Real Estate Investment Trust – REIT
A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, hotels and forestry. REITS often trade on major exchanges like a stock, providing investors with an extremely liquid stake in real estate.
REITs are required by law to maintain dividend payout ratios of at least 90%, making them a favourite for income-seeking investors. REITs can deduct these dividends and avoid most or all tax liabilities, though investors still pay income tax on the payouts they receive. Many REITs have dividend reinvestment plans (DRIPs), allowing returns to compound over time.
REITs in the United Kingdom became legal in 2007. The Finance Act 2012 brought five main changes to the REIT regime in the UK. The most important was the ability for REITs to be listed on the AIM (the London Stock Exchange international market for smaller growing companies) reducing costs and increasing flexibility. The abolition of the 2 percent entry charge also reduced costs.
The number of UK real estate investment trusts (UK-REITs) is now over 30. The principal attraction is exemption from UK tax on property investment income and capital gains, but REITs also offer liquidity through share trading and the ability to access capital markets, subject to conditions.
These securities may compliment a diversified international portfolios via both an asset class and geographical differences.. As an inflation hedge, with strong dividend yields and conservative management (there is less money to spend on costly pet projects). There are risks to investing in international REITs in terms of politics, taxation, currency risk and illiquidity.
The easiest way to invest in international REITs is through exchange-traded funds (ETFs). Many of these ETFs do not offer dividend yields, but rather capital gains potential from the reinvestment of any dividends.
Funds From Operations Per Share – FFOPS
A performance measurement of a real estate investment trust (REIT). Similar to earnings per share, FFOPS expresses the amount each shareholder receives in the form of periodic dividends.
A form of real estate investment method that is designed to reduce or eliminate tax while providing returns on real estate. As a non-traded REIT does not trade on a securities exchange, it is illiquid for long periods of time. Front-end fees can be as much as 15 percent and early redemption can result in high fees that can lower the total return.
Funds from Operations (FPO)
Refers to the figure used by REITs to define the cash flow from their operations. It is calculated by adding depreciation and amortization expenses to earnings, and is sometimes quoted on a per share basis.
Financial Management Rate Of Return (FMRR)
A metric used to evaluate the performance of a REIT, the FMRR is similar to the internal rate of return and takes into account the length and risk of the investment. FMRR allows investors to accurately compare investment opportunities.