======REITs======
REITs ([[Real Estate Investment Trust]]) are companies that own, operate, or finance income-producing real estate. Imagine pooling your money with other investors to buy a portfolio of properties—like shopping malls, apartment buildings, or office towers—and then receiving a share of the rental income. That's essentially a REIT! It allows you to invest in a slice of a large-scale real estate empire through the [[stock market]], just like buying a share in Apple or Google. This structure opens the door to real estate investment for everyday people, offering a taste of property ownership without the hefty down payment or landlord headaches. Most REITs are publicly traded, meaning you can buy and sell their shares easily, providing far more [[liquidity]] than owning a physical building.
===== How Do REITs Work? =====
The magic of REITs lies in a special tax deal. To qualify as a REIT and avoid paying corporate income tax, a company **must** pay out at least 90% of its taxable income to its shareholders in the form of [[dividends]]. This is fantastic for income-seeking investors, as it often results in higher-than-average dividend yields. The income you receive is essentially the rent collected from the REIT’s tenants, minus operating expenses. This structure makes REITs a powerful tool for generating a steady stream of passive income. In return for this income, investors hope that the value of the underlying properties will also grow over time, leading to [[capital gains]] when they sell their shares. This combination of income and growth potential makes REITs a popular tool for portfolio [[diversification]].
===== Types of REITs =====
While there are many flavours, REITs generally fall into two main categories:
==== Equity REITs ====
These are the most common type. They are the actual landlords.
  * **What they do:** They own and operate physical properties. Think of companies that own a portfolio of high-rise office buildings, sprawling shopping centres, or modern logistics warehouses for e-commerce giants.
  * **How they make money:** Primarily from collecting rent from tenants. Their success is tied to keeping their properties leased and managing them efficiently.
==== Mortgage REITs (mREITs) ====
These are the financiers, not the landlords.
  * **What they do:** They don't own property directly. Instead, they invest in mortgages and mortgage-backed securities. They lend money to property owners or buy existing loans.
  * **How they make money:** From the interest on the loans they own. Their profit comes from the spread between the interest they earn on their mortgage assets and the cost of funding those assets. //mREITs are generally considered riskier than Equity REITs due to their sensitivity to interest rate changes.//
===== The Value Investor's Lens =====
A true [[value investing]] approach to REITs goes beyond simply chasing the highest dividend yield. A high yield can sometimes be a warning sign of a struggling company. Here’s how to think like a value investor when looking at REITs:
==== Focus on FFO, Not Earnings ====
Standard corporate earnings can be misleading for real estate companies because of a huge non-cash expense called depreciation. A more accurate measure of a REIT's cash flow is [[Funds From Operations (FFO)]].
  * **FFO Calculation (Simplified):** Net Income + Depreciation - Gains on Property Sales.
  * **Why it matters:** FFO gives you a clearer picture of the actual cash being generated to pay dividends and reinvest in the business. A smart investor will look at the Price/FFO ratio instead of the traditional P/E ratio.
==== Assess the Net Asset Value (NAV) ====
[[Net Asset Value (NAV)]] is the estimated market value of a REIT's properties minus all its liabilities.
  * **The Goal:** A value investor's dream is to buy a REIT for a price //significantly below// its NAV per share. This is like buying a dollar's worth of prime real estate for 80 cents. It provides a "margin of safety."
  * **How to find it:** While calculating it yourself is complex, many financial data providers and analyst reports provide NAV estimates.
==== Quality Over Quantity ====
Don't be seduced by a vast, scattered portfolio. A value investor scrutinizes the quality.
  * **Properties:** Are the buildings in prime locations with high occupancy rates and creditworthy tenants? A portfolio of Class-A office towers in major cities is very different from a collection of aging strip malls in declining towns.
  * **Management:** Is the management team experienced, shareholder-friendly, and skilled at navigating the [[property cycle]]? Look for a track record of smart acquisitions and prudent financial management.
===== Risks and Considerations =====
No investment is a free lunch, and REITs are no exception.
  * **Interest Rate Risk:** When interest rates rise, borrowing becomes more expensive for REITs. Higher rates can also make less-risky investments like government bonds more attractive, potentially drawing money away from REITs and pushing their share prices down.
  * **Economic Sensitivity:** REITs are tied to the health of the economy. In a recession, businesses may close and individuals may lose jobs, leading to lower occupancy rates and falling rents.
  * **Sector-Specific Headwinds:** The world changes. The rise of e-commerce has hit retail REITs that own shopping malls hard, while the shift to remote work has created uncertainty for office REITs. Always consider the long-term trends affecting a REIT's specific sector.