Why does this incredibly successful investment product never make the big headlines? What are REITs and how do they work? Listen today as Senior Financial Advisors Rob McClelland and Mike Connon fill you in on why they might be a great investment option to add to your portfolio.
Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management. And this is Think Smart with TMFG. Today on Think Smart with TMFG, Mike and I are going to be discussing one of my favourite asset classes, Real Estate Investment Trusts.
You’ve been a fan of theirs for years, haven’t you?
You know, I think we first started in 1995, adding REITs to our client’s portfolio, and it has done nothing but deliver a great investment experience for our clients over all those years.
It’s a great asset group, isn’t it? It’s not really a stock. It’s not really a bond. It’s a hybrid between the two, and it doesn’t have the misery of bonds sometimes when interest rates move, and it can give you some of the returns of stocks along the way too. So it’s been a nice addition to the portfolio.
What’s interesting is it doesn’t make the headlines much, and yet it’s been very consistently delivering great returns, great income. And so what I wanted to do today is explore some of the world’s largest real estate investment trusts. And these are going to be companies you may or may not have heard of, and yet they’re the biggest real estate companies in the world.
First of all, let’s understand what is a REIT. So REIT stands for Real Estate Investment Trust. Couple little things it has to have, after a year of operation, has to have at least a hundred shareholders, and no more than half of its shares can be held by five or fewer people. In other words, you need to have broad ownership of the thing.
Number two, it must derive at least three-quarters of its income from rental income, interest on mortgages, or real estate sales. So maybe they sold a property that they previously owned. So their income has to predominantly come from rental income. They’ve got to pay out 90% of that income to their shareholders in the form of dividends.
At least three-quarters of the assets inside a REIT have to actually be in real estate. And you can have a little bit of cash because you might be buying some real estate, but it’s got to be in real estate. And finally, it must be a corporation. So it’s a way of holding all these real estate properties inside a corporation.
Well, I guess the key component in a REIT is it’s a liquid way to have real estate, because the big problem with real estate, it’s a very non-liquid investment, right? And you can’t take… You can’t buy a piece of property and take 10% out next week, right? You can’t have joint ownership very easily. It doesn’t give you any type of cash flow necessarily that’s stable.
And when you have these REITs, the big advantage is they’re a liquid investment. You have the same advantages as you would in owning a place, but you have liquidity. If you want to trade in tomorrow, you can get a fair market value that day, which is very different than owning the real asset of real estate.
Often what happens, and this isn’t all the REITs, but some of them, is so you might have a family that has been in the real estate business and maybe they owned a bunch of shopping malls and they’re passing that asset onto the next generation and the next generation doesn’t really want to run the business anymore.
So what they do is they sell that entire office, or that entire business off to a REIT. It becomes a publicly-traded REIT. The family can still own shares in that REIT, but they’re not having to run the business anymore.
And think of the savings you have in transactionary costs. Real estate, you can pay 6% real estate commission on a transactionary cost. With a REIT, when you’re selling and someone else is buying at the same time, there’s really not a cost between that. It’s trading like a stock. So it’s being bought and sold between the bid and ask, you’re no longer paying the 6% commission on a trade.
So go through, Mike, some of the biggest… these are the 10 biggest REITs in the world. And when I say the name, you’re not going to hear Google and Amazon.
So, we’ll start off with a $116 billion. Prologis. So what does Prologis do, Rob?
It manages the world’s largest portfolio of logistics real estate. Includes warehouses, distribution centers, and other supply chain facilities around the world. So think of Amazon. Think of all the warehouses’ Amazon is having to build, and building across the world to deliver goods same day.
It’s a big industry. And growing.
That’s what Prologis does.
And growing every day.
Every day. Huge, huge business, huge opportunity.
Let’s go to the next big one. And this is another one that would surprise people. American Tower Corporation, $109 billion.
So American Tower Corporation basically owns the land that the cell towers that we use for our cell phones, our iPads. Wherever you’re getting a cell phone signal, whether it’s 3G, 4G, 5G, that’s coming from a cell tower somewhere, and American Tower Corp owns that land.
