OK, I'm smart enough (barely) to know that any business, including a REIT has three major factors in the viability of the company - The Management Strategy, The Capital holdings, and the operating profit/loss. So Slick Willy's Chevrolet with a one time deal on hot pink Camaros, available only if you come in today before noon and sign on the line, has:
Management strategy - sales offers, workforce management, an inventory control program, and advertising and marketing strategies.
Capital holdings - the physical dealership, tools, inventory, service vehicles, etc.
Operating profit/loss - the staff salaries, maintenance on the building and lot, franchise fees, etc.
I can take Willy's accounting ledger and see how much capital value the dealership has. I can take a look at teh assets to get a feel for capital valuation, and from those two lines get a feel for the market value of the company, then I can look into Willy's beady little eyes, see his management strategy and project that current value forward to guess whether an investment in his Chevrolet dealership would see a gain or loss.
In a REIT though, the capital holdings are the product. However much value they gain can never be realized... and if it is, the operating value of the REIT changes since rents will change with addition/loss of a property, which means that the more actively a REIT trades property, the less stable its income should be - and yet (I think) most REITs become profitable by buying/selling property to realize capital gains and reinvest them.
If that is the case, then the dividends paid from the REIT are actually eroding the capital increase, limiting it's ability to grow/purchase new properties. So yeah, I think that I completely don't understand these investments. Can someone explain at me how a REIT makes money?
