REIT Definition And Meaning In Stock Trading

REIT Definition And Meaning In Stock Trading

Stock traders enjoy access to a wide selection of equities. From S&P 500 funds to high-risk tech startups, the market seems to have something for everyone. 

Some investors prefer investing in real estate, but owning an individual piece of property can be a time-consuming and stressful process. 

For this reason, real-estate investment trusts seek to fill the gap on the market and allow investors the opportunity to own a piece of a fund that invests its capital in various pieces of real estate. These trusts are called REITs for short and may invest in anything from single-family units and apartment blocks, to commercial and industrial properties. 

The world of REITs is a highly diverse one and investors can find a lot of variety among public offerings. 

REIT investments work broadly similarly to any equity investment and shareholders can buy and sell stocks in RIETs as they please. 

However, there are also some differences between regular stock investments and REITs, mainly in terms of how dividends are handled and distributed. 

If you are a beginner investor and would like to know more about what REITs are and how they work, this Investfox guide is for you. 

What Is A REIT And How Does It Work?

A Real Estate Investment Trust (REIT) is a type of investment vehicle that allows individuals to invest in income-producing real estate assets without directly owning, managing, or financing the properties themselves. 

REITs are traded on stock exchanges, and they offer several advantages for investors interested in real estate. 

The primary difference between a REIT and the stock of a public company or an ETF is that REITs come with a mandate that obligates them to distribute most of their earnings as dividends, which is why they typically have a much higher dividend yield than even the most popular dividend aristocrat stocks.

Owning REITs has a few advantages over holding individual pieces of real estate, which are:

  • Legal Structure: To qualify as a REIT under U.S. tax laws, the entity must meet certain criteria, including distributing at least 90% of its taxable income to shareholders in the form of dividends. This favorable tax treatment enables REITs to avoid paying corporate income taxes at the entity level
  • Diversification: Investing in a REIT provides investors with exposure to a diversified portfolio of properties across different sectors and geographic locations. This diversification can help spread risk
  • Liquidity: Unlike owning physical real estate, which can be illiquid and require significant capital, investing in REITs provides liquidity. REIT shares can be bought and sold on stock exchanges during regular trading hours, offering flexibility to investors
  • Dividend Income: REITs are known for their dividend yields, as they are required by law to distribute a significant portion of their earnings to shareholders. Investors often choose REITs for the regular income they provide
  • Capital Appreciation: In addition to dividend income, investors may also benefit from capital appreciation as the market value of REIT shares can increase over time
  • Transparency: REITs are required to provide regular financial reports and disclosures, making it easier for investors to assess their financial health and performance

REIT Example - American Tower Corp (NYSE:AMT)

Let’s look at an example of the American Tower Corporation, which is a real estate investment trust that specializes in wireless and broadcast communications infrastructure, such as towers and data centers. 

amt stock.png

As we can see, the price chart of AMT is similar to any other stock. The core difference is its relatively modest price performance, which is subsidized by its high dividend yield of 3.52%. 

If we view the latest financial results from the Q2 2023 earnings report, we will see the following:

  • Quarterly revenues of $2.77 billion 
  • Quarterly net earnings of $475.7 million

Such high profit margins are characteristic of REITs, as most of their revenue is generated from rental income and property sales. 

Therefore, the main risk associated with REIT investments is in their ability to generate enough dividend income for shareholders to cover for potential decline in stock price performance. 

REITs offer a more organized and simple method of investing in real estate and generating stable cash flows via dividend payments. 

Types Of REITs You Can Invest In

While most REITs function similarly, the types of real estate they invest in varies greatly, which affects their inherent risk exposure and financial performance.

The types of REITs you can invest in include:

  • Equity REITs: These are your typical real estate investment trusts and may invest in anything from residential, hospitality and commercial real estate, to office, healthcare and industrial facilities
  • Mortgage REITs (mREITs): Unlike equity REITs, mREITs do not own physical properties. Instead, they invest in real estate-related debt securities, such as mortgages and mortgage-backed securities
  • Hybrid REITs: These REITs combine elements of both equity and mortgage REITs. They may invest in a combination of physical properties and real estate-related debt instruments. Hybrid REITs aim to achieve a balance between income generation and capital appreciation

Other, more specialized types of REITs, such as the one discussed in the previous section, invest in data centers, cell towers, and other vital infrastructure. 

Key Takeaways From REIT Definition And Meaning In Stock Trading

  • Real estate investment trusts, or REITs, are funds that invest in properties, such as residential units, office buildings, industrial and healthcare facilities, etc
  • REITs generate revenues through property rentals and sales
  • REITs are obligated to distribute at least 90% of their earnings to shareholders as dividend payments 
  • REITs are characterized by the highest dividend yields on the market, higher than some of the most popular dividend stocks
  • Investors often use REITs to diversify their portfolios and gain exposure to the real estate market

FAQs On REIT Definition And Meaning

What is a REIT?

A real estate investment trust, or REIT, is a type of fund that invests in residential, commercial, or other types of real estate and generates revenues through rental income and sale of property. 

Are REITs good investments?

REITs can be good additions to long-term investment portfolios as they add diversification and exposure to the real estate market, while offering above average dividend yields and consistent cash flows. 

Do REITs pay dividends?

Yes. As a matter of fact, REITs have some of the highest annual dividend yields on the stock market, due to the requirement to distribute at least 90% of their net earnings as dividends to shareholders.