Types of REITs
There are three types of REITs—equity REITs, mortgage REITs, and hybrid REITs. In this parts of the series, we’ll discuss these three REITs in detail.
Mortgage REITs, also known as mREITs, lend money directly to landlords and their operators to purchase a property. Alternatively, mREITs lend for an acquisition of loan or mortgage-backed securities. Like equity REITs, they don’t invest in properties. Mortgage REITs generate revenue through the interest paid on their mortgage loans. Interest is earned either directly from mortgages or from mortgage-backed securities. The factors that impact mREITs include changes in mortgage rates, prepayments of a loan before the due date, and credit events like foreclosure or bankruptcy. Examples of mortgage REITs include Annaly Capital Management (NLY) and American Capital Agency (AGNC).
Equity REITs own and operate income-producing real estate assets like offices, shopping centers, apartments, medical facilities, student housing complexes, hotels, resorts, timberlands, data centers, and cell phone towers. They lease space in the facilities to tenants for rent. Most of the equity REITs operates in their core areas. They can be further classified as retail, residential, office, industrial, healthcare, self-storage, hotels and resorts, and diversified. Examples of equity REITs include Simon Property Group (SPG) and Ventas (VTR).
A REIT that combines the investment strategies of both the equity REIT and mortgage REIT is known as a “hybrid REIT.” A hybrid REIT generates income from rent and capital gains just like an equity REIT. However, it receives interest, like a mortgage REIT. Hybrid REITs aren’t very common today.
In the next few parts in this series, we’ll discuss the different types of equity REITs in more detail.
Investors looking for diversification in the REIT sector can get exposure to REIT ETFs like the Vanguard REIT ETF (VNQ), the iShares U.S. Real Estate ETF (IYR), and the iShares Cohen & Steers REIT ETF (ICF).