Companies investing in buildings and real estate finance

REIT stands for Real Estate Investment Trust. In the U.S., it is a structure that meets tax law requirements regarding real estate-related assets, income, shareholder structure, and distributions. While some REITs are listed on exchanges like stocks, others are unlisted, leading to differences in liquidity and valuation methods.

Demand and costs vary by asset type, such as office, industrial, residential, data centers, and cell towers. Equity REITs are primarily exposed to asset management and leasing, while mortgage REITs are exposed to interest and financial structures related to loans and mortgage assets. Do not view both as the same rental business.

What is 90% an 90% of?

The distribution requirement for U.S. REITs is generally linked to statutory calculation standards, such as at least 90% of REIT taxable income, excluding net capital gains. It is not the same as 90% of GAAP net income, revenue, rent, or total cash flow. Check IRS requirements for detailed adjustments.

This does not mean "distributing dividends in the form of voting rights." Voting rights are for voting, while dividends are distributions. This requirement does not guarantee high stock returns, a specific dividend amount, or monthly payments. If taxable income decreases, dividends may also decrease.

FFO and AFFO as supplements to EPS

Due to real estate depreciation and gains or losses on sales, it can be difficult to compare recurring operating performance based solely on accounting net income. FFO, as defined by Nareit, is a supplemental metric that adjusts net income for real estate depreciation and certain gains or losses on sales.

AFFO further adjusts FFO for maintenance capital expenditures and rent-related items, but do not assume a standardized definition. Check the adjustment table for each company and review it alongside GAAP net income and cash flow. Do not interpret FFO or AFFO directly as the cash balance available for dividends.

Interest rates, borrowing, and tenants are key.

Rising interest rates can burden refinancing costs and property values. Vacancies, declining rents, bankruptcy of major tenants, and concentration of lease expirations can destabilize cash flow. High dividend payouts may leave less internal capital, potentially increasing reliance on capital increases or borrowing.

For mortgage REITs, check the interest rate spread between assets and liabilities, leverage, and costs for prepayment and hedging. You cannot judge risk solely by the vacancy rate of building-based REITs. A high dividend yield may reflect concerns about price declines or dividend cuts.

Look at five things in addition to dividends.

Examine the rental performance of the same assets, vacancy and occupancy rates, lease expirations and major tenants, debt maturity and the proportion of fixed-rate debt, and actual maintenance capital expenditures and dividend sources. If there are many development projects, completion delays and cost overruns are also important.

Publicly traded REITs can also experience significant stock price declines. Distributions can be classified as ordinary dividends, capital gains, or return of capital, and taxation and withholding for Korean investors vary by type. Do not apply the general common stock 15% rule to all U.S. REIT distributions.

Check what you have read.

• Have you distinguished between public and private, and equity and mortgage REITs?
• Have you reviewed the FFO/AFFO reconciliation table?
• Have you checked the vacancy and debt maturity?
• Have you checked the distribution type and taxes?

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