Real Estate Investment Trusts (REITs) are comparable to mutual funds, which allow multiple investors to gain ownership of real estate ventures or operate commercial properties. They can be thought of as shares and most can be traded on major stock exchanges. REITs usually pay out all their taxable income in the form of dividends, and so pass on the tax to investors as shareholders then have to pay income taxes on the dividends they receive.
There are two main types of these trusts: equity REITs and mortgage REITs. Equity REITs generate income through rent and the sales of long-term properties, while mortgage REITs invest in residential and commercial mortgages. In the UK, REITs have various criteria which must be met in order for them to continue operating. These include having to distribute at least 90% of their taxable income in the form of dividends in each accounting year, to invest at least 75% of their entire assets in real estate, and to derive at least 75% of their gross income from rental payments, interests on mortgages or sales of real estate.
The main reason that investors are attracted to REITs is that it allows them to invest in real estate without having the massive capital required to purchase tangible real estate. REITs also provide investors with investments that are much more liquid than tangible real estate. They also offer an easy way for investors to diversify their portfolios, and high-dividend yields too.
However REITs also have a number of disadvantages: their performance obviously depends on the performance of the housing market, and rising interest rates can have a negative effect on their level of profitability. What follows is an analysis of REITs which have performed particularly well in recent times:
Great Ajax Group
Great Ajax Group (AJX) is a REIT that acquires, invests, and manages a portfolio of mortgage loans secured by single-family residences and single-family properties. Incorporated at the beginning of 2014, the Great Ajax Group is a very new corporation – but one whose fundamentals are nothing short of astonishing for a firm of its age.
The firm boasts a current ratio (current assets/current liabilities) of 13.50 and recorded earnings-per-share growth of 409.30% this year. Its price-to-earnings ratio of 7.68% is also very desirable – as is its small market cap of $247.94m, which may indicate that large investors and/or managed funds have thus far overlooked this particular REIT.
In addition to the already impressive fundamentals outlined above, the firm also has an annual dividend yield of 7.53% and very healthy net profit margin of 44%. As shown by the price chart below, Great Ajax Group’s share price has shown relatively low volatility since May 2016 and has been trading within a fairly uniform range.
However there are some considerations which investors should take into account before investing in Ajax. Over the time period discussed earlier, while volatility was low the firm’s share price nevertheless fell by about 5.7%. This is by no means a catastrophic reduction, but the share price continues on a slight downward trend.
There was an area of support (which has been outlined on the price chart below with a white shaded rectangle) that has been tested several times and not been breached – which indicates that it is a strong area of support. If this support area was to be breached then investor confidence may fall, and there may be an acceleration in the fall of Ajax’s share price.
In addition to this, the firm has a debt-to-equity ratio of 1.54 which indicates that it may not be able to generate enough cash to cover its debt obligations. This may be a major concern to investors as REITs are very susceptible to downturns in the housing market.
SOURCE: The Market Mogul
