REITs are part of an extremely complex and diverse industry, but they can also be very profitable. Not only are there different categories of REITs, many different property types and classifications can comprise them.
Let’s start with the three types of REITs: mortgage, equity and hybrid.
There are three ways a real estate investment trust can be structured.
The first type, is a Mortgage REIT. Mortgage REITs work by creating a trust which will provide a loan and lend money to landlords and their operational teams to purchase a property. The way revenue is generated is through the interest paid on the mortgage loans. Interest can be earned either directly from mortgages or from mortgage-backed securities. Mortgage real estate investment trusts are not direct investments in specific property. Since the primary way the mortgage REIT survives is through the interest earned, many factors can make a mortgage REIT strong or weak. These factors include mortgage rates, prepayments of a loan before the due date, and credit events like foreclosure or bankruptcy.
The second type of real estate investment trust is an equity REIT. An equity REIT owns and operates income-producing real estate assets like offices, shopping centers, medical facilities, and resorts, among many other assets. This is the category where healthcare REITs fall. The real estate investment trust leases space in the facilities to tenants for rent. Most of the equity REITs operates in their core areas. For healthcare operations, this includes medical office building (MOB) development, outpatient facilities, senior housing facilities, nursing homes, and assisted living facilities. Essentially healthcare REITs are landlords to the medical world.. Many Healthcare REITS have substantial stakes in seniors housing. Some of them own the buildings outright and have tenants pay the leases, as well as the taxes and upkeep (so called triple-net-lease arrangements, or NNN). Some healthcare REITs own the property but has an operating company run the day-to-day operations.
Finally the third type of REIT is a Hybrid REIT, which is a combination of equity and mortgage REITS. This REIT generates income from rent and capital gains like an equity REIT but receives interest like a mortgage REIT.