Land Ho! Property Investing Across Sectors with Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) offer an opportunity to invest in properties used by farms, retail, communications, health care, and more. invested: Farmland REITs
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Key Takeaways

  • REITs are holding companies that own income-producing properties such as apartments or malls

  • REITs are often listed on exchanges like shares of stock
  • Some REITs invest in certain industries or sectors such as agriculture, health care, and data centers

Long before the stock markets existed, investors had a fixation on land. After all, as the old saying goes, they’re not making any more of it. There’s also a limit to what you can put on land (houses, skyscrapers, shopping malls) and get out of it (grain, gold, oil, wood).

Real estate investment trusts, or REITs, first emerged in the 1960s, but for a long time they tended to fly under the financial media and investing radar. More recently, many market professionals have turned to REIT investing as an inroad to fast-growing areas of the economy.

What is a REIT, and how does REIT investing work? At its most basic, a REIT is a holding company that owns income-producing properties such as apartment buildings or commercial strip malls. REITs often, although not always, trade on major exchanges.

Today, REITs own about $3 trillion worth of U.S. real estate assets. More than two-thirds of that total is held in publicly listed and non-listed REITs, according to Nareit, a research and lobbying group based in Washington, D.C. (Privately held REITs make up the remainder.)

Here are some basics of how to invest in REITs. We’ll look at a few REIT sectors linked to specific industries such as health care, retail, agriculture, and infrastructure.

What are some potential benefits of REITs versus traditional stocks?

REITs are a different asset class from equities and often have relatively low correlation to stocks, proponents say, meaning REITs can offer diversification for investors. Additionally, REITs typically pay out most or all of their taxable income each year to their shareholders as dividends; the IRS requires them to pay out at least 90% annually.

Historically, REITs don’t always move in tandem with the broader stock market, which in part reflects the time difference between the business cycle and the real estate cycle, which historically lasts years longer.

How does the performance of REITs compare with stocks?

In general, the REIT market can see periods of outperformance versus the broader stock market. However, the sector can also see periods of intense volatility. Figure 1 shows a 20-year chart of the Dow Jones Composite All REIT Index ($RCI) versus the S&P 500 Index (SPX). Note that in the early 2000s (a period which many called a real estate bubble) $RCI outperformed the SPX, but the sector was hit particularly hard during the ensuing financial crisis in 2008-09.

FIGURE 1: A VOLATILE SECTOR? Over the last 20 years, the Dow Jones Composite All REIT Index ($RCI - candlestick chart) has seen periods in which it outperformed the S&P 500 Index (SPX - purple line), and periods where it underperfomed. $RCI has also seen periods if intense volatility, specifically in the years before, during and after the financial crisis in 2008-09. Data source: S&P Dow Jones Indices. Chart source:  thinkorswim platform from TD Ameritrade.  For illustrative purposes only. Past performance does not guarantee future results.

What about REITs’ correlation with interest rates and the broader economy?

The U.S. Federal Reserve’s rate hike cycle, which began in 2015, might appear bearish for REITs, as rising rates can mean higher borrowing costs for homeowners, builders, and others in real estate. Rising interest rates and expectations of tighter monetary policy have at times pressured REIT prices.

Still, borrowing costs remain relatively low, and in 2019 the Fed signaled that it was done raising benchmark rates for now. Plus, rising rates are often driven by economic growth, which may support REIT earnings and dividends in the future, according to Nareit.

Shopping for Retail REITs

Retail REITs own and manage real estate devoted to shopping malls, strip malls, big-box stores, and the like. They rent space in those properties to tenants. For the 12-month period through the week ending April 18, an index of 33 U.S.-based retail REITs, including shopping-centers, regional malls and “free-standing” retail properties, posted a total return of 18.8%, according to Nareit (free-standing properties have a single business, such as a restaurant or pharmacy).

Over longer periods, retail REITs weren’t as robust, with the Nareit index posting a three-year total annual return of -2.4%, a five-year return of 3.9% and a 10-year return of 14.2%.

Still, considering the recent struggles of traditional retailers, investors should proceed with caution, analysts say.

