What is an infrastructure REIT?
A real estate investment trust is a company whose primary business activity is investing in real estate assets. That’s the short version, and not all real-estate-based businesses are legally classified as REITs.
To be classified as a REIT, a company needs to meet some specific requirements, including, but not limited to, the following:
- REITs must distribute at least 90% of their taxable income to shareholders. Most choose to pay out all of it. This is the most well-known REIT characteristic and why most REITs have above-average dividend yields.
- REITs must invest at least three-fourths of their assets in real estate or related investments. They must also derive at least three-fourths of their income from these investments.
- REITs must have at least 100 shareholders, and no five shareholders can own more than 50% of the total shares.
- REITs must be legally structured as corporations.
If it meets all of these requirements, a REIT is treated as a pass-through entity for tax purposes, similarly to a partnership or LLC. This means that no matter how much a REIT earns, it doesn’t pay a dime of corporate tax on its income. REIT profits aren’t taxed until they're paid out to investors.
Even then, if a shareholder owns the REIT in a retirement account, the profits aren't taxed until they're withdrawn. In tax-advantaged accounts, they don't get taxed at all.
There are two broad categories of REITs. Equity REITs invest in commercial properties. Mortgage REITs invest in mortgages, mortgage-backed securities, and other non-property assets.
Generally, when you hear the term “REIT,” it refers to equity REITs. People usually specify when they're referring to a mortgage REIT.
Most equity REITs concentrate on a specific type of property. Infrastructure REITs invest in properties such as telecommunications towers that are used by cellular and other wireless communications providers. They also invest in other types of wireless and wired infrastructure and energy (oil and gas) pipelines.
Some infrastructure REITs invest in only domestic real estate assets, while others invest all over the world. U.S.-based assets are generally safer and easier to predict, but there can be far more growth potential overseas. This is especially true in emerging markets that are still in the early stages of building out their infrastructure.
Risks of investing in infrastructure REITs
There are a few risk factors that impact all REITs and others that are property-type specific. Here’s a quick rundown of the risks that infrastructure REIT investors should be aware of before getting started:
Interest rate risk
Rising interest rates are bad for REIT share prices. When buying income-based investments like REITs, investors expect returns to exceed what they can get from risk-free investments like Treasury securities.
So when risk-free yields rise (the 10-year Treasury note is a good one to watch), REIT yields typically rise accordingly. Since price and yield have an inverse relationship, higher yields push share prices downward.
Because of the diverse nature of infrastructure REITs, some are more cyclical (economically sensitive) than others. However, they tend to be less cyclical than many other types of real estate.
Generally speaking, infrastructure assets are leased on a long-term basis; initial lease terms of 5–10 years are common. And automatic rent increases are built in, insulating these REITs from any troubles their tenants are having.
The types of industries that lease properties from infrastructure REITs are highly regulated. This can work for or against these REITs.
For example, regulation and zoning issues limit communication tower supply, giving a big advantage to REITs that own these properties. They have strong tenant retention and pricing power. On the other hand, new regulations can often be costly, so it’s important to realize that there is significant risk.
Publicly traded infrastructure REITs
There are seven publicly traded infrastructure REITs as of May 2019. They have a total market capitalization of about $165 billion, according to Nareit data. These range from the largest REIT in the entire world to up-and-coming small-cap companies.
Here’s a quick guide to the public infrastructure REITs to help start your search.