Real Estate Investment Trust (Reit): A Financial Model

This website was assembled under cooperative agreement between USAID/EGAT and Evensen Dodge International (EDI) with number EPP-A-00-06-00015-00 and name “Aliance for Subnational Infrastructure Financing” REAL ESTATE INVESTMENT TRUST (REIT) A Financial Model CONTENT INTRODUCTION TO THE REIT MODEL ......................................................................1 Background: REITs in the United States...................................................................2 Major benefits of REITs.............................................................................................3 DEFINITION OF REIT....................................................................................................3 OBJECTIVE OF REIT....................................................................................................3 DESCRIPTION OF THE REIT MODEL .........................................................................3 Equity REITS.............................................................................................................4 Mortgage REITS........................................................................................................4 Hybrid REITS.............................................................................................................4 THE REIT STRUCTURE................................................................................................4 Mutual Fund Trust Structure......................................................................................4 LEGAL ISSUES REGARDING REITS...........................................................................6 TAX IMPLICATIONS OF REITS....................................................................................8 Taxation at the Trust Level........................................................................................8 Taxation to Unit holders.............................................................................................9 STATISTICS ON REITS ................................................................................................9 REITS by sector (August 2005).................................................................................9 Relative Performance (30 Year Total Returns) .......................................................10 Public REIT Market..................................................................................................10 Relative REIT Performance.....................................................................................10 CASE STUDIES ON REITS.........................................................................................12 Typical REITs models..............................................................................................12 The Hoyt REIT Model..............................................................................................12 CANADA: REITs success story...............................................................................13 COMPARATIVE REITs MODELS................................................................................15 Differences between the United States vs Canada.................................................15 REITs IN FINANCIAL CRISIS......................................................................................15 CONCLUSIONS...........................................................................................................16 INTRODUCTION TO THE REIT MODEL Real Estate Investment Trusts ( REITs) are securities that sell very similarly to stocks on the stock market exchange. A REIT is an investment into real estate directly through either properties or Evensen Dodge International / Real Estate Investment Trust (REIT), a PPP Model / 1 mortgages. REITs receive special tax considerations and most often offer investors high yields. REITs are typically a very high liquid form of investing in real estate. Like many other types of securities, there is a variety of different types of REITs. There are Equity REITs which not only are investments but also retain property rights as well. This means that Equity REITs are responsible for the equity or value of their real estate assets. The revenues of these Equity REITS come primarily from their properties` rents. Mortgage REITs deal with the investment and ownership of property mortgages. This specific type of REIT loans money for the mortgages to the owners of the real estate, or deals with the purchase of existing mortgages or mortgage-backed securities. The revenues of these REITs are generated mainly from the interest that they earn on the mortgage loans. The last form of a REIT is known as a Hybrid REIT. A Hybrid REIT is a combination of the investment strategies used for Equity REITs and Mortgage REITs. So in effect, a Hybrid REIT uses a combination of both properties as well as mortgages. One looking to invest in REITs can do so by purchasing shares in REITs on an open exchange much like that either of stocks, or by investing in mutual funds that specialize directly in public real estate. Just like stocks, many REITs include dividend reinvestment plans (DRIPS). Other than just homes and real estate, REITs invest in shopping malls, office building and complexes, apartments, warehouses, and hotels. Some REITs may specialize in investing in one particular area of real estate, like hotels or apartments, while others may invest in a particular region, like a specific city or region. So investing in REITs is just an alternative way to invest in the real estate market. Background: REITs in the United States Over nearly 50 years the U.S. REIT industry has been an integral part of the U.S. economy as well as its investment markets. United States REITs alone have seen their market capitalization skyrocket from $90 billion to more than $300 billion in the last 10 years alone. This unbelievably high growth in the U.S. market has set the stage for this REIT approach to securitized real estate investment globally. The United States Congress created REITs during the 1960 as a means to make investing in real estate at a large scale, available to all investors similar to other forms of liquid securities like stocks. Before the creation of listed real estate equities, the access to the investment returns of commercial real estate equity as the primary asset was primarily only available to institutions and wealthy individuals who had the sufficient funds and means to take on direct real estate investment. Early on, the REIT industry was dominated by mortgage REITs, which were used