A real estate investment trust (REIT) is an easy way for retail investors to invest in commercial real estate without having to shoulder its cost. A REIT is a company that owns and manages properties that produce cash flow and shares its profits with investors.
Top REITs in the World
What is a REIT?
A real estate investment trust is a corporation that owns or finances real estate. From an investor’s perspective, it’s essentially a pooled investment vehicle for buying and managing real estate properties. There are private REITs (which could also be called non-listed REITs or a non-traded REIT) but these REIT investments are only available to private or institutional investors.
By contrast, traded REITs are much like stocks. However, the SEC has strict rules about how a REIT is different than other securities. A REIT needs at least 100 shareholders. It cannot have more than 50% of its shares held by 5 or fewer individuals, and it must get 75% of its income from real estate.
Shares of a REIT can be purchased like a common stock on the stock exchange. The share price of the REIT will vary on a number of factors, just like any other investment. And just like most other securities, REIT stocks tend to be issued by companies that focus on specific asset classes with real estate. In a sense, REITs are similar to mutual funds or exchange-traded funds (ETFs). Investors can invest according to their means, and the REIT pools all the investments into one fund for purchasing and upkeeping properties like hotels, apartments, hospitals, and malls.
Many REITs pay decent dividends. In order to retain their status as a REIT, they have to pay out at least 90% of their profits to shareholders—unlike other publicly traded companies, which do have the option of reinvesting their profits and not paying investors at all. Since the profit generated by REITs is directly tied to real estate, and because many REITs now have huge portfolios that can help them balance out losses in one region, REITs won’t be among the most active stocks. However, REITs are still stocks, and like anything else on Wall Street, there will be ups and downs.
There are two main types of REITs: equity REITs and mortgage REITs. Mortgage REITs are involved in the financing of real property, investing in property loans, while equity REITs are involved in building an actual portfolio of landed assets. Mortgage REITs may invest and provide capital for real estate, or they may issue mortgage-backed securities, like shares of a home loan (this is a great way to make income in a booming housing market). Equity REITs are the more common type of REIT investing, and a great way for investors to acquire some income from landed assets without needing a huge amount of capital to get in the game, worry about tenants, or navigate the ins and outs of defending their taxable income. Just for paying the cost of the REIT stock price, investors acquire a share in the corporation and reap the dividends as if they were collecting rent.
Top REITs in the World
These publicly-traded REITs are the best on the stock market. If you’re looking to invest in REITs, you don’t want to ignore these high dividend yield REIT investments.
Public Storage (NYSE: PSA)
Public Storage (NYSE: PSA) is a company that provides climate-controlled storage bays for consumers to store their excess goods—everything from personal mementos to collectible cars. This Glendale-based company has successfully ridden the waves of one of the latest America trends—storage—and become one of the best growth stocks on the market. Home ownership is down among a younger, more mobile generation, which means that people need a place to permanently keep their stuff. Enter Public Storage, a REIT with over 2,200 facilities around the United States, Canada, and Europe. Investors receive a whopping 90% of the profits from this storage REIT, which also owns office parks and sells packing supplies.
Equity Residential (NYSE: EQR)
Equity Residential (NYSE: EQR) is a San Francisco based, apartment-focused REIT with a portfolio of over 307 properties. Between the urban centers of Southern California, San Francisco, Denver, New York City, Boston, Seattle, and Washington D.C., Equity Residential owns, manages, and draws income from almost 80,000 units—so it’s no surprise that they’re the 3rd largest owner of rentals in the US, and the 9th largest apartment management company. When Equity went public in 1993, they owned around 25% of the rental units they own today. A series of portfolio acquisitions (from Lincoln Property Group, Merry Land, Lexford Residential Trust, and others) has helped Equity become a leading REIT, even after selling over 22,000 units to Starwood Capital Group.
American Tower (NYSE: AMT)
American Tower (NYSE: AMT) is a REIT that focuses on managing wireless and communications infrastructures that they also own. They have 170,000+ sites around the world, on all six inhabited continents. American Tower was actually formed as a spinoff company from American Radio Systems, which merged with CBS. American Tower has mostly built up its portfolio by acquiring defunct towers from AT&T, which discontinued its long line telephone program. The unused relay towers have since been appropriated by American Tower, which has turned them into cell phone towers and leased the space to cell phone companies and private industries. They own most of these towers across the United States, and since 2007 have expanded in foreign markets.
