Specialty REITs offer investors exposure to growing industries and unique revenue streams, often driven by demographic trends or technological advancements. For example, data center REITs benefit from increasing cloud computing needs, while healthcare REITs capitalize on aging populations. These REITs can provide diversification to an investor’s portfolio, as they tend to have distinct drivers compared to broader real estate markets.
Investing in specialty REITs requires careful consideration of industry-specific risks, such as regulatory changes, technology shifts, or demand fluctuations. However, their potential for growth and diversification makes them a compelling option for investors seeking targeted real estate opportunities.
What are Specialty REITs?
Specialty REITs are a niche category of real estate investment trusts (REITs) that focus on unique or non-traditional property types outside the mainstream sectors like residential, office, or retail. These REITs provide investors access to diverse real estate assets tied to specific industries or trends, offering diversification and specialized income streams.
Examples of property types targeted by specialty REITs include:
- Data Centers: Facilities that house servers and data infrastructure for companies, benefiting from increasing demand for cloud computing.
- Healthcare Facilities: Including hospitals, senior living communities, and medical offices.
- Cell Towers: Supporting wireless communication networks, driven by growing mobile and 5G technology.
- Self-Storage Units: Providing space solutions for individuals and businesses.
- Infrastructure and Renewable Energy: Assets such as pipelines, solar farms, or wind energy facilities.
- Correctional Facilities: Privately operated prisons or detention centers, like those owned by CoreCivic.
Benefits of Specialty REITs
- Diversification: Specialty REITs offer exposure to unique asset classes like data centers, healthcare facilities, or cell towers, which are less correlated with traditional real estate markets, helping investors diversify their portfolios.
- Access to Growth Industries: Many specialty REITs invest in sectors with high growth potential, such as technology (e.g., data centers and cell towers) or healthcare, which benefit from demographic and technological trends.
- Stable and Long-Term Income: These REITs often have long-term leases or contracts, especially with government or corporate tenants, providing steady income streams. For example, correctional or healthcare facilities often involve multi-year agreements.
- Inflation Hedge: Some specialty REITs benefit from inflation-indexed leases, ensuring that rental income adjusts with inflation, thus preserving investor returns.
Risks of Specialty REITs
- Industry-Specific Risks: Specialty REITs are tied to niche markets, making them vulnerable to industry-specific challenges. For example, data center REITs may face risks from rapid technological advancements, while healthcare REITs are sensitive to regulatory changes in the healthcare sector.
- Regulatory and Political Risks: Sectors like correctional facilities or energy infrastructure may face heightened scrutiny or policy shifts, potentially impacting operations or revenues.
- Higher Volatility: Since specialty REITs focus on unique asset classes, their performance can be more volatile compared to traditional REITs due to factors like tenant concentration or dependence on a single sector.
- Market Demand Fluctuations: Specialty REITs depend on the demand within their niche markets. For example, self-storage REITs may see reduced demand in areas with high homeownership or oversupply.
How to Invest in Specialty REITs
You can invest in publicly traded specialty REITs through an online stock broker. Units of REITs are traded on national stock exchanges from 9.30 a.m. to 4 p.m. EST on weekdays. A multitude of mutual funds and exchange-traded funds (ETFs) also invest in REITs.
Largest Specialty REITs
Here are some of the largest specialty REITS you can invest in.
CoreCivic Inc.
CoreCivic Inc. (NYSE: CXW) is a diversified company focused on providing correctional and government solutions, making it a unique player in the specialty REIT sector. It is recognized as one of the largest owners of correctional, detention, and residential reentry facilities in the U.S., managing over 15.8 million square feet of real estate utilized by government agencies.
CoreCivic supports federal and state governments by offering flexible, cost-effective facilities and services, including alternatives to incarceration aimed at reducing recidivism. This dual focus on real estate management and service provision distinguishes CoreCivic from other REITs.
EPR Properties
EPR Properties (NYSE: EPR) focuses on experiential real estate, particularly properties tied to entertainment, recreation, and education. Its portfolio includes entertainment venues like movie theaters, experiential attractions, ski resorts, and private education facilities.
The company emphasizes creating value through properties where consumers choose to spend discretionary income, offering unique investment opportunities within the REIT sector. EPR Properties manages approximately $5.7 billion in assets spread across 44 U.S. states.
Industry Overview
| Number of REITs | 7 |
| Average Dividend Yield | 3.27% |
| YTD Total Return | 52.57% |
| October Total Return | 1.31% |
| 2023 Total Return | 22.28% |
Quarterly Performance Data
| Financial Metric | Q3 2024 | 2023 |
| FFO ($M) | $471 | $1,853 |
| NOI ($M) | $1,675 | $6,174 |
| Dividends Paid ($M) | $487 | $1,840 |
Investing in Specialty REITs
Specialty REITs are some of the most diverse real estate investment options with the potential to generate significant returns. While there is considerable risk associated with such unique real estate investments, they are good alternative investment assets.
By combining specialty REITs with more traditional investments, you can create a well-rounded portfolio that leverages the strengths of diverse real estate markets while hedging against broader economic fluctuations. For many investors, specialty REITs are an appealing option for aligning investments with emerging trends and long-term growth opportunities.
Frequently Asked Questions
What are the top 5 largest REITs?
The top five largest REITs by market capitalization as of 2024 include: Prologis (PLD), American Tower (AMT), Crown Castle International (CCI), Public Storage (PSA), and Equinix (EQIX).
What REITs does Warren Buffett invest in?
Warren Buffett, through Berkshire Hathaway, historically invested in STORE Capital, a net lease REIT specializing in single-tenant commercial properties. This was his primary REIT holding due to its consistent income generation and diversified tenant base. However, Berkshire Hathaway exited its position after STORE Capital was acquired in early 2023. Currently, Buffett does not appear to hold any direct investments in REITs, reflecting his preference for other asset classes.
What is the 90% rule for REITs?
The 90% rule for REITs requires them to distribute at least 90% of their taxable income to shareholders in the form of dividends. This rule ensures that REITs remain tax-exempt at the corporate level, as long as they adhere to this distribution requirement. It encourages REITs to generate consistent income for investors while limiting their ability to reinvest profits back into the business.