Carlisle Mitchell – Investment Strategies – Real Estate Operating Companies
A real estate operating company is a company that invests in real estate and whose shares trade on a public exchange. A real estate operating company (REOC) is similar to a real estate investment trust (REIT), except that an REOC reinvests its earnings into the business, rather than distributing them to shareholders. Also, REOCs are more flexible than REITs in terms of the type of investments made.
Because real estate operating companies reinvest earnings rather than distribute dividends to shareholders, they don’t receive the same benefits of lower corporate taxation that are a common characteristic of REITs.
Investors in an REOC seek capital gains rather than passive income. When analyzing a potential REOC investment, an investor should look for relatively high return on investment capital, return on equity and return on assets, as well as a respectable valuation. These are all measures of how well a company has been using its invested capital, equity and assets to generate profits.
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