Real Estate Investment Trusts (REITs)
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Industry Overview
The US REIT industry includes about 1,000 companies with combined annual revenue of over $20 billion. Major companies include Simon Property Group, Vornado Realty Trust, ProLogis, and Equity Residential. The industry is highly concentrated: the 50 largest companies generate more than 80 percent of revenue.
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 commercial real estate owned by REITs is close to $500 billion, 10 to 15 percent of total institutionally owned real estate. A company organized as a REIT under IRS regulations can avoid paying income taxes if it pays out at least 90 percent of its taxable 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. Many REITs have been exploring the cash-saving technique of declaring a dividend partly in cash and partly in newly issued stock.
To qualify as a REIT, the IRS requires a company to have at least 100 shareholders, and at least 75 percent of total investment assets must be in real estate. REITs invest in a variety of property types, such as office buildings, industrial buildings (warehouses), shopping centers, malls, or apartments. Some REITs specialize in a particular property type or region. Simon Property Group, for example, invests only in regional malls. ProLogis invests in warehouses, and Equity Residential invests in apartment buildings. Some REITs, like Vornado Realty, hold a diverse portfolio of properties.
Office and industrial properties account for 20 percent of REIT holdings, retail properties for 25 percent, apartments and healthcare-related properties each make up 15 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.
