Frequently Asked Questions About REITs

A REIT, or real estate investment trust, is a company that owns or finances income-producing real estate. Below are answers to fundamental questions about REITs.

Why were REITs created?

Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to average investors through the purchase of equity. In the same way shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through real estate ownership.


How does a company qualify as a REIT?

To qualify as a REIT, a company must comply with certain provisions within the Internal Revenue Code.


What Types of REITs are there?

REITs often are classified in one of two categories: equity or mortgage. Equity REITs mostly own and operate income-producing real estate, such as shopping centers, health care facilities, apartments, warehouses, office buildings and hotels. Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities.


What types of properties do REITs own and manage?

REITs own and manage a variety of property types: shopping centers, health care facilities, apartments, warehouses, office buildings, hotels and others. Most REITs specialize in one property type only, such as shopping malls, timberlands, data centers or self-storage facilities.

Some REITs invest throughout the country or, in some cases, throughout the world. Others specialize in one region or even a single metropolitan area.


How many REITs are there?

The Internal Revenue Service shows that there are about 1,100 U.S. REITs that have filed tax returns.

As of August 31, 2015, there were more than 300 REITs in the U.S. registered with the SEC that trade on one of the major stock exchanges—the majority on the NYSE. These REITs have a combined equity market capitalization of more than $900 billion.


Who invests in REITs?

Everyone. Individual investors of all ages, both in the U.S. and worldwide, invest in REITs. Other typical buyers of REITs include exchange-traded funds, pension funds, endowments, foundations, insurance companies and bank trust departments.


How do investors own REITs?

Investors own REITs directly or through REIT mutual funds.

The majority of REITs trade on major stock exchanges. Investors may invest in a publicly traded REIT by purchasing shares through a securities dealer. As with other publicly traded securities, investors may purchase common stock, preferred stock or debt securities.

REIT investors also can buy shares in a REIT mutual fund or exchange-traded fund.


What are the investment benefits of REITs?

REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Additionally, REITs offer liquidity, portfolio diversification and strong corporate governance.


What factors contribute to REIT earnings?

Growth in REIT earnings typically comes from several sources, including higher revenues, lower costs and new business opportunities.


How do REITs measure earnings?

The REIT industry uses net income as defined under Generally Accepted Accounting Principles (GAAP) as the primary operating performance measure. The REIT industry also uses funds from operations (FFO) as a supplemental measure of a REIT's operating performance. NAREIT defines FFO as net income (computed in accordance with GAAP) excluding gains or losses from sales of most property and depreciation of real estate.


How do shareholders treat REIT dividends for tax purposes?

For REITs, dividend distributions for tax purposes are allocated to ordinary income, capital gains and return of capital, each of which may be taxed at a different rate.


What are the differences between stock exchange-listed REITs, public, non-listed REITs (PNLRs) and private REITs?

Stock exchange-listed REITs file with the Securities and Exchange Commission (SEC). Shares of their stock trade on national stock exchanges.

PNLRs file with the SEC. Shares of their stock do not trade on national stock exchanges.

Private REITs do not file with the SEC. Shares of their stock do not trade on national stock exchanges.


Do countries besides the United States have REITs?

Yes, more than 30 countries currently have REITs. The majority of REIT laws around the world mirror the U.S. approach to REIT-based real estate investment.


How could changes in the level of interest rates affect the performance of stock exchange-listed REIT share prices?

Like other stock exchange-listed equities, listed REIT share prices are unpredictable over short time horizons for many reasons, including uncertainty regarding the behavior of investors when, among other possible events, measures of economic activity are reported, corporate earnings are announced or the level of interest rates rises or falls. With respect to changes in the level of interest rates, most asset prices usually rise (or fall) as the immediate response to a decrease (or increase) in the level of interest rates. This is especially true for assets with future cash flows that are fixed, such as the interest payments from bonds having fixed coupons. If future cash flows are not expected to rise, then increasing interest rates would have a clear negative impact on asset values, including the share prices of listed REITs.
However, changes in the level of interest rates often reflect changes in the level of economic activity, with stronger economic activity often accompanied by growing demands for credit and rising interest rates. In particular, the historical record reveals that share prices of listed equity REITs have more often increased than decreased during periods of rising interest rates. The more frequent occurrence of higher equity REIT share prices during periods of rising interest rates often reflects higher earnings, as an economy that generates stronger earnings is often also accompanied by higher interest rates.