It’s extremely valuable. It’s critical for infrastructure and you need to protect that because if that cell tower goes down, you’re not going to have great reception. You might not even be able to use your cell phone.
What about Equinix? $64 billion.
Their business is again, completely different. Similar to another company in the top 10 called Digital Realty, they’re focused on data centers. So everything today has moved into the cloud, right? But someone’s still got to store all of that stuff. So we call it in the cloud, but someone’s still physically storing all the data, not physically, but they’re storing all the computer data.
And it’s a fast-growing industry. It’s becoming extremely digitized. It’s extremely profitable. And it’s being used by some… Again, those big tech firms like Amazon and Google are playing a major role in the development of this type of REIT.
And what if you want to own commercial real estate like… And you’d use a Realty Income, what would that invest in?
So a Realty Income… The one we talk it’s called Realty Income, they own over 11,000 commercial real estate properties in Europe and the US. It rents out these properties to major brands that we would heard of. Walgreens, which is, you know, they’re Shoppers Drug Marts’ down in the states, 7-Eleven, which is both in Canada and the US. And they account, those two companies alone, account for about 8% of the REITs annual income. So they basically manage that property for them.
I’ve even looked at public storage before. It’s about $65 billion. Interesting about public storage is it’s one of the stocks that’s considered recession-proof because as people go into recession and businesses close up, the first thing they have to do is put things into public storage. And it tends to counter the market when you’re going into poor times.
So there’s investments that are very different than the stock market inside this real estate market. There’s other companies out there like AvalonBay Community, who is residential. And I think they focus on a lot of retirement residential too, which is another. When we have the baby boomers in that age, there is going to be tremendous demand in those areas.
It was interesting. I was listening to this one thing and what they were doing. They were trying to figure out where to increase their storage units. And so what they did is they went and tracked where there’re truck rental companies… So people would go and rent a truck. They would rent it in one city, say Salt Lake City, and they would end up in San Francisco. And so they were dumping the trucks in San Francisco.
Well, guess what? They need storage. They’ve got truckloads full of stuff. Sure enough, public storage in that area is booming. And so that’s just an example of some interesting real estate companies that are out there today. What’s important? How does this behave as an investment? Is it a stock, Mike? Is it a bond?
It’s more of a hybrid. You know, it’s funny over the years, people said, because we’re financial advisors, we’re anti-real estate, doesn’t mean we’re really anti-real estate. It’s a matter of sometimes the liquidity issues with real estate don’t match up with what people need financially. They tie up too much of their money and they tend to over-leverage themselves and get into problems over time. And we may start to see that with rising interest rates.
There’re REITs, the real estate investment trusts, giving the ability to have that real estate in your portfolio, have liquidity to go and rebalance, to move around, to change your positions along the way, and give you someone that’s going to professionally manage a piece of real estate. We have a lot of clients that go and have rental properties, and they have done very well.
I’ve seen a lot of people make a lot of money. So I can’t say it’s a bad idea, but it’s a job, right? If you’re going to be a landlord it’s a pretty close to full-time job, and it can be a pretty miserable job at times, too. As things are breaking in the middle of the night, you’re getting called to fix the plumbing. Someone didn’t pay their rent, you can’t kick them out, because it’s winter. It can just be a chore to manage this stuff.
The real estate investment trust give you the same plus side to owning real estate and get rid of all the negative side of having to manage it.
It’s completely liquid, extremely diversified, and you don’t have to worry about all the little headaches that go on. My thought is it’s somewhere… If you had a 10% allocation, it’s probably like a 5% allocation to a bond and a 5% allocation to a stock. So it’s about 50-50 between the two.
In terms of how much should you have in your portfolio? You know, I think anywhere between five on the low side, 15 to 20% on the high side. If you look at all the big pension funds out there, they’ve always got at least 15 to 20% exposure to REITs or real estate in their portfolio.
That brings us to the end of another week. This is Rob and Mike with Think Smart from the McClelland Financial Group of Assante Capital Management, reminding you to live the life that makes you happy.
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