Real Estate Investment Trusts

What is a REIT?

• A REIT is a company that 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 a REIT are freely traded, usually on a major stock exchange.

• A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate tax bill. As a result, most REITs remit at least 100 percent of their taxable income to their shareholders and therefore owe no corporate tax. Taxes are paid by shareholders on the dividends received and any capital gains. Most states honor this federal treatment and do not require REITs to pay state income tax. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. However, like other businesses but unlike partnerships, a REIT cannot pass its tax losses to its investors.

美國發展歷史• 美國 REITs 在 1960 年及 1970 年代的發展初期

展現榮景， 1968 年至 1972 年間 REITs 資產成長近 2000% ，但整體市場仍不大。 1973 年開始萎縮， 1974 年， 1975 年及 1976 年總資產連續下降，從美金 20 billion ，到 12 billion ，再到 9.7 billion 。主要的原因是初期這些 REITs 都投資了極大比例的資金在抵押貸款上 ( 註1) ，而當時市場利率的上升，造成 REITs 損失，影響其發展。

• 1980 年代中期， REITs 市場一度好轉，主要是因為 REITs 調整其資產配置，減少抵押貸款的投資，增加權益型資產的投資，此時少有個別的 REITs 市值是超過美金 500 Million 的。

• 經過 30 年的發展，在 1990 年代初期，由於傳統可融通不動產市場開發的資金缺乏，促成REITs 的蓬勃發展。在市場總值、個別 REITs大小、及交易量方面都有十足進展，提升了交易效率。 1997 年，有 25 家 REITs 的總市值超過美金 1 Billion ，甚至於有 5 家是超過美金 2 Billion 的。這時 REITs 的投資標的多選定在權益型資產，尤其是投資商業不動產，並且不再委外管理，而採內部自行管理資產 ( 註 2) 。

•

REIT Modernization Act of REIT Modernization Act of 19991999

Federal tax law change whose provisions allow a REIT to own up to 100% of stock of a taxable REIT subsidiary that can provide services to REIT tenants and others. The law also changed the minimum distribution requirement from 95 percent to 90 percent of a REIT's taxable income -- consistent with the rules for REITs from 1960 to 1980.

How Does a Company Qualify as a REIT?

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 the shares held by five or fewer individuals during

the last half of each taxable year; invest at least 75 percent of the total assets in real estate assets; derive at least 75 percent of gross income from rents from real property, or interest

on mortgages on real property; have no more than 20 percent of its assets consist of stocks in taxable REIT subsid

iaries; pay dividends of at least 90 percent of its taxable income in the form of shareholder

dividends.

REITs

Do not pay taxes on their earnings.Asset requirements:• At least 75% of the value of a REIT’s assets must consist

of real assets, cash, and government securities.• Not more than 5% of the value of the assets may consist of

the securities of any one issuer if the securities are not includable under the 75% test.

• A REIT may not hold more than 10% of the outstanding voting securities of any one issuer if those securities are not includable under the 75% test.

Income requirements:• At least 95% of the entity’s gross income must be derived

from dividends, interest, rents, or gains from the sale of certain assets.

• At least 75% of gross income must be derived from rents, interest on obligations secured by mortgages, gains from the sale of certain assets, or income attributable to investments in other REITs.

• Not more than 30% of the entity’s gross income can be derived from sales or disposition of stock or securities held for less than six months or real property held for less than four years other than property involuntarily converted or foreclosed on.

Distribution requirements:• Distributions to shareholders must equal or exceed the sum

of 95% of REIT income.

What Types of REITs are There?

The REIT industry has a diverse profile, which offers many attractive opportunities to investors. REIT industry analysts often classify REITs in one of three investment approaches:

• Equity REITs own and operate income-producing real estate. Equity REITs increasingly have become primarily real estate operating companies that engage in a wide range of real estate activities, including leasing, development of property and tenant services. One major distinction between REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed.

• Mortgage REITs lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today's mortgage REITs generally extend mortgage credit only on existing properties. Many modern mortgage REITs also effectively manage their interest rate risk using securitized mortgage investments and dynamic hedging techniques.

• Hybrid REITs both own properties and make loans to real estate owners and operators.

Types of trusts• Equity trusts

– Blank or “Blind Pool” check trusts

– Purchasing, or specified trusts

– Mixed trusts

– Leveraged REITs versus unleveraged REITs

– Finite-life versus nonfinite-life REITs

– Closed-end versus open-end REITs

– Exchange trusts

– Developmental-joint venture equity REITs

– Health-care REITs

• Mortgage trusts• Hybrid trusts

UPREITUPREIT In the typical UPREIT, the partners of the Existing

Partnerships and a newly-formed REIT become partners in a new partnership termed the Operating Partnership. For their respective interests in the Operating Partnership ("Units"), the partners contribute the properties from the Existing Partnership and the REIT contributes the cash proceeds from its public offering. The REIT typically is the general partner and the majority owner of the Operating Partnership Units.

Public Investors(Stockholders)

Private Investors(Partnership Unit-holders)

REIT

Umbrella Partnership(UP)

Operating Partnership(OP)

Operating Partnership(OP)

Operating Partnership(OP)

Property Property Property

How Many REITs Are There?

There are about 300 REITs operating in the United States today. Their assets total over $300 billion. About two-thirds of these trade on the national stock exchanges:

New York Stock Exchange - 149 REITs American Stock Exchange - 27 REITs NASDAQ National Market System - 12 REITs

In addition, there are dozens of REITs that are not traded on a s

tock exchange. The balance of this publication discusses publicly-traded REITs.

Who Determines a REIT's Investments?

• A REIT's investments are determined by its board of directors or trustees. Like other public companies, a REIT's Directors are elected by, and responsible to, the shareholders. In turn, the directors appoint the management personnel. As with other public corporations, REIT directors are typically well-known and respected members of the real estate, business and professional communities.

Agency Costs: Conflicts of InterestAgency Costs: Conflicts of Interest

Some major issues to watch out for…

1) Transaction bias in UPREITs: · Due to tax-based conflict (different cost basis for LP investors vs publ

ic stock investors)?…

2) Real estate interests outside the REIT: · Do REIT managers have other real estate interests that compete with t

he REIT’s properties or for the managers’ time & energy (other properties not in the REIT, other interests such as brokerage or management firms)?…

3) Potential for “self-dealing”: · Do REIT managers have incentives to have the REIT engage in “Swe

atheart” deals with brokerage, management, development firms in which they have interests?…

委外管理 vs 內部管理

REITs offer investors:

Current, stable dividend income; Dividend growth that has consistently exceeded the rate of consumer p

rice inflation; High dividend yields; Liquidity: share of publicly traded REITs are readily converted into cas

h because they are traded on the major stock exchanges; Professional management: REIT managers are skilled, experienced re

al estate professionals; Portfolio diversification: minimizes risk; Performance Monitoring: a REIT's performance is monitored on a regul

ar basis by independent directors of the REIT, independent analysts, independent auditors, and the business and financial media. This scrutiny provides the investor a measure of protection and more than one barometer of the REIT's financial condition.