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Monday, August 26, 2013

What is a REIT?

What is a REIT?

A REIT, or Real Estate Investment Trust, is a type of real estate company modeled after mutual funds.  REITs were created by Congress in 1960 to give all Americans – not just the affluent – the opportunity to invest in income-producing real estate in a manner similar to how many Americans invest in stocks and bonds through mutual funds. Income-producing real estate refers to land and the improvements on it – such as apartments, offices or hotels.  REITs may invest in the properties themselves, generating income through the collection of rent, or they may invest in mortgages or mortgage securities tied to the properties, helping to finance the properties and generating interest income.

REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property.

What are some examples of REITs?
REITs – quite literally – are all around us. REITs own many of the shopping malls, apartment buildings, student housing complexes, homes, medical facilities, office buildings, hotels, cell towers and timberlands that we use every day. REIT-owned properties are located in every state and contribute millions of dollars in jobs and investment income to the national economy each year.

Are REITs located only in the US?
REITs are now global: Nearly 30 countries have adopted variations of the U.S. REIT model. Today, anyone in the world can invest in REITs around the world.

Are all REITs the same?
The REIT industry has a diverse profile, which offers many benefits. REITs often are classified in one of two categories: equity REITs or mortgage REITs. Equity REITs derive most of their revenue from rent. Mortgage REITs derive most of their revenue from interest earned on their investments in mortgages or mortgage backed securities.

REITs can be publicly registered with the SEC and have their shares listed and traded on major stock exchanges, publicly registered with the SEC but not have their shares listed or traded on major stock exchanges, or private (not registered with the SEC and not having their shares listed or traded). Ninety percent of listed REITs are Equity REITs; the remaining 10 percent are Mortgage REITs.

What must a company do to qualify as a REIT?
  • Invest at least 75 percent of its total assets in real estate
  • Derive at least 75 percent of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
  • Pay at least 90 percent of its taxable income in the form of shareholder dividends each year; as a result, REITs may not generally retain their earnings
  • Be an entity that is taxable as a corporation
  • Be managed by a board of directors or trustees
  • Have a minimum of 100 shareholders Have no more than 50 percent of its shares held by five or fewer individuals
Why did Congress create REITs?
Congress created REITs in 1960 to provide greater investment opportunities for the public. It had the foresight to see that income-producing real estate could give all Americans the chance to save and invest for their future security. Among other investment options, REITs allow Americans to invest in real estate through their 401(k) plans. Today, nearly 50 million Americans are invested in REITs through their 401(k)s.
Congress appreciated and understood the diverse role real estate would play in the U.S. economy and that has been borne out over the past five decades.

What laws and regulations govern REITs?
REITs operate under a specific set of laws established by Congress. The IRS oversees what qualifies as a REIT and implements the REIT rules. Publicly registered REITs also operate under the same rules as other public companies for regulatory and financial reporting purposes, and are subject to the rules of the NYSE, the NASDAQ or any other exchange they may be listed on.

Who can invest in REITs?
Any individual, from any income level, from any walk of life, can invest in REITs.

Why should someone invest in REITs? What advantages can REITs potentially offer investors?
  • Diversification: Equity REITs invest in many different property types in all 50 states, bringing investment diversification by property and geography to investor portfolios. (Source: SNL Financial.)  Over the long term, equity REIT returns have followed a path that has been different than the path of returns for other stocks, an important source of portfolio diversification. (Source: Wilshire Associates, 2012, “The Role of REITs and Listed Real Estate Equities in Target Date Fund Asset Allocations.”)
  • Dividends: REITs must pay out at least 90 percent of their taxable income as dividends to shareholders who in turn pay income taxes on those dividends at ordinary rates; in 2012 alone, $29 billion was paid out in dividends to REIT investors.
  • Liquidity: Publicly traded REIT shares can be easily bought and sold. More than 160 REITs are traded on major stock exchanges.
  • Performance: Over the 30 years ended March 28, 2013, publicly traded equity REITs outperformed the leading stock market indexes, including the S&P 500, Dow Jones Industrials and NASDAQ Composite. (Source: FactSet, REITWatch.)
  • Transparency: Publicly traded REITs operate under the same rules as other public companies for securities regulatory and financial reporting purposes.
  • Growth: Over long holding periods, equity REIT returns have tended to outpace the rate of inflation, helping investors hedge the purchasing power of their portfolio.
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