This Week, Industry Snapshot Looks at
Health Care REITs

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Health Care Property Investors

Health & Retirement Properties

Meditrust

Nationwide Health Properties

Omega Healthcare Investors

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This Week's Industry Snapshot

Those who are quickest to proselytize are invariably among the most recently converted. That is certainly the case with this author after reading The Essential REIT by Ralph R. Block (available through The Motley Fool's FoolMart). Having always been dubious of investing in securities that seemed neither fish nor fowl, Block counters this notion and effectively cuts through much of the mythology that seems to perpetually surround Real Estate Investment Trust (REIT) issues. Anticipating objections and weighing in with facts, Block makes a compelling, balanced case for REIT investment.

REITs have delivered total returns over the last three decades that have approximated those of the S&P 500 index. They have low betas, which means that they are less volatile than the market as a whole, and are less prone to dramatic loss in the event of a broader market decline. In addition, REITs provide tidy dividends, which, while certainly a positive, also put them in the lamentable situation of being compared with bonds and utility stocks.

Real Estate Investment Trusts were spawned by legislation in 1960 that allowed the creation of real estate companies that were not taxed at the corporate level and were required to pay out 95% of its earnings in the form of dividends to shareholders. The legislation was intended to provide investors with the opportunity to participate in the benefits of owning commercial real estate and to engage in mortgage lending, all on a tax advantaged basis. Other requirements for REITs to meet in order for them to continue to elude taxation at the corporate level include: at least 75% of the REIT's assets must be invested in real estate, mortgage loans, shares in other REITs, cash or government securities; at least 75% of the REIT's gross income must come from rents, mortgage interest or gains from the sale of real property, and at least 95% must come from these sources together with dividends, interest and gains from securities sales. The REIT must have at least 100 shareholders and more than 50% of the outstanding shares may not be concentrated in the hands of five or fewer shareholders; and finally, no more than 30% of gross income may come from the sale of real estate held for less than four years (except for foreclosed properties) or from the sale of securities held for less than six months.

A quick and dirty description of the typical (equity) REIT's operating model would include owning property, collecting rents, dispersing dividends to shareholders, and using the rest to manage growth either internally at the property level or externally through new development and property acquisition. While structures vary, today 95% of REITs do their own leasing, managing and development, which clears up many of the potential conflicts inherent in operating a separate, outside management company. Instrumental in this development was the Tax Reform Act of 1986, which relaxed certain prior restrictions on REITs and allowed them to render normal and customary maintenance and other services for their real estate tenants. The key aspect of REITs today is that they are fully integrated, operating companies that have the ability to handle all aspects of real estate management.

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