REITs pay most of their income as dividends, yet they can grow the business both internally and externally.
Let's talk how they grow, and how they finance the growth ๐๐งต
This thread is a summary of a video I made on the subject where I go into more details, check it out if you're interested in the subject:
REITs have 2 categories of business expansion:
Internal growth - growing income from existing assets
External growth - growing income by getting new assets
External growth is obviously more capital intensive than internal growth, but we'll get to that.
First, let detail each:
*Internal growth*
Growing through existing assets is the easiest path forward.
Rent raise - if the demand is there, rent raise is "free" growth.
Renovations - spending some money on renovation is a relatively cheap and safe way to grow.
*External growth*
Growing by getting new assets. Much more capital intensive than internal growth.
Buying assets - outright buying existing assets from others, lower risk
Developing - Buying land, developing new assets from 0, higher risk
And lastly, we can't talk about these kinds of growth without discussing financing it.
REITs can retain some of the money inside for reinvestment, but it's usually not enough to drive substantial growth.
That's why REITs usually get their capital from outside sources:
*REITs funding*
Retained earnings - Possible, but almost never enough alone. REITs pay 90% of taxable income by law.
Debt - Raising debt in the market. As long as the balance sheet is not too frothy, that's good.
New shares - New shares offering for capital is common in REITs
That's it.
Again, this is super-densed and oversimplified.
If you care about the details, I recommend watching my video:
Summary:
REITs can grow in various ways, understanding it is important if you wish to have capital growth with REITs and not only the dividends.
Internal growth is cheap, safe, and slow.
External growth is expensive, risky, but fat.
Funding is usually complicated, but possible.
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