Saturday Brain Storming Thought (136) 23/10/2021
COMPILED BY ER. AVINASH KULKARNI
REAL ESTATE INVESTMENT TRUST (REIT)
A Real Estate Investment Trust (REIT) is a company that owns, operates or finances income-generating real estate
This makes it possible for individual investors to earn dividends from real estate investments – without having to buy, manage or finance any properties themselves
Key Takeaways
1) REIT is a company that owns, operates or finances income-producing properties
2) REITs generate a steady income stream for investors but offer little in the way of capital appreciation
3) most REITs are publicly traded like stocks, which makes them highly liquid (unlike physical real estate investments)
4) REITs invest in most real estate property types, including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses
To qualify a REIT
The company must comply with certain provisions to qualify as a REIT
1) invest at least 75% of total assets in real estate, cash or U S Treasuries
2) derive at least 75% of gross income from rents, interest on mortgages that finance real estate property or real estate sales
3) pay a minimum of 90% of taxable income in the form of shareholder dividends each year
4) be equity that’s taxable as a corporation
5) be managed by a board of directors or trustees
6) have at least 100 shareholders after its first year of existence
7) have no more than 50% of its shares held by five or fewer individuals
Types of REITs
1) Equity REITs
Owns and operates income-producing real estate
Revenues are generated primarily through rents (not by reselling properties)
2) Mortgage REITs
Holds mortgages on real property
Earnings are generated primarily by the net interest margin
3) Hybrid REITs
Owns properties and hold morthages
These REITs use the investment strategies of both equity and mortgage REITs
REITs classification based on their shares
1) Publicly trades REITs
These shares are listed on a national securities exchange, where they are bought and sold by individual investors
2) Public non-traded REITs
These REITs don’t trade on a national securities exchange, hence less liquidity
3) Private REITs
These REITs aren’t registered with the SEC (Securities and Exchange Commission) and don’t trade on a national securities exchange
Private REITs can be sold only to institutional investors
Advantages of investing in REITs
1) liquidity
2) diversification
3) transparency
4) stable cash flow through dividends
5) attractive risk-adjusted returns
Disadvantages of investing in REITs
1) low growth
2) dividends are taxed as regular income
3) subject to market risk
4) potential for high management and transaction fees
Who can invest in REITs
1) any investor (domestic, foreign, retail, institutional) can by REIT units in india
2) minimum lot size of 200 units(and multiple thereof)
3) Unit-holders can purchase REIT units through a Demat account, similar to how they would purchase equity shares)
4) REIT units can be bought/sold freely on stock exchange platform
5) investors can also buy REIT units through participation in REIT IPO whenever a REIT gets listed
Assets which can a REIT owns
1) Retail income – earnings real estate projects
2) commercial sectors – offices, hotels, retail, industrial, healthcare
3) Not Permitted – residential (houses, apartments) speculative landbank
4) Min 80%
Completed & in one producing assets
5) Max 20%
Under-construction assets
6) Leverage restrictions
unitholder approval needed for debt to capitalization above 25%
Debt to Capitalization capped at 49%
Disclosures to Unit-holders by REIT
1) Earning materials
Published quarterly and benchmarked to global disclosure standards
2) Earning calls
Held quarterly by management
3) Half-yearly Report
Published semi-annually (not required by listed companies)
4) Independent REIT valuation
Conducted half-yearly
5) Unitholder meetings and webinars
Held throughout the year
6) Annual meeting
Held once a year
Legal and regulatory framework for REIT
1) securities commission act 1993
2) guidelines on Real Estate investment trusts
Parties in REIT
1) management company – subsidiary of financial companies, or property development company
2) Trustee – a trusted company registered under the TCA 1949 or pursuant to PTCA 1995
3) purchasers of the shares/beneficiaries
Passive investors – may choose which company to invest but will not be able to dictate types of shares to be bought – has no say
Islamic Real Estate Investment
1) interest
2) types of properties
3) Halal / haram business
4) Board of Syaria panel
History of REIT
REITs were first created in the US in 1960s to give anyone and everyone the ability to invest in large-scale commercial properties
Legalized in 2001 in the USA
REIT law passed in India in 2013
Valuation of REITs
1) NAV calculation – the REITs total asset minus all liabilities, divided by all outstanding equity shares of the REIT yields the NAV
2) value of a REITs property assets can be enhanced through capital expenditures
This is significant because these expenditures, either for development or maintenance of the property, can maintain or increase NAV
Why REITs instead of direct investment
1) property sector and geographic diversification
2) professional and experienced management
3) real time pricing
4) low transaction costs
5) liquidity
*The investment system matches heterogeneous investors (sources of financial capital) with heterogeneous productive assets (physical capital)
REIT analysis – measuring performance
1) earning per share (EPS)
2) funds from operations (FFO)
3) funds available for distribution (FAD)
4) free cash flow (FCF)
5) Net asset value (NAV)
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5) Net asset value (NAV)
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