Syndicated UPREITs, which are private REITs, have a predetermined amount of equity that they raise from investors within a specific timeframe. This equity is limited by a private placement memorandum (PPM) and typically ranges from $100 million to $1 billion. One of the main advantages of investing in a REIT is the opportunity for diversification and access to high-value institutional grade properties.

In addition to the stated preferred return, REITs also distribute cash flow. This cash flow can be distributed through funds from operations (FFO) or by returning invested equity, which reduces the REIT’s net asset value (NAV). FFO is a crucial factor in assessing the financial stability of a REIT and provides more insight than earnings per share. It is calculated by adding depreciation, amortization, and losses from the sale of REIT assets to the stated earnings, and then subtracting interest income and gains from the sale of REIT assets. Essentially, FFO represents the cash flow generated by the REIT’s operations. NAV, on the other hand, refers to the estimated market value of the REIT, which determines its share price. To calculate the share value, divide the NAV by the total authorized and outstanding shares. Investors can also evaluate a REIT’s true operating performance by calculating earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a standard disclosure on financial statements. Another important financial ratio for assessing potential debt risks is the EBITDA to interest expense ratio.

The ever-changing economic environment poses challenges for REITs in achieving their equity goals and investment objectives. Similarly, newly registered REITs may struggle to find investors willing to take the risk with a new investment REIT that has not yet raised sufficient capital to acquire a significant number of properties. Some UPREITs are classified as blind pool UPREITs, meaning they have a limited number of acquired properties within the REIT. To attract early investors, these blind pool REITs often offer incentives such as higher share prices or preferred returns, which may dilute the NAV. However, the risks associated with blind pool investments can be mitigated to some extent by a sponsor with multiple existing DST offerings. The sponsor can offer to exchange the DST offerings for a UPREIT option, gradually adding them to the REIT over time. Alternatively, many DST sponsors have existing REITs with an UPREIT option that includes multiple stabilized properties generating reliable cash flow. These stabilized REITs have the income necessary to fund distributions from operations on an adjusted funds from operations (AFFO) basis. AFFO is an alternative to FFO and is used to evaluate the financial performance of a REIT, taking into account recurring capital expenditures for maintaining the quality of the underlying assets. It also includes GAAP adjustments for factors like straight lining of rent and leasing costs. While these stabilized REITs are considered less risky, they offer a lower return rate.