Source: Flickr / Tax Credits.

The concept of owning rental property is fairly simple to understand. That's one of the things that makes real estate investment trusts (REITs) so desirable. However, these are complex companies and they are increasingly making complex investments, often outside of property ownership, to facilitate their growth. This is a trend you need to watch closely.

A big deal
A good example of an aggressive investment was AvalonBay (AVB -0.37%) and Equity Residential's (EQR 0.39%) purchase of Archstone properties from Lehman Brothers Holdings. The $6.5 billion transaction notably increased each company's portfolio, but included assets that neither company wanted. However, to get the good apartments, both companies were willing to deal with selling the bad ones.

Equity Residential's Sam Zell has a history of aggressive investments, like an ill-fated attempt to turn around newspaper company Tribune. So breaking up Archstone and then disposing of the unwanted parts was just business as usual. However, AvalonBay has a more conservative history focused on building from the ground up.

Thus this joint purchase was a bit outside the box for AvalonBay. That said, it quickly increased the company's scale in key markets despite the hassle of having to sell unwanted properties. While it was aggressive for AvalonBay, it kept within the normal property model. More and more REITs are actually stepping further outside of the REIT box.

A spotty history
Vornado (VNO -2.20%) is the poster child for such investments. In addition to owning properties in New York and Washington D.C., it also owns a 32.6% interest in Toys "R" Us. That investment cost the company $0.82 a share in impairment charges in the fourth quarter of 2013. That came on top of $0.66 a share in losses attributable to the struggling toy chain.

(Source: Mike Kalasnik, via Wikimedia Commons)

Clearly, Vornado's foray into kids toys isn't working out so well and there doesn't appear to be an easy way out. But this isn't the first time the company's been burned. It's attempt to help J.C. Penney also soured quickly: an investment in that retailer's turnaround ended with Vornado's sale of its nearly 10% stake at an over $250 million loss.

Others throwing a hat in the ring
Vornado's cautionary tale, however, isn't stopping others from trying their hands at investing. For example, Health Care REIT (WELL 0.03%) bought Sunrise Assisted Living in 2012 for its property. It quickly sold Sunrise's management company to Kohlberg Kravis Roberts, retaining a 20% interest. Health Care REIT recently agreed to up its stake to 24% to help a Canadian senior housing manager buy Sunrise from Kohlberg Kravis Roberts.

While the deal is well within Health Care REIT's focus on senior housing, it's upping its stake in an investment well outside of property ownership. So far it's worked out, but Vornado's investment results show the risk.

Another example is Kimco Realty's (KIM -0.38%) participation in the grocery business. It all started with an investment in troubled grocery chain Albertsons in 2006. Kimco added to that investment in 2013 when it joined in the purchase of SUPERVALU assets by Cerberus Capital Management. And now it's participating in Cerberus' purchase of Safeway. After this transaction, it will have a nearly 10% stake in the resulting grocery chain and own over eight million shares of SUPERVALU.

(Source: MortalConviction, from Wikimedia Commons)

So far this series of deals has been a winner for Kimco. The SUPERVALU stake alone has an unrealized gain of over $20 million. But CEO Milton Cooper notes that this supermarket foray is part of the company's, "...Plus strategy of creating additional value through opportunistic investments with real estate rich retailers." That's a far cry from the traditional REIT model, which Vornado shows doesn't always play out well.

Winners and losers
As you are no doubt aware, when you invest you pick some winners and some losers. You hope your good calls outweigh your bad ones. REITs are increasingly making such investment choices, too. Keep a close eye on this trend and if you own Vornado, Kimco, or Health Care REIT make sure to watch their portfolios and their outside investments.