I know they’re getting hammered right now but Im more interested in what its like to work for them and how they operate. Do many of them do their own developments? Or do they just take equity/debt stakes in the development’s of others. Also what is it like to work as an analyst or senior member of their team, what are they looking for from candidates, the standard career path, etc? Any insight would be appreciated. Thank you
Most own their developments. Increasingly many REIT’s have set up JV with PE funds & Pensions funds, where they are a minority owners (seen many with 20% ownership) and get mangement fees for running real estae portfolio. Never worked for a REIT but have valued them in the past.
I’ve never worked for them, but I have covered REITs for the past four and a half years (please visit my other post on my current job situation!). Most do their development on balance sheet, with many seeing a slip in development schedules and some long-term development plans being shelved, given the current market. There just isn’t as high a demand for real estate as many companies are just trying to make it through the next quarter and aren’t expanding these days. Overall, supply isn’t too out of whack with demand, unlike what happened in the 90’s, so there isn’t too much concern (you have to look to each individual market and property sector to delve deeper here) about oversupply in the coming years. The problem with development is that REITs will take short-term construction financing and then try to pre-lease their space before completion, enabling them to refi at reasonable rates upon delivery, taking out their construction loans; however, given the current crisis, some previously-signed LOIs and even leases are dropping out, leaving the REIT holding a only partially-leased property with no immediate prospect for full occupancy, making it very difficult to refi. That’s why they have been dumping longer-term projects, to some degree. JV’s help to mitigate a lot of that risk, where the REIT will take a bunch of fees (acquisitions fees, disposition fees, management fees, financing fees, etc.) on top of only holding a small percentage of the equity in the JV. But, a lot of those JVs are with pension funds/etc. who really want safety, and they typically don’t do as many development or re-development deals and tend to focus more on fully-stabilized properties in the JVs. REITs have been a nice industry for the past few years, though it is still somewhat young, as the real “birth” of the REIT industry only came in 1993-94 when the market cap of the industry jumped from about $8.8B in 1991 to $39B by 1994 (there were 50 IPOs in 1993 and 45 in 1994). Fundamentally, real estate is a necessary asset and will continue to act as an inflation hedge going forward, and has always held a low correlation to the broader market, though it has increased in the past couple of years.
mcthorp - ive just accepted a job as a finance manager within a REIT (looking after the accounting/taxation and also helping out with some of the cap raisings + some modelling of asset acquisitions or disposals). What do you think are some of the main issues I will be faced with in this role? the Fund holds a range of real estate assets, but mostly hotels and office space in oz and europe. I am trying to research as much as possible prior to starting. cheers
djjk1 - Just for clarity - what property sector is the REIT in and is it an American REIT? You say the “Fund holds a range of real estate assets,” - is that the fund you currently work at, or a fund sponsored by the REIT you are going to be employed at? Some REITs may raise a fund as a secondary way to finance some of their projects. I’m going to guess that the REIT is the one that has the hotels and office space in oz and europe - in that case, I’m not too sure on the international market, other than it tends to mirror and lag the US market to some degree, especially following the recent global economic downturn. Hotels are a unique type of real estate in that they are able to re-price the lease immediately in response to current market conditions, given that lease rate are re-negotiated daily, which also leads to tremendous volatility. The metrics to look at there are RevPAR (Revenue Per Available Room), which multiplies the Average Daily Room Rate (ADR) by the occupancy rate, focusing on the productivity of the real estate. This is a good indication of what the property offers the REIT in terms of FFO. What types of hotels (upper upscale or budget lodging for example) and brands are they? Operators and owners can benefit from re-branding the asset and tend to like concentration within a market and/or regionally and can take advantage of economies of scale. Are they located in primary markets? Within the market, are they located in prime locations, meaning, if it’s a Parisian hotel, is it near the Eiffel tower or in the outskirts of town (caveat - I’ve never been to Europe)? What kind of clientele does the hotel cater to - tourists or business travelers? These kinds of questions will lead you to a better understanding of what will effect operations, and the REITs are not the operators. Most hotels are seasonally stronger in the 2Q and 3Q. Hotels are very economically sensitive and rely on a growing economy that increases the need for business travel that is often tied to discretionary budgets allocated to travel spending. Office properties typically have longer-term leases, but owners are often able to set up triple-net leases or at least pass on most of the operational costs of the property to the tenants. The best properties are normally in central business districts and are in primary markets, though owning the best Class-A building in a secondary market has its upsides. Primary markets usually offer a more educated workforce, better transportation hubs and better highways, more and diverse restaurants, and tend to have above average population and income growth demographics. Class-A buildings offer more services, are usually newer or better updated and are better located than Class-B properties. Office sector health is heavily tied to the economy, as economic growth pushes employment growth and corporate spending, driving occupancies and rents higher. Oversupply/overdevelopment of office space pushes rents and occupancy rates down, and is one of the largest concerns in each market. Good luck in your new role! Let me know if you hear of any other positions opening up! I’m trying to transition out of my role ASAP.
