The Real Deal on REITs (Real Estate Investment Trusts) High income, inflation hedge
By Gene Walden
Excerpt from If Not Stocks What?
If you own your own home, then you have a stake in the real estate market. But the commercial real estate investment market moves in a different cycle than the housing market, and can provide some benefits that home ownership doesnt. If you want a stake in the commercial real estate market, there is no easier way to invest than to buy shares of a real estate investment trust (REIT).
REITs are like stocks for the commercial real estate industry. They are trusts that buy commercial properties, such as apartments, office buildings, and shopping centers that produce income. When you buy shares of a REIT, you become a part owner in all of the property holdings of the REIT.
REITs are traded like stocks on the major stock exchanges, so they provide the liquidity of stocks with the diversification and income of commercial real estate.
REITs were first approved by Congress in 1960 to offer small investors a chance to participate in the commercial real estate market. Although they were slow to catch on initially, they have become increasingly popular in recent years. There are now more than 200 REITs available on the major stock exchanges, including about 150 REITs on the New York Stock Exchange, and dozens more on the American Stock Exchange and NASDAQ market. You can buy them through any broker and follow them in the daily stock listings of many newspapers (or the Internet).
REITs have several attractive features. They pay among the highest yields of all types of investments, the dividends often increase from year to year, and they are easy to buy, sell and follow.
There are several different types of REITs available on the market:
- Equity REITs own and operate income producing real estate, such as apartments, warehouses, office buildings, hotels, and shopping centers.
- Specialized REITs focus on a particular type of property, such as shopping centers or health care facilities.
- Geographically-focused REITs specialize in a single region or metropolitan area, while others try to acquire properties throughout the country.Mortgage REITs lend money to real estate owners and operators, and raise income from the interest payments on the mortgages.
- Hybrid REITs own properties and provide loans to real estate owners.
REITs are closely regulated, and must meet certain requirements:
- Must be managed by a board of directors
- Must pay shareholder dividends of at least 90 percent of its taxable income.
- Must invest at least 75 percent of total assets in real estate assets.
- Must derive at least 75 percent of gross income from rents from real property or interest on mortgages on real property.
- Must be managed by a board of directors
- Must have a minimum of 100 shareholders.
- Must have no more than 50 percent of the shares held by five or fewer individuals.
Who should buy REITs?
REITs are geared to both large and small investors interested in current income and a stake in the real estate market as part of a diversified portfolio.
Who should not buy REITs?
REITs would not be attractive to investors looking for capital appreciation. REITs distribute 90 to 100 percent of pre-tax earnings each year to shareholders in the form of dividends, but the value of the shares tends to change very little from year to year.
REITs also may not be appropriate for you if you dont need the income and you want to minimize your taxes. The dividends paid by REITs are added to your total taxable income, so you will owe more taxesunless you use REITs in your IRA or other tax-deferred retirement plan.
The rate of return offered by REITs is outstanding as compared with other income-producing investments. In recent years, while money market funds were paying 1 to 2 percent and many government bonds were paying under 5 percent, many REITs were paying dividends of 6 to 12 percent. And the dividends for many REITs increase nearly every year, providing yet another advantage over bonds and other traditional fixed-income investments.
Although most REITs provide pretty steady performance, there are risks with REITs. In a down economy, if vacancies increase in the commercial properties owned by the REIT, income could decline. In a very slow market, you could see a decline in your income as well as in the value of your REIT shares.
The biggest upside to REITs may be their high yields, but there are some other benefits as well, such as:
- Increasing stream of income. REITs often increase their dividends each year providing investors with a steadily increasing stream of income.
- Inflation hedge. Owning real estate can be an inflation hedge. Real estate often rises in value along with inflation, so the value of your investment in real dollars stays about the same regardless of inflation. And the increasing stream of income REITs provide compensates for the increasing costs of inflation.
- Professional management. Professional real estate managers run the business, select the properties, handle the maintenance and leasing and the many other intricate details of the business, while you sit home and collect your dividend checks.
