Four reasons for looking into REITs

Associated Press / April 19, 2009
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Shares of real estate investment trusts - or REITs - present opportunities for investors willing to bet on a beaten-down sector. Here are four tips that touch on REITs' unique qualities compared with other stocks:

1. Offer diversification: REIT stock prices reflect market expectations about the returns from the real estate holdings that REITs own, and sometimes operate. That foundation in tangible assets means REITs often behave differently than the broader stock market, and differently than bonds. For example, if stocks are down, REITs may be up. That can make REITs a good way to diversify a portfolio and smooth out returns.

2. A dividend play: REITs must distribute at least 90 percent of their taxable income to shareholders each year. It's a requirement that enables REITs to avoid corporate taxes. That means REITs must pay out most of what they earn through dividends, rather than plowing profits back into the company to fuel future growth. So dividend payouts are a key part of the equation when it comes to REITs' total returns.

3. What's FFO?: Most companies' financial health is measured primarily by net income, and earnings per share. But the REIT yardstick is funds from operation, or FFO. FFO adds expenses from depreciation and amortization of real estate assets back into the profit figure. It's intended to provide a more accurate picture of cash performance.

4. Consider debt ratio: Like a homeowner with a big mortgage, REITs can get into trouble if they've borrowed too heavily to buy the real estate that generates their income. So a REIT's debt ratio is key to its ability to stay financially healthy while still paying dividends. The average REIT debt ratio has been below 50 percent for much of the last decade. But because of the real estate slump, many REITs' ratios have now climbed above 60 percent.