Simon Property Group (NYSE: SPG)
Simon Property Group (NYSE: SPG) is the largest REIT in the United States and the largest operator of shopping malls. Its portfolio of 325 properties is comprised of 241 million square feet of retail space, including several flagship profiles like the Houston Galleria, Dadeland Mall, Copley Place, and Stanford Shopping Center. One of Simon’s biggest acquisitions was the Mills Group, which operates large regional shopping malls, many of which have a cinema megaplex and one or two food courts. Simon has also expanded into the retail outlet sector with its acquisition of Prime Retail and Premium Outlets of Canada. Certain pundits have carried a doom-and-gloom mentality on brick-and-mortar retail, but others have seen promise in the rebirth of retail centers as mixed-use areas with a residential and lifestyle component.
Prologis (NYSE: PLD)
Prologis (NYSE: PLD) is a REIT focused on the supply chain. The San Francisco based company is the largest industrial real estate company in the world, with more distribution centers and warehouses than any other player in the logistics space—almost 3,400 around the world. Because Prologis is so intimately involved with the supply chain of diverse industries, they are also a thought-leader in the logistics business, conducting market research and publishing respected white papers and quarterly publications. Prologis was formed through a 2011 merger between Security Capital Industrial Trust and AMB Property Corporation, the latter of which avoided the office bubble pop of the 1980s by investing heavily in the warehouse space—which has been carried on by Prologis.
Equinix (NASDAQ: EQIX)
Equinix (NASDAQ: EQIX) is a REIT that focuses on data centers; they own over 200 such data centers in 24 different countries. Since 2002, Equinix has expanded overseas in Asia, Europe, South America, and now the Middle East—mostly through acquiring locally extant companies in billion-dollar deals (such as Telecity Group, its largest acquisition to date). Equinix has ridden the wave of increased demand for interconnectivity triggered by cloud computing, and most recently, the internet of things (IoT, or the idea of devices transferring data). Equinix has big plans to acquire more enterprise clients, in direct competition with similar providers like Amazon Web Services and Microsoft Azure.
Even though REITs are themselves much like a mutual fund or ETF, each one tends to specialize in one area, whether that’s retail, logistics, communication, or residential properties. If a particular market is hard-hit, and the entire industry takes a nosedive, then the cash flow produced by a REIT can slow down to a trickle. Examples of this might include the way office space might suffer from outsourcing, a bad job market, and shifts to remote work, or as rental properties might suffer when interest rates are low, and consumers find it more attractive to own their own property.
Alternatively, it can be hard to see what area of real estate will take off and produce some of the biggest stock gainers. Who could have guessed that public storage would become such a nationwide trend, or that retail outlets would see a decline in market share with the advent of internet shopping?
To that end, rather than try and guess what type of real estate will be most valuable in the future, and which companies will be at the forefront of the trend, you can leave investment decisions up to an experienced analyst and buy into an exchange-traded fund for REITs. An exchange traded fund is like a cross between a REIT mutual fund and a stock. A REIT ETF is a pooled investment vehicle, but instead of contributing money to be invested, you buy a share, just like you would on the market. This is a great way to get started investing in REITs without having to worry about stats like market capitalization or other nuances like a comparison of one payout ratio to another.
The Vanguard Real Estate ETF (VNQ) is weighted to focus on the top five REITs, some of which have been mentioned above in more detail: Simon Property Group, Prologis, Crown Castle International, American Tower, and Public Storage. If you’re looking for an ETF that invests in smaller players with more potential for growth, you might want to look at the Invesco KBW Premium Yield Equity REIT ETF (KBWY), which has 90% of its assets in small to mid-cap REITs and sees yields of up to 7% (by comparison, the aforementioned Vanguard Fund yields around 3.7%).
Should I Invest in REIT Stocks?
Real estate is a great investment vehicle with significant stability. It’s often debated which is better, stocks or real estate, but no one can argue that land has indestructible value. Even so, it’s extremely difficult for the average consumer to invest in real estate beyond small rental properties like a home. The idea of buying an apartment, let alone a hotel or mall, seems out of reach and too burdensome in terms of legal details.
A REIT is an attractive option for investors looking to get involved with real estate. Though the returns won’t be as high as they would be if they owned property outright, the entry fee is much lower, and there is no upkeep or maintenance involved. Some experts estimate that a good REIT might yield returns as high as 11.8% on average, which is excellent, especially when compared to the long-term growth of a mutual fund, which tends to hover around 8-10%.
The answer to whether you should invest in REIT stocks is just the same as it is for any other type of investment: Don’t put all your eggs into one basket. REITs are not likely to be lucrative for day traders who need securities with a greater amount of volatility, but they’re excellent for investors looking to generate wealth from a dividend investing strategy. But if you’ve always wanted to profit from real estate without having to worry about managing tenants or tax law, this is your chance to get in the game for the same price as buying shares of any other high dividend yield stock.
Companies Mentioned in This Article