Traditionally, companies that own office buildings, shopping malls, and apartment complexes have been the most likely to be structured as real estate investment trusts (or “REITs”). However, there has been a trend in recent years for a much broader range of companies to make the conversion to a REIT structure. This conversion process has been so widespread that the IRS has begun to ramp up scrutiny of the application of the definition of “real estate” as applied to the rules for REITs.
REITs have huge benefits for shareholders
REITs offer a compelling investment option for several reasons. The REIT structure exempts qualifying companies from income tax. This lack of taxation leaves more money to be returned to shareholders. To this end, REITs are also required to distribute at least 90% of their taxable income to shareholders; as a result of this requirement, REITs are often among the highest yielding stocks available.
REITs can beat the market whether they are growing trees or operating high technology businesses
Even during the recent bull market, REITs have demonstrated an ability to translate the tax advantages noted above into market-beating returns as noted in the following chart.
Vanguard’s REIT Index ETF (NYSEMKT:VNQ) has almost doubled the performance of the S&P 500 over the past five years. Interestingly, this outperformance is attributable to a wide range of REITs.
Timber REITs such as Weyerhaeuser (NYSE:WY) and Plum Creek Timber Co. Inc. (NYSE:PCL) have surged thanks in large part to growing demand generated by the early stages of a recovery in housing. On the opposite end of the spectrum, data center operator Digital Realty Trust, Inc. (NYSE:DLR) and wireless tower operator American Tower Corp (NYSE:AMT) have participated in industry trends towards wireless data and cloud computing with great success.
It should be noted that Digital Realty Trust, Inc. (NYSE:DLR)’s data center operations are comparable to those of Equinix Inc (NASDAQ:EQIX), a company that recently received IRS scrutiny in its attempt to gain REIT status; as a result, it will be important to monitor any developments regarding whether data center operators like Digital Realty Trust, Inc. (NYSE:DLR) will have any risk of losing REIT status based on the IRS review of Equinix.