REAL ESTATE INVESTMENT TRUSTS (REIT)
A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing real estate. Modeled after mutual funds, REITs historically have provided investors of all types regular income streams, diversification and long-term capital appreciation.
REITs assemble the capital of numerous investors making it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves. Most are publicly traded like stocks, which makes them highly liquid (unlike physical real estate investments).
Types of REITs
1. Equity REITs
Most REITs are equity REITs, which own and manage income-producing real estate. Revenues are generated primarily through rents (not by reselling properties).
2. Mortgage REITs
Mortgage REITs lend money to real estate owners and operators either directly through mortgages and loans, or indirectly through the acquisition of mortgage-backed securities. Their earnings are generated primarily by the net interest margin—the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases.
3. Hybrid REITs
These REITs use the investment strategies of both equity and mortgage REITs.
Publicly Traded REIT
These REITs are listed on securities exchanges, where their shares are bought and sold by individual investors. They are regulated by the U.S. Securities and Exchange Commission (SEC).
Public Non-Traded REITs
Although these REITs are registered with the SEC, they are not traded on securities exchanges. Consequently, they are not as liquid than publicly traded REITs.
These REITs are only sold to institutional investors because they are not registered with the SEC and do not trade on securities exchanges.
Publicly Traded Equity REITs
1 - Health Care REITs
Health care REITs own and manage a variety of health care-related real estate and collect rent from tenants. These property types include senior living facilities, hospitals, medical office buildings and skilled nursing facilities.
2 - Hotel & Resort REITs
Lodging REITs own and manage hotels and resorts and rent space in those properties to guests. They own different classes of hotels based on features such as the hotels’ level of service and amenities. These properties service a wide spectrum of customers, from business travelers to vacationers.
3 - Industrial REITs
Industrial REITs own and manage industrial facilities and rent space in those properties to tenants. Some focus on specific types of properties, such as warehouses and distribution centers. They play an important part in e-commerce and are helping to meet the rapid delivery demand.
4 - Office REITs
Office REITs own and manage office real estate and rent space in those properties to tenants. Those properties can range from skyscrapers to office parks. Some focus on specific types of markets, such as central business districts or suburban areas. Some emphasize specific classes of tenants, such as government agencies or biotech firms.
5 - Residential REITs
Residential REITs own and manage various forms of residences and rent space in those properties to tenants. They include REITs that specialize in apartment buildings, student housing, manufactured homes and single-family homes. Within those market segments, some also focus on specific geographical markets or classes of properties.
6 - Retail REITs
Retail REITs own and manage retail real estate and rent space in those properties to tenants. They include REITs that focus on large regional malls, outlet centers, grocery-anchored shopping centers and power centers that feature big box retailers.
7 - Specialized or Specialty REITs
These REIT owns and manages various types of timberland real estate and specializes in harvesting and selling timber.
They own and manage storage facilities and collect rent from customers, who are both individuals and businesses.
These REITs own and manage infrastructure real estate and collect rent from tenants that occupy that real estate. Property types include fiber cables, wireless infrastructure, telecommunications towers and energy pipelines.
They own and manage facilities that customers use to safely store data, and offer a range of products and services to help keep servers and data safe; including providing uninterruptable power supplies, air-cooled chillers and physical security.
There are a multitude of publicly traded equity REITs to choose from.
The table shown to the right displays the 1-year price change for equity REITs listed on the S&P 500, as well as a few popular REIT EFTs.
Due to current U.S. economic condition, I think there are several value plays within the Health Care, Residential, and Specialized sub-industries.
One might convince me Office REITs are a potential, as employers move their workforce back into the office; however, it would have to be a powerful argument as I see it as a risky (e.g., employees will return to existing office space) and a very, very long-term play comparatively. It’s compelling though.
For me, health care is like air – we all need it and there is an opportunity to grab a position at a decent value.
Residential is compelling because the housing market continues to decline, meaning people are renting and will continue to rent into the foreseeable future.
I like specialized REITs as well, mainly for Weyerhaueser (WY), Extra Storage Space (EXR), and Public Storage (PSA); Iron Mountain (IRM) and Crown Castle (CCI) are good too. But if you can get a value position in any of those specialized REITs, I think your portfolio would thank you.
POPULAR REIT EFTs
Vanguard Real Estate
Schwab US REIT
Real Estate Select Sector SPDR Fund
iShares U.S. Real Estate
iShares Cohen & Steers REIT
iShares Core U.S. REIT
SPDR Dow Jones REIT
Fidelity MSCI Real Estate Index
Pacer Benchmark Data & Infrastructure Real Estate SCTR
JPMorgan BetaBuilders MSCI US REIT
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We have no stock, option, or similar derivative position in any of the firms mentioned, and no plans to initiate any such positions within the next 72 hours.
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