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Friday, December 7, 2012

REITs outperform the Market

4:56 PM
Real Estate Investment Trusts Outperform the Market The U.S. economy slowed in the first half of 2012, delivering only tepid growth. The exception, however, is commercial real estate. In 2012, apartment, retail, office, warehouse and other commercial real estate vacancy rates continued to decline, rent growth gained momentum and the stocks of Real Estate Investment trusts – REITs ─ fared well, outpacing the broader equity market. A real estate investment trust, or REIT, is a company that owns, and in most cases, operates income-producing real estate. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. REITs are permitted to deduct dividends paid to its shareholders from corporate taxable income. As a result, most REITs historically remit 100 percent of their taxable income to their shareholders and therefore owe no corporate tax. Taxes are paid by shareholders on the dividends received and any capital gains. REIT total return performance over the past twenty years has outstripped the performance of the S&P 500 Index, and other major equity and fixed income indices – as well as the rate of inflation. In the past year, REITs more than doubled the performance of the stock market, delivering a total return of 12.48% to the S&P 500’s 5.45%. REITs help to reduce the risk of overall portfolio losses in volatile markets because they do not always move in tandem with other equities. Equity REITs generate a consistent stream of cash mainly by collecting rents from multiple tenants occupying the properties they manage. Since they must pay out at least 90% of their taxable income annually as dividends to shareholders, a larger share of REIT investment returns come from dividends when compared with other stocks. REITs provide a natural hedge against inflation in ways that match up well with investors’ needs. Commercial real estate rents and values tend to increase when prices do, which supports REIT dividend growth, providing retirement investors with reliable income even during inflationary periods. In all but two of the last 20 years, REITs’ dividends have outpaced inflation as measured by the Consumer Price Index. “The REIT yields are very attractive compared to anything else in the market,” says Brad Case, vice president of research and industry information for the National Association of Real Estate Investment Trusts. REITs are essentially a hybrid investment, embodying aspects of fixed income investments, with their consistent, strong dividends, and equities, with their ability to produce long-term capital appreciation through effective management of the corporation. Demonstrating once again that investment instruments secured by real estate are among the best investment options available to investors.

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