Real estate investment trusts (REITs) are a type of traded securities that
invest in the financing of income-producing properties. Commercial properties,
such as office buildings, multi-family housing, shopping centers, and
hospitals, are the types of assets that make up equity REITs. These security
instruments function as holdings portfolios that concentrate on earnings
from equities or mortgages.
Mortgage-backed securities (MBS) are real estate backed deeds that comprise
the bulk of mortgage REITs. Heavily tied to mortgage markets, the REITs
react with the ups and downs of the lending industry, but often offer
a higher return than traditional stocks or equities. REITs are offered
publicly on the major stock exchanges, but can also be privately sold
and transferred to investors. The investment is popular among both institutional
and private investors due to the structure of REITs, which requires that
90% of all taxable income be paid out as dividends.
Investing in Retail REITs
Retail REITs are comprised of properties such as shopping centers and shopping
malls. When consumer confidence is strong, these REITs do fairly well
since they are tied to consumer spending habits throughout the country.
Investors in these types of REITs can benefit with an increase in shopping
during good economic times, when consumer spending is at its highest.
The two types of tenants in the retail mall industry are anchor tenants
and inline tenants. Anchor tenants are large retail outlets for national
stores such as Macy’s or Sears, which already have a loyal customer
base. The anchor stores help sustain the financial success of the property,
allowing the smaller outlets to fill the remaining space, significantly
reducing the risk and volatility of the property.
A good example of a retail REIT with high upside potential is Tanger Factory
Outlet Centers. The organization specializes in discount outlet shopping,
which is a unique niche market compared with traditional shopping malls.
At the heart of the market, lie retailers such as Banana Republic, Calvin
Klein, Brooks Brothers, Nike, Coach, and Polo Ralph Lauren. Favorite national
brands like these help drive spending in their stores from consumers looking
for quality products at discounted outlet prices. For more than 20 years,
the company has enjoyed occupancy rates above 95%. Tanger Factory Outlet
Centers’ REIT is a sound investment for investors seeking a better-than-average
rate of return with a diversified portfolio of properties.
Investing in Healthcare REITS
Healthcare REITs invest in the financing of healthcare-related properties,
such as hospitals, medical office facilities, senior housing, and science
facilities. Investors covet these types of REITs based on the potential
for high, long-term growth in the healthcare industry. Longer life expectancies
and medical advances have contributed to high growth within healthcare
REIT markets. The upside for this market continues to look strong; as
baby boomers seek to retire, there will be an increased demand for healthcare
and senior living communities. Also, medical facilities and other health-based
properties tend to hold longer leases, contributing to a more stable investment market.
One of the top 5 investment REITs in this market is HCP Inc. Based on market
capitalization, HCP is the third-largest healthcare related REIT and has
a diversified portfolio of properties to stabilize the investment. With
senior housing, nursing homes, and medical facilities all over the country,
HCP has a nice chunk of the market share when it comes to healthcare REITs.
Competition is essentially a non-factor due to the top-tier tenants leasing
HCP properties. Long leases and quality tenants and operators translate
into long-term stability and favorable returns. The Affordable Care Act’s
mandate dictates that medical professionals cooperate in a value-based
system, making it less likely that medical facility tenants will want
to move in the short-term. Most of HCP’s portfolio works in conjunction
with the nationally established healthcare system.
Divest of Storage Unit REITs
The REITs incorporated into this type of real estate market hold self-storage
units, containers, outdoor vehicle storage lots, and climate-controlled
facilities. The majority of the customers utilizing these kinds of services
are short- or mid-term clients. Storage lockers or lots are usually rented
on a monthly basis, and facilities typically see wide-ranging turnover
rates from season to season. Pricing for these storage facilities is based
on location, size, and term of use, and often face sporadic fluctuations.
Storage facilities see an average client life span of six to eight months.
These constant vacancies require the owners of the properties to spend
more time and resources on advertising and marketing. The marketplace
is extremely competitive, and owners will often see harsh competition
over the course of the year. Management of these facilities is also a
concern as abandoned storage lockers and property require the owners to
go through legal hurdles to remove items and free up storage unit space.
A good example of the downside associated with this type of REIT, and one
of the most recognized names in the business, is Public Storage (NYSE:
PSA). Although it is one of the largest self-storage companies in the
U.S., it still only represents about 5% of the overall industry. Over
the last several years, Public Storage has gone through a tremendous growth
period. But as with all good things, it must come to an end, and it appears
that the company has finally peaked. The company now sees struggles ahead
as it tries desperately to keep up with stiff competition that is expanding
into new markets. The company has a long road ahead, faces heavy competition
within emerging market space, and the stock only pays a lower than average
dividend of around 2.8%.
Investing in REITs can be a profitable way to diversify an investment portfolio,
but care should be taken to invest in those that demonstrate long-term
success, and avoid REITs that are exposed to wild market swings. Savvy
investors choose REITs in industries that see more economic stability
or provide potential for more growth, as opposed to short-term, sporadic
opportunities. REITs can also be risky if they are the types which are
easily influenced by economic turmoil. REITs that are too heavily vested
in a particular industry or real estate market can face severe losses
during economic downturns. One way to ensure success and limit risk is
to research carefully each prospective REIT and the markets in which it
Contact Geraci Law Firm at (949) 298-8050 today, or
contact Melissa Martorella directly for more information.