to provide debt financing primarily for residential or commercial properties through their investments in just mortgages or mortgage-backed securities. Initially the market`s interest in Equity REITs was minimal because unlike today where these Equity REITs are usually both owned and managed by commercial Evensen Dodge International / Real Estate Investment Trust (REIT), a PPP Model / 2 properties, the Equity REITs then had to be owned and managed separately. However, when the Tax Reform Act of 1986 was passed, this allowed for the vertical integration of Equity REITs to be owned and managed together rather than separately. This tax reform act being passed set up the wave of Equity REIT IPOs in the mid-1990s. Of the nearly 200 publicly traded REITs in the U.S. right now more than 90% are Equity REITs that often own and manage both the commercial real estate as well as deriving most of their revenue and income from rents. Under law by the Internal Revenue Service (IRS), a company must pay 90% of its taxable income to shareholders every year. The company must also invest at least 75% of its total assets in some form of real estate and also generate equal to or more than 75% of its gross income from investments in or mortgages on real property. Major benefits of REITs There are many reasons and benefits to owning shares in REITs or owning and operating a particular REIT. Five of the major reasons why REITs have been a popular investment for policy-makers in the United States are: (1) Like securities and stocks REITs help diversify a portfolio, (2) are fairly liquid investments, (3) have dividends, (4) have relatively high performance, and (5) provide transparency for the investor. One other popular benefit of REITs is their amount of low advantage. Credit Ratings Agencies have awarded many REITs an investment grade and generally have a debt ratio below 50%. DEFINITION OF REIT A Real Estate Investment Trust (REIT) is a corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT). REITs are traded on major exchanges just like stocks. They are also granted special tax considerations. In order to maintain REIT status on an on-going basis, a REIT must also operate in conformity with the requirements for REIT qualification under the Internal Revenue Code. REITs were created in the 1960’s so that smaller investors can secure advantages normally available only to those with larger resources. It was created as a Passive Investment Vehicle similar to the Stock Market Fund. OBJECTIVE OF REIT REITs offer several benefits over actually owning properties. First, they are highly liquid, unlike traditional real estate. Second, REITs enable sharing in non-residential properties as well, such as hotels, malls, and other commercial or industrial properties. Third, there`s no minimum investment with REITs. REITs do not necessarily increase and decrease in value along with the broader market. However, they pay yields in the form of dividends no matter how the shares perform. REITs can be valued based upon fundamental measures, similar to the valuation of stocks, but different numbers tend to be important for REITs than for stocks. DESCRIPTION OF THE REIT MODEL Evensen Dodge International / Real Estate Investment Trust (REIT), a PPP Model / 3 REITs fall into two basic categories: companies that invest directly in real estate so as to have equity ownership of it; and companies that lend funds and take mortgages on real estate. The income of a REIT is not taxed to the corporation but rather is taxed directly to the shareholders. Equity REITS Mortgage REITS Hybrid REITS Equity REITs are the most common type of REIT, investors either invest, manage or own real estate. Their revenues come principally from the properties’ rents. Mortgage REITs are REITS that consist of investors lending money to owners and developers or investing in financial instruments secured by mortgages on real estate. Their revenues are generated primarily by the interest that they earn on mortgage loans. Hybrid REITS are a combination of equity and mortgage REITS. They combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages. Typically, REITs tend to be more value than growth-oriented, and are chiefly composed of small and mid cap holdings. The Internal Revenue Service (IRS) requires REITs to pay out at least 90% of their incomes to unit holders (the equivalent of shareholders). This is similar to corporations, and means REITs provide higher yields than those typically found in the traditional fixed-income markets. They also tend to be less volatile than traditional stocks because they swing with the real estate market. On a cautionary note, a REIT is not a guaranteed investment. Its value can go either up or down. Factors that affect REITs value are: The first is the quality and income-generating potential of the properties held by the trust. The second factor is interest rates. Real estate is sensitive to interest rates. Therefore, the interest rate outlook can affect the value of REITs. The third factor is management. REIT must manage its properties held effectively if they are to generate income. Many REITs trade on national exchanges or in the over-the-counter market. Publicly traded REITs must file reports with the SEC quarterly and annually. REITs have grown through the years due to: • Increasing Investor Interest in Owning Income Producing Real Estate • Change in United States Tax Laws • The Need to recapitalize the industry in the early 1990’s • The search for ‘YIELD’ THE REIT STRUCTURE Mutual Fund Trust Structure • Closed end trust-‘mutual fund trusts’ under tax law • “Flow through” for tax purposes • No taxes payable by trust provided all income distributed Evensen Dodge International / Real Estate Investment Trust (REIT), a PPP Model / 4 • Foreign ownership limitations GLOBAL REITs MARKET REITs are used in developed countries including in the United States, Canada, France, Germany and Australia. The Model has been adapted for emerging economies and has started to be used in South Africa. Mexico, in a similar track, modified its legal framework in 2006 to welcome this model too. Other developing countries could consider REITs as a Public-Private Partnership (PPP) to foster infrastructure development and as a means to trigger the economy moving forward. The REIT Model can be adapted to meet each country’s needs; however, interested countries will have to consider reforming their legal frameworks for public entities to get engage in this type of initiative. Evensen Dodge International / Real Estate Investment Trust (REIT), a PPP Model / 5 ... - tailieumienphi.vn