REIT Investment Information
Real estate investment trusts (REITs) are a type of asset class that investors can use to diversify their portfolio. Real estate investment trusts will not protect an investor in a protracted economic downturn but they will provide some safety in more modest recessions. During periods of economic expansion they can provide both capital appreciation and a healthy level of investment income.
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History
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Prior to the Real Estate Investment Trust Act of 1960, only wealthy individuals and corporations had the financial wherewithal to invest in real estate projects; the average individual investor was left out. Congress passed the Real Estate Investment Trust Act, which exempted special purpose companies from income tax if certain criteria were met. This Act of Congress was passed to encourage average investors to pool their money so they, too, could participate in the real estate market.
Criteria for a REIT
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For a company to be legally considered a Real Estate Investment Trust and be able to take advantage of the tax benefits that come with the status, it must pass four distinct tests.
• It must distribute at least 90 percent of its annual taxable income to its shareholders.
• The REIT must have at least 75 percent of its assets invested in real estate, mortgages, cash, or government securities.
• At least 75 percent of its taxable income must come from rents, mortgage interest, or gains from real estate sales.
• A REIT must have at least 100 shareholders and less than 50 percent of the outstanding shares can be concentrated among five or fewer shareholders.
If these four criteria are met then the company can be legally designated a Real Estate Investment Trust. -
Varieties
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Real estate investment trusts have evolved over the decades and today's investors have a wider variety of REITs than ever before to choose from. Some examples include:
• A REIT that focuses only on commercial property in major metropolitan areas
• A REIT that only invests in medical facilities
• A broad-based REIT that invests in both commercial and residential projects throughout the country or around the worldNo matter what segment of the real estate market an investor wants to put money in, there is a real estate investment trust that can meet his need.
Finding Information
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Publicly traded REITs are required to file their annual and quarterly reports with the Securities and Exchange Commission. These reports are available for free at sec.gov. For example, if you want information about Washington Real Estate Investment Trust, stock symbol WRE, go to the SEC's website and under the Filings & Forms section click on the "Search for Company Filings" link. This link will take you to a page that allows you to type in the REIT's stock symbol and will then pull up the annual and quarterly reports on file.
What's Important
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When looking at the filings it is important to note several key items. The first is the actual financial statements. You want to make sure there is a trend of increasing revenues and increasing EBITDA. Real estate is a cash business so net income isn't as important as the cash flow that is generated. Another key piece to look at is the breakdown of the cash flow. How much of it is coming from rents and leases and how much is coming from the sale of property? If management is selling a lot of property and not replacing it, how long will the current dividend payout rate be sustained? You also want to read management's discussion on performance. This discussion should give you a fair idea of the REIT's performance and the issues it faces. It does not provide you with all the information you might want to know but, taken together with the financial statements and the notes to the financial statements, does give you a good foundation for your investment decision.
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