| Real Estate Investment Trusts 'Reit's' |
| Real Estate Investment Trust (REIT) - A real estate investment trust (REIT) is a company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centers, offices and warehouses. Some REIT's also engage in financing real estate. Importantly, to be a REIT a company is legally required to pay virtually all of its taxable income (90 percent) to its shareholders every year (see below for all REIT's requirements). A REIT may deduct the dividends paid to the shareholders from its corporate tax bill so long as the company's assets are primarily composed of real estate held for the long term, the company's income is mainly derived from real estate, and the company pays out at least 90 percent of its taxable income to shareholders. The main benefit of being a REIT is one level of taxation. The main limitation of being a REIT is a restriction on earnings retained by the company. For a REIT to grow, capital must come from money raised in the investment marketplace as well as money generated internally Naturally this means that from time to time the company will go to the capital markets with equity or debt to generate cash for investment. You will notice through our discussion and analysis of REITS we categorize them based on the primary holdings of theTrust. The broad categories are ones such as hotel/motel, industrial, office, retail, commercial, residential and financial. Most REITS specialize in just one of the categories---although there are those we call 'diversified' which may hold some properties in all of the categories--but this is not the normal way of operating. The above categories are self explanatory for the most part--with the exception of the 'financial' category. This category is composed of Trust that hold all types of mortgages or do various types of short or long term lending relative to real estate. CAUTION---regardless of the quality of any individual company you must diversify. This means not just other REIT's, but investments in other types of high yielding instruments as well. Remember that unless you are going to stay in high yield savings account you will have to take some level of risk. n order for a corporation to qualify as a REIT and gain the advantages of being a pass-through entity free from taxation at the corporate level, it must comply with the following Internal Revenue Code provisions: --Structured as a Corporation, business trust, or similar association --Managed by a board of directors or trustees --Minimum of 100 shareholders --Pays dividends of at least 90 percent of REIT's taxable income --No more than 50 percent of the shares can be held by five or fewer individuals during the last half of each taxable year --At least 75 percent of total investment assets must be in real estate --Derive at least 75 percent of gross income from rents or mortgage interest |
| KEY POINT As far as REIT's are concerned the key measure of the ability to pay dividends to the unit holders is FFO--Funds From Operations (Not earnings per share). FFO is the cash flow from operations and is comprised of net income plus depreciation and amortization expenses |
| The Yield Hunter Let's make some money and sleep well at night |
| Updated 4/27/2008 |