REIT IPO Regulations

By August 5, 2021Other
REIT IPOs face different registration requirements than other IPOs. This article details several key differences in this area.

Real estate investment trusts (REITs) have consistently been a significant part of the IPO market for many years. REIT IPOs differ from regular IPOs in some significant ways, with different registration statements, reporting requirements, and operating regulations. To help you understand the differences, and why so many REITs eventually choose to go public, this article explains the basics of the REIT structure and several of the most important differences in reporting and registration requirements.

Number of REIT IPOs by Year
Figure 1: Number of REIT IPOs by Year

Introduction to REITs

A real estate investment trust is a specific type of business entity under the laws of the United States. REITs specifically own or finance income-producing real estate. The types of real-estate that REITs own are varied across a variety of property classes or sectors. There are several types of REITs including equity REITs, mortgage REITs, and hybrid REITs. Equity REITs own and operate income-producing real estate. Mortgage REITs (often called mREITs) finance property owners directly through issuing real estate loans, or indirectly through other means such as mortgage-backed securities. Hybrid REITs use a combination of equity and mortgage REIT business practices. In addition to the nature of the business, REITs are also classified by their status as a private or public company.

By law, a REIT must meet a variety of requirements to become or maintain its status as a REIT. The Security and Exchange Commission lists these requirements, and that list is included in the toggle below.

REIT Requirements

In addition to paying out at least 90 percent of its taxable income annually in the form of shareholder dividends, a REIT must:

  • Be an entity that would be taxable as a corporation but for its REIT status;
  • Be managed by a board of directors or trustees;
  • Have shares that are fully transferable;
  • Have a minimum of 100 shareholders after its first year as a REIT;
  • Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year;
  • Invest at least 75 percent of its total assets in real estate assets and cash;
  • Derive at least 75 percent of its gross income from real estate related sources, including rents from real property and interest on mortgages financing real property;
  • Derive at least 95 percent of its gross income from such real estate sources and dividends or interest from any source; and
  • Have no more than 25 percent of its assets consist of non-qualifying securities or stock in taxable REIT subsidiaries.1

The tax laws that apply to REITs are also different from a normal corporation. For example, income is not taxed at the company level; instead, the owner of the equity in the REIT will be taxed on the distributions they receive through dividends.2 The income paid out to the owners of the REIT are “generally […] treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends.”3 The tax laws surrounding REITs and REIT equity transactions are often complex, and should be navigated carefully by both the company and the shareholders.

REIT Registration and Reporting Requirements

Because of the unique nature of both the legal requirements of REITs and the real estate industry in general, the SEC requires REITs to file more detailed disclosures than other companies when they register to go public. Instead of a Form S-1, which most companies use to register for their IPO, a REIT is required to file a form S-11. In addition, the SEC’s Industry Guide 5 contains more detailed guidelines for the issuance of equity in real estate companies.4 The requirements of these documents address areas such as investment policies, operating data, descriptions of the real estate, and several other areas. The requirements even include disclosures about the prior experience of the REIT’s sponsors and affiliates. Depending on the exact nature of the REIT and the IPO, other documentation might be required as well.

REIT Form S-11 Examples

The purpose of Forms S-11 and S-1 is the same—to give investors the information they need to make an informed investment decision. Thus, many of the disclosures, details, and instructions are very similar. However, the S-11 requires more in-depth disclosures in certain areas. Several of these disclosures are illustrated below:

Investment Policies of Registrant

REITs are required to disclose the details of their investment policy. The four areas that every S-11 must cover include the following:

  1. Investments in real estate or interests in real estate
  2. Investments in real estate mortgages
  3. Securities of or interests in persons primarily engaged in real estate activities
  4. Investments in other securities

In each of these categories, the S-11 includes instructions about the exact details the company is required to provide. The example in the toggle below comes from the S-11 of Alpine Income Property Trust and includes this organization’s policies in each of the four areas.

Investment Policies Example: Alpine Income Property Trust, Inc.

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of certain of our investment, financing and other policies. These policies have been determined by our board of directors and, in general, may be amended or revised from time to time by our board of directors without a vote of our stockholders.

Investment Policies

Investments in Real Estate or Interests in Real Estate

We will conduct our investment activities through our Operating Partnership and its subsidiaries. Our objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a diversified portfolio of high-quality single-tenant, net leased retail and office properties. For a discussion of our properties and our acquisition and other strategic objectives, see “Business and Properties.”

