Question

What are the three principal types of REITs? What are some important lease provisions of which investors should be aware when analyzing the financial statements of REITs?

Answer 1

Ans. There are three types of principal REITS:

1. Equity Reits

In Equity Reits, they usually earn income from rents. They operate and manage income producing property.

2. Mortgage Reits

Mortgage Reits lend money to the property owners and operate like a mortgage. They earn money from the interest on the money lent to property owners. Mortgage Reits can also acquire mortgage backed securities.

3. Hybrid Reits

As the name suggests, these Rwits are the blend of Equity Reits and Mortgage Reits. They diversify their portfolio by investing in both Equity and Mortgage reits. The income for hybrid Reits come from both rent and interest.

There are certain important provisions related to Reits of which the investor should be aware of when analysing the financial statements for Reits:

1. Investor should invest at least 75% of its total assets in real estate, cash or US treasurys

2. Receive at least 75% of its gross income from real property rents, interest on mortgages financing the real property or from sales of real estate.

3. Return a minimum of 90% of its taxable income in form of shareholder dividend each year.

4. Have a minimum of 100 shareholders after its one year of existence.

5. Have no more than 50% of its shares held by five or fewer individuals during the last half of the taxable year.

Therefore above are some provisions that a Investor must comply in order to invest in REITS.