No. of Recommendations: 12
NAREIT was sufficiently concerned about these recent developments, i.e., the issue of M-REITs being "destabilizers," the new entrants to REITville from "non-traditional" forms of real estate, and even the future tax status of REITs, that they put on a conference call last Wednesday.

As we might expect, they expressed much confidence that no changes were likely to occur from Congressional action. One can be skeptical (after all, they ARE NAREIT), but their argumens were persuasive. From my notes on the conf call:

1. M-REITs have recently reduced leverage and, in most cases, have hedged interest rate risk. Also, there have been no "blow-ups" from interest rate risk at the M-REITs during the Credit Crunch (although those M-REITs that relied heavily upon short-term funding sources got into trouble). And, M-REITs are an increasingly important source of capital in the home mortgage markets.

2. The NY Times never asked NAREIT for comment on that story, and were thus unable to provide information to put it in perspective. The definition of "real estate" in the laws pertaning to REITs is very broad and inclusive, and includes "land and permanent improvements." (My thought: Some businesses may be "pushing the envelope" with regard to the definition of "real estate," but the IRS would simply deny such outliers the ability to become a REIT).

NAREIT also says that, far back as 1969, railroad tracks were clearly "real estate." Contrary to what the NYT article implies, the IRS has not redefined "real estate," nor does it intend to do so (and, in any event, lacks statutory power to do so). And most of the companies that now want to become REITs do not own "novel" types of real estate (perhaps billboards are an exception). Finally, NAREIT says that the primary driver of these new REIT conversions is investors' demand for greater dividend distributions, not to save taxes.

3, There has also been loose talk of REITs losing their present tax status as part of some grand reform of the tax code. NAREIT spent most of their time talking about this. They point out that Congress is looking at ALL aspects of the tax code. They note that there would be no incremental addition to government coffers if REITs could no longer deduct paid dividends. They also believe that every member of Congress they have talked with believe that the REIT industry, using lower debt leverage than is available to private owners, has been a stabilizing force in the US economy. Finally, the long-term success of the industry speaks for itself, and benefits shareholders and investors. NAREIT has expressed great confidence that no major changes will occur.

Of course it would be irresponsible of investors not to pay attention to these stories; however, if there was a real risk of REITs losing their present tax status, REIT stocks would be reflecting this in lower prices. But the market seems to be taking all this talk in stride. In short, I worry about too many things, but the destruction of the REIT industry isn't one of them.

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