When you buy a Real Estate Investment Trust (REIT) you’re becoming as much of a property owner as a dividend stock investor.
REITs own office buildings, shopping centers seniors homes and apartment complexes that they lease to tenants. After collecting the rent and paying the expenses associated with running their properties, REITs pay out the bulk of what’s left to shareholders.
Publicly traded REITs must distribute at least of 90 percent of their income to shareholders in the form of dividends, which is why they are popular with investors seeking income. The REIT can raise the payout to more than 90 percent but, can’t lower it below 90 percent.
REITs help diversify an investment portfolio since stock markets and real estate markets move in different ways. They also let you own real estate without the hassles of buying and managing properties on your own. They are easier to sell than owning property. To cash out, you simply sell your shares.
REITs carry the normal investment risks. Occupancy rates could fall and increasing vacancies hurt revenues. Share prices can drop when property values fall. High dividend payouts force management to borrow large amounts to expand real estate holdings. Rising interest rates hurt profitability.
One area of REIT growth involves the demographics of aging. The trends are boosting the prospects of Health Care REITs as demand rises for senior housing, new medical office buildings, and space for life science research labs.
The Canada Pension Plan Investment Board (CPP IB) which manages investments for the Canada Pension Plan (CPP) has more than $1 billion invested in healthcare-related real estate, mainly in the U.S. It is betting that these investments offer a conservative way to generate income for the retirement of Canadians.
In 2015, the CPP IB spent $449 million (U.S.) in a partnership with the predecessor of Welltower Inc. (NYSE:WELL) to buy a portfolio of California medical office buildings. In 2016, CPP IB and Welltower bought six seniors housing properties with 1,930 rental units in Florida for $555 million (U.S.).
The Harvest Global REIT Leaders Income ETF (HGR) has exposure to many types of real estate including healthcare. It helps position the fund to generate income for investors including the healthcare demographics at play. AM
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