Investments Trusts
July 21st, 2005
Question: Are income trusts a good investment?
I am considering investing in income trusts. Specifically a REIT. I am concerned about the recent changes to taxation and am wondering if they are still a wise choice. I have not really followed the changes therefore require a layman’s explanation.
Thanks
Answer: As with stocks, some are, and some are not Good Investments.
With REITS and other income trusts, you must especially examine return of capital considerations. If the trust is borrowing or maintaining inadequate capital expenditures in order to pay its dividend, you might be making a bad investment.
For example, before buying any REIT, be certain to look at its GAAP, audited financial statements. Compare the GAAP earnings per share with the stock price of the REIT. You’ll probably find that you are paying much more for the REIT’s earnings than you would with many other corporations, some with superior growth rates. The REIT’s distributions may not be sustainable in the long run.
REIT reported price/earnings ratios often use a concept different than earnings — funds available for distribution, which IMO may include funds that should be used in maintaining properties in some cases.
Canadian tax laws, and unrelated business income tax considerations for 401(k)s and IRAs in the U.S., are other issues often overlooked by investors when buying income trusts.
Real Estate Investment Trusts with a Warning
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