REIT, also known as Real Estate Investment Trust, is a trust or company that owns, operates, manages or finances the income-generating real estate or related assets spanned over a wide range of property sectors. They invest directly in real estate mortgages or properties.
The shares of publically traded real estate investment trusts(REITs) are listed publicly on the major stock exchange. The option to trade, i.e. buy or sell them like regular stocks, is available to any investor without taking on property management responsibilities. Investors can diversify their holdings by purchasing shares of real estate investment trusts (REITs). REITs may also offer more significant dividend returns than other types of investment and earn profits in exchange for investment based on the performance and value of the REIT. Additionally, REITs provide stable growth, stable dividends and capital appreciation.
For a corporation or company to be designated as REIT, 75% of its assets must be in real estate and related assets, with a minimum of 75% of its gross revenue from rents or mortgage. When publishing financial information, REITs, like all other publicly traded companies, must calculate earnings per share based on net income in line with generally accepted accounting principles.
REITs, in general, focus on a single real estate sector. The real estate investment trust sector includes residential buildings, warehouses, retail complexes, office buildings, hotels and hospitality enterprises, healthcare infrastructure, industrial resorts. Diversified and specialty REITs, on the other hand, may own a variety of various sorts of properties in their portfolios. REITs which are diversified by nature, own and manage a variety of different property types such as residential and commercial. In contrast, specialty REITs hold or manage a diverse portfolio of properties that do not fit into other REIT sectors.
Different Types of REITs
REITs are categorized into the following categories – Equity REITs, Mortgage REITS and Hybrid REITs.
Equity REITs
Equity REITs own and manage the revenue yielding residential real estate properties. These properties can be residential buildings, apartments, office buildings, shopping malls etc. These REITs generate income from rents collected. Buying and selling buildings or complexes is not considered for revenue calculation of the REIT.
Mortgage REITs(mREITs)
Mortgage REITs(mREITs) provide income yielding real estate financing through money loans, mortgages, or mortgage-backed securities. Therefore, holding the mortgage on the property financed. Income is earned through the interest earned on mortgage loans.
Hybrid REITs
Hybrid REITs contain a mix of Equity & Mortgage REITs. Therefore owns, operates the property and holds mortgages as well.
Private REITs
Private REITs are not traded or listed on national stock exchanges and are regulated under their own securities law. Only qualified investors who meet specific criteria may purchase private REIT units. One significant benefit of investing in a private REIT is that it is not subject to market fluctuations. Private REIT units are priced entirely based on the REIT’s current real estate holdings. These are private because they consider that real estate is a tangible asset that exists in the physical realm and should not be evaluated or handled akin to stocks, which are intangible things.
REIT’s Sector
Residential REITs
Multi-family structures, residential apartments, and prefabricated homes are typically owned and operated by these REITs. While investing in Residential REITs, you should keep an eye on actual rental market trends because, being public, these REITs are strongly correlated to the real estate market. Investing in the residential sector makes sense when vacancy rates are low, and rents increase due to increased demand and low availability. People in Toronto, for example, are being compelled to live on rent as a result of the city’s housing affordability crisis and high home prices.
Retail REITs
Retail REITs typically deal with retail properties housing retail tenants such as shopping malls, outlet malls, regional malls, super-regional centers, power centers, and lifestyle centers. If the retail property includes net leases, the tenant is paying for operating expenses in addition to rent. In other words, if the tenants in these properties are profitable, the REITs that hold them are also in gain. Further, if a particular store is having difficulty making sales, it will impact its owning REITs as well. Investing in retail real estate investment trusts (REITs) with a diversified portfolio of high-demand retailers is highly recommended. For example, a mall with an anchor grocery store will always draw a greater number of consumers.
Healthcare REITs
Health care REITs hold and manage a wide range of real estate-related to the healthcare industry. Healthcare firms such as hospitals, medical offices, life science offices and skilled nursing homes are among the tenants of these REITs.
