REIT- Key External Industry Drivers

Tax Reform

Investors of REITs will gain from the Tax Legislation because there will be a smaller tax bill on dividends. Shareholders of REITs are paying the top income tax of 39.6% on dividends received, which will now be dropped to 29.6%. It is also going to be more attractive because investors who earn rental income outside of REITs could be subject to taxes at 37% compared to the 29.6% in REITs. The capital gains tax will remain the same at 20%.

Rental Vacancy

The rental vacancy rate measures the degree to which a building space goes unused in the United States. When the rate is high, more office space is empty, indicating an oversupply of building space, a recent decline in the number of businesses or an overall contraction in the business sector. High rental vacancy rates discourage new building construction, while low rates reflect strong demand for construction operators in this industry. Since REITs cover a variety of real estate property types the vacancy rates may differ depending on the sector.

Yield on 10-year Treasury Note

The high costs of purchasing property and constructing new buildings forces buyers to purchase on credit and builders to seek financing for new projects. Interest rates, reflected by the yield on the 10-year Treasury note, help determine the cost of borrowing money for these activities. When interest rates are low, financing becomes more affordable; conversely, higher interest rates make debt more expensive. Rates are currently rising and are about 2.68%.

Consumer Spending

Consumer spending directly influences businesses that rely on consumers for demand, and indirectly affects other businesses by driving the performance of the overall economy. Therefore, the REITs industry benefits from higher consumer spending, which raises demand for a variety of businesses that require building space. Consumer spending is expected to increase in 2016.

Corporate Governance

Publicly traded REITs generally are actively and professionally managed corporations. They adhere to the same corporate governance principles that apply to all major public companies. They have a senior management team that is headed by a chief executive officer (CEO) who actively manages the overall strategic vision and equity of the enterprise. The board of directors appoints the CEO, which in turn is elected by and accountable to the shareholders of the REIT.

Charlie Izaguirre contributed to this report.

Nate Nead
Nate Nead
Nate Nead is a private equity investor and the Managing Principal at Investnet, LLC. Nate works with middle-market companies looking to acquire, sell or divest business assets.