Investor Bulletin: Publicly Traded REITs

A REIT, or real estate investment trust, is a company that owns – and typically operates – income-producing real estate or real estate-related assets.  The income-producing real estate assets owned by a REIT may include real assets (e.g., apartment or commercial buildings) or real estate-related debt (e.g., mortgages).  Most REITs specialize in a single type of real estate – for example, apartment communities.  There are retail REITs, office REITs, residential REITs, healthcare REITs and industrial REITs, to name a few.

Publicly traded REITs (also called exchange-traded REITs) have their securities registered with the SEC, file regular reports with the SEC and their securities are listed for trading on an exchange such as the NYSE or NASDAQ.  As with any stock listed on an exchange, you can buy and sell the stock of a publicly traded REIT with relative ease.  An investment in publicly traded REITs is typically a liquid investment.  Real-time market prices for the shares of a publicly traded REIT are widely available to the public.

In contrast, there are also non-traded REITs whose securities are registered with the SEC, file regular reports with the SEC, but their securities are not listed on an exchange and are not publicly traded.  Because non-traded REITs are not publicly traded, there is no readily available market price for the stock of a non-traded REIT.  An investment in a non-traded REIT poses risks different than an investment in a publicly traded REIT.

Private REITs.  In addition to publicly traded REITs and non-traded REITs, there are also private REITs.  Similar to non-traded REITs, private REITs are not listed making them hard to value and trade.  Private REITs also do not regularly file regular reports with the SEC possibly making it difficult for you to keep informed of your investment.  Instead, private REIT offerings are private placements and rely on an exemption from the obligation to register with the SEC.  Investors are typically limited to accredited investors.

Real estate as part of an investor’s portfolio.  Investing in actual real estate properties can be an expensive investment option.  By investing in REITs, many investors find that a REIT investment allows them to diversify their investments to include real estate without having to incur the time and money commitment necessary when investing in actual real estate.

Regular dividend payments.  Because of the rules by which REITs are established, REITs have to distribute at least 90 percent of their taxable income for the year.  Because REITs often generate income based on the regular rents received on their property holdings, this requirement to distribute income may result in regular dividend payments that income-seeking investors may find attractive.

No double taxation.  REIT investments do not incur the double taxation that can often affect an investor’s return in a typical operating company.  For REITs, the income that is distributed to investors is not taxed at the entity level.  Rather, that income is only subject to tax when investors receive the REIT distribution and report the income personally.  A typical operating company, on the other hand, has its profits taxed at the corporate level and then at the investor level when these profits are distributed as dividends to investors.  Of course, tax on any investment income whether from a REIT or other investment may be deferred if the investments are held by the investor in a tax-deferred account such as an individual retirement account.

Not Qualified Dividends.  Another thing to note is that REIT dividends do not typically qualify as and, therefore, do not receive the favorable tax treatment accorded to qualified dividends.  Depending on your tax situation, qualified dividends are dividends that meet certain criteria to be taxed at the lower long-term capital gains tax rate rather than the higher ordinary income tax rate.  Please consult your tax advisor regarding your individual tax circumstances.

Different types of investments.  Investing in publicly traded REITs offers investors an opportunity to include real estate as part of an investment portfolio.  Not all publicly traded REITs are alike, however.  Publicly traded REITs often specialize in one particular type of real estate property.  Understand the different types of real estate properties before investing in REITs.

For example, there are office REITs that focus on the acquisition, development, management and leasing of commercial office properties.  Industrial REITs do the same with industrial warehouse and distribution properties.  The value and rents earned for these REITs are significantly tied to spending by businesses.  On the other hand, the value and rents earned for retail REITs that focus on retail properties and residential REITs that focus on housing are more closely tied to spending by individual consumers.  REITs can be even more specialized as to focus on a single type of property, such as self-storage centers or data centers only.

There are also REITs that invest in mortgages.  Mortgage REITs provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities. Mortgage REITs tend to be more leveraged (that is, they use more borrowed capital) than REITs that are focused on properties.  In addition, many mortgage REITs manage their interest rate and credit risks through the use of derivatives and other hedging techniques. There are investment risks to these leveraging and hedging strategies, and to learn more you should review the risk factors in the latest Form 10-K filed by the mortgage REIT.

Interest rate sensitivity.  REIT investments may be sensitive to a changing interest rate environment.  Different REITs may be affected differently.  When interest rates increase, some REITs may experience an increase in rent rates or mortgage rates.  Other REITs, however, may experience higher acquisition costs, similar to when a homebuyer is affected by higher mortgage rates when buying a home.  Because some investors find REITs attractive for their dividend yields, REITs may become less attractive for those investors as investment alternatives such as savings accounts and certificates of deposit increase their rates.

Conflicts of interest.  Publicly traded REITs are often managed by their own employees.  However, as typically found in nontraded REITs, some publicly traded REITs may hire external managers to manage their investments and operations.  The external manager may be paid significant transaction fees by the REIT for services that may not necessarily align with the interests of shareholders, such as fees based on the amount of property acquisitions and assets under management.  In addition, the external manager may manage or be affiliated with other companies that may compete with the REIT in which you are invested or that are paid by the REIT for services provided, such as property management or leasing fees.

Prudent investing.  As with any investment, you should take into account your own financial situation, consult with an investment professional and perform thorough research before making any investment decisions concerning REITs.  You can review publicly traded REIT’s disclosure filings, including annual reports and quarterly reports and any offerings prospectus using the SEC’s EDGAR database.  There are also REIT-focused mutual funds and exchange-traded funds to consider.

For more information about non-traded REITs generally, see our Investor Bulletin.

Also see FINRA’s investor alert about non-traded REITs.

For more information about private placements, see our Investor Bulletin.

For more information about accredited investors, see our Investor Bulletin.

For more information about Form 10-K, see our Investor Bulletin.

For information on how to search for company documents, such as Forms 8-K, in the SEC’s EDGAR database, see Using EDGAR – Researching Public Companies.

For another resource for using EDGAR, see Researching Public Companies Through EDGAR: A Guide for Investors.

Visit here for more information about mutual funds.

For more information about exchange-traded funds, see our Investor Bulletin.

For information about how fees impact your investment, see our Investor Bulletin.

To learn about how to research your investment professional, see our Investor Bulletin.

For our Investment Adviser Public Disclosure (IAPD) website, visit adviserinfo.sec.gov.

For FINRA’s BrokerCheck, visit brokercheck.finra.org.

To locate contact information for your state securities regulator, visit nasaa.org.

For additional investor educational information, visit the SEC’s website for individual investors, Investor.gov.