Real Estate Investment Trusts (REITs)
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Industry Overview
The roughly 600 REIT companies in the US have combined annual revenue of $25 billion. Large companies include Equity Office Properties, Equity Residential Properties, Simon Property Group, and Vornado Realty Trust. Following strong consolidation, the industry has become highly concentrated at the top. The largest 50 REITs hold over 80 percent of the market. The larger REITs are publicly traded, but many smaller ones are privately held.
Competitive Landscape
The health of the economy drives demand for REITs as investment vehicles. Profitability depends on the value of the properties in the portfolio, which in turn highly depends on real estate vacancy rates. Large companies have advantages in deal-making, and economies of scale in marketing, computer and infrastructure investment, and operations. Smaller companies can compete by specializing not only in real estate type, but by geography, though geographic focus can increase risks.
Products, Operations & Technology
REITs are corporations that derive most of their revenue from owning or managing real estate, or from mortgages secured by real estate. The value of all real estate owned by REITs is close to $500 billion. A company organized as a REIT under IRS regulations can avoid paying income taxes if it pays out at least 90 percent of its net income (excluding capital gains) as dividends to shareholders. The benefit of being a REIT is that corporate income isn't taxed; the disadvantage is that the company can't fund growth with retained earnings.
To qualify as a REIT, the IRS requires a company to have at least 100 shareholders. REITs typically invest in a single type of real estate, such as office buildings, industrial buildings (warehouses), shopping centers, malls, or apartments. Simon Property Group, for example, invests only in regional malls. Equity Office Properties invests in office buildings, and AvalonBay invests in apartment buildings. Some REITs, like Vornado Realty, hold a diverse portfolio of properties.
Office and industrial properties account for 30 percent of REIT holdings, retail properties for 25 percent, apartments for 20 percent, and a collection of hotels, hospitals, self-storage centers, and other types of real estate for the rest. The vast majority of companies are so-called "equity REITs" that own and manage property. A small number are "mortgage REITs" that own mortgages rather than property. Another small percentage are "hybrid REITs" that hold both property and mortgages.