With volatility expected to remain elevated in the stock market and the future direction of interest rates a bit cloudy, 2019 might be a good time for financial advisors and their clients to revisit real estate investment trusts, or REITs as they’re more commonly known.

REITs are funds that own income-producing properties in a range of real estate sectors, such as shopping malls, health-care facilities and nursing homes, hotels, data centers, office and commercial buildings, storage facilities and warehouses, and residential apartments. Essentially, REITs collect rent from the tenants of these properties and distribute the income to their investors in the form of dividends.

While most REITs invest in one of these property types, some hold multiple types of properties in their portfolios. Investors can invest in individual REITs—which can be bought and sold like regular common stocks—or in exchange-traded funds that invest in them, providing a further layer of diversification.

In order to qualify as REITs, these companies must meet a number of legal requirements. Most important, they must invest at least 75% of their assets in real estate and pay out at least 90% of their taxable income to shareholders, although most pay out close to 100%.

“REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation,” says Nareit, the Washington, D.C.-based trade group for the industry. “Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.”

Calvin Schnure, senior vice president of research and economic analysis at Nareit, says REITs recently “have been resilient despite the macroeconomic headwinds.” Through the third quarter of 2018, industry earnings from operations were up 11% over the same period the previous year.

At the same time, REITs are relatively insulated from interest rate moves despite the conventional wisdom that they aren’t. “There has been a lot of attention paid to what’s going on with interest rates, and I think what might be surprising is that REITs have not taken a hit in terms of their operating performance,” says Schnure. “It’s not affecting their cash flows nearly as much as some people might have thought.”

There’s a reason for that.

Stronger Balance Sheets

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