What Is A REIT? - InvestingChannel

What Is A REIT?

Proprietary Data Insights

Top Industrial REIT Searches This Month

#2Public Storage6,060
#3Stag Industrial3,801
#4Extra Space Storage2,812
#5Uniti Group1,734
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What Is A REIT?

We’ve covered a ton of diverse ground so far in our October Housing is Haunted series. But today might be the most wide-ranging, eye-opening installment, particularly if you know very little about Real Estate Investment Trusts (REITs). Even if you have some knowledge, The Juice might be able to show you a thing or two you didn’t know. 

But first, the linkfest of all linkfests. Grab a cup of tea or beer and curl up with what we’ve done so far this month: 

And today — What Is A REIT?

A real estate investment trust — REIT for short — is … 

Let’s let our favorite REIT resource, Nareit, provide the formal definition: 

A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing real estate. REITs provide an investment opportunity, like a mutual fund, that makes it possible for everyday Americans—not just Wall Street, banks, and hedge funds—to benefit from valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.

Nareit is a solid site to bookmark and go back to whenever you have a question about REITs. They drill down into every aspect of REITs. 

In today’s Juice, we detail a few basics that matter most to the largest number of investors. 

First and foremost: 

  • REITs are bound by law and IRS rules to pay out at least 90% of their taxable income to shareholders each year via dividends. This makes them attractive to income investors, particularly dividend growth investors. 

Most REITs pay out close to 100% or more of their taxable income, because the same IRS regulations allow them to deduct the dividends they pay from their taxable income. 

It comes as no surprise that REITs promote their dividend-paying prowess to investors. One of the most popular REITs — Realty Income (O) — actually trademarks its marketing as it relates to its dividend: 

Realty Income, The Monthly Dividend Company®, is an S&P 500 company and member of the S&P 500 Dividend Aristocrats® index. We invest in people and places to deliver dependable monthly dividends that increase over time. The company is structured as a real estate investment trust (“REIT”), and its monthly dividends are supported by the cash flow from over 13,100 real estate properties primarily owned under long-term net lease agreements with commercial clients. To date, the company has declared 640 consecutive monthly dividends on its shares of common stock throughout its 54-year operating history and increased the dividend 122 times since Realty Income’s public listing in 1994.

Realty Income is what you might think of when you think of a REIT. It owns and operates commercial properties around the world — mainly retail — leased by household names such as 7-Eleven, Walgreens (WBA), Walmart (WMT) and Lowe’s (LOW)

But here’s the other key. 

The sectors REITs run in go beyond the obvious. While you’ll find REITs in retail, you’ll also find apartment REITs, healthcare REITs, office REITs and industrial REITs. Some REITs span spaces. 

Others are less obvious. Such as mortgage REITs, which provide real estate financing by originating or purchasing mortgages and mortgage-backed securities. 

Back to the slightly more, though not completely obvious. 

Consider today’s Trackstar top five. 

All classified as industrial REITs, they run in distinct sub-spaces. 

For example, #1 Prologis (PLD) came about after a 2011 merger with AMB Property Corporation. The firm owns and operates those big warehouses you often see on the outskirts of large urban areas. 

#5 Uniti Group (UNIT) provides wireless infrastructure, such as fiber connectivity, for its clients. This infrastructure is, technically, real estate. To a similar end, there are data center REITs, such as Digital Realty (DLR) and Equinix (EQIX) that manage — you guessed it — data centers for clients such as IBM (IBM) and AT&T (T)

Then, there’s #2 Public Storage (PSA) and #4 Extra Space Storage (EXR). Yes, those storage units scattered all over town. They’re real estate. And PSA and EXR are two huge REITs. 

The Bottom Line: Housing is a sub-sector of real estate. And real estate (investment)  isn’t merely where you and other people live, shop and work. It’s much broader, expanding into areas such as data centers, mortgages and storage spaces. 

So you can use REITs to get at areas of this broad market you really like. If you think the housing crisis will keep the rental market hot over the long-term, you have apartment REITs. If you can’t believe how much it costs to rent a storage space these days (it’s pretty crazy), you might go the PSA or EXR route. 

This specialization can lead to diversification. And the regular dividend income doesn’t hurt much either.

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