SeanC - sorry to have hijacked your thread with talk of Aussie real estate (djjk1 - you’re down under, right?). To answer the original question about REIT structures: Depending on what property focus the REIT is in, they typically run fairly lean. To return to the hotel example, the owner is not the operator - the REIT owns the property and leases it to a major REOC (Real Estate Operating Company) like Hilton or Travelodge to run the place. Their corporate structure is leaner since they don’t have to staff each property. Office, Retail and Healthcare properties are similar, in that they don’t operate the properties. Multifamily, however, is a different story. They need a full staff at each property, including a manager, leasing agents and maintenance. Working at the higher level of management you are looking at either working on the acquisition, disposition, development/re-development, financing or accounting functions. It just depends where your skillset lies, and how large a department the REIT can support for each function. I believe the standard career path is similar to any other major corporation: you go to a good school, intern in real estate somewhere or get a first job in one of the listed functions above, and then lateral your way in to a similar role at the REIT, and then work diligently and move up the ladder. I’ve noticed that most of the companies I follow tend to have higher-level employees that have worked their way up the ranks over the years and know the ins and outs of the company. There seems to be a good environment for career growth at REITs; however, given the current environment, and the constant cyclicality of real estate, some functions are prone to being laid off when not needed (i.e., development teams are being cut back, acquisitions teams are not closing on deals, and dispositions are just not being completed, either).
excellant mcthorp. i learned a lot. definitely a tremendous post. thx. i just got a book on REITs as i’m studying different sectors. do you have any learning material i should look at in the range of intermediate to advance?
The best book out there, and a pretty easy read, is Ralph Block’s Investing in REITs: Real Estate Investment Trusts. He also keeps a blog going called the Essential REIT. A quick and easy study is to go over to NAREIT’s website at reit.com and click on the section All About REITs. That a perfect place to start. They also have free access to their monthly magazine, Portfolio, where they interview industry people and there’s always great articles there. There is definitely a lot of free information out there on the web to look up, with lots of websites dedicated to commercial property coverage. CPN, Commercial Property News has a website with lots of articles, though not solely covering REITs. Good luck in your quest for REIT knowledge.
To go back to djjk1’s question for a moment: I think the accounting department is one of the safer places to be within a REIT right now, given that there will continue to be a need for property reporting activities, while the credit market freeze and its effect on diminishing development pipelines and increased hurdle rates for acquisitions make those areas more volatile, staff-wise. I think the capital raising and acquisition/disposition portion of the job sounds more interesting, but I think you’ll find that there isn’t a lot of capital chasing real estate (smart money seems to be waiting on the sidelines for the dust to clear) and there just isn’t much going on in terms of acquisitions or dispositions due to a shift in cap rates and the difficulty in obtaining credit, which are inter-related. You’ll probably be involved in evaluating some deals out there, but getting them done is another matter. At some point, this will change, as spreads move back to historical norms and credit loosens up, but who is to say when that will happen? Now is a great time to get in there and get your hands dirty and learn as much as you can while the real estate market is in such flux.
MacThorp. If you were looking at a REIT with a good portfolio of properties and no serious solvency concerns, what entry point would you consider attractive right now? 50% discount to NAV and div yield >5%? Lots of REITS trading at some big discounts to NAV. Obviously a risk that NAV will be restated lower. Just wondering how you look at valuing a REIT and at what point you would look to buy into one. Thanks for the info so far by the way.
Mcthorp, thank you for this insight.
Carson - I continue to speak in generalities here, hopefully this information is still helpful. You are correct in starting off your REIT research by looking at solvency and trying to find a good portfolio of properties, as those two things are a measure of a company’s strength, as REITs tend to grow their FFO through one of two ways: rent growth (which is much easier with strong properties) or asset growth (accomplished through acquisition, development or re-development, and all three require capital, often more easily found and with better spreads if the company has a strong balance sheet). NAVs are calculated based on an appropriate cap rate for the company’s portfolio of real estate. Figuring out the correct cap rate is where the difficulty is: a swing of 50pbs can generate a large variance in the underlying NAV. And, getting a grasp on what is an “appropriate” cap rate for an entire portfolio of diversified real estate assets (diversification normally comes from geography, quality, size and tenant mix, since most REITs these days tend to specialize in a single property type), is quite difficult in a normal market, and is even more difficult today, given that there are very few reliable comparable sales figures to look at since the real estate market isn’t very liquid right now. If you think you have a good grasp on what a company’s underlying NAV should be, then you can start figuring out at what point a certain discount would be a good entry for you. That being said, I believe there are other factors to take into account when valuing a company besides solely looking at its assets - strength of the management team and the company’s business platform are two, in addition to others. These other factors are generally why REITs have historically traded at a slight premium to underlying NAVs, and are often taken into account when calculating a company’s overall NAV. Looking at dividends, if you simply bought the index (there are a few comparable indices that include most of the US property REITs), you would be looking at a blended dividend yield of approximately 9.5% today (as of the close 02/13/09). Historically speaking (again), the dividend has provided about 2/3 of REITs total return since 1972, although that number has decreased somewhat if you only look at the most recent few years.
McThorp. Thank you for that response. I might come back on here to pick your brains about REITs at some point in the future!