Personal Finance 1st Edition by Jack R. Kapoor

Exercise 2

Using the Internet to Obtain Information about Various Types of REITs. Many REITs now maintain Web sites. Visit a few Web sites of REIT companies discussed in this chapter and of the National Association of Real Estate Investment Trusts (NAREIT) at www.nareit.com. Then prepare a report that summarizes the various types of REITs available to investors. (Obj. 1)

Step 1 of 2

Meaning of REIT:

Full form of REIT is Real Estate Investment Trust. REIT is a company which owns and operates real estate which mostly generates income. Some of them also finance for the real estate purpose. Many REITs’ shares are traded on major stock exchanges.

A company to become REIT should have the following characteristics

1. Most of its assets in the form of real estate

2. Most of its income are generated through real estate investment

3. Distribute 90 percent or more of its taxable income annually to shareholders in the form of dividends.

REIT allows deducting dividends which is paid to its shareholders from its corporate taxable income. Hence most REITs pay dividends to the tune of 100 percent of their taxable income therefore owe no corporate tax whereas shareholders pay tax on dividends received and capital gains. REIT cannot pass any tax losses to its investors.

Following can invest in REITs:

Individuals can invest in REITs. They can invest directly or indirectly through mutual funds. Pension funds, Exchange traded funds, foundations, insurance companies, endowments and bank trust departments also invest in REITs.

The basic characteristics of commercial real estate investment are higher amounts of current income and the opportunity of long-term growth. Because of this, REITs attract investors. REITs provide diversification, dividends, liquidity, performance and transparency.

Benefits of investing in REITs:

REITs provide higher amounts of current income and the opportunity of long-term growth. They provide higher return than lower risk bonds. But the high-growth stocks with high risk provide higher return than REITs.

REITs provide highest dividends. This is because by law they have to distribute every year 90% of their taxable income as dividend. The REITs have relatively stable income and they can be predicted. As they are rentals of the properties and rents tend to rise during the periods of inflation. Since their rentals increase period after period they help to build diversified portfolio. They can become better hedge against inflation.

National Association of Real Estate Investment Trusts (NAREIT)

REITs and publicly traded real estate companies with an interest in U.S. real estate and capital markets are represented by NAREIT. REITs, other businesses (that own, operate and finance income-producing real estate), firms and individuals who advise, study and service these businesses can become the members of NAREIT.

Numerous programs, publications and services are provided by NAREIT to its members and to nonmembers. Several educational and networking resources are provided to nonmembers. Members are allowed to additional benefits and cost savings on this site.

NAREIT provides its members:

• Representation before state and national policymakers;

• Numerous opportunities to network amongst themselves and with a variety of service providers in the industry;

• Opportunities to participate on NAREIT committees and to work with other leaders of industry to shape its policies. Committees include: Accounting, Government Relations, Insurance, and Investor Relations;

• Access to the latest industry research information about REITs on the NAREIT Web site.

Over 2,000 REITs, real estate companies, investors, industry professionals, and academics take advantage of membership in NAREIT and our related resources; many more purchase publications and attend events through NAREIT.

Types of REITs

REITs’ invest in Real Estate either directly or somewhat indirectly. There are three main types of REITs.

Equity REITs

Equity REITs invest directly in Real Estate and own and manage the properties. Therefore REITs are responsible for the properties’ asset value. Their revenues come primarily from properties’ rent. Properties are usually purchased to be part of a portfolio of investments rather than developed for resale. Equity REITs offer both dividend incomes as well as capital gains when properties are sold. Hence they become an excellent long-term investment.

Mortgage REITs

A mortgage REIT originates buys and/or sells mortgages for real estate property owners. They make loans that are secured by real estate. They purchase mortgage-backed securities or existing mortgages. Basically this type of REIT is a finance company. Primary revenue for them comes from the interest earned through mortgages. When interest rates drop, Mortgage REITs can be a good investment.

Hybrid REITs

The investing principles of mortgage REITs and equity REITs are combined in case of Hybrid REITs. They do make mortgage loans and direct property ownership. Both rental