Real estate investment trust – Wikipedia, the free encyclopedia

Real estate investment trust

From Wikipedia, the free encyclopedia

A real estate investment trust (REIT) /ˈriːt/ is a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. Some REITs also engage in financing real estate. Created by the U.S. Congress in 1960,[1] REITs were designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.[2] REITs are strong income vehicles because REITs must pay out at least 90 percent of their taxable income in the form of dividends to shareholders.[3]

REITs can be publicly traded on major exchanges, public but non-listed or private.[3] The two main types of REITs are Equity REITs[4] and Mortgage REITs.[5] In November 2014, Equity REITs were recognized as a distinct asset class[6] in the Global Industry Classification Standard by S&P Dow Jones Indices and MSCI. The key statistics to examine in a REIT are net asset value (NAV), funds from operations (FFO), and adjusted funds from operations (AFFO).

 

REITs were created in the United States when President Dwight D. Eisenhower signed into law the REIT Act title contained in the Cigar Excise Tax Extension of 1960.[7] REITs were created by Congress in order to give all investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities.

Since then, more than 30 countries around the world have established REIT regimes, with more countries in the works. The spread of the REIT approach to real estate investment around the world has also increased awareness and acceptance of investing in global real estate securities.[8]

A comprehensive index for the REIT and global listed property market is the FTSE EPRA/NAREIT Global Real Estate Index Series,[9] which was created jointly in October 2001 by the index provider FTSE Group, the National Association of Real Estate Investment Trusts (NAREIT) and the European Public Real Estate Association (EPRA).

As of June 2014, the global index included 456 stock exchange listed real estate companies from 37 countries representing an equity market capitalization of about $2 trillion (with approximately 78% of that total from REITs).[10]

Evolution[edit]

Around the time of their creation in 1960, the first REITs primarily consisted of mortgage companies. The industry experienced significant expansion in the late 1960s and early 1970s. The growth primarily resulted from the increased use of mortgage REITs in land development and construction deals. The Tax Reform Act of 1976 authorized REITs to be established as corporations in addition to business trusts.

The Tax Reform Act of 1986 also impacted REITs. The legislation included new rules designed to prevent taxpayers from using partnerships to shelter their earnings from other sources. Three years later, REITs witnessed significant losses in the stock market.

Retail REIT Taubman Centers Inc. launched the modern era of REITs in 1992 with its creation of the UPREIT. In an UPREIT, the parties of an existing partnership and a REIT become partners in a new “operating partnership.” The REIT typically is the general partner and the majority owner of the operating partnership units, and the partners who contributed properties have the right to exchange their operating partnership units for REIT shares or cash.The industry struggled beginning in 2007 as the global financial crisis kicked in. In response to the global credit crisis, listed REITs responded by deleveraging (paying off debt) and re-equitizing (selling stock to get cash) their balance sheets. Listed REITs and REOCs raised $37.5 billion in 91 secondary equity offerings, nine IPOs and 37 unsecured debt offerings as investors continued to act favorably to companies strengthening their balance sheets following the credit crisis.

From the end of February 2009 through the end of October 2014, stock-exchange listed Equity REITs have posted total returns of 312% (28.4% per year) and all stock-exchange listed REITs have gained 295% (27.5% per year), outpacing the return of 217% (22.6% per year) in the broad stock market and 210% (22.1% per year) in large-cap stocks.[11]

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