What is a REIT Company? They are Real Estate Investment Trusts which operate and invest in real estate assets directly. It is an effective and easy way for investors to have exposure to commercial real estate. REITs first started in commercial real estate, now there is more sub-sector focus including REITs investing in industrial, logistics or apartments.
Without REITs, investors would have to purchase those real estate assets whole or seek out partnerships. Also most are professionally managed with fiduciary duty to the shareholders. It lowers overall costs for investors that would want to invest in Real Estate. Listed REITs also allows investors to easily perform portfolio management through ETFs. They can be bought and sold as needed and rebalancing in portfolio is much easier than holding real estate directly.
If they are listed they are called traded REITs, unlisted trusts are called non traded REITs. Listed REITs have a higher level of transparency as daily market pricing would reflect changes in the underlying real estate asset the trust holds, the market it primarily invest in and the quality of the management. Unlisted REITs does not have immediate feedback for investors aside from the infrequent price quotes where investors can judge the performance independently.
How is it a REIT Company different to other traded stocks are that for companies to be classified as a REIT it must satisfy certain conditions:
Advantage of REITs for investors is the income will not be double taxes, first at the company level then at the individual level when the REIT distribute dividends. Incomes for REITs are nontaxable however for companies to be classified as the nontaxable REITs it must satisfy certain conditions.
– Payout 90% of annual income as dividend to investors
– 75% of the total assets are in Real Estate assets (cash can also be counted in this threshold)
– 75% of the income must be from Real Estate which ensures no business are operating tax free
– 95% of gross income are from property and property related sources like rent, interest and dividends
Kinds of REIT Company
There are 2 primary ways on how REIT Company invests in real estate. A REIT company invests in real estate equity or mortgage or a combination of both.
Equity REITs are REIT companies are direct property REITs. Theses trusts seek to primarily to hold in equity ownership of real estate assets. For example Vornado Realty Trust focus on investing and developing sites with the end goal of retaining the equity component of building with partial financing with debt. Some listed REIT Company give investors exposure to real estate markets outside of their home country i,e Global REITs in US.
Mortgage REITs focus on investing the mortgages or loans made to real estate owners which the underlying real estate asset is used as collateral. In the simplest way MREITs such as Annaly are lenders to investors who invest in real estate however they don’t want exposure to the assets it self. Rather they are seeking secured cash flow using property as collateral.
One aspect investors should be aware of MREITs is that mortgages are sensitive to interest rates and combined with high leverage of mortgage REITs makes them very sensitivity to interest movements.