downturn in the price of many REIT stocks, their executives won't want to sell them into UITs at low prices.

"The important thing for a UIT is to have stocks that provide high income whose stock price won't fluctuate that much," said Legg Mason's Mr. Frank.

He believes that the market for UITs may be drying up and that "we need to give it a rest for a while."

But some enthusiastic supporters disagree.

"While our basic objective with UITs is to provide high income and long-term growth, we could include some higher-yielding stocks in them as well," Salomon's Mr. Atcheson said.

"As time goes by we'll do more of them and there are all kinds of different risk and return portfolios that could be put together," he adds.

Some could be the traditional, more conservative UITs including stocks of the major REITs from each category.

But others could be more "high-flying," in Mr. Atcheson's words. They could be more aggressive and include stocks that have a higher risk but also a higher return potential.