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Which REITs Are Right For You?

One of the best ways to invest in real estate without actually buying a property is through real estate investment trusts, or REITs, but which ones are right for you? There are two main types of REITs, with some investing in actual properties (equity REITs) and some buying mortgages and similar assets (mortgage REITs). Here is a quick guide to the differences between the two and the pros and cons of each.

Equity REITs for growth and income
This a very broad category, as there are equity REITs specializing in all different types of properties. You can find REITs that own apartment buildings, offices, malls and other retail stores, hotels, health care facilities, and storage units, just to name a few.

For example, Boston Properties (NYSE: BXP  ) is one of the largest, specializing in office buildings. The company currently owns about 160 properties, which consist of more than 44 million rentable square feet. The company's shareholders make their money in two ways: through quarterly distributions of income as well as through appreciation in the properties owned by the trust.

General Growth Properties (NYSE: GGP  ) owns, develops, and operates regional shopping malls throughout the U.S. The trust's main goal is to maximize the income from its 144 malls through active property management and operating cost reduction. Currently, General Growth Properties pays a 2.7% annual yield, which has increased significantly in recent years.

Two ways to win with equity REITs
The best reason to invest in REITs that own property is not just for the income stream, but for the growth potential as the underlying properties appreciate in value over time. As far as income is concerned, the dividends are generally in the 2-5% range, and here is a sampling of what can be expected from some of the larger equity REITs:

If you are bullish on real estate prices in the United States, an equity REIT may be the way to go, as many of the equity REITs have doubled in value (or more) since the end of the recession as real estate has rebounded.

Equity REITs tend to move up when the real estate market is "healthy", meaning that the level of defaults is relatively low. So, if you think the worst of the foreclosures are behind us, history tells us real estate values will go up and will subsequently take the equity REITs with them. 

Mortgage REITs for income
Mortgage REITs buy mortgage securities and make their money from the difference in the interest rate they pay to borrow and the rate they collect on the mortgages they buy. Now, these spreads are usually not wide enough to produce the type of income their investors want, so mortgage REITs employ a great deal of leverage in order to produce high returns, which can reach double-digits.

The largest and oldest of the mortgage REITs, Annaly Capital Management (NYSE: NLY  ) is an excellent place to get started, because they are one of the more "conservative" of the mREITs. The company has greatly reduced its leverage ratio in anticipation of volatile interest rates during the Federal Reserve's tapering process, and as a result will have more available capital left to jump on lucrative opportunities as they come up.

As I wrote in another recent article, Annaly's leverage is currently around five to one, and if the company wanted to bring is up to seven-to-one (still pretty low for the sector), they could purchase about $24 billion in additional assets.

American Capital Agency (NASDAQ: AGNC  ) is also a very popular mortgage REIT, but management's strategy is a bit different from Annaly's. Both companies are trading for substantial discounts to book value, but American Capital's strategy has been to aggressively buy back its own shares. This seems like a no-brainer: if you can buy shares of your own business for less than the underlying assets are worth, why not?

Annaly, on the other hand, feels that with new money spreads on the rise, their shareholders will be better served by adding assets to the portfolio, increasing the company's leverage and profit potential.

American Capital Agency has a higher use of leverage (around seven-to-one), and rewards investors with a slightly higher yield of 11.8%, compared with about 10.8% for Annaly.

Which is best for you?
The best way for you to play real estate depends on several factors, such as your specific risk tolerance, income requirements, and the timeframe of your investments. However, since these are two very different types of investments, some combination of the two should be right for just about everyone.

As long as you choose REITs with a large, diverse asset pool and good management at the helm, both equity and mortgage REITs should produce excellent income and growth in your portfolio for years to come.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2014, at 9:25 AM, bigjohn327 wrote:

    ggp-preferred A pays 6.87 percent

  • Report this Comment On March 25, 2014, at 10:28 AM, TMFMathGuy wrote:

    Very good point. I prefer the common shares because of the extra potential for price appreciation, but preferreds are great for generating income. Thanks for the comment!

  • Report this Comment On March 25, 2014, at 11:02 AM, foolishdave wrote:

    re: ggp: 120 malls, not 144


    Annual Report


    Our primary business is to be an owner and operator of best-in-class retail properties that provide an outstanding environment and experience for our communities, retailers, employees, consumers and shareholders. Our properties are predominantly located in the United States. As of December 31, 2013, we are the owner, either entirely or with joint venture partners, of 120 regional malls comprising approximately 125 million square feet of GLA.

  • Report this Comment On March 25, 2014, at 2:15 PM, TMFMathGuy wrote:

    There are 120 malls in the US and another 24 or so abroad.

  • Report this Comment On March 26, 2014, at 12:33 PM, foolishdave wrote:

    ggp sold all but one of its malls in brazil. not aware that they have any other foreign malls.

    see following from ggp's 10k:


    During 2013, we completed transactions achieving operational goals that promote our long-term strategy as summarized below (figures shown represent our proportionate share):

    sold our investment in Aliansce (Note 6)

    Aliansce Shopping Centers S.A. ("Aliansce")

    On September 30, 2013, we closed on the sale of our investment in Aliansce Shopping Centers, S.A. ("Aliansce") to Canada Pension Plan Investment Board and Rique Empreendimentos e Participacoes Ltda. ("Rique"), which includes a member of Aliansce management. The sale of the stock resulted in a loss of $3.7 million on our investment in the Unconsolidated Real Estate Affiliate, including the realization of accumulated foreign currency translation losses and a note receivable issued to Rique. The note receivable is recorded in Accounts and notes receivable on the Consolidated Balance Sheets at December 31, 2013. The note receivable is denominated in Brazilian Reais, bears interest at an effective interest rate of approximately 14%, is collateralized by shares of common stock of Aliansce, and requires annual principal and interest payments over the five year term. We recognize the impact of changes in the exchange rate on the note receivable as Loss on foreign currency in our Consolidated Statements of Operations and Comprehensive Income (Loss).

    The table below summarizes the loss calculation:

    Cash received from acquirers

    $ 446,322

    Note receivable from Rique


    GGP's investment in Aliansce

    (491,325 )

    Accumulated foreign currency translation adjustment realized

    (109,861 )

    ​ ​ ​ ​ ​

    Loss on sale of Aliansce

    $ (3,737 )

    ​ ​ ​ ​ ​

    ​ ​ ​ ​ ​

    As of December 31, 2013, we still hold a 35% noncontrolling interest in a large regional mall, Shopping Leblon, in Rio de Janeiro, Brazil which is accounted for under the equity method.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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