What is a REIT?
A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.
REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property.
Most REITs are traded on major stock exchanges, but there are also public non-listed and private REITs. The two main types of REITs are Equity REITs and Mortgage REITs. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.
Today, REITs are tied to almost all aspects of the economy, including apartments, hospitals, hotels, industrial facilities, infrastructure, nursing homes, offices, shopping malls, storage centers, student housing, and timberlands. REIT-owned properties are located in every stateand according to an E&Y study, support an estimated 1.8 million U.S. jobs annually. U.S. REITs have become a model for REITs around the world, and now more than 35 countries around the world have adopted REIT legislation.
After the close of trade on Aug. 31, 2016, Equity REITs and other listed real estate companies were transferred from the Financials Sector of the Global Industry Classification Standard (GICS) to a new Real Estate Sector. The change reflected the growing importance of the real estate sector, and is expected to create a larger and more diverse investor base for the REIT industry. Mortgage REITs remained within the Financials Sector.
REIT Financial Benefits
Low Correlation with Broader Market
Increases Return/Reduces Risk
Completes Asset Allocation
Dividends & Wealth Accumulation
Reliable Income Returns
Reduce Portfolio Volatility
Returns Consistently Outpace CPI
Natural Inflation Hedge
High & Low Inflation
Outperformed S&P Over Most Periods
Better Returns vs. Corp. Bonds
Bought & Sold Like Other Equities
Tactical Asset Allocation
Strong Corporate Governance
Publicly traded REITs offer investors the benefits of commercial real estate investment along with the advantages of investing in a publicly traded stock. The special investment characteristics of income-producing real estate provide REIT investors with competitive long-term rates of return that complement the returns from other stocks and from bonds.
REITs are required to distribute at least 90 percent of their taxable income to shareholders annually in the form of dividends. Significantly higher on average than other equities, the industry’s dividend yields historically have produced a steady stream of income through a variety of market conditions.
In addition to the investment performance and portfolio diversification benefits available from investing in REITs, REITs offer several advantages not found in companies across other industries. These benefits are part of the reason that REITs have become increasingly popular with investors over the past several decades.
REITs’ reliable income is derived from rents paid to the owners of commercial properties whose tenants often sign leases for long periods of time, or from interest payments from the financing of those properties.
Most REITs operate along a straightforward and easily understandable business model: By increasing property occupancy rates and rents over time, higher levels of income may be produced. When reporting financial results, REITs, like other public companies, must report earnings per share based on net income as defined by generally accepted accounting principles (GAAP).
In short, REITs over time have demonstrated a historical track record providing a high level of current income combined with long-term share price appreciation, inflation protection, and prudent diversification for investors across the age and investment style spectrums.