Mike and Vero delve into real estate investment trusts (REITs), detailing their roles, current obstacles, and those that continue to hold value for a dividend growth portfolio.
Learn how to assess REITs utilizing precise metrics, recognize red flags, and evaluate their alignment with your portfolio.
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You Will Discover
Why REITs Have Faced Recent Difficulties
REITs have experienced hurdles impacting their performance and investor confidence in recent years.
- Soaring interest rates have elevated borrowing expenses and constrained development.
- Highly leveraged REITs encounter challenges due to refinancing demands.
- Dividend hikes have decelerated across the industry.
- A decline in interest around REITs influences their market attractiveness.
You Can Experience Losses in Real Estate
Despite real estate seeming secure, REITs and direct property investments face potential risks.
- The perceived security of owning physical assets can lead to insufficient due diligence.
- Rental properties may pose unforeseen challenges such as difficult tenants or substantial repairs.
- Even physical assets can suffer from poor management or economic fluctuations.
The Categories of REITs and Who’s Suffered the Most
Various REIT sectors show differing performances, with some encountering notable struggles.
- Equity REITs buy and manage properties; mortgage REITs back real estate deals.
- Mortgage REITs have been negatively impacted by interest rate fluctuations and timing inconsistencies.
- Office REITs face challenges due to remote work trends and vacant properties.
- Less prominent retail REITs contend with competition from e-commerce, while luxury malls tend to fare better.
The Advantages and Disadvantages of REITs
REITs offer appealing income and ease of investment, but investors should weigh their shortcomings.
- Advantages: Tangible assets, income distribution, regular payouts, perceived reliability.
- Disadvantages: Reliance on financing, dilution from new unit offerings, sluggish growth, diminished flexibility.
How to Assess REITs Using the Dividend Triangle
REITs necessitate distinct evaluation tools as compared to traditional accounting measures.
- Utilize FFO or AFFO per unit instead of EPS in profitability evaluations.
- Payout ratios should be calculated using FFO, not EPS.