Staying invested in the market over a long time has historically paid off for many investors. Despite the risks involved in long term investments, its benefits remain significant. One of these is the lower volatility it exhibits over time. Long term investments offer investors more probability to weather low market periods. With patience and the appropriate risk tolerance, long-term investors have little worries.
There are different ways to invest funds for a long time. The safest long term investments are currently stocks, bonds, mutual funds and REITs. There is a school of thought that declares stocks to be the best amongst these. However, REITs can generate dividend along with capital appreciation. This makes it a worthy counterpoise to stocks, bonds and cash. REITs have had an unwavering track record of good performance. They have potentials of generating higher returns, more diversification and less risk. For this reason, Morris Armstrong says that nearly all investors would benefit from exposure to REITs.
What are REITs?
‘REITs’ stands for Real Estate Investment Trusts. REITs are companies who own and operate real estate properties. Typically, REITs buy and manage apartments while some may manage commercial properties or mortgages on these properties. These commercial properties include; hotels resorts, malls, office buildings etc. A REITs investment could be a convenient income earning vehicle for retirees. Since there are different categories of REITs, intending investors have a variety to choose from.
REITs are an alternative to direct ownership of real estate property. Their popularity has grown since creation in 1960. They are a passive way to gain real estate exposure with less principal. It is like a pool of real estate asset traded freely on the stock exchange market. Investments can be made in individual companies through exchange traded fund or with mutual fund.
REITs do not pay corporate income tax like most public corporations. After management deductions, dividends are distributed pretax to investors. REITs are mandated by the law to distribute 90% of their profits in form of dividends to investors. Most REITs distribute these dividends quarterly to their investors. Investors who are looking would prefer REITs to fixed income. Good investment portfolios always take care to include both.
Types of REITs
Usually, REITs are divided into sectors. While most REITs focus on a particular type of property, some can handle multiple types. Here are some of the sectors.
- Residential REITs
These specialize in apartment buildings, homes and students housing and manufactured housing. They own and manage these residences. These REITs are responsible for renting spaces in the apartments to tenants. The biggest residential REITs tend to focus on large urban centers. A city with a net inflow of people is often indicative of a good residential REITs choice.
- Industrial REIT
Industrial REITs own manage and rent spaces to tenants in industrial facilities. These could be warehouses or distribution centers. These facilities play a vital role in most business. A high quality, strategically located industrial REIT would attract many tenants.
- Retail REITs
These are concerned with retail properties such as large malls, outlet centers, shopping centers and power centers. Retailers REITs make money from the rent they charge tenants. If retailers have cash flow problems, they may delay or default on their payments. Thus, it is necessary to invest in retail REITs with strong anchor tenants.
- Office REITs
Just like the name, they own, manage and rent office spaces to tenants. These spaces could range from skyscrapers to just office parking spaces. There could be further specialization amongst office REITs. Some are market specific as in central business districts or suburban areas. They could be directed to specific classes such as government agencies or biotech firms.
- Healthcare REITs
Investments in hospitals, medical centers, nursing facilities and retirement homes fall under healthcare REITs. For this type of REIT to succeed, the healthcare system must be working well. Always look out for companies with significant healthcare experience. Such facilities must not have funding issues due to poor occupancy.
- Data Center REITs
The 21st century REIT sectors must include data-centers. Data-center REITs own server farms for internet and other data needs. Data center REITs provide infrastructure for power, cooling and physical rack space. It’s suitable for customers who install and manage personal server and computing equipment. Some people believe it is safer than investing in technology.
- Hotel/Lodging REITs
These REITs rent spaces in hotels or resorts they own and manage to guest. Lodging REITs often own different classes of hotel’s services and amenities. They offer a wide spectrum of customers business and vacation travelling services. They are often advertised as stable investments with predictable occupancy rates.
- Infrastructure REITs
REITs that manage infrastructure such as cables, telecommunication towers, energy pipelines and wireless infrastructure fall in this category. Companies that own such REITs must meet certain regulatory guidelines.
- Specialty REITs
The properties owned and managed by these REITs do not fall under any of the above listed category, hence the name. These properties include theatres, casinos, farmlands, advertising sites etcetera.
Ways to invest in REITs
There are different ways of investing in REITs these include:
- Public traded REIT: They are registered with the Securities and Exchange Commission SEC and traded on the stock exchange market. The SEC regulates their activities. These companies are subject to public disclosure, lower management costs and better governance. These factors make them superior to private REITs. Anyone can invest in them with a minimum of one share
- Private REITs: these are companies or real estate funds whose shares are not traded on the stock exchange market. They are also exempted from SEC registration. As such, they are not subject to as much disclosure requirements as public REITs. They are usually sold to institutional investors only. These include large pension funds, accredited investors-those with a net worth of over $1million. Since they are not registered, private REITs are not subject to corporate government policies. There is also a risk of illiquidity where access to funds may be difficult.
- Public non-traded REIT: they are registered with and regulated by the SEC. like the private; their shares are not traded on the stock exchange market. Thus, their shares are not subject to stock market volatility. They do not deal with daily price changes hence managers can focus on long term objectives. The minimum investment is $1000 but may vary.