Healthcare is vital, as demonstrated during the covid-19 pandemic. As a result, REITs focused on healthcare appear to be promising. However, the success of this real estate is inextricably linked to the state of the healthcare system. These REITs would be more stable as long as adequate funding is available to maintain the healthcare system.
Office REITs
Office REITs handle office real estate. These can include major skyscrapers holding office tenants to smaller office campuses. Basically, they provide physical office space to their tenants. They are usually invested in office buildings based on location and demographics. Pre-pandemic, office leases were highly competitive, and the vacancy rate was minimal.
Investing in these office buildings pays out handsomely in the long run because of their stable cash flow and appreciating market value. The value of office REITs is also affected by several economic and real estate trends.
However, since the pandemic and the widespread adoption of a work-from-home lifestyle, we’ve observed a substantial fall in their demand and an increase in the vacancy rate. In a general scenario, that should impact the value of the office REITs. But because the bulk of office leases are long-term, renters were still obligated to pay rent even if the office space was unused. As a result, during the COVID-19 epidemic, the majority of office REITs suffered only a slight reduction in rental income. Even so, it may not work in all situations. As a result, before making an office REIT investment, it is highly recommended that you consider all of the relevant social and economic variables.
How to Invest In REITs
Dividend-paying equities with a real estate focus are classified as REITs. Consider them as well as high-yield bond funds and dividend-paying equities if you are looking for income. REITs are assessed in the same way as other equities since they pay out dividends.
Methods to evaluate REITs value/share value:
One of the numerous factors determining the value of a REIT’s share price is the market appreciation of real estate and the earnings from rental revenue. The economics of supply and demand in real estate markets significantly impact the level and growth of rents. These basics include demographic indicators, including population size, population growth, employment growth, construction, and general economic activity. These factors directly impact rentals and occupancy rates, affecting predicted earnings and property values. Therefore, it impacts the value of REITs that own, operate and manage these rentals.
When deciding to invest in REITs and overall market knowledge, the following factors should be considered. This includes an estimate of how much profit the stock will make based on how much the price is expected to change and how much the dividend yield will be produced. Management and structure of the company you are looking into. And underlining properties and their distribution across various REITs sectors. Calculate dividend payout ratios expressed as a percentage of REIT FFO or AFFO. FFO is used to calculate net income, excluding gains or losses mostly from real estate sales and devaluation. Also known as AFFO, it is defined as Adjusted Free Cash Flow, which is FFO adjusted for rent hikes and certain capital expenditures.
FFO – Funds From Operations
Real estate investment trusts (REITs) use the term “funds from operations” (FFO) to describe the cash flow generated by their businesses. Funds from operations (FFO) is the amount of cash flow a company makes from its business operations.
To compute net FFO, add non-cash expenses or losses to the net profit, such as devaluation, amortization, and any losses during the sale of property in REIT’s portfolio to net income. Add then subtract any gains from property sales and interest income.
FFO = Net Income + (Depreciation expense + Amortization expense + Losses on sale of assets) – (Gains on sale of assets + Interest income)
AFFO – Adjusted Funds From Operations
The financial success of a REIT is measured by Adjusted Funds From Operations (AFFO), which is an alternative to Funds From Operations (FFO). Unlike FFO, AFFO considers capital expenditure. Which provides a reasonable estimate on how much money is required for the upkeep of the property.
AFFO = FFO – ( Ongoing Expense + Capital Expenditure) + Rent Increase
To summarize, you can invest in REITs to benefit from both real estate and stock market investing. Most REITs pursue an uncomplicated business approach that any investor can comprehend. Without owning, operating, or financing properties, investors can gain exposure to real estate through REITs and mutual funds. Since its inception, real estate investment trusts (REITs) have provided income to investors in the form of dividends, as well as market-beating returns, disclosure, scalability, inflation protection, and a diverse portfolio.