The growth of e-commerce “has created upheaval in the retail real estate market, which is saddled with tired big-box concepts and a need to rethink brick-and-mortar location strategies,” Green Street Advisors, a REIT researcher, said in a 2019 outlook. Many key strip center tenants “are struggling in the current retail environment. Above-normal retailer bankruptcies and store closures should be expected for the foreseeable future.”


Retail REITs own and manage shopping malls, big-box stores, and free-standing retail properties. 

Health Care REITs

Growth in both the U.S. senior population and demand for medical services signals continued strength in health care REITs, some market professionals say.

Similar to their retail counterparts, health care REITs own and manage a variety of properties and collect rent from tenants. These properties include senior living facilities, hospitals, medical office buildings, and skilled nursing facilities. Over the past 12 months (through the week ending April 18), U.S. health care REITs posted a total return of 30%, according to Nareit.

Health care REITs posted a three-year total return of 4.9%, a five-year return of 5.8% and a 10-year return of 13%.


Health care REITs own nursing facilities, hospitals, medical offices, and more.

REITs Down on the Farm and Deep in the Woods

There are only about two REITs devoted to U.S. farmland, according to Nareit (the group includes farmland in a category of about a dozen “specialty” REITs that own and manage a “unique mix” of properties, including movie theaters and casinos).

Timberland REITs have performed poorly of late, losing nearly 23% over the past 12 months, according to Nareit (returns were flat over the past three years and just 3.5% over the past five years).
images/gallery/icons/Corn Stalks.png

Farmland REITs own land used to raise crops like corn and wheat. Although everyone has to eat, land values do fluctuate.

REIT Angles on E-Commerce

Data center, industrial, and infrastructure categories are among the top-performing REIT sectors in recent years, reflecting growth in e-commerce, according to Nareit.

Infrastructure REITs, which include cell towers used to relay e-commerce orders, posted a total return of almost 29% in the 12 months through April 18, according to Nareit data. The three- and five-year total returns were 21% and 18%, respectively (10-year return was not available).

Industrial REITs, which include warehouse distribution and logistics facilities for e-commerce goods, returned nearly 20% over the same 12-month period. The three-, five- and 10-year total returns were 20%, 16% and 19%, respectively.

Data-center REITs returned about 14% both over the past year and the past three years (five- and 10-year returns were not available).

Data center, industrial, and infrastructure categories form a synergistic “triad” for the e-commerce economy, said Ron Kuykendall, vice president of media and public relations for Nareit.

“E-commerce is a major driver now,” Kuykendall explained. Over the past 10 years or so, as e-commerce grew, industrial REITs “morphed into the warehouse logistics backbone for the e-commerce industry and for e-commerce players of all types.”

“Companies such as Amazon (AMZN) and others involved in the e-commerce supply chain, such as FedEx (FDX), need facilities to move and warehouse products close to the markets where they’re delivering,” he added.

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Data center, industrial, and infrastructure REITs benefit from e-commerce growth.

Ready to explore the world of REIT investing? Do your research first; know the related industry fundamentals, your goals, and your risk tolerance. TD Ameritrade clients can screen the universe of REITs using a robust set of criteria before making a potential land grab (see figure 1).

Screen REITs by investment criteria

FIGURE 1: WHITTLE IT DOWN. As of April 2019, a sector search on pulls up 412 REITs. How to choose which REITs to consider? TD Ameritrade clients can log in and, under the Research & Ideas tab, select Screeners > Stocks > Create a Screen. Next, select Sector, Industry & Sub-Industry > Real Estate. From there, you can focus your search using additional criteria such as fundamentals, valuation, dividend history, and more. For illustrative purposes only.

Investments in REITs and other real estate securities are subject to the same risks as direct investments in real estate, including loss of principal. The real estate industry is particularly sensitive to economic downturns. Be sure to consider your own financial situation, perform thorough research and consult with a qualified tax professional before making any investment decisions concerning REITs.You may also want to review this SEC Investor Bulletin concerning REIT investing.

Key Takeaways

  • REITs are holding companies that own income-producing properties such as apartments or malls

  • REITs are often listed on exchanges like shares of stock
  • Some REITs invest in certain industries or sectors such as agriculture, health care, and data centers

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