REIT is an abbreviation for a Real Estate Investment Trust. The REITs were designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. Read more about REITs...
REIT is an abbreviation for a Real Estate Investment Trust. A REIT is a tax designation for a company investing in real estate. The REITs were designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. As an investment, REITs combine the best features of real estate and stocks. They give an investor a practical and effective means to include professionally managed real estate in a diversified investment portfolio.
REITs typically own and operate income producing real estate such as apartments, shopping centers, offices, hotels and warehouses. There are some REITs that are also involved in financing real estate. One of the distinguishing characteristics of a REIT is that it must distribute at least 90 percent of its taxable income to shareholders annually. These dividends can be deducted from its corporate taxable income. As a result, most REITs remit at least 100 percent of their taxable income to the shareholders to avoid owing corporate taxes. The shareholders pay taxes on the dividends received and any capital gains. Most states in the United States honor this federal treatment and also do not require REITs to pay state income tax. Similar to other businesses, but unlike partnerships, a REIT cannot pass any tax losses through to its investors.
In order to qualify for the advantages of being a pass-through entity for U.S. corporate income tax a REIT must meet these qualifications:
-It must be structured as a coportation, trust, or association
-It must be managed by a board of directors or trustees
-It must have trasferable shares or transferable certificates of interest
-It must not be a financial insititution or insurance company because these entities receive certain tax benefits that a REIT may not receive.
-It must be taxable as a domestic corporation
-It must be jointly owned by 100 people or more
-No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year.
-It must have 90% of its income derived from dividens, interest and property income
-It must pay dividends of at least 90% of its taxable income
-It must have at least 75% of total investment assets in real estate
-It must derive 75% of its gross income from rents or mortgage interest
-It must have no more than 20% of its assets be stocks in taxable REIT subsidaries.
REITs behave like other corportions and can be publicly or privately held. This flexibilty allows public REITs to be listed on public stock exchanges like shares of common stock in other firms. REITs can be classified as equity, mortgage or a combination of these. When analyzing the value of a REIT the key statistics to consider include its NAV (Net Asset Vaue), AFFO (Adjusted Funds From Operations) and CAD (Cash At Disposal).
When a REIT is classified as an equity REIT, it owns and operates income-producing real estate. Equity REITs have become the primarily real estate operating companies that are involved in a wide range of real estate activities, inclduing leasing, development of real property and tenant services. The major difference between REITs and other real estate companies is that REITs acquire and develop properties primarily to operate them as parts of its own portfolio instead of reselling the property once it is developed.
Mortgage REITs lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today’s mortgage REITs generally extend mortgage credit only on exisiting properties. Most mortgage REITs hedge their interest rate risk by using securitized mortgage investments and dynamic hedging techniques.
Hybrid REITs are a combination of an equity and a mortgage REIT. As the name suggests hybrid REITs own properties and make loans to real estate owners and operators.
It is improtant to measure the financial success of REITs, and this can be accomplished by using net income as defined under the Generally Accepted Accounting Principles (GAAP) as the primary operating performance measure for real estate companies.
As mentioned earlier the REIT industry also uses Funds From Operations (FFO) as a measure of its operating performance. NARIET defines FFO as net income (computed in accordance with GAAP) excluding gaines or losses from sales of most property and depreciation of real estate. When real estate companies use FFO in public relases or SEC filing, the law requires them to reconcile FFO to GAAP net income. However, many real estate professionals as well as investors believe that commercial real estate maintains residual value to a much greater extent than machinery, computers or other personal property. Therefore, they view the depreciation measure used to arrive at GAAP net income as generally overstating the economic depreciation of REIT property assets and the actual cost to maintain and replace these assets over time, which may in fact be appreciating. Thus, FFO excludes real estate depreciation charges from periodic operating performance. Many securities analysts judge a REIT’s performance according to its Adjusted FFO (AFFO), thereby deducting certain recurring capital expenses from FFO.
REITs were originally created in 1960 by the US Congress in make investments in large-scale, income-producing real estate accessible to smaller investors. This allowed average investors to invest in large scale commercial properties in the same way they are able to invest in other industries, through the purchase of equity. Additionally shareholders benefit from owning stocks of other corporations by providing more diversification. The stockholders of a REIT can earn a pro-rata share of economic benefits that are derived from the production of income through commercial real estate ownership. REITs offer distinct advantages to investors through greater diversification because they are investing in a portfolio of properties rather than a single building and the portfolio is management by experienced real estate professionals.
About us | Thu Oct 19 20:43:52 2006