The REIT structure parallels closely the concept of stock mutual funds – similar to allowing investors to own a basket of securities without having to buy each one of them – REIT provides a way to own a basket of real-estate assets without having to actually purchase any real-estate.
REIT structuring varies across countries. In the US, the major requirements to qualify as an REIT are:
- Distribute at least 90% of their taxable income as dividends.
- Dividends, interests, and property rental income should form 95% of income earned.
- At least 75% of income should be derived by rents or mortgage income.
- Cannot be a financial institution or an insurance company.
- Ownership in taxable REIT subsidiaries cannot be more than 20% of assets.
REIT is classified under three different types:
- Equity REIT: They have ownership interest in real-estate properties. Rents form the primary source of revenue for such REIT.
- Mortgage REIT: They have ownership interest in real-estate property mortgages. Interest earned on the mortgages owned form the primary source of revenue for such REIT.
- Hybrid REIT: They combine the characteristics of an Equity and Mortgage REIT by owning both real-estate properties and mortgages.
- Spread: It represents the difference between the interests paid by the company for debt issued vs the realized returns on investments.
- Leverage: It represents the ratio of the company’s debt-to-equity.
|Spread||Realized Investment Return % (=No Leverage)||Projected Return at 3:1 leverage||Projected Return at 6:1 leverage|
1. Anthracite Capital (AHR) - Part 1 - Introduction.
2. Anthracite Capital (AHR) - Part 2 - Business Issues.
3. Anthracite Capital (AHR) - Part 3 - Outlook.