Why REITs Sell Properties
If the purpose of a REIT is to acquire and profit from real estate investments, why would some management teams elect to sell properties? Like most good businesses, it is advisable for REITs to periodically review its property
portfolio and decide which assets are likely to generate less-than-average cash flows in future years. The proceeds from the sale of these properties can be reinvested in opportunities with higher prospects or used to strengthen the balance sheet (viz. debt reduction) or increase shareholder wealth through a
share repurchase program. Investors must realize the primary goal of any successful corporation should be to increase shareholder wealth, not just mindlessly keep on doing business.
Using REITs for Diversification and Asset Allocation Programs
Real estate investing offers an attractive alternative to common stock, bond and mutual fund investing. Those investors with an eye on diversification, however, must remember that it is not simply enough to buy a few REITs and call your portfolio diversified. Instead, the investor must make certain that the REITs he acquires represents a geographically and sector diverse group of properties. For the
defensive investor, it is far safer to own several apartment, office, industrial, storage, and health REITs from New York to California under different management teams than it would be to buy only a Pennsylvania-based self-storage company.
Mortgage REITs
A mortgage REIT is a company that specializes in underwriting, acquiring and holding debt obligations guaranteed by real estate properties. Mortgage REITs are essentially loan portfolios as opposed to ownership of the asset, as is the case with their equity counterparts.
Hybrid REITs
A REIT is referred to as a hybrid when it has both equity and mortgage components. Although not as heavily favored by investment advisors as pure equity REITs, they are still attractive investment alternatives.
Summary: Advantages of Real Estate Investing through REITs
- Double taxation avoided, allowing more of the investor's capital to compound.
- Professional, dedicated management team responsible for the day-to-day operation of the business, providing the investor with expertise beyond his or her own knowledge base.
- Unlike real estate directly held by the investor, REITs are a liquid asset that can be sold fairly quickly to raise cash or take advantage of other investment opportunities.
- Using REITs, investors with only a few thousand dollars available can diversify their holdings between various geographic areas and property specializations. In the case of direct property ownership, this would not be financial feasible unless the investor took on excessive leverage or business partners.
- REITs can tap the debt and equity markets and raise funds to take advantage of opportunities when they arise.
- REITs have a lower correlation to equities than many other asset classes, providing portfolio stability for those with an active asset allocation strategy.
- High cash dividends relative to the market tend to establish phantom bottoms to REIT share prices, often keeping them from falling as far as common stock in bear markets.
A Final Caveat on REITs
The investor must always remember that REITs do not just represent a pile of real estate assets. They are in and of themselves a going-concern business and must be evaluated and analyzed as such.