- Easy to buy. Buying REITs is as easy as calling your broker or making a few clicks in your online brokerage account. REITs trade like stocks on the major stock exchanges, so they are very easy to buy and sell. They give you a chance to own real estate without evaluating properties, dealing with real estate agents and bankers, and personally maintaining the properties.
- Low Price of Admission. The cost of buying commercial real estate on your own could be millions of dollars. Even in a limited partnership real estate deal, you might be required to put up $25,000 to $100,000 or more. But with REITs, you can pick your price. If you want to buy a few hundred dollars or a few thousand dollars worth of REIT shares, you have that option. In fact, you can buy shares of two or three REITs if you want to diversify within the REIT universe. Its all very affordable.
- Liquidity. You can buy or sell REITs whenever the stock market is in session, so you have excellent liquidity. By contrast, many limited partnerships require you to leave your money in for five to 10 yeas. Or if you own your own commercial property, selling it can be a major ordeal. With a REIT, you can buy or sell with a call to your broker or a couple of clicks in your online brokerage account.
The downside to REITs is that they provide little, if any, capital appreciation. They do provide excellent income, but that income is taxable, so it can increase your tax burden (unless you use REITs in your IRA or other tax-deferred retirement plan).
How to Buy REITs
Buying REITs is the same as buying stocks. You can buy shares of REITs through your broker or through any online broker.
The value of your REIT shares and the dividend they pay depends on the strength of the real estate market. In a depressed real estate market, you could see the value of your shares decline. In a bad commercial real estate market, rising vacancy rates would also cut into income collected by the REIT, which would reduce the amount of your dividend.
It would be a good idea to have a small portion of REITs in your portfolio at all times because of the diversification they offer. However, they are particularly attractive during periods of low interest rates and a down stock market. Typically when stocks are faltering, real estate can buoy the portfolio. And when bond interest rates are low, REITs can provide a much better stream of income.
REITs are less attractive when the stock market is boomingsince returns from REITs fall short of the average annual returns from stocks. They are also less attractive during periods of high interest rates, when you can do almost as well with government bonds and triple A corporate bonds as you would with a REIT.
For the perfect time to buy a REIT is when the economy is coming out of recession, and business is picking up. At that point, real estate prices may still be a little depressed, but business growth will soon lead to higher office and warehouse occupancy rates.
Monitoring Your REITs
You can follow your REITs exactly as you follow any stock. REIT share prices are listed in the usual stock tables in the business section of many major newspapers, USA Today, The Wall Street Journal, or Investors Business Daily. You can also find their current share prices on the Internet at any of the many financial Web sites that feature stock prices. Most REITs trade on the New York Stock Exchange, the American Stock Exchange or the NASDAQ market, although some are traded on the smaller over-the-counter market.
As with all types of investments, the amount of your savings that you allocate for REITs should depend on your tax situation, your financial situation, your investment goals and your threshold for risk.
Investors interested in income might want to load up on REITs, with 10 to 30 percent of your portfolio in REITs since they offer a stream of income that is among the best in the investment market.
Because they are taxable, unless you need the income, you might want to put your REITs in your tax-sheltered retirement account.
When selecting a REIT, you may want to look at several factors:
- What is the dividend yield and how does that compare with other REITs? Since income is the main benefit of REITs, you may as well look for one that pays a relatively high return.
- What is its track record? Look at the REITs past growth record and dividend payment history. Look for a REIT that has maintained a fairly steady stock price the past few years, and, perhaps even more importantly, a steadily increasing dividend.
- Check out the company. Nearly all REITs have a Web site. Go to the Web site, check out the information on the company, its history, its management, and its investment properties. You might want to look over several REITs to compare and contrast before making a decision. If the yield is high, the track record is solid with steadily rising dividends, and the company and its management look good, thats a good sign. However, for the sake of safety and diversification, you might want to spread your money around to two or three different REITs.
- How is the market for the type of properties the REIT owns? For instance, if office space or apartment units are filling up around the country, theres a good chance that REITs that invest in those types of properties would soon see an increase in earnings. But if the economy is slowing down and vacancies are rising, you may want to avoid those REITs.