We expect to pursue our objective primarily through the ownership, directly or indirectly, by our Operating Partnership of our initial portfolio and future single-tenant, net leased commercial properties. We generally seek to execute acquisitions of properties that, upon acquisition, meet our investment guidelines. We expect to target a diversified portfolio that, over time, will

  • derive no more than 10% of its annualized base rent from any single tenant, irrespective of the tenant’s credit rating;
  • derive no more than 10% of our annualized base rent from any single industry; and
  • derive no more than 5% of its annualized base rent from any single property.

While we consider these criteria when making investments on our behalf, we may be opportunistic in pursuing investments for us and our portfolio that do not meet these criteria if we believe the investment opportunity presents an attractive risk-adjusted return. We intend to engage in future investment activities in a manner that is consistent with our qualification and maintenance of our qualification as a REIT for U.S. federal income tax purposes. In addition, we may purchase properties for long-term investment, expand, improve, redevelop and renovate the properties in our initial portfolio and any properties we acquire in the future, or sell such properties, in whole or in part, when circumstances warrant.

We may also participate with third parties in property ownership, through joint ventures or other types of co-ownership. These types of investments may permit us to own interests in larger assets without unduly reducing our diversification and, therefore, provide us with flexibility in structuring our portfolio. We will not, however, enter into a joint venture or other partnership arrangement to make an investment that would not otherwise meet our investment policies.

Investments in acquired properties may be subject to existing mortgage financing and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these properties. Debt service on such financing or indebtedness will have a priority over any distributions with respect to our common stock. Investments are also subject to our policy not to be treated as an “investment company” under the Investment Company Act.

Investments in Real Estate Mortgages

Our current portfolio consists primarily of, and our business objectives emphasize, equity investments in single-tenant, net leased commercial properties. We do not intend to originate any secured or unsecured real estate loans or purchase any debt securities as a stand-alone, long-term investment, but, subject to the income and asset tests necessary for REIT qualification, we may do so in certain limited circumstances. In such circumstances, the mortgages in which we may invest may be first-lien mortgages or subordinate mortgages secured by real estate. The subordinated mezzanine loans in which we may invest may include mezzanine loans secured by a pledge of ownership interests in an entity owning a property or group of properties. Investments in real estate mortgages and subordinated real estate loans are subject to the risk that one or more borrowers may default and that the collateral securing the mortgages may not be sufficient or, in the case of subordinated mezzanine loans, available to enable us, to recover our full investment.

Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers

Subject to the income and asset tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. We do not intend that our investments in securities will require us to register as an investment company under the Investment Company Act, and we would intend to divest such securities before any such registration would be required.

Investments in Other Securities

Other than as described above, we do not intend to invest in any additional securities such as bonds, preferred stocks or common stock.5

Description of Real Estate

Another requirement of the S-11 is that the registering REIT provides details about the real estate in which it is currently invested. These descriptions are important because the real estate the company owns is the heart of the business. Thus, as opposed to other industries, the SEC has specific details they require REITs to share about their properties. These details include aspects such as the geography of the real estate, the terms of current leases or contracts, and plans for renovation and development. The toggle below comes from the S-11 registration statement of Postal Realty Trust Inc.

Description of Real Estate Example: Postal Realty Trust, Inc.

BUSINESS AND PROPERTIES

Overview

We are an internally managed real estate corporation that owns and manages properties leased to the United States Postal Service, or the USPS. Upon completion of this offering and the related formation transactions, we will own and manage an initial portfolio of 271 postal properties located in 41 states comprising 871,843 net leasable interior square feet, all of which are leased to the USPS, and through our taxable REIT subsidiary, or TRS, we will provide fee-based third party property management services for an additional 404 postal properties leased to the USPS and owned by members of Mr. Spodek’s family and their partners. We believe that we will be one of the largest owners and the largest manager measured by net leasable square footage of properties that are leased to the USPS. We will have a right of first offer to purchase 255 of our 404 managed properties. Our chief executive officer, Andrew Spodek, currently owns interests in 199 of the 271 initial properties we will own which he will contribute to us as part of our formation transactions. Of these 199 properties, Mr. Spodek controls our 190 Predecessor Properties and has a non-controlling ownership interest in nine of our Acquisition Properties. Mr. Spodek has been actively engaged in the ownership and management of postal properties for over 20 years. Upon completion of this offering and the related formation transactions, Mr. Spodek will own approximately 29.0% of the fully-diluted equity interests in our company.

