The World of REITs

This is chapter one of a guide on REIT investing. Begin here.

This is chapter two of a guide
to REIT stocks. Begin here.

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The origin

Over 60 years ago U.S. President Eisenhower argued that Main Street investors should be able to buy commercial real estate. And if purchasing an entire office building was beyond their financial abilities, then Main Street investors should at least be able to buy an equity interest (read: a partial interest) in a building. And so, on September 14, 1960. President Eisenhower signed the Cigar Excise Tax Extension of 1960.

And if proof is ever needed of the American influence on the global stock market, real estate investment trusts (REITs) serve as a prime example. Since the time of the first REIT, American Realty Trust, more than 36 countries have embraced the REIT structure.

The FTSE EPRA/Nareit Global Real Estate Index Series, which represents the global REIT market capitalization, includes over 350 REIT companies that are operating outside of the U.S. The Global REIT index includes numerous REITs from the following countries: 55 from China; 44 from Japan; 41 from the UK; 16 from Brazil and 12 from Australia.

The following companies are 25% of the index: the German Vonovia; the Dutch WFD Unibail-Rodamco; and the Japanese Mitsui Fudosan. Half of the real estate companires are diversified REITs; 16% are residential REITS and 16% are retail REITs.  

So, if you wanted an equity interest in the global commercial real estate market, you now know where to go.

REITs in numbers

REITs own nearly 511,000 properties across the U.S. And an estimated 80 million Americans own REITS through their retirement and investment funds. And by buying the stocks of REITs, the REIT investor selects among varying asset classes - from retail, residential and infrastructure buildings to health care, office, industrial, data centers, self-storage, lodging, timberland and mortgages.

In the U.S., the REIT industry is represented by the FTSE Nareit ALL REITs Index. Its dividend yield is 4.3%, and according to the National Association of Real Estate Investment Trusts website, over 70% of investment advisors recommend REITs to their clients.

More U.S. numbers: There are 189 REITs trading on the New York Stock Exchange. There are 226 REITS in the FTSE Nareit ALL REITs Index. REITs represent about 5% of the market capitalization of the New York Stock Exchange. As of the second quarter of 2018, the average debt ratio was 32% and the fixed charge ratio was 3.6x (defined as EBITDA divided by the interest expense plus preferred dividend). And the REIT industry boasts that in 16 of the last 25 years, the FTSE Nareit All Equity REITs Index outperformed the S&P 500 Index.

The growth in REITs

The number of REITs in which you can invest nearly doubled in the last 30 years. In 1988 there were 117 REITs of which 56 were equity REITs, 40 were mortgage REITs and the 21 remaining were hybrid REITs. Today, in comparison, there are 222 REITs, of which 181 are equity REITS and 41 are mortgage REITS (Hybrid REITs ceased to exist in 2009).    

REITs buy more than real estate properties. In 2018 REITs were also actively buying each other: Brookfield Asset Management bought GGP in August, Two Harbors Investment Corp bought CYS Investments in July, Welltower Inc. bought Quality Care Property, Prologis, Inc. bought DCT Industrial Trust, Annaly Capital Management bought MTGE Investment Corp, Blackstone Group bought Gramercy Property Trust, Greystar Real Estate Partners bought Education Realty Trust and there are three pending transactions as I type these words.

Capital markets activities, debt and equity issuance in 2018, kept the investment bankers busy too. There were 4 initial public offers (Industrial Logistics Properties Trust, Americold Realty Trust, VICI Properties and Essential Property Realty Trust); there were 40 secondary common stock offering; there were 9 issuances of preferred debt and 57 issuances of secondary debt. The total equity raised this year was about $42 billion.


The National Association of Real Estate Investment Trusts (NAREIT) defines itself as "the worldwide representative voice for real estate investment trust - REITS - and publicly traded real estate companies with an interest in U.S. real estate and capital markets."

NAREIT is also a producer of research and data on the REIT, which I will use throughout this guide.   By buying one of the ETFs that track the FTSE Nareit ALL Reits Index, you get a slice of the action of the following companies: 36 retails (shopping centers, regional malls, free standing), 24 offices; 22 residential (apartments, manufactured homes, single family homes), 21 lodging, 18 health care and 38 mortgages related.

While the NAREIT index providers boast about a 40-year return of 11% and a 10-year return of 12%, the "buy and hold" REIT investor surely suffered a few sleepless nights between 1971 and 2018.

In 1973 the index dropped by 27%. The following year, in 1974, the index fell by an additional 42%. If you had initially invested $100,000 in REITs, within two years the value of your portfolio was $42,000. A more recent example would be from 2007, when the NAREIT index dropped by 18% in 2008 and then fell by an additional 37% the year after. History, in short, had tried the REIT investor’s soul.

What's next

It is worthwhile to understand the evolution of the world of REITs. By knowing how wide and different REITS are in the present, the REIT investor may focus the attention on specific sector or country of the industry.

In no other times did this option exist. Since the historical record shows an adequate return for the REIT sector, it is likely that more REITs will continue to exist with more esoteric business models. And no unlike Darwin' theory, only the fittest will survive.