REITs: cash flow conduits?

Relates to cfa mock 2018 pm q43

Following statement is said to be correct : REITs do act as cash flow conduits for underlying real estate assets.

My understanding is REITs buy equity shares in companies that buy and operate real estate. Therefore I argued that they do not act as cash flow conduits for underlying real estate but only for the shares if you want to put it that way. What are your thoughts on this?

I remember from level II that in order to qualify as a REIT, the trust has to distribute its profits to shareholders like a dividend for almost all of its profits. It cannot retain profits (up to a certain extent) or it gets penalized on taxes IIRC.

I think you’re confusing a REIT with an ETF composed of REITs:

  • a REIT directly invests in real estate: they own commercial (offices, malls, etc) and residential (apartment buildings, etc) properties.

Example: Simon Property Group (ticker: SPG)

  • a REIT ETF will buy the shares of various publicly listed REITs

Ex. : Vanguard Real Estate Fund (VNQ)

A REIT will receive income from its properties (minus expenses) and then distributes earnings to its shareholders. REITs do not pay taxes if they distribute more than 90% of their taxable earnings

Not all REITs invest directly in real estate; there are mortgage REITs that invest in . . . wait for it! . . . mortgages.

I stand corrected! And I got it confused because according to schweser the NAREIT is an index of traded stock of companies that invest in RE or RE related assets. That sounds quite indirect and close to my understanding. Does the index then not invest in traded REITs?

“REITs are publicly traded equity shares in a portfolio of real estate”.

To me this all sounded much more_​​​ indirect_ in terms of investment approach than it actually is? I think I also have answered a tt question that indicated this indirect approach… Whatever

If you invest in a publicly traded REIT or a fund of REITs (ETF), it is considered an Indirect RE investment.

You are investing in a company which owns properties, but you do not have direct ownership of the properties

The know whether it’s a direct or indirect investment, ask yourself if you have direct ownership or not:

From the CFAI website:

“Real estate investments can be viewed in terms of direct ownership and indirect ownership. Direct ownership includes investment in residences, business real estate, and agricultural land. Indirect ownership includes investment in vehicles such as REITs.”

This is correct. I can’t remember if I saw it in the CFA curriculum, but just having worked in MBS for years, I remember looking at REITs every quarter and their dividend yield would be insanely large. And the reason is exactly what you said above.

Waiting in the supermarket line I remember the odd thing that was throwing me off here:

why then considering out discussion above are REITs more correlated to equity than REIF if they are essentially no companies (then it would make sense) but only cash flow conduits