The USPS is an independent agency of the executive branch of the U.S. federal government that generated $70.6 billion of revenue for its fiscal year ended September 30, 2018. Article I, Section 8, Clause 7 of the United States Constitution empowers Congress “[t]o establish Post Offices and post Roads,” making the USPS one of the few federal agencies explicitly authorized by the United States Constitution. The USPS is federally required to provide universal service to all residents of the United States and its territories, including rural and isolated areas, and has a monopoly on mail delivery and delivery to residential and business mailboxes, with delivery to most homes and businesses six days per week. The USPS’s ability to deliver 493 million pieces of mail to an estimated 159 million delivery points as of September 30, 2018 is driven by a sophisticated logistics infrastructure of post offices, processing and distribution centers and annexes. As of September 30, 2018, the USPS managed a network of over 31,000 properties of which over 23,000 were owned by private owners and leased to the USPS. We believe that this network of properties is a critical element of the nation’s logistics infrastructure that facilitates cost effective and efficient “last mile” delivery solutions for the nation’s largest e-commerce providers including Amazon, FedEx and UPS.6 […]

Map taken from Postal Realty Trust’s S-11 Filing
Map taken from Postal Realty Trust’s S-11 Filing7

Our Initial Properties

The table below summarizes certain information as of December 31, 2018 for the 271 properties that we expect to acquire in the formation transactions including two properties acquired subsequent to December 31, 2018 by our Predecessor and a JV Seller:8

RegionLocationInterior Square FeetAnnualized Gross Rent(1)(2)Initial Date USPS OccupiedLease Expiration Date
MidwestSpirit Lake, IA5,304$51,832.00April 1980October 2022
Archer, IA589$4,418.00August 1988February 2022
Exline, IA640$4,800.00May 1986February 2022
Edgewood, IA2,084$13,248.00June 1960May 2022
Trenton, IA2,237$3,338.00November 1987February 2022
Mount Vernon, IL14,513$18,500.00October 1962September 2022
Chicago, IL14,434$103,000.00October 1958September 2026
Chicago, IL3,264$32,640.00January 1961December 2020
Bartsow, IL768$5,376.00January 1976January 2021
Carbon Cliff920$7,176.00November 1961October 2021
Table taken as a selection from Postal Realty Trust’s S-11 Filing9

Other Requirements

In addition to the examples above, there are a variety of other important details that companies are required to include. These include details such as operating data, occupancy rates, distribution policies, transaction policies, and many others. All of these requirements are detailed in the S-11 registration document on the SEC’s website.10

Conclusion

REIT IPOs are and have been a significant part of the IPO market for decades, but they are clearly different from normal IPOs. While the economic benefits of an IPO are largely the same as other companies, the registration and reporting requirements are very different. Because of the legal requirements and distribution policies, REIT IPOs will likely attract a different type of investor. Due to the required disclosures, the reporting requirements will also create new burdens and increased accountability for REIT leadership. To go public, REITs will need to start preparing long in advance to allow themselves time to meet the complex reporting requirements.



Resources Consulted


Footnotes

  1. Securities And Exchange Commission: “Investor Bulletin: Real Estate Investment Trusts (REITs).” Dec 2011.
  2. Morrison & Foerster: “MoFo’s Quick Guide to: REIT IPOs.” Accessed 3 Jun 2021.
  3. Securities And Exchange Commission: “Investor Bulletin: Real Estate Investment Trusts (REITs).” Dec 2011.
  4. Securities and Exchange Commission: “Industry Guides.” Accessed 11 Jun 2021.
  5. Alpine Income Property Trust, Inc. 19 Nov 2019. Form S-11/A. Pages 150-153.
  6. Postal Realty Trust, Inc. 30 Apr 2019. Form S-11/A. Page 89.
  7. Postal Realty Trust, Inc. 30 Apr 2019. Form S-11/A. Page 91.
  8. Postal Realty Trust, Inc. 30 Apr 2019. Form S-11/A. Page 92.
  9. Postal Realty Trust, Inc. 30 Apr 2019. Form S-11/A. Page 92.
  10. Securities and Exchange Commission: “Form S-11.” Accessed 3 Jun 2021.
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Author John Baadsgaard

John grew up in Spanish Fork, Utah. In addition to his Strategy degree, he is also completing minors in statistics and economics. John hopes to bring a uniquely down-to-earth, data driven, as well as big-picture perspective to problem solving and analysis. In his spare time, John also loves exploring mountain peaks, cooking exotic foods, and mastering Chopin etudes. He plans to join LEK Consulting in Houston after graduation.

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