REITs at a Glance
A real estate investment trust, or REIT, is a company that pools the money of many investors and purchases a diversified, professionally-managed portfolio of commercial real estate assets. REITs are legally required to pay 90 percent of taxable income as dividends and, therefore, have the potential to provide attractive streams of income.
There are various types of REITs. One way in which REITs vary is by the type of investments they hold. Similar to stocks and bonds, debt-focused REITs and equity-focused REITs have different risk and return characteristics. Holding both in an investment portfolio may help reduce overall portfolio risk.1
Instead of buying properties directly, debt-focused REITs provide capital to finance commercial real estate properties. These REITs typically generate income from contractually agreed upon interest payments and are less vulnerable to changing economic conditions, however, if the borrower lacks sufficient funds, distributions may be delayed or not made.
Often, debt-focused REITs emphasize income generation and preservation of capital and tend to offer better protection against declines in real estate property values than equity-focused REITs.
Equity-focused REITs acquire, manage, operate and sell commercial real estate properties. They generate revenue from rent which is the contractual obligation of the tenant. Once debt service costs and all expenses have been paid, equity-focused REITs make distributions to investors.
During periods of economic pressure, demand for space may fall and rents may drop, causing the income that equity-focused REITs provide, and the value of the properties they hold, to decline. During periods of prosperity, equity-focused REITs may offer the opportunity for growth in investor capital when economic conditions cause property values to rise.
REITs also vary in the ways in which they are bought and sold.
Publicly-Traded REITs are bought and sold on national securities exchanges and are more liquid than non-traded REITs. Because they are publicly traded they move up and down with the markets and are subject to the same market fluctuations and volatility as other exchange-traded stocks.
Public, Non-Traded REITs do not trade on exchanges and are not subject to the volatility of the markets.2 Non-traded REITs may pay higher distributions than publicly-traded REITs; although they may also experience less capital appreciation. In addition, non-traded REITs have limited liquidity and lack price transparency in comparison with publicly-traded REITs.
1) There is no guarantee that asset allocation will assure a profit or protect against loss in a broadly declining market. 2) Non-listed REITs, like publicly traded REITs, remain subject to the risk of declining values resulting from changes related to the fundamentals of the company and its underlying properties.