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How does a REIT operate and what strategies does it apply?

REIT or Real Estate Investment Trust is defined as a security that sells like a stock especially on the major exchanges and in turn, invests in real estate directly. It can be invested either in the form of properties or mortgages. REITs receive special tax considerations and are considered to offer investors with high yields, and a highly liquid (more cash) method of investing in real estate.

Types of REITs

  1. Equity REITs: Equity REITs are the ones that are invested in properties and are thus responsible for the equity or value of their real estate assets. Equity REITs usually earn their revenues from properties’ rents.
  2. Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages.  Owners of real estate borrow mortgages from these REITs, or purchase existing mortgages or mortgage-backed securities. And their revenues are generated by the interest that they earn on the mortgage loans.
  3. Hybrid REITs: These REITs derived its name from the combination of the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

Objectives

  • Function to generate stable and growing cash distributions on a tax-efficient basis;
  • By enhancing the value of the REIT’s assets and thus, maximizing long-term Unit value through active management; and
  • By expanding the asset base of the REIT and increasing the AFFO(Adjusted fund from operations) per Unit through acquisitions

Growth Strategies
One of the major objectives of the REITs is growth and it applies various strategies to accomplish this objective.
The primary internal growth strategy of a REIT focuses on generating greater cash flow from the Initial Properties. This objective is usually achieved by increasing average monthly rents and maximum occupancy of the market depending upon the local geographic conditions of the market, in accordance with operational costs and improving on its asset base using infrastructure improvement programs.
The REIT’s external growth strategy focuses on accumulating acquisitions of multi-suite residential rental properties across Canada. This strategy concentrates in those geographic areas which has the presence of REIT’s platform of Properties and TransGlobe. The REIT usually undertakes the identification of potential property acquisitions using formal investment criteria which primarily focuses on the security of cash flow, its potential for capital appreciation, increasing value through more efficient management of the assets etc.
Even though the REITs try to accommodate low cost appreciation in the real estate undertakings, and it is appreciated by investors as well, this behaviour has created difficulties for the REITs in the equity markets and thus causing trouble for them to raise capitals. “There just hasn’t been a significant amount of new investment capital finding its way into the REIT sector,” Grueber says. Investors have been slow to incorporate REITs despite improving performance.
Investors playing a cautious role while dealing with REITs have kept the prices at a stable rate. The tech sector has rather experience volatility for some time now, and this has stimulated the REIT interest rates to rise. “People are just a little uncertain of where the market and the economy is going,” Grueber says. REIT shares will likely continue to trade at a discount to values until there is more clear evidence of where the market and economy are headed, he says.
Debt financing or equity financing (also defined as a firm raising capital as they issue shares in public offering or IPOs) is another financing option. “We’re pretty fortunate because we have fairly low debt, about 32% of our total market cap. So we have quite a bit of room to add financing if we need to, but we’re pretty careful about that,” Onufrey says.