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What The Heck Is A REIT : “REIT 101″

Posted on April 28th, 2013 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

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REIT is a company that mainly owns, and in most cases, operates income-producing real estate such as apartments, shopping centers,offices, hotels and warehouses. Some REITs also engage in financing real estate. The shares of many REITs are traded on major stock exchanges.

With changes in the tax rates, a number of other operating businesses are evaluating the benefits of conversion to a REIT status.

As a real estate investment trust, a company is allowed to distribute 90% of its taxable income to its shareholders and is subject to lower taxes. This Post will help you to gove more insights on REIT.

REITs can be bought and sold like listed securities and generates revenue through rental payments from the properties under it.

This revenue is distributed to the unit holders either on a semi-annual or annual basis. REITs are known to some as “pass-through entities” since they pass significant amount of their profits to investors.[ref:http://sqft.asia]

arrowA REIT is an entity that:

  • Owns, leases and operates income-producing real estate
  • Holds at least 75% of total assets in real estate
  • Derives at least 75% of gross income from real property rents, including storage revenues, or other real property sources
  • Generates service and non-property related income within Taxable REIT Subsidiaries
  • Distributes annually at least 90% of qualifying taxable income in the form of dividends

arrowREIT structure provides significant benefits to stockholders

  • Substantial tax savings
  • Disciplined capital allocation strategy
  • New opportunities for value creation

arrowAre 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

arrowWhat are some examples of REITs?

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.

These sort of companies currently exploring REIT status represent new REIT property types

Tower Companies
Tower companies build permanent structures on land and rent space on them to telecom companies.

Data Centers
Data center REITs lease server space to their tenants, and they have been in the index since 2004.

Storage
Storage REITs have been around for decades.

Prisons
Prison REITs first entered the index in the 1990s.

Lodging/ Resorts
There have been dedicated hotel REITs since 1970.

Infrastructure
There currently is an Infrastructure sector in the FTSE NAREIT All REITs Index.

Billboards and Gaming
There haven’t been billboard or gaming REITs in the index in the past, but their basic business models, like those of other REITs, involve providing land and the improvements on it for lease to tenants.

arrowAre all REITs the same?

The REIT industry has a diverse profile, which offers many benefits.

arrowTypes of REITs

REITs often are classified in one of two major 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.

A third type is Hybrid REITs – A combination of the two aforementioned REITs

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).

Source from Internet , Ninety percent of listed REITs are Equity REITs; the remaining 10 percent are Mortgage REITs.

arrow Qualification as REIT for U.S. Tax Purposes

In order for a company to qualify as a REIT, it must comply with certain provisions within the Internal Revenue Code.

As required by the Tax Code, a REIT must:

  • Be an entity that is taxable as a corporation
  • Be managed by a board of directors or trustees
  • Have shares that are fully transferable
  • Have a minimum of 100 shareholders
  • Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year
  • Invest at least 75 percent of its total assets in real estate assets
  • Derive at least 75 percent of its gross income from rents from real property or interest on mortgages financing real property
  • Have no more than 25 percent of its assets consist of stock in taxable REIT subsidiaries
  • Pay annually at least 90 percent of its taxable income in the form of shareholder dividends

arrowWhy should someone invest in REITs? What advantages can REITs potentially offer investors? [ Source Internet]

  • Diversification: Equity REITs invest in many different property types in all 50 states, bringing investment diversification by property and geography to investor portfolios. 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.
  • 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.
  • Liquidity: REIT is a liquid investment when it is listed as a shares or units of a listed REIT and traded like any others stock on the stock exchange. REIT able provides greater investment flexibility, with ability to react more quickly to change in market conditions, in comparison to investing in physical property.
  • 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.
  • Transparency: REITs are governed by the respective exchange regulations and are mandated by law to submit disclosures every quarter or year. This makes REITs highly transparent investment instruments.
  • Growth: Over long holding periods, equity REIT returns have tended to outpace the rate of inflation, helping investors hedge the purchasing power of their portfolios.

arrowWho manages a REIT?

  • Like other publicly traded companies, a REIT's executive management team operates the company, deciding what properties it will own and manage.
  • Management's decisions are overseen by a board of directors that is responsible to the shareholders.

arrowREIT Provides Significant Stockholder Benefits

Three Key Value Drivers

  • Higher dividends over time supported by
  • U.S. federal & state income tax savings
  • Higher distributable pre-tax income
  • Both U.S. & international rental (QRS) income

arrowFacts About REIT Conversions

A number of companies have announced recently that they are exploring converting to a REIT. Why?

There are two primary reasons a company would consider converting to a REIT:

1) Business model and core competencies – REIT status is available to companies that are primarily real estate companies, the majority of whose revenues and assets come from real estate. They’re choosing to focus on their core real estate business and operate as REITs.

2) Macro-economic trends – Today’s slow-growth economic environment and the Federal Reserve’s commitment to keep interest rates low for an extended period have produced a global search for yield and strong valuations for income stocks. The requirement that REITs pay out at least 90 percent of their taxable income as dividends makes them especially desirable now as excellent income stocks.

arrowGlobalization of Real Estate Securities

Many countries have adopted a REIT-type structure:

  • LPT - Listed Property Trusts (Australia)
  • Dutch FBI - Fiscal Beleggings Instelling (Netherlands)
  • S-REIT – Singapore Real Estate Investment Trust
  • J-REIT - Japanese Real Estate Investment Trust
  • SIIC – Sociétés d'investissements Immobiliers Cotées (France)
  • Canadian REITs – Legislated in 1993, growing universe
  • Belgium REITs – Growing universe
  • Hong Kong REITs – Largest REIT IPO Completed in November 2005
  • Bulgarian REITs – Newest country with REIT legislation
  • Malaysian REITs – Growing universe

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