SIC 6798 Real Estate Investment Trusts

SIC 6798

This industry covers establishments primarily engaged in closed-end investments in real estate or related mortgage assets operating so that they could meet the requirements of the Real Estate Investment Trust Act of 1960 as amended. Such trusts include mortgage investment trusts, mortgage trusts, realty investment trusts, and realty trusts. This act exempts trusts from corporate income and capital gains taxation, provided they invest primarily in specified assets, pay out most of their income to shareholders, and meet certain requirements regarding the dispersion of trust ownership.

NAICS CODE(S)

525930

Real Estate Investment Trusts

INDUSTRY SNAPSHOT

In June 2005 the National Association of Real Estate Investment Trusts (NAREIT) reported 195 real estate investment trusts (REITs) with over $326 billion in market equity capitalization. About 90 percent of all REITs were equity based, with mortgage and hybrid REITs accounting for 17 percent and 3 percent of the industry, respectively. REITs invest in properties that produce income and thus focus on the commercial real estate sector. Industrial properties, which include offices, accounted for 26 percent of properties; retail, especially malls, accounted for 25 percent; and residential properties, primarily apartments, 15 percent. Other smaller categories include health care, self-storage, lodging and resorts, and home mortgages.

After suffering a downturn in real estate property values during the late 1990s, the REIT (pronounced "reet") industry prospered during the first half of the 2000s, outperforming the stock exchanges significantly. In 2004 the industry reported returns in excess of 30 percent. However, rising interest rates and skyrocketing real estate prices had industry leaders cautiously predicting a coming cool-down in the market.

ORGANIZATION AND STRUCTURE

REITs are corporations, trusts, or associations that pool investor money to purchase and manage real estate and sometimes related investments such as mortgages. A corporation or trust that qualifies as a REIT generally is not required to pay federal income tax. In most states, REITs are also exempt from state income taxes.

U.S. tax laws specify exacting standards for what qualifies as a REIT. Among other requirements, a REIT must have:

a board of directors or trustees;

at least 100 shareholders;

at least 75 percent of its total assets in real property;

at least 75 percent of its gross income from real estate operations;

no more than 30 percent of gross income from the sale of real property held for less than four years or from securities held for less than six months; and

shareholder dividends equal to at least 95 percent of its taxable income.

Most REITs issue shares that are traded publicly on an exchange such as the New York Stock Exchange (NYSE), the American Exchange (AMEX), or NASDAQ. The NYSE is home to about three-quarters of all REITs. These vehicles pool investors' money, using professional managers to supervise a portfolio of properties, mortgages, or both, depending on the business objective. REITs thus provide liquidity to investors wishing to participate in the real estate market, while providing capital for real estate managers and developers to develop new revenue streams from real estate holdings.

REITs characteristically have high dividend yields, which recently have been about the same as yields on ten-year Treasury notes. High yields make REITs interest-rate sensitive like utility stocks and other financial companies, since high-yielding equity investments compete with fixed-income securities for investor money.

Types of REITs

The three basic types of REITs are equity trusts, mortgage trusts, and hybrids. Most REITs belong to the equity category and invest directly in real property. They receive rental income and lease payments and occasionally realize capital gains from selling properties. Equity trusts are typically organized as blind pools for the purpose of investing in several unspecified rental income-producing properties to be held for an indefinite period to produce cash flow from rent, which could be distributed as dividends to shareowners.

A fully specified REIT invests in properties or in mortgages detailed in its offering statement, which does not change over time. As a result, investors can attempt to evaluate the quality of the underlying real estate prior to investing in the REIT. A blind-pool trust, in contrast, raises capital initially and then searches for real estate properties or mortgages in which to invest the proceeds raised from the offering.

Some equity trusts are organized as specified funds or specified trusts. Sale-leaseback trusts, in contrast to blind-pool trusts, invest in non-depreciable land underlying buildings and then lease the land back to the sellers from whom they were purchased. Because these trusts offer tax advantages to the seller-lessee, they typically attempt to obtain higher rental returns by sharing in the gross receipts of the lessees or the proceeds from refinancing the respective buildings.

Mortgage REITs are established to invest the proceeds from the sale of their shares in mortgages secured by real estate holdings or mortgage-backed pass-through certificates. These trusts are sensitive to the credit quality of the borrower. Some mortgage trusts limit their investments to construction and other short-term mortgages, while others invest only in long-term or permanent mortgages, and yet others invest in both types of mortgages.

Another type of mortgage trust is a dedicated trust, which is organized to provide mortgage financing to a particular real estate developer for a given project. Hybrid trusts are organized to invest in both equity properties and...