People no longer rely solely on their savings for future security in the information age. Personal savings are now considered insufficient to ensure financial security. Idle cash in our bank accounts represents a missed opportunity because it is incapable of earning additional money and, second, it does not have the potential to beat inflation.
The concept of just getting by day by day is obsolete. Having a financial portfolio that will ensure early retirement is the new norm. By having a financial portfolio, we mean investing—making the money we earn work for us.
Being aware of investing, of course, you are looking for new ways of earning more with your cash on hand and in the bank.
This is where we introduce you to REIT or Real Estate Investment Trust.
Defining Real Estate Investment Trust
In general, according to blackrock.com, an investment trust is a public limited company that invests in other businesses in order to earn money. Investing in an investment trust allows you to diversify your portfolio of companies.
The Securities and Exchange Commission of the Philippines defines a REIT as a stock corporation formed primarily for the purpose of owning income-producing real estate assets such as hospitals, apartment buildings, office buildings, medical facilities, hotels, resorts, highways, warehouses, shopping centers, and railroads as examples of real estate assets.
It is a type of investment indicator that pays investors a return on the underlying real estate asset’s rental income.
Hence, specifically for real estate investment trusts, the source of return for the investment is income-producing real estate.
As stated on www.reit.com, “REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock or through a mutual fund or exchange-traded fund (ETF). The stockholders of a REIT earn a share of the income produced – without actually having to go out and buy, manage or finance property.”
In a nutshell, one can be a shareholder of income-producing real estate by simply investing in a real estate investment trust.
What is an Income Producing Real Estate?
Tenant rents, market price appreciation, and other additional revenue streams turn properties into income-generating real estate. Income-producing real estate can include single-family homes, apartments, and commercial property.
Commercial real estate encompasses many different types of retailers, including office space, hotels and resorts, strip malls, restaurants, and healthcare facilities.
How Do Real Estate Investment Trusts Pay Dividends?
As mandated by law, investors can expect to receive 90% of distributable income as dividends annually. However, the dividend rate will depend on the REITs’ income. The form dividends may be in the form of cash, property, or stock dividends.
What are the types of REITs?
As mentioned previously, REITs come in a variety of forms. Thus, let us examine each type.
Equity – When we say Equity REITs, these are REIT Companies that own and manage income-producing real estate, and they generate revenue primarily through rent.
Mortgage – Mortgage real estate investment trusts (mREITS) finance income-producing real estate by purchasing or originating mortgages and mortgage-backed securities (MBS) and earning interest on these investments. Their overarching goal is to profit from their net interest margin, defined as the difference between interest income on their mortgage assets and funding costs.
This is a company that combines both Equity REITs and Mortgage REITs.
For REITs, Staples and Paper Clips are not simply Office Supplies. These are kinds of structures of REIT companies that do not only invest in real estate, but itself has become a company that owns or partners with a separate income-producing business, which may also be from a different industry other than real estate.
If, for example, a commercial REIT buys a mall as its asset and leases it to third-party operating companies in exchange for a lease payment stream, including a percentage of the mall’s gross income from rents.
The REIT effectively conveys some of the economic arbitrage created by the operating company’s active investment in managing and operating the mall. However, the operating company retains a sizable portion of the economic profit generated by the facility’s operation. The stapled REIT was created to prevent this “leakage,” or operating profit that the REIT does not retain.
Stapled REIT Structure
The stapled REIT structure aims to effectively capture cash flow leakage and give REIT shareholders increased control over the REIT’s active business. This is accomplished by “stapling” the REIT’s stock to the operating company’s stock and trading them in tandem.
When a REIT and an operating company enter into an intercompany agreement to grant each other the right to participate in specific transactions and investments, this structure is referred to as a Paper Clip REIT.
Although the stock in the two companies is not traded concurrently (or stapled), the economics of the two businesses are inextricably linked or “paper clipped” as a result of an intercompany agreement between the REIT and the operating company.
In other words, shareholders interested in capitalizing on the combined economics of the distinct businesses can acquire shares in each and paper clip them together.
The genius of the paper-clip structure, as with the stapled structure, enables REIT shareholders to benefit from the economics of both active and passive real estate investments.
A REIT must be registered with the Securities and Exchange Commission as a stock corporation with at least P300 million in paid-up capital.
A REIT must be listed on an exchange and have a minimum of 1,000 public shareholders, each possessing at least 50 shares and collectively owning at least 1/3 of the REIT’s outstanding capital stock.
At least one-third or two, whichever is higher, of the board of directors shall be independent directors.
A REIT must appoint an independent Fund Manager and Property Manager.
Directors, officers, fund managers, property managers, distributors and other REIT participants must qualify under the fit and proper rule.
Pros and Cons of REITs Investing
REITs are essentially a collection of funds invested in real estate assets. They are similar to mutual funds, except that you will invest in income-producing real estate assets instead of investing in publicly traded companies.
Investing in REITs sounds promising because of the following reasons:
Finally, as Filipinos, here’s how you can access REIT. REITs are offered via Initial Public Offering (IPO) during a specified period. If it becomes challenging to invest in REIT when a private company initially offers its shares to the public, you can still buy REITs like regular stocks in the secondary market.
Here in the Philippines, these are some of the REITs to invest into:
Although Vista Land is yet to launch its REIT, the company has a promising real estate portfolio.
With a broad selection of residential and commercial real estate, the Vista Land REIT will undoubtedly be the talk of the town. Given the company’s continued growth and expansion, this will undoubtedly be an excellent REIT to invest in.