Equity REIT Vs Mortgage REIT, Real Estate Investment Trust

Alternative Real Estate Investment: Equity REIT, Mortgage REIT

last updated Thursday, September 7, 2023
#Equity Real Estate Investment Trust #Mortgage Real Estate Investment Trust

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John Burson

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CONTENTS

What are Equity REITs?

Equity REITs are real estate companies or associations that own or manage income-generating properties, for example, shopping centers and residential or commercial buildings. Owning or managing such properties lets them lease properties to tenants. After paying the overall expenses for such properties, equity REITs pay out dividends to the shareholders annually. Equity REITs also produce income from the sale of properties. Equity REITs can be listed on stock exchanges and can be publicly or privately held.

Benefits of Equity REITs Investments

Dividend Income

Compared to the high dividend generated from REITs implies a larger share of REIT investment returns comes from dividends. That's why many investors consider equity REITs more effective in generating income. Equity REIT dividend yields are higher than average. Over the long term, more than half of equity REIT total returns have come from dividends. 

Portfolio Diversification

Equity REITs have provided important diversification as a benefit to the investors for their relatively low correlation with other assets, which includes stocks, bonds, etc. Diversification reduces portfolio volatility. It helps to diversify portfolios between small or large-cap stocks. However, the strategy only divides a portfolio between different parts of the same asset class and does not achieve the full benefit of diversification.

Inflation Hedging

Many investors worry about ensuring an income for a necessary period. Even in a low-inflation environment, specific effects of inflation over a long time can cause troubles for portfolio assets by decreasing the purchasing power. So, it can be challenging for those investors to stay ahead of inflation by employing fixed-income securities while equities are being cut down. Listed equity REITs have provided a cushion against inflation to help investors. The prices and rents of commercial real estate offer a steady income even in an inflation period.

Liquidity and Transparency

Real estate wasn't considered liquid assets. However, the liquidity of REITs listed on major stock exchanges makes real estate relatively easy and liquid. REITs also provide transparency with real-time pricing and evaluations. The listed REITs in the U.S. are also registered and managed by the SEC, so it follows the standards of corporate governance and financial reporting.

Risks of Equity Investments

Equity REITs' share prices heavily depend on market conditions and are susceptible to fluctuation. While the real estate market cycle differs from other stocks' market cycles, commercial real estate can sometimes be unpredictable. The changes in the values of the portfolios affect the price of shares. That's one risk you need to keep in mind before investing.

What are Mortgage REITs?

Mortgage REITs or mREITs are a type of REIT where an individual buys one or more shares listed on major stock exchanges. The shares can be purchased in a Mutual Fund or ETF as well. People invest in mREITs because mREITs generate high dividends. mREITs let an investor hold an equity investment in the mortgage market with the liquidity of publicly traded equities. There are other mREITs with SEC-registered but not listed on any stock exchange. mREITs can also be privately held.

Benefits of mREITs

mREITs provide funding for mortgage credit for both homeowners and businesses. Utilizing private capital for purchasing residential mortgages and RMBS, these REITs help provide liquidity and credit to home mortgage markets. mREIT purchases of commercial and CMBS provide another source of mortgage credit for business investments in commercial real estate.

Risks of mREITs

Interest Rate Risk

Managing the effects of short and long-term interest rates is essential in mREITs business. Interest rates can affect the net interest margins and the value of their mortgage assets, which affects corporate net worth.

Credit Risk

Commercial mREITs can be exposed to credit risk through private-label RMBS and CMBS. The degree of credit risk depends on the underlying loans' credit performance and the security structure. The degree of over-collateralization can also be held responsible.

Prepayment

Specific changes in the interest rates or borrower home sales can affect the probability that some borrowers will refinance or repay their mortgages. When such refinancing occurs, the investor who holds the mortgage or MBBS must reinvest the proceeds into a prevailing interest rate environment, which might be higher or lower.

 
 
 

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