- The Washington Times - Wednesday, January 8, 2003

One group of companies that would be hurt by President Bush's economic-stimulus package is real estate investment trusts, which would lose their tax advantages unless they are included in the final legislation.
Many analysts expect that the more than 300 REITs nationwide will not be privy to tax breaks on dividends offered to most companies, because they already are exempt from normal income taxes.
REITs are companies that own and often manage real estate such as office buildings, malls and apartment complexes. They are required by law to distribute 90 percent of taxable income to shareholders in the form of dividends. As a trade-off, REITs do not pay corporate income tax.
Mr. Bush's proposal to eliminate a tax on dividends is an effort by the administration to eliminate "double taxation." Most companies already pay corporate income tax.
There is no wording in Mr. Bush's plan addressing REITs or any other specific stock. But analysts said final legislation is likely to include language excluding the sector from any tax breaks.
"The general thinking seems to be that REITs will be excluded," said Rich Moore, a real estate analyst with McDonald Investments in Cleveland.
This could be bad news for the valuation of REITs, analysts say, because investors may decide to move their money to other stocks that pay untaxed dividends.
Merrill Lynch analyst Steve Sakwa said in a research note that the value of REIT stocks could decline as much as 9 percent if a tax is eliminated for all dividends except those issued by REITs.
What's more, analysts said, some REITs might opt to change their structures, choosing to pay corporate income tax and free themselves of their dividend requirements.
Mr. Bush's proposal is unlikely to be pushed through quickly. Democrats in Congress are mounting opposition and have announced a plan of their own. The National Association of Real Estate Investment Trusts is expected to lobby Congress to be included in changes to taxes on dividends.
Several bills proposed last year could be reintroduced with compromises on the dividend tax. A decrease in the tax or a cap on the amount of untaxed income from dividends a person can receive are options, analysts said.
"There will be some give-and-take," Mr. Moore said.
Not everyone said Mr. Bush's proposal is horrible news for REITs. Analysts and company executives said REITs are still viewed as the easiest way for individual investors to diversify their portfolios by adding a real estate component.
REITs pay a higher dividend on average than any other group of companies. The dividend yield on the Morgan Stanley REIT index is 6.73 percent, compared with a 1.71 percent yield by companies in the Standard and Poor's 500 Index.
Even with a tax, the total dividend return from REITs still would outpace other stocks, real estate executives and analysts said.
"Certainly, investors will take into account the tax impact of the proposal," said Tom Carr, president and chief executive of CarrAmerica, a District REIT. "But we can't see why the REIT benefits would change. The cash flow won't be affected at all. There's no particular reason why the value of a REIT stock would be affected."
Although the Morgan Stanley REIT Index fell 6.46 points, or 1.5 percent, to close at 431.76 yesterday, many analysts believe REITs will remain a solid investment even if dividend taxes are cut.

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