Dollars, Not the Three 'Ts"
By Kevin Dietrich
Real estate investment trusts hold billions of dollars of South Carolina property but are relatively little known or understood by many in the Palmetto State.
The trusts, commonly known as REITs, are entities that own or finance income-producing real estate across a range of property sectors, including shopping centers, apartment complexes and commercial forests. A REIT can be as small as a single structure or as large as a multi-billion-dollar portfolio that includes New York’s Empire State Building.
Some are publicly traded on major stock exchanges while others are privately held.
In South Carolina, REITs operate a wide array of properties, from the Tanger Outlets in North Charleston and Myrtle Beach to the Fairview Corners shopping mall in Simpsonville to The Mills House Wyndham Grand House in Charleston.
REITs are structured similarly to mutual funds, investment funds that enable people to make money from the stock market without purchasing individual stocks. REITs allow individuals to invest in real estate – and potentially earn a share of the income produced through that investment – without purchasing real estate properties they would then have to manage.
“People who invest directly in real estate underestimate the headaches of dealing with vacancies, people tearing up properties and other issues,” said Rob DeHollander, a certified financial planner with Greenville’s DeHollander Financial Group. “REITS are a great way of investing in real estate properties without having to deal with the three Ts: trash, tenants and toilets.”
Approximately 145 million Americans invest in REIT stocks through their 401(k) and other investment funds, according to Nareit, a Washington D.C.-based REIT research firm.
An estimated 41 percent of South Carolina households are invested in real estate investment trusts and more than 9,500 Palmetto State properties are held by REITs, with a total value of more than $22.4 billion, according to Nareit, which compiled its figures from information gathered from S&P Global Financial data, member company data and Factset.
An advantage that REITs have over some other public companies is that they pay no corporate income taxes. This can bolster investor returns. By selecting a REIT structure, real estate investment companies agree to pay out 90 percent or more of their taxable profits in dividends in exchange for avoiding corporate income tax.
Real estate investment trusts have their downsides, as well. These include investment fees, which can be difficult to ferret out in marketing materials. Such fees include acquisition fees, investment management fees, committed capital fees, debt-placement fees and administrative fees.
Not surprisingly, all of the above can add up. That’s important because such fees reduce the cash available to pay out to investors as dividends. Investors should read marketing materials closely and ask questions.
In the Beginning
REITs came into existence in the early 1960s, after a federal law was enacted giving individuals the chance to invest in large-scale, diversified portfolios of income-producing real estate. The first real estate investment trust was American Realty Trust, founded by Thomas J. Broyhill, cousin of Virginia Congressmen Joel Broyhill, who pushed for passage of the law creating REITs.
In South Carolina, real estate investment trusts were slow to take off, with only five filing to begin operation in the first decade after they became legal. But changes to state law resulted in 21 REITs being filed with the S.C. Secretary of State’s Office between 1971-72, according to a 1972 article in South Carolina Legal Review.
Today, many of the REITs operating in South Carolina are based out of state, but there are some private real estate investment trusts based in the Palmetto State.
Most real estate investment trusts employ a straightforward business model. They lease out space and collect rent, thereby generating income. This income is paid to shareholders through dividends. While REITs must pay out at least 90 percent of their earnings to shareholders, the latter are taxed on what they receive.
Other requirements of real estate investment trusts include:
- Having a board of directors or trustees to manage investments;
- Investing a minimum of 75 percent of total assets in real estate, U.S. Treasuries or cash; and
- Earning a minimum of 75 percent of income from property rents, mortgage interest or real estate sales.
An individual may buy shares in a REIT listed on major stock exchanges just like any other public stock. Investors may also purchase shares in a REIT mutual fund or exchange-traded fund.
Publicly traded REITs are one of several different types of real estate investment trusts available. They are:
- Equity REITs – The majority of equity REITs are publicly traded. These own or operate income-producing real estate;
- Mortgage REITs – Also known as mREITs, they provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities, and earning income from the interest on these investments;
- Public non-listed REITs – These are registered with the U.S. Securities and Exchange Commission but do not trade on national stock exchanges; and
- Private REITs – Offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges.
Most, but not all, REITs specialize in one type of real estate, such as apartment complexes, healthcare facilities, hotels, office buildings, retail centers, self-storage and timberland.
In South Carolina, the single largest number of assets owned by real estate investment trusts is timberland tracts, followed by outdoor advertising and towers (such as those used by cell phone companies).
“REITs are a different way to build wealth,” said DeHollander, the Greenville certified financial planner. “An investment is something you buy today that will hopefully be worth more tomorrow, such as stocks and bonds. REITS are simply a different asset class.
“I’m a big fan of REITs; they’re great for diversifying a portfolio,” he added. “They tend to zig when everything else is zagging.”