Introduction
Real Estate Investment Trusts (REITs) are a way to invest in real estate in financial markets. To qualify as a REIT, companies must have at least 75% of their assets invested in real estate, mortgage loans, shares in other REITs, cash, or government securities.
In contrast to traditional real estate investments (such as buying a building or a house), investing in REITs is characterized by its accessibility (the minimum investment is the price of the share, significantly lower than the equity required for a real estate investment), liquidity (buying and selling, like most stocks, is immediate), and low correlation with other assets.
It’s important to note that since 1960, there has been a law mandating a minimum distribution of 90% of income earned from real estate investments directly to shareholders.
There are primarily two types of REITs: Equity and Mortgage.
Equity REITs focus on owning, managing, and operating income-generating real estate properties. These properties varies from Shopping Centers to Offices, Apartments, Hotels… (each representing a different segment that we cover in detail later). As previously commented, the main characteristics of Equity REITs are hedging inflation over time, high dividend income and low correlation with other asset classes. The US Equity REIT market is much higher than the Mortage REITs one ($1.28T vs $0.06T)
Mortgage REITs make and hold loans and other debt instruments secured by real estate collateral. Mortage REITs (mREITs) invest in residential and commercial mortgages, as well as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). One of the reasons why people invest in mREITs is because high dividends (as you can see in the picture below & explain later). The main risks of mREITs are interest rates, credit risk and pre-payment
There are also hybrid REITs and other classifications like public/private, which we won’t delve into in today’s publication.
One interesting aspect of REITs is that, like other sectors, they have subsectors (Residential, Healthcare, Retail, etc.), each with its own characteristics that make them behave differently throughout the economic cycle.
Another characteristic difference is the method of valuation for a REIT, which differs from the valuation of a traditional company. While discounted cash flow (DCF) is a possibility, it is more common to use Funds from Operations (FFO) and Net Asset Value (NAV).
The goal today is to gain a better understanding of the US REIT industry, for which we provide a spreadsheet with data on all US-listed companies (plus several analysis included – The pictures before are a overall summary and the 190 list ranked by market cap – There are also several analyses by segment ). We will explain in detail the characteristics of their subsectors, valuation methods, and analyse the current situation and prospects for 2024.
