I just looked up my friend’s company (First Industrial - Ticker FR - if you must know) and acording to Morningstar, the industry is listed as “REITS.” What is this? I assume it is something like Real Estate Income Trust… Super! How is it different from a normal company?
Real estate investment trust
EJs Girl is right on what the letters stand for.
A REIT is a special type of real estate holding company that receives special tax benefits. Because of these tax benefits, the REIT has become a very popular way to holding large portfolios of property. Equity Office Properties (Sam Zell’s company) is a REIT which is also the largest owner of commercial office buildings in the country.
(Basically, a REIT is required to diburse 95% of its annual profit in the form of dividends to shareholders or owners. As long as it does this, and follows a bunch of other rules and regulations regarding income sources (e.g., the company’s income must be made up mostly of rental income) etc., they don’t have to pay any corporate level income taxes. )
REIT’s are securities that sell like stocks and/or mutual funds. They invest in real estate directly, either through properties or mortgages. Revenue generally is derived from rent (Equity REIT), or interest generated through mortgages (Mortgage REITS). Some are a combination (Hybrid REIT). They can be very attractive investments, but like anything else in the financial word, have some pitfalls. Research carefully if you intend to invest.
A REIT operates under different rules than a normal company, primarily so that they can generally avoid paying taxes. They have to have at least 75% of their assets in real estate (can include mortgage paper), and are required to return 95% of their income to their shareholders in dividends. They typically pay high dividend yields, but may behave differently than the rest of the market - one of the criticisms is that they often underperform in bull markets. Some people like to view them as hedge investments for this reason.
There are many various types, most of which specialize in some particular form of real estate - office buildings, apartment complexes, malls, storage space, health care facilities, simply holding mortgages, etc. Different considerations apply for valuation than would for a normal company - REIT’s are allowed to write off depreciation and pay dividends from it, and will often go for years without earnings, or with losses, continuing to distribute dividends the whole time. Cash flow is a more important consideration for valuing a REIT - FFO (funds from operations) is usually considered the important metric. One popular rule of thumb is a that a REIT should be paying about 85% of the FFO in dividends.
A motley fool article:
http://www.fool.com/dripport/1999/dripport991209.htm
A much more detailed resource is NAREIT:
NAREIT’s website – the National Association of REITs.
Essentially, a REIT is organized as a trust rather than a normal corporation, and functions more or less as a mutual fund for investment in real estate. It’s subject to special rules which often allow it more profitability than a typical real estate corporation. A REIT buys, and rents out and manages, buildings, often in a given geographic area and/or in a building category within its area(s) of expertise (apartment complexes, office buildings, warehouse space, etc.), and is owned by investors – “trustors” – who find it a profitable venture.
Investopedia.com gives this definition and explanation:
Oh, and FR is a REIT that specializes in industrial properties - they invest in warehouses and manufacturing facilities.