Real Estate Investment Trusts, Now is the Time

May 27, 2018
Posted in Insights
May 27, 2018 DCT Capital Fund

REITs remain attractive to investors for several reasons. With the status of the current bull run, few assets have remained untouched by the hardships of capital markets. The market expresses the benefits of REITs now more than ever.

Real estate investment trusts or REITs for short are corporations that possess and utilize a portfolio of real estate properties and mortgages. REITs were used to aid smaller investors in commercial properties and were developed by Congress with the intentions of using a pass-through structure to aid in avoiding double taxation. The only catch is that in order to qualify for REIT, companies that use REITs have to distribute at least 90 percent of its annual income, but as a direct result REIT does not pay cooperate, federal or state income taxes. Those who utilize REIT instead pass the tax burden on to its shareholders.

In the future, it is expected that price of yield-driven assets will decrease, while interest’s rates will rise as a direct result. Meanwhile, the value of expected cash flows will steadily decline. Prices on existing investments will eventually decline for yields to remain competitive. Because oncoming case flows are fixed, the condition remains the same for bonds. Interest rates will not be the only factor to thrust REITs into a better position where future cash flows can increase. REITs income flows tend to rise with a growing economy, which makes the great hybrid investments that will showcase the traits of both bonds and equities. REITs are an attractive alternative for their valuation, balance sheets and are also prepared to handle economies rising rates.

There are several signs investors use to determine whether or not REITs are over or undervalued. Given the fortitude of the current state of the economy, REITs have good power to expand their operating income, especially class B retail properties that are more closely associated with the expansion of the economy like industrial REITs for example. Occupancy rates will continue to grow for industrial and office REITs as the economy grows.

Just because Real Estate Investment Trusts are well suited to handle the rising rate of the economy, doesn’t necessarily mean that all REITs are created equal. It mostly depends on the duration of the underlying assets. The overall industry balance sheet is shown to be less leveraged nowadays than any point ever before. The balance sheet is less levered and the interest expense to aid with the debt is at an all-time low. It is very unlikely for interest expenses to rise because almost all the debt was financed with the fixed long-term- rates in mind.

 

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