1 The REIT Way of Owning, Operating, and Financing Commercial Real Estate The National Association...
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Transcript of 1 The REIT Way of Owning, Operating, and Financing Commercial Real Estate The National Association...
1
The REIT Wayof Owning, Operating,
and FinancingCommercial Real
EstateThe National Association of Real Estate Investment Trusts®
Friday Concurrent Sessions Sponsored by
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• REITs were created in 1960 by an act of Congress
– Sections 856 and 857 of the Internal Revenue Code (IRC)
– Real Estate Investment Trust Act of 1960
• Part of the Cigar Excise Tax Extension of 1960 signed by President Eisenhower September 14, 1960
• Congress looked to the provisions governing mutual funds
• To allow small investors to pool their investments in real estate in order to obtain the same benefits as might be obtained by direct ownership, while also diversifying their risks and obtaining professional management
• “ … small investors can secure advantages normally available only to those with large resources.” (Committee Report)
REITs In the Beginning…the Purpose
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• A REIT must be a company in the real estate business
– For example, Intel or Verizon or Caterpillar may not elect to be a REIT
– The REIT rules ensure this limitation
• REITs own and, in most cases, manage and lease investment-grade,
income-producing real estate, including office buildings, apartments,
shopping centers and warehouses. Some REITs undertake
development, redevelopment and property management. Some REITs
engage in the financing of residential or commercial real estate
• Operating a real estate company as a REIT is a voluntary election
under the Internal Revenue Code
General Principles
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• Publicly traded REITs operate under the same rules for federal tax,
regulatory and financial reporting purposes as all other publicly-
traded companies
• A REIT is taxed as a corporation, but unlike other corporations, a
REIT may deduct dividends paid to its shareholders when
calculating its “taxable income” so long as it complies with the
entire REIT regime
• Leverage is not subject to statutory restrictions, but publicly traded
equity REITs generally use moderate leverage
General Principles
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• Managed by a board of directors or trustees
• Transferable shares or equity interests
• Ownership tests
– At least 100 shareholders
– No more than 50% of equity interests held by five or fewer “individuals” during the last half of the year (The “five or fewer” rule)
• Dealer sales safe harbor rules
REIT Requirements
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• Asset tests
– At least 75% of total assets must consist of real estate assets
– Remaining 25% may be invested as desired, subject to certain limitations
• Income tests
– At least 75% of gross income must come from rent on real property or mortgage interest (“qualifying” income)
– At least 95% of gross income must come from qualifying income plus certain other types of passive income, such as interest and dividends
REIT Requirements
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• Distribution requirement
– Distribute at least 90% of taxable income annually to shareholders in the form of dividends
– In practice, most REITs distribute 100% of their taxable income to avoid the entity level corporate tax
– Taxable income not distributed remains subject to ordinary corporate tax
– All dividends and capital gains are taxable at the shareholder level
– Dividends may include ordinary income distributions, capital gain distributions and return of capital distributions
REIT Requirements
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Attributes of Public REITs
• Full-time professional management teams
• Traditional corporate governance
• SEC financial reporting and transparency
• Tax treatment– Not a “pass-through” tax regime
– Tax losses or credits cannot be passed along to shareholders
– Entity may not retain taxable income without disqualification as a REIT or corporate tax on remainder
• Stock holdings backed by real assets
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Types of Publicly Traded REITs
91% EQUITY REITsProvide equity capital for commercial real estate by owning real estate assets. Derive revenues primarily from rents.
Data as of June 30, 2011. Source: NAREIT®
9% MORTGAGE REITsProvide debt capital for
housing and commercial real estate by investing in mortgages and mortgage-backed securities.
Derive revenues primarily from interest payments.
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Publicly Traded Equity REIT Industry in U.S. Broad Diversification by Property Type and Geography
Data as of June 30, 2011 Source: NAREIT®
Property Sector Percent
Residential
Regional Malls
Office Buildings
Shopping Centers
Diversified
Industrial Facilities
Mixed (Industrial/Office)
Free Standing (Retail)
16
16
13
8
8
5
2
2
Core Property Types 70
Health Care
Lodging/Resorts
Timber
Self-Storage
12
7
6
6
Total 100
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Types of U.S. REITs
• Publicly traded REITs– Register with the SEC– Shares trade on national stock exchanges
• Non-listed REITs– Register with the SEC– Shares are not listed on national stock exchanges
• Private REITs– Companies do not register with the SEC– Not listed on national stock exchanges
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Size and Scope of REIT Market
Publicly Traded
REITs1,2
Public,
Non-listed REITs3
Private
REITs
Number of Companies
160 ~ 63 >1,000
Total Assets
Q4 2010$680 Billion $94 Billion N/A
Equity Market Capitalization
$455 Billion N/A N/A
Note: Data as of June 30, 2011, unless otherwise noted.
