REIT Foundations · REITs

Equity REITs primarily own property. Mortgage REITs primarily provide property finance. Understanding that distinction prevents a high yield from hiding a different business model.

Start with the asset being financed

An equity REIT typically owns buildings and earns rental or related operating income. A mortgage REIT holds or originates property loans and mortgage securities. Some businesses combine activities. Read the asset breakdown rather than classifying the entire company from its name or one property photograph.

Use the right operating questions

For a landlord, investigate occupancy, lease expirations, maintenance and local supply. For a lender, investigate borrower quality, collateral, loan seniority and funding terms. A mortgage security can also be exposed to changes in interest rates, repayment speeds and the spread investors demand. A strong property market does not eliminate those risks.

Compare the effect of a financing shock

Imagine a landlord with a long fixed rate loan and a lender that renews substantial borrowing every few weeks. A sudden increase in short term funding costs reaches their income statements on different schedules. The landlord can still face weaker tenants or refinancing later. The lender may face an immediate reduction in its earnings spread or additional collateral requirements.

Do not apply one valuation shortcut everywhere

Property NAV, rental NOI and equity REIT FFO are useful in the right context. A mortgage REIT may require closer examination of book value, asset yields, economic leverage and hedging. Neither a lower price to book value nor a higher dividend automatically indicates a bargain. Explain why the discount exists and what could make it persist.

Try it yourself

Two REITs own commercial real estate exposure. One collects office rent and the other owns office mortgages. Which questions belong first in each review?

Show the worked answer

For the landlord, start with tenants, occupancy and leases. For the lender, start with borrower cash flow, collateral, seniority and funding. Both require debt and liquidity analysis.

Further reading

Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.

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