REIT
See Real Estate Investment Trust.
Frequently Asked Questions about Real Estate Investment Trusts (REITs)
What is a REIT?
A Real Estate Investment Trust (REIT) is a real estate mutual fund allowed by tax law to avoid corporate income tax by distributing the majority of its income to shareholders. A REIT sells ownership shares and must invest in real estate or mortgage loans, meeting requirements such as dispersed ownership and income tests.
How are REITs taxed?
REITs must distribute at least 90% of their taxable income to shareholders, which avoids taxation at the corporate level. However, dividends received by shareholders are taxable at the individual level.
What types of REIT shares exist?
REIT shares can be publicly traded on major stock exchanges or privately held, depending on the structure and target investor base.
What performance metrics are used to evaluate REITs?
Unique performance metrics used for REITs include Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO). These metrics adjust for non-cash items like depreciation and account for recurring capital expenditures.
How is FFO calculated for a REIT?
FFO is calculated by adding depreciation and amortization back to net income and excluding gains or losses from property sales. For example, if net income is $1.8M and depreciation is $0.6M, FFO equals $2.4M.
What is AFFO and why is it important?
AFFO adjusts FFO for recurring capital expenditures and other operational costs. It gives a more accurate picture of the cash available for distribution to shareholders. For example, if FFO is $2.4M and capex is $0.2M, AFFO equals $2.2M.
How do REITs distribute income to shareholders?
REITs typically distribute 90–95% of AFFO to shareholders. In a sample case, a REIT distributing $2.09M over 10 million shares would pay $0.209 per share.
Why might an investor choose to invest in a REIT?
REITs allow investors to access large-scale real estate investments with the benefit of regular income through dividends, without facing corporate-level taxation.
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