Understanding Publicly Traded REITs

Publicly traded REITs can be a useful tool for generating income, diversification, and smoothing the returns of your portfolio.


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While investors have grown accustomed to the prominent growth sectors, particularly technology, leading the market in either direction, other sectors often quietly take on a starring role. In this environment, publicly traded REITs are some of those rising stars.

Over the past three months, the S&P 500 real estate sector advanced more than any other. The Real Estate Select Sector SPDR ETF (XLRE) is up 15.20%, with shares trading around $42, matching their February 2020 all-time high.

Publicly traded REITs behave just like stocks, in the sense that they can be bought and sold on major exchanges.

There are some non-traded REITs that commissioned financial advisors may sell to clients, but I advise against these, as exiting your position may be expensive and difficult. It doesn’t make sense to own one of these vehicles, no matter what kind of return the salesperson touts, when it’s so easy to own a vehicle listed on a major exchange.

One attraction of all REITs, including publicly traded REITs, lies in the very nature of its structure. To qualify as a REIT from a tax perspective, a company must pay out to investors at least 90% of taxable income.

If a company meets that requirement, it pays zero corporate taxes.

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That big chunk of income is passed along to investors as a dividend. REITs, as an asset class, pay higher-than-average dividends.

We currently hold a REIT in the Wall Street’s Best Stocks portfolio, National Storage Affiliates Trust (NSA). Its current dividend yield is $1.40 per share, or 3.07%.

Its year-to-date total return is 24.73%, ahead of the broader sector return of 16.49%.

As a mid-cap, this REIT is not included in the S&P 500 large-cap index, as tracked by the XLRE ETF.

This portfolio holds 29 equities, as well as a small amount of cash.

The holdings themselves are somewhat concentrated, with the top 10 components accounting for 62.90% of total assets.

But what exactly do these large-cap REITs hold? If you’re thinking either red-hot residential real estate or essentially dead office space, you’d be wrong.

Top holdings of large-cap publicly traded REITs

  • American Tower (AMT): Cellular towers
  • Prologis (PLD): Industrial and warehouse properties
  • Crown Castle (CCI): Cellular towers
  • Equinix (EQIX): Global data centers
  • Public Storage (PSA): Self-storage facilities
  • Digital Realty Trust (DLR): Global data centers
  • Simon Property Group (SPG): Shopping malls
  • SBA Communications (SBAC): Cellular towers
  • Welltower (WELL): Senior housing and other health care facilities
  • Weyerhaeuser (WY): Timberland

Other than Simon Properties, whose portfolios of shopping malls doesn’t appear to be poised for growth any time soon, these companies focus on fast-moving industries.

In good news for investors, data compiled by Nasdaq shows that 13.6% of holdings on a weighted basis saw insider buying in the most recent six months.

Publicly traded REITs have traditionally been used as alternative investments in a stock-and-bond portfolio. Other alternative investments may include commodities, precious metals, cryptocurrencies, and even less liquid hard assets like fine art or actual real estate.

The thinking with alternatives goes like this: If equities, as a whole, are correlated, investors should hold non-correlated assets that move in a different direction at a different rate. In a fully allocated portfolio, you don’t want all your investments moving in the same direction at the same time. Everything moving in the same direction is not an allocation; it’s a bet.

Bonds have historically been used to provide diversification and to dampen the volatility of stocks.

Where does that leave publicly traded REITs as viable alternatives?

Because REITs carry the very specific business and tax structures, they can offer positive returns to investors even during an era of market downturns. However, so can plain-vanilla equities that pay out dividends, although the latter can more easily be slashed during an economic downturn when companies want to conserve cash.

Nonetheless, publicly traded REITs still have business risks (remember Simon Properties, above?). As publicly traded equities, they are integrated into the wider market. As an S&P 500 sector, these companies are now bundled in with the broader index. So every time an investor buys shares in one of the many S&P index funds, these large-cap REITs are part of the deal.

Does that mean there are zero diversification benefits? No, but that can be said of every single asset class. For example, diversification is the reason you should hold those glamorous, fast-moving techs, along with those boring, sleepy, dividend-paying utilities.

You should absolutely diversify with REITs in your portfolio, but you may not see quite the diversification benefits that some financial advisors discuss, or quite the benefits you may have seen in the past. The reason to own them is to smooth the risk and return equation in your portfolio – the same reason you would broadly diversify with other assets.

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