Real Estate Investment Trust--REITs
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REITs are required to pay out at least 90% of income as shareholder dividends.
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Book value ratios are useless for REITs, instead, calculations such as net asset value are better metrics.
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Top-down and bottom-up analyses should be used for REITs, where top-down factors include population and job growth, while bottom-up aspects include rental income and funds from operations.
What Qualifies as a REIT?
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Most REITs lease space and collect rents, and then distribute that income as dividends to shareholders. Mortgage REITs (also called mREITs) don't own real estate, and instead finance real estate. These REITs earn income from the interest on their investments, which include mortgages, mortgage-backed securities, and other related assets.
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To qualify as a REIT, a company must comply with certain Internal Revenue Code (IRC) provisions. Specifically, a company must meet the following requirements to qualify as a REIT:1
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Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
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Earn at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
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Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
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Be an entity that's taxable as a corporation
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Be managed by a board of directors or trustees
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Have at least 100 shareholders after its first year of existence
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Have no more than 50% of its shares held by five or fewer individuals
There are a number of different types of REITs. Equity REITs tend to specialize in owning certain building types such as apartments, regional malls, office building,s or lodging/resort facilities.
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The other main type of REIT is a mortgage REIT. These REITs make loans secured by real estate, but they do not generally own or operate real estate. Mortgage REITs require special analysis. They are finance companies that use several hedging instruments to manage their interest rate exposure.
R-Opus is setting up a R-Opus Equity REIT, For more information [please contact us.
