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Securian Financial

Real Estate Investment Trusts (REITs)

Diversifying an investment portfolio is important, and REITs provide an option to investors seeking portfolio diversification.

They are a more liquid alternative to traditional commercial and residential real estate investing while still having exposure to the real estate market.

REITs de-mystified

Often when investors think of the real estate market, homeownership, “flipping” and buying commercial real estate, comes to mind. Since 1960, investors have been able to also invest in real estate in the manner that one buys and sells stocks on a publically-traded exchange by using real estate investment trusts (REITs). A REIT is a company that owns or invests in institutional grade,1income-producing property and sells share of their REITs on a publically-traded exchange like a stock or a bond. 

While REITs can take several forms, they typically own or invest in leased commercial properties. The rental income is then invested into their asset base or returned to shareholders through dividends. Some REITs diversify by investing in multiple property types, however, most publicly traded REITs in the U.S. focus only on one particular property type.

Benefits of REITs

  • Performance and diversification. REIT stocks have low correlation with other equities and fixed income vehicles. This helps build a diversified portfolio which can produce larger returns.
  • Dividend growth/inflation hedge. REITs are required by law to distribute at least 90 percent of their taxable income. This means that as inflation causes increased rental rates and property value, a REIT’s income, cash flow and dividends are positioned to increase as well. It’s worth noting that in 13 out of the last 17 years, REITs have outperformed the S&P 500® Index.
  • Liquidity and transparency. Public REIT shares trade on the open market and can be sold relatively quickly compared to privately held real estate, which is generally brokered and takes several months to close. Additionally, REITs are subject to SEC regulation, including strict protocols about performance reports.
  • Experienced professional management. REITs typically have experienced teams of professionals in place to manage, maintain and run the properties.

Characteristics of common real estate investments

  REITs Personal home Commercial property
Current income? Yes No Yes
Capital appreciation? Yes Yes Yes
Liquidity? Yes  No No
Diversification? Yes No No
Initial investment? $ $$ $$$

Historical performance of public REITs vs. S&P 500

Total return outperformance 13 out of 17 years
Graph: Historical performance of public REITs vs S&P 500

Source: Bloomberg. From 2000 – 2016.

CPI growth rates vs. REIT dividend growth

Over the past 17 years, REIT dividend growth has exceeded the consumer price index (CPI) on average.
Graph: CPI growth rates vs REIT dividend growth

Source: NAREIT. From 2000 – 2016.

A diversified REIT portfolio might invest in any of the property types below:

  • Shopping centers
  • Offices
  • Hotels
  • Apartments
  • Self-storage
  • Healthcare
  • Timber
  • Mixed
  • Mortgage
  • Industrials

1. Institutional grade property generally refers to a property of sufficient size and stature to merit attention from large national or international investors, it does not represent a guarantee of its investment quality.

The Consumer Price Index (CPI) is a measure of the average change over time in prices paid by urban consumers for a market basket of consumer goods and services.  The measure is calculated by the U.S. Bureau of Labor Statistics.

The MSCI US REIT Index is a free float market capitalization weighted index that is comprised of Equity REITs securities that belong to the MSCI US Investable Market 2500 Index.

The S&P 500 Index consists of 500 large cap common stocks which together represent approximately 80% of the total U.S. stock market. It is a float-adjusted market-weighted index (stock price times float-adjusted shares outstanding), with each stock affecting the index in proportion to its market value.

One cannot invest directly in an index.

Investment risks associated with real estate investing, in addition to other risks include rental income fluctuation, depreciation, property tax value changes, and differences in real estate market values.

Nothing contained herein constitutes investment, legal, tax or other advice or is it to be relied on in making an investment or decision. This document should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. Opinions expressed herein are those of Advantus only.

Approved For Use with the General Public.