Here is a list of the REITs that trade on the major stock exchanges:
NEW YORK STOCK EXCHANGE:
Company Name: Ticker:
Acadia Realty Trust AKR
Agree Realty Corporation ADC
Alexander's Inc. ALX
Alexandria Real Estate Equities, Inc. ARE
AMB Property Corporation AMB
America First Mortgage Investments, Inc. MFA
American Land Lease ANL
American Residential Investment Trust, Inc. INV
Amli Residential Properties Trust AML
Annaly Mortgage Management, Inc. NLY
Anthracite Mortgage Capital Inc. AHR
Apex Mortgage Capital Inc. AXM
Arden Realty Group, Inc. ARI
Asset Investors Corporation AIC
Associated Estates Realty Corp. AEC
AvalonBay Communities Inc. AVB
Bedford Property Investors BED
Boston Properties, Inc. BXP
Boykin Lodging Company BOY
Brandywine Realty Trust BDN
Brookfield Properties Corporation BPO
BRE Properties, Inc. BRE
BRT Realty Trust BRT
Burnham Pacific Properties, Inc. BPP
California Preferred Capital Corp. CFP
Camden Property Trust CPT
Capstead Mortgage Corporation CMO
CarrAmerica Realty Corporation CRE
Catellus Development Corporation CDX
CBL & Associates Properties CBL
Center Trust Properties CTA
CenterPoint Properties Trust CNT
Chateau Communities, Inc. CPJ
Chelsea Property Group CPG
Chevy Chase Preferred Capital Corp. CCP
Clarion Commercial Holdings Inc. CLR
Colonial Properties Trust CLP
Commercial Net Lease Realty NNN
Cornerstone Realty Income Trust TCR
Corporate Office Properties Trust OFC
Correctional Properties Trust CPV
Cousins Properties, Inc. CUZ
Crescent Real Estate Equities, Inc. CEI
CRIIMI MAE, Inc. CMM
Crown American Realty Trust CWN
Developers Diversified Realty Corporation DDR
Duke Realty Corporation DRE
EastGroup Properties, Inc. EGP
Elder Trust ETT
Entertainment Properties Trust EPR
Equity Inns, Inc. ENN
Equity Office Properties Trust EOP
Equity One, Inc. EQY
Equity Residential EQR
Essex Property Trust, Inc. ESS
Federal Realty Investment Trust FRT
FelCor Lodging Trust Inc. FCH
First Industrial Realty Trust FR
First Union Real Estate Investments FUR
Forest City Enterprises FCE.A
Gables Residential Trust GBP
General Growth Properties, Inc. GGP
Glenborough Realty Trust Inc. GLB
Glimcher Realty Trust GRT
Great Lakes REIT GL
Health Care Property Investors, Inc. HCP
Health Care REIT, Inc. HCN
Healthcare Realty Trust, Inc. HR
Highwoods Properties, Inc. HIW
Home Properties of New York, Inc. HME
Hospitality Properties Trust HPT
Host Marriott Corporation HMT
HRPT Properties Trust HRP
Innkeepers USA Trust KPA
IRT Property Company IRT
iStar Financial Inc. SFI
JDN Realty Corporation JDN
Keystone Property Trust KTR
Kilroy Realty Corporation KRC
Kimco Realty Corporation KIM
Koger Equity, Inc. KE
Konover Property Trust, Inc. KPT
Kramont Realty Trust KRT
La Quinta Properties, Inc. LQI
LaSalle Hotel Properties LHO
LASER Mortgage Management, Inc. LMM
Lexington Corporate Properties, Inc. LXP
Liberty Property Trust LRY
LTC Properties, Inc. LTC
Macerich Company, The MAC
Mack-Cali Realty Corporation CLI
Malan Realty Investors, Inc. MAL
Manufactured Home Communities MHC
MeriStar Hospitality Corporation MHX
Mid-America Apartment Communities, Inc. MAA
Mid-Atlantic Realty Trust MRR
Mills Corporation, The MLS
