Equity REITs are real estate investment trusts that primarily own and operate income-producing properties. They are the type of REIT most closely associated with traditional real estate investing because their businesses are built around physical properties and the rent those properties generate.
Instead of purchasing an apartment building, warehouse, or shopping center directly, an investor can buy shares in an equity REIT that may own dozens, hundreds, or even thousands of properties.
How equity REITs work
An equity REIT raises capital and uses it to acquire, develop, improve, and operate real estate. Tenants pay rent to use the properties, creating recurring revenue for the REIT. The company then pays operating expenses, property-related costs, interest on debt, and other corporate expenses.
Over time, an equity REIT may also sell properties, develop new ones, or acquire additional assets. Management’s ability to allocate capital effectively can have a significant effect on long-term shareholder returns.
Like other REITs, an equity REIT must satisfy specific requirements under U.S. tax law to maintain REIT status.
Common types of equity REITs
Equity REITs are often grouped according to the types of properties they own. Each property sector has different economic drivers.
Residential REITs
Own apartments, manufactured housing, or other residential properties. Results can depend on local housing supply, employment, household formation, and rent growth.
Industrial REITs
Own warehouses, logistics facilities, and distribution properties. Demand can be influenced by trade, manufacturing, inventory needs, and e-commerce.
Retail REITs
Own shopping centers, malls, freestanding stores, and other retail properties. Tenant quality, consumer spending, and store demand are important factors.
Specialized REITs
Can own data centers, cell towers, healthcare facilities, self-storage properties, hotels, and other specialized real estate.
Office REITs are another major category. Their performance depends on factors such as employment, leasing demand, location, building quality, and the amount of competing office space.
How equity REITs make money
Rental income is the foundation of most equity REIT business models. A property that remains occupied and generates growing rent can produce recurring cash flow. Long-term leases may make some revenue relatively predictable, although leases eventually expire and tenants may not renew.
Equity REITs can also create value by developing new properties, renovating existing properties, increasing occupancy, raising rents when market conditions allow, or selling properties for more than their investment cost.
Property appreciation can contribute to long-term value, but real estate prices can also decline. Public REIT share prices may move above or below estimates of the value of the underlying properties.
Important metrics for equity REITs
Traditional corporate earnings are useful, but real estate depreciation can make net income less informative when comparing property-owning REITs. Investors therefore often consider additional measures.
| Metric | What it helps show |
|---|---|
| Occupancy | The percentage of available property space that is leased or occupied |
| Same-property results | How an existing portfolio is performing without relying solely on acquisitions |
| Funds from operations (FFO) | A widely used supplemental measure that adjusts net income for certain real estate-related items |
| Debt and leverage | How heavily the REIT relies on borrowed capital |
| Dividend payout | How the dividend compares with the REIT’s earnings or cash-flow measures |
No single metric provides a complete picture. For example, high occupancy can be positive, but lease expiration schedules, tenant quality, rent levels, and debt obligations still matter.
Equity REITs vs mortgage REITs
The key difference is what the REIT owns. Equity REITs own real estate, while mortgage REITs primarily own mortgages and mortgage-related investments or provide real estate financing.
| Equity REIT | Mortgage REIT | |
|---|---|---|
| Primary assets | Physical properties | Mortgages and mortgage-related assets |
| Main income source | Rent and property operations | Interest and financing spreads |
| Key business drivers | Occupancy, rents, property values, expenses | Interest rates, funding costs, credit, leverage |
Both structures can use debt and both can be affected by interest rates, but the underlying economics are different.
Benefits of equity REITs
Equity REITs make diversified property ownership possible without requiring investors to become landlords. A single REIT may own properties across many cities and serve numerous tenants. Publicly traded shares also provide substantially more liquidity than directly owned property.
Investors can choose exposure to specific property sectors or hold multiple REITs to spread their real estate exposure. However, sector diversification within real estate is not the same as diversification across different asset classes.
Risks of equity REITs
Equity REITs remain exposed to the economics of their properties. Falling rents, rising vacancies, tenant bankruptcies, higher operating costs, excessive new construction, or declining property values can weaken results.
Debt creates another layer of risk. A REIT that needs to refinance significant borrowings when interest rates are higher may face increased interest expense. Highly leveraged REITs can have less flexibility when property markets weaken.
Different sectors also face specific risks. Hotels can be highly sensitive to travel demand, office buildings can face changing workplace patterns, and retail properties depend heavily on the financial health of their tenants.
For a broader discussion, see our guide to REIT risks.
Key takeaways
- Equity REITs primarily own and operate income-producing real estate.
- Rental income is usually their main source of revenue.
- Property sectors include residential, industrial, retail, office, healthcare, data centers, self-storage, and others.
- Occupancy, rents, property values, tenant quality, expenses, and leverage all affect performance.
- Equity REITs differ fundamentally from mortgage REITs, which focus on real estate financing rather than primarily owning properties.