Real Estate Investment Trusts
UNDERSTANDING THE BASICS OF A R.E.I.T.
A Real Estate Investment Trust, or "REIT", is a single investment into a diversified basket of real estate properties. REITs are legally required to distribute 90% of all taxable income to investors on a yearly basis. REITs are often diversified by property type, geography, or multiple categories to achieve strategic objectives. REITs have also historically been positively correlated with rising inflation, which may make them a possible hedge for rising inflation.
In addition to offering liquid, cost-efficient ownership of real estate, the REIT structure can provide some tax advantages. As long as certain requirements are met, REITs are not required to pay any corporate income taxes. This can give REITs an advantage to taxable corporations.
When interest rates rise, investors may look for alternative investment options that offer stable, long-term returns. Non-listed REITs, also known as private REITs, can be a compelling option for those seeking to diversify their portfolio. Unlike publicly-traded REITs, which are subject to market fluctuations and trade on exchanges, non-listed REITs are not publicly traded and are typically only available to accredited investors. This can provide a level of stability and reduce volatility compared to publicly-traded REITs.
What Is A Real Estate Investment Trust (REIT)? A real estate investment trust (REIT) is a specific type of company that owns or operates real estate. A REIT functions largely the same way as other pooled investment vehicles such as mutual funds: investors can purchase a fractional interest in an underlying portfolio of assets by purchasing individual shares of the REIT. REITs may be diversified, investing in various types of real estate. For example, a REIT may hold a portfolio that consists of apartment buildings, office space, and industrial buildings. Other REITs may focus on a specific type of asset. For example, a multifamily REIT may own exclusively apartment buildings. Additionally, some REITs may also engage in the financing of real property by issuing mortgages. REITs were created in 1960 as part of an amendment to the Cigar Excise Tax Extension. Prior to this legislative change, fractional ownership in commercial real estate portfolios was largely restricted to high net worth and institutional investors. The creation of the REIT structure allowed individual investors to achieve access to this asset class as well. A major modification to REITs came with the Tax Reform Act of 1986. Prior to that legislation, REITs were restricted to the ownership and financing of real estate. The Tax Reform Act of 1986 gave REITs the ability to manage and operate real estate as well, significantly expanding the revenue streams available.
The Timeline of R.E.I.T/s
The timeline below (from REIT.com) shows how the REIT industry has evolved. Following the Tax Reform Act of 1986, REITs have expanded to own, operate, and finance a wide variety of property types. 1960 — Congress enacts the initial legislation authorizing REITs. 1961 — Community shopping centers and shopping malls. 1967 — Railroad real estate. 1970 — Lodging and resorts. 1971 — Apartments and warehouse / distribution facilities. 1972 — Central business district (CBD) office buildings. 1980 — Racetracks. 1985 — Healthcare facilities and suburban office buildings. 1986 — Self storage. 1988 — Suburban office parks. 1990 — Net leased properties. 1993 — Factory outlets, golf courses, and manufactured home communities. 1994 — Life sciences buildings. 1997 — Movie theaters and correctional facilities. 1998 — Automobile dealerships. 1999 — Senior housing, telecommunication towers, and timberlands. 2001 — Gasoline stations. 2003 — Bank branches. 2004 — Data centers, offices leased to federal govt, military housing, and student housing. 2005 — Medical offices. 2012 — Pipelines and single family rental housing. 2013 — Farmland and casinos. 2014 — Outdoor advertising and business storage. 2015 — Electric transmission lines and telecommunications fiber. 2018 — Refrigerated storage. 2019 — Post offices
What Are The Types Of REITs?
REITs can be classified based on several different criteria:
1. Business activity: REITs may own and operate real estate (equity REIT), originate and hold mortgages on real estate (mortgage REITs), or both (hybrid REIT).
2. Property type: REITs may focus on a specific type of property, such as storage facilities, commercial buildings, residential developments, medical centers, senior housing, or malls. They may also hold a diversified portfolio that includes a variety of these property types.
3. REIT structure: REITs may be publicly traded, public non-traded, or private. The rest of this section will provide an overview of these structures.
Publicly Traded REITs
Publicly traded REITs account for the majority of REIT assets. These companies are listed on the Nasdaq or NYSE just like traditional stocks and are regulated by the U.S. Securities and Exchange Commission (SEC). These REITs must file annual (10-K) and quarterly (10-Q) reports, as well as various other mandatory filings. Shares of publicly traded REITs are often very liquid, since investors can buy or sell them throughout the day.
Examples of publicly traded REITs include Public Storage (NYSE: PSA), Simon Property Group (NYSE: SPG), and AvalonBay Communities (NYSE: AVB). Additionally, there are also exchange-traded funds (ETFs) and mutual funds that offer exposure to a basket of REITs.
Public Non-Traded REITs
Public non-traded REITs (also known as public non-listed REITs/NPLRs) must register with the SEC, but shares are not publicly traded on an exchange. That means that shares in these REITs are illiquid, and investors may not be able to readily sell them without offering a significant discount. Public non-traded REITs must still make regular filings, including quarterly and annual reports. Some non-traded REITs may offer periodic share repurchase windows, during which investors can liquidate their shares. 6 Many non-traded REITs will establish an “end date” at which they will either go public (i.e., become a publicly-traded REIT) or liquidate the underlying portfolio.
Private REITs are not traded on a stock exchange and are not registered with the SEC. Shares in these REITs are typically issued through exemptions in securities laws. For example, Regulation D allows issuers to sell shares to accredited investors while Rule 144A allows issuers to sell to qualified institutional buyers. Though these exemptions are set forth in laws enforced by the SEC, private REITs are not required to make regular regulatory filings. Investors will typically have the opportunity to review information about strategy, fees, and corporate structure through a private placement memorandum or other summary document. The lack of reporting requirements can eliminate compliance costs and administrative burdens from private REITs. Additionally, investments in private REITs are not subject to the vagaries of the public equity markets, which can cause significant short-term price dislocations and result in the pursuit of strategies that do not maximize long-term shareholder value. In this sense, the lack of liquidity can be a positive for those investors able to tolerate an extended holding period. Some private REITs may offer occasional share repurchases, but these securities are typically very illiquid. Similar to public non-traded REITs, private REITs may seek to gain liquidity after a specified amount of time through an IPO, sale, or liquidation. But, in general, private REITs are illiquid investments that will have a holding period of five years or more.
If you would like to learn more about investing in real estate investment trusts reach out to us here at The Virtual Advisor Group to discuss the available opportunities in opportunity zones & R.E.I.T.s.