Real Estate Investment Trusts (“REITs”) are a business structure designed to hold an interest in real estate. REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Under the current tax laws, most REIT dividends are taxed as ordinary income, and not at the lower corporate dividend rate. There are exceptions to this rule, such as to timber REITs, whose dividends are treated as long-term capital gains.
REITs have had a volatile last few years. REITs are considered part of the financial sector, which has been extremely volatile since 2008. Additionally, since 2007, the underlying real estate market suffered well-known issues. Moreover, many REITs hold properties such as malls, office buildings and medical centers, and these industries also may suffer their own fluctuations that will invariably affect their respective REITs.
Below I have listed ten large-cap REITs in various industries. I have provided recent performance rates as well as their present yields.
As the data indicates, these large-cap REITs across all industries have performed relatively poorly over the near term, with 90% of their share values down over the last month and 70% down over the last six months. Nonetheless, 60% are positive for 2011-to-date, and 80% are positive within 2011 once dividends are also counted.
Since the financial crisis began, REITs have become more heavily correlated to the broader equity market than they traditionally were. This trend may eventually come to an end. A strong holiday season could bode well for those REITs with greater retail exposure, possibly also including certain warehouse and industrial properties. The flip-side to a strong holiday season could be that improved Internet purchasing may cause additional traditional retail locations to close, increasing retail vacancies.
Publicly traded REITs were conventionally considered a convenient method to allocate into real estate that provided both liquidity and often an above average yield. In the last few years, a large number of investors have become reluctant to allocate into real estate, reducing the liquidity and increasing their volatility.
Nonetheless these large-cap REITs still offer reasonably high liquidity, each having an average daily trading volume between one million and seventeen million shares. REITs offer real and understandable property-related benefits and risks. Exposure to REITs should be limited to a reasonable percentage of a portfolio.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.