- REIT preferred stock: these are preferred stocks issued by REITs. Dividends are paid regularly and redeemed at fixed par values. Their prices move in response to changes in interest rates. Higher interest rates lead to lower prices and lower interest rates increase their prices. REIT preferred stock has no claim to the company’s profits beyond its dividend. Thus, it is unlikely that REIT preferred stocks would appreciate in value beyond the issuing price.
Best REITS to invest into in 2019
The best REITs offer high dividend payments and growth potential. The quality of properties, tenants, balance sheets and dividend growth is indicative of good REITs. In no particular order, here is a list of Top seven US REITs in 2019 as reported by Money Show:
This is currently one of the largest REITs in the US. It has over 1200 properties in the US, Canada and the U.K. these properties include medical office buildings, research centers and senior housing. It benefits from the favourable trends which include the aging U.S population. Ventas has a healthy balance sheet and 2019 is projected to be its pivot year in company transition. It has an attractive yield and growth. Healthcare is expected to grow by 5.8% per year till 2024. Investing in a healthcare REIT is definitely a good decision.
This REIT is a collection of eighty grocery and convenience stores properties in New York, New Jersey and Connecticut. These properties are strategically located which gives them a large number of potential consumers. Its dividends were increased by 2.1% in December, 2018. Dividends have been paid uninterruptedly for the past 48 years. Investors have enjoyed 35 years of consecutive annual increase in dividends. With a history of dividend growth and strong yield of 5.3% it is an attractive investment option.
Reality Income operates in commercial real estate. Its income portfolios include pharmacies, theatres and others. This company has a history of steady monthly dividends for over 48 years. It currently has an attractive list of high quality tenants like FedEx, Walmat and AMC. Its management guides for an FFO of $3.25 to $3.31 on a per share basis in 2019.
This REIT generates 80% of its revenue from its nursing facilities and 20% from senior housing developments. It currently has the highest dividend yield of about 7.1%. It expects a dividend payout ratio of 87% in 2019. Despite hurdles, its dividends remain intact and are expected to remain so.
It owns shopping centers, retail properties, apartments and condominiums. Its strategy of pursuing highly populated, affluent estates has paid off for business. Since 2010, FFO has had an average annual increase of 6%. Its dividend yield is just 3% but dividend growth is rapid. The company is currently on an exclusive list of ‘Dividend kings.’ It is list of companies whose dividends have increased for more than fifty consecutive years.
Kimco is a retail REIT specifically for open-air shopping centers. It assets have a strong performance, net operating income rose by 2.6% during the fourth quarter of 2018. In recent years, they have undergone a portfolio transformation. Weaker properties have been old out to improve its balance sheet. Their dividend has not increased since 2017 but its yields are as high as 6.1%. Retiree investors would find this very attractive.
STAG deals with single-tenant industrial properties and currently has properties in 37 states in the US. Since 2011, it has had a solid growth and a promising future. Its funds from operations FFO grew by 4.5% in the last quarter of 2018. It achieved a strong occupancy REIT of 95.5% and currently has a healthy balance sheet. Dividends are paid monthly instead of quarterly. This dividend has never been cut since 2011.
REIT Investors Checklist
It’s not wrong to have reservations about investing in REITs. Of course it is your money involved and you can’t be too careful here. To help calm your rising nerves, here is a checklist you can use when deciding:
- The REIT Caveats; this refers to the investment assets. You can get this from their prospectus and research reports. From this you can research on the current performance of the sector.
- The structure of the REIT; this includes the management, sponsorship, expected fees, gearing and maturity profile. This is usually in the REIT’s prospectus.
- The REIT holders’ rights; the trust deed and prospectus would tell you your rights and interests especially in the REIT management.
- Distribution policy: information about the timing, frequency, adjustments and special circumstances surrounding the REIT distribution is essential.
- Check the Corporate Governance of the REIT; it must be acceptable to you as an investor.
- The REIT you invest in must suit your needs else, its aim is defeated.
If a REIT under consideration cannot meet these conditions, it may be wise to avoid such. As with all investments, REITs carry some risks. Interest rates, employment rates and other economic factors shape the market.
REITS Benefits and Risks
- High dividend yields
- Liquidity of public traded investments
- Hassle-free investment in real estate
- Low minimum investment requirement
- Distribution of dividends to investors is mandatory
- Diversification of investment portfolio
- Illiquidity of
- Often affected by the weakness of real estate properties
- Potential market correlation
- Have potential to produce negative total returns when interest rates are rising
- Probable decline in value of properties
- The 90% mandate on REITs sometimes leaves little capital for growth and expansion and could lead to debts.
REITs have produced steady growth overtime. Its benefits outweigh the associated risks. It is important to research on your REIT and brokerage options. Record keeping of received payments would help you avoid fraud and malfeasances. The registration status and validity of a REIT must always be verified to avoid fraud. With all necessary conditions met, REITs remain the best long term investment choice.