What is a REIT?

A Real Estate Investment Trust (“REIT”) is a company that owns or generates income from real estate. Similar to mutual funds, REITs pool investors’ money together in order to invest in, and earn income from, real estate assets. REITs were created in 1960 when President Eisenhower signed into law the REIT Act title, created by Congress in order to give all investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in a tax advantaged manner. Therefore, a REIT serves as a conduit for investors to gain access to the cash flows generated from the underlying real estate holdings.

A REIT can own a diversified pool of real estate assets measured by both property type and geography. Most REITs own and manage commercial or residential properties such as offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels. There are three types of REITs:

Equity REIT: Equity REITs are the most prevalent type of REITs. The primary source of return for an equity REIT is the rental income it earns from maximizing both property occupancy rates and rent. In addition, an equity REIT can generate income from selling an appreciated real estate asset.
Mortgage REITs: Mortgage REITs lend to commercial or residential property builders and earn both interest income and capital appreciation in loan prices.
Hybrid REITs: As implied by the name, hybrid REITs use a combination of equity REIT and mortgage REIT investment strategies.

REITs seek to offer investors stable income streams. By following prescribed income and ownership rules, a REIT can pass its income and losses through to investors without incurring income tax. In order to qualify as a REIT, the company must meet these income and ownership rules, which include:

Having a minimum of 100 shareholders, with no more than 50% of its shares held by five or fewer individuals
75% of assets invested in cash, government securities and real estate
At least 95% of income must be passive
75% of income must be from real estate sources, such as rents, real estate interest, sale of real estate assets, reimbursements
Paying at least 90% of its taxable income in the form of shareholder dividends each year, and as a result do not generally retain their earnings
A long-term investment horizon – Less than 30% of gross income can be sales of real properties held less than 2 years¹

The REIT industry has changed significantly since its creation

Through an act of Congress in 1960, REITs were formed. This act allowed investors to buy a portion of a real estate portfolio – therefore making the benefits of real estate investments accessible to all investors and providing smaller investors access to real estate exposure without having to finance, buy, and manage property. In the 30 years following its formation in the 1960s, the number of REITs grew to over 100 and represented a market cap of ~$10 billion. From the mid-1990s onward, the REIT sector grew but the number of REITs decreased. This decline was a result of increased merger and acquisition activity, private equity deals, and the introduction of the Sarbones-Oxley Act, which increased regulation for publicly traded companies and put cost pressure on smaller REITs. Today, it's estimated that there are over 200 publicly traded equity REITs available for investors, representing a market cap of over $2 trillion².

REIT Timeline

Source: Nareit U.S. REIT Industry Equity Market Cap as of 12/31/2019, BAML Equity Research, Emles Advisors LLC

How to invest in REITs

A REIT has similar characteristics to direct private real estate assets, but the differences underscore a more accessible vehicle. A REIT raises capital in the public markets and is traded on an exchange. REITs are available in most major developed and emerging markets. Investors can purchase shares of a REIT -or access a pool of REITs through a mutual or exchange-traded fund – through a broker or brokerage account.

REITs can play a role in investment portfolios

Real estate investments seek to offer steady income streams and attractive total returns. Many investors look to real estate investment strategies to help protect against inflation and diversify the risks of traditional asset classes like equities or fixed income.

Despite their potential diversification benefits, the real estate market is still subject to volatility, which can increase during periods of economic stress. Investors may consider complementing and diversifying their real estate equity allocations with real estate corporate bonds, or bonds issued by predominantly equity REITs. The Emles Real Estate Credit ETF (REC) invests in a portfolio of real estate corporate bonds with strong financials and high credit quality. For investors looking to initiate or expand their allocation to real estate, consider adding REC to your portfolio to potentially add diversification or reduce standard deviation (volatility) relative to other fixed income or REIT strategies. Complement and diversify your broader real estate allocation with Emles Real Estate Credit ETF (REC.)

Disclosure

REITs: Real estate investment trusts are publicly traded entities that invest in office buildings, apartment complexes, industrial facilities, shopping centers and other commercial spaces. Most REITs trade on major stock exchanges or over-the-counter.

Mutual Funds: A mutual fund is an “open-end company,” a mutual fund is an investment company that pools money from many investors and invests it based on specific investment goals. The mutual fund raises money by selling its own shares to investors. The money is used to purchase a portfolio of stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. Each share represents an ownership slice of the fund and gives the investor a proportional right, based on the number of shares he or she owns, to income and capital gains that the fund generates from its investments.

Exchange-Traded Funds: An exchange-traded fund is an “open-end company,” an exchange-traded fund is an investment company that pools money from many investors and invests it based on specific investment goals. Exchange-traded fund shares trade like stocks on stock exchanges and can be bought or sold throughout the trading day at fluctuating price.

Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the Fund’s prospectus, which may be obtained by visiting www.emles.com or by calling +1 (833) 673-2661. Please read the prospectus carefully before you invest.

Investing involves risk, including possible loss of principal. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Investments in REITs are subject to the same risks as direct investments in real estate and mortgages, and their value will depend on the value of the underlying real estate interests. These risks include default, prepayments, changes in value resulting from changes in interest rates and demand for real and rental property, and the management skill and creditworthiness of REIT issuers. Fixed income securities are subject to interest rate, inflation, credit and default risk. Events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Global events such as the current novel coronavirus (COVID-19), terrorist attacks, natural disasters, social and political discord or debt crises and downgrades, among others, may result in market volatility and have long term effects on both the U.S. and global financial markets. The Fund is non-diversified, which means that it may invest more of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund. As a result, the Fund may be more exposed to the risks affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. This may increase the Fund’s volatility and cause the performance of a relatively smaller number of issuers to have a greater impact on the Fund’s performance. The Fund is not actively managed and would only sell shares of an equity security if that security is removed from the Index or the Index is rebalanced. Please see the prospectus for details of these and other risks.

Nareit REIT Industry Timeline as of October 9, 2020.
Moody’s Hoyt REITs/Credit Risk report May 15,2014, BAML Equity Research
Nareit U.S. REIT Industry Equity Market Cap as of 12/31/2019, BAML Equity Research

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What is a REIT?

The REIT industry has changed significantly since its creation

How to invest in REITs

REITs can play a role in investment portfolios

Disclosure

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