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:

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:

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.)