Montgomery CV Realty Group CVI
National Golf Properties, Inc. TEE
National Health Investors, Inc. NHI
Nationwide Health Properties, Inc. NHP
New Plan Excel Realty Trust NXL
Novastar Financial, Inc. NFI
Omega Healthcare Investors, Inc. OHI
Origen Financial, Inc. OFI
Pacific Gulf Properties PAG
Pan Pacific Retail Properties PNP
Parkway Properties Inc. PKY
Pennsylvania REIT PEI
Phillips International Realt Corp. PHR
Plum Creek Timber Company PCL
Post Properties, Inc. PPS
Prentiss Properties Trust PP
Prime Group Realty Trust PGE
Prime Retail, Inc. PRT
Public Storage, Inc. PSA
RAIT Investment Trust RAS
Ramco-Gershenson Properties Trust RPT
Realty Income Corporation O
Reckson Associates Realty Corp. RA
Redwood Trust, Inc. RWT
Regency Centers Corporation REG
RFS Hotel Investors, Inc. RFS
Rouse Company, The RSE
Saul Centers, Inc. BFS
Security Capital Group, Inc. SCZ
Senior Housing Properties Trust SNH
Shurgard Storage Centers, Inc. SHU
Simon Property Group, Inc. SPG
Sizeler Property Investors, Inc. SIZ
SL Green Realty Corp. SLG
Sovran Self Storage SSS
Starwood Hotels & Resorts HOT
Storage USA, Inc. SUS
Summit Properties Inc. SMT
Sun Communities, Inc. SUI
Tanger Factory Outlet Centers, Inc. SKT
Taubman Centers, Inc. TCO
Thornburg Mortgage Asset Corporation TMA
Town and Country Trust, The TCT
Transcontinental Realty Investors, Inc. TCI
Trizec Properties, Inc. TRZ
U.S. Restaurant Properties USV
United Dominion Realty Trust, Inc. UDR
Universal Health Realty Income Trust UHT
Urstadt Biddle Properties, Inc. UBP
Ventas, Inc. VTR
Vornado Realty Trust VNO
Washington Real Estate Investment Trust WRE
Weingarten Realty Investors WRI
Winston Hotels WXH
AMERICAN STOCK EXCHANGE:
Company Name: Ticker:
Aegis Realty Inc. AER
American Mortgage Acceptance Company AMC AMC
AmeriVest Properties Inc. AMV
Anworth Mortgage Asset Corporation ANH
Arizona Land Income Corporation AZL
BNP Residential Properties, Inc. BNP
Capital Alliance Income Trust CAA
Commercial Assets Inc. CAX
FBR Asset Investment Corporation FB
Golf Trust of America, Inc. GTA
Hanover Capital Mortgage Holdings, Inc. HCM
Hersha Hospitality Trust HT
HMG/Courtland Properties, Inc. HMG
Impac Commercial Holdings, Inc. ICH
Impac Mortgage Holdings, Inc. IMH
Income Opportunity Realty Investors IOT
InnSuites Hospitality Trust IHT
Mission West Properties MSW
National Health Realty NHR
One Liberty Properties, Inc. OLP
Pacific Gateway Properties PGP
Pittsburgh & West Virginia Rail Road PW
PMC Commercial Trust PCC
Presidential Realty Corporation (Class B) PDL B
Price Legacy Corporation XLG
PS Business Parks, Inc. PSB
Resource Asset Investment Trust RAS
Roberts Realty Investors, Inc. RPI
Shelbourne Properties, Inc. I HXD
Shelbourne Properties, Inc. II HXE
Shelbourne Properties, Inc. III HXF
Stonehaven Realty Trust RPP
United Mobile Homes, Inc. UMH
Wellsford Real Properties, Inc. WRP
Company Name: Ticker:
Amresco Capital Trust AMCT
Bando McGlockin Capital Corporation BMCC
Banyan Strategic Realty Trust BSRTS
Capital Automotive REIT CARS
Humphrey Hospitality Trust, Inc. HUMP
Jameson Inns, Inc. JAMS
Maxus Realty Trust, Inc. MRTI
Monmouth Real Estate Investment Corp. MNRTA
Pinnacle Holdings, Inc. BIGT