The Intelligent REIT Investor Guide

A Building Block for REITs

Innovations in the world of finance tend to be incremental, rather than revolutionary, but every now and then one comes along that truly enhances societal value. Two that quickly come to mind are the introduction of the first mutual fund nearly 100 years ago and a refinement of that idea – the ETF – about 30 years ago. Both provided a means for investors of all sizes to efficiently gain access to diversified portfolios that otherwise would have been cumbersome and costly to construct. A similar quantum leap occurred with the formation of the first Real Estate Investment Trusts (REITs) in 1960, which, like mutual funds and ETFs, are non‐taxable, pass‐through entities. Whereas mutual funds and ETFs own stocks or bonds, REITs provide a comparable mechanism for investing in properties.

The primary appeal is obvious: Publicly traded REITs turn an asset class that is otherwise illiquid and hard to access into something that can be bought or sold with a few clicks on a keypad. In addition, today's REITs are best‐in‐class companies that own some of the highest‐quality real estate. In most U.S. property sectors, REITs dominate the list of largest property owners, and they bring a level of managerial acumen and operational expertise that is often not found among smaller players. Their size also affords efficiency on overhead and borrowing costs, and their corporate governance practices provide reasonable alignment of interests between managers and investors. ...