Sources: 1SNL Financial, 2NAREIT®, 3Blue Vault Partners Inc.
• According to the Internal Revenue Service, approximately 1,680 REITs (public and private) filed tax returns in 2008
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Representation of Publicly Traded Equity REITs in U.S. Equity Benchmarks• S&P 500 = 1.70 percent
– 15 REITs are constituents of the S&P 500 Index– 26 REITs are constituents of the S&P 400 Index– 30 REITs are constituents of the S&P 600 Index
• Dow Jones U.S. Total Stock Market Index = 2.96 percent
• 142 REITs traded on New York Stock Exchange
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UPREIT Corporate and Property Structure
PublicStockholders
Publicly-TradedREIT
(General Partner)
OperatingPartnership
PrivateInvestors
(Contribute Properties)
Property 1 Property 2 Property 3
Management
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DownREIT Corporate and Property Structure
PublicStockholders
Publicly-TradedREIT
(General Partner)
OperatingPartnership
PrivateInvestors
(Contribute Properties)
Property 1 Property 2 Property 3
Management
Property 4
Property 5
16Note: Data as of June 30, 2011
0
100
200
300
400
500
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
1992: Taubman Centers IPO(First UPREIT)
1986: Tax Reform Act Permits Internal
Management
1989: Collapse of Real Estate
Market
1993: Relaxation of the “Five or Fewer”
Rule for Pension Funds
2007-2009: Great
Financial Crisis
1960s-1970s: Mortgage and Hybrid
REITs Dominant
1960: REITs created by Congress
Billions of dollars
Publicly Traded REIT Industry GrowthEquity Market Capitalization
1991: Kimco IPOModern REIT Era Begins
2007: Equity OfficeProperties LBO
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Access to Capital: Securities Offerings by U.S. REITs
0
10
20
30
40
50
60
Equity Debt
• REITs raised $23 billion through equity and unsecured debt offerings in 2009; and an additional $47 billion in equity during 2010
• REITs continue to raise equity and issue debt successfully in 2011 with $26.0 billion through equity offerings and $9.5 billion through unsecured debt offerings during the first six months
Billions of dollars
Data as of June 30, 2011Source: NAREIT® and SNL Financial
1818
Global REIT ChronologyCountries with Existing REIT-Like Structures
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NAREIT is not acting as an investment adviser, investment fiduciary, broker, dealer or other market participant, and no offer or solicitation to buy or sell any security or real estate investment is being made. This information is solely educational in nature and is not intended by NAREIT to serve as the primary basis for any investment decision. Investments and solicitations for investment must be made directly through an agent, employee or representative of a particular investment or fund and cannot be made through NAREIT. NAREIT does not allow any agent, employee or representative to personally solicit any investment or accept any monies to be invested in a particular security or real estate investment.
All REIT data are derived from, and apply only to, publicly traded securities. While such data is believed to be reliable when prepared or provided, such data is subject to change or restatement. NAREIT does not warrant or guarantee such data for accuracy or completeness, and shall not be liable under any legal theory for such data or any errors or omissions therein. See http://reit.com/TermsofUse.aspx for important information regarding this data, the underlying assumptions and the limitations of NAREITs liability therefore, all of which are incorporated by reference herein.
Performance results are provided only as a barometer or measure of past performance, and future values will fluctuate from those used in the underlying data. Any investment returns or performance data (past, hypothetical or otherwise) shown herein or in such data are not necessarily indicative of future returns or performance.
Before an investment is made in any security, fund or investment, investors are strongly advised to request a copy of the prospectus or other disclosure or investment documentation and read it carefully. Such prospectus or other information contains important information about a security’s, fund’s or other investment’s objectives and strategies, risks and expenses. Investors should read all such information carefully before making an investment decision or investing any funds. Investors should consult with their investment fiduciary or other market professional before making any investment in any security, fund or other investment.
For more information, visit: www.reit.com
Disclaimer