What Is a Real Estate Operating Company (REOC)?
A real estate operating company (REOC) is a publicly-traded entity that actively invests in properties, particularly commercial real estate. Unlike real estate investment trusts (REITs), REOCs reinvest their earnings back into the business, which gives them the potential for growth but also subjects them to higher corporate taxes.
Key Insights
- Engagement in Real Estate Investments: REOCs are publicly listed and trade shares on stock exchanges.
- Reinvestment of Earnings: Unlike REITs, REOCs reinvest their earnings back into their business operations.
- Growth Potential: While REOCs have significant growth potential, they might not provide as much immediate income as REITs typically do.
Unveiling the World of REOCs
Investors looking to diversify and add real estate to their portfolios have various choices. Purchasing real estate directly can be risky and expensive. However, investing in REOCs can be a more manageable option. These companies provide exposure to different types of real estate, carefully selected and managed by professionals, mitigating some of the risks associated with direct property ownership.
Investing in REOCs
How REOCs Function
The primary holdings of REOCs are commercial properties like retail stores, hotels, office buildings, shopping malls, and multifamily homes. They may also manage and lease properties. For instance, a REOC could lease parts of a multifamily home or office building and still maintain essential common areas such as parking lots and lobbies.
Shares in REOCs are publicly traded and can be bought through a broker-dealer or financial professional. Despite mitigating the risks of owning physical properties, REOCs still face market risks like interest rate fluctuations, the housing market, liquidity risks, and credit risks. Unlike REITs, REOCs pay federal taxes as they are not mandated to distribute their earnings to shareholders.
REOCs vs. REITs: Decoding the Differences
Although REOCs and REITs both invest in real estate, their operational and strategic approaches differ:
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Earnings Reinvestment: REOCs are structured to reinvest earnings back within the company, allowing them to expand holdings or improve existing properties. This reinvestment strategy subjects them to higher corporate taxes compared to REITs.
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Taxation: REITs benefit from favorable tax treatment which REOCs do not. To qualify as a REIT, a company must invest at least 75% of its assets in real estate and distribute a minimum of 90% of its earnings to unitholders.
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Investment Strategies: REITs aim for long-term stability by holding onto properties that promise sustainable returns due to special tax statuses. By contrast, REOCs can adopt strategies involving buying and subsequently selling properties for future returns.
Both REOCs and REITs offer unique advantages, allowing investors to choose based on their investment goals and risk tolerance. REOCs can be a powerful addition to your portfolio if you are looking for growth potential and diversified exposure to real estate. Dive deeper into the world of REOCs to enhance your understanding and investment strategy.
Related Terms: Real Estate Investment Trust, Commercial Real Estate, Investment Portfolio, Broker-Dealer.
References
- U.S. Securities and Exchange Commission. “Investor Bulletin: Real Estate Investment Trusts (REITs)”, Page 1.
