Can anyone shed some light as to why REIT jobs don't seem to be as appealing as REPE/Investment funds jobs.
Essentially they do roughly the same job functions, with an Asset Management arm, acquisitions, etc. Is it mainly due to compensation, or other reasons?
Any insight would be helpful.
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I'm familiar with this stigma you're referring to and I honestly don't think it holds much water. Job roles at REITs entail similar responsibilities and I've seen people go from REPE groups to REITs and vice versa.
Compensation is relatively similar, as long you compare the respective tiers, although it may be more weighted to salary than bonus. Another argument could be the shorter time frame in REPE makes an investment as "sexier" - something REITs are intrinsically not designed to do.
another consideration is that a lot of PE funds have clauses in their JV/management agreements that provide them with a large amount of discretion over investment opportunities. these funds may be able to target a range of asset classes, buildings with various occupancy scenarios, etc. that make the perceived approach to underwriting/evaluating "sexier." REITs by law have to obtain an overwhelming percentage of cash flows (95) from rent (primarily), and are consequently very sensitive to achieving and maintaining occupancy levels as a central objective. So, the focus on occupancy metrics and rent streams, as opposed to various other means of creating value in RE, may give REIT investing a less sexy or entrepreneurial overall score.
That's not true at all, REIT needs to derive 95% of their income from "real estate sources". There are Mortgage REITs, they obviously aren't collecting rents and disposition proceeds count towards real estate sourced income.
So its not necessary for REITs to collect rents but due to their tax structure it makes sense for them to invest in cash flowing properties.
Certified real estate associate doesnt know REIT structure
Reits have to invest 75% of total assets in real estate assets, derive at least 75% of its gross income from rents from real property or from mortgages. The 90-95% is the amount of taxable income that must be distributed to shareholders in the form of a dividend.
My question for SHB is why the discrepancy between the percent of the REIT's gross income that must be derived from rents from real property (i know this is inclusive of more than just rent from a tenant) - Section 856(c)(2) states that at least 95 percent of a REITs gross income must be drived from, among other sources, rents from real property. The section immediately following, Section 856(c)(3) states at least 75 percent of a REITs gross income must be derived from, among other sources, rents from real property. Just trying to understand, as I am curious. A company like Iron Mtn that is converting to the REIT structure most definitely does not meet the 95% threshold but meets the 75% threshold.
You should take a look at the actual code because 856(c) (which I actually had to look up to confirm) is a large list of qualified income. 2 & 3 are actually slightly different lists. What the IRS is saying is at least 75% has to come from the list in 856(c)(3), then once that hurdle is met, up to 95% can come from everything from the 75% test and also other dividends, interest and stock sale (two separate hurdles must be met). The remaining 5% can be whatever the heart desires.
This is the link for the actual IRS code which will probably be much more clear than I can be. https://www.law.cornell.edu/uscode/text/26/856
Back to Ops question I think there are a few of reasons (some of which were touched on above): Comp: although similar, structure in REIT is probably tilted a little more towards salary, less variability = less sexy. And the equity piece of any bonus in a REIT comes through in stock which isn't likely to produce the kind of returns that most REPE target. Returns: most REITs are going to invest in more conservative assets. Like everyone has said above (to varying degrees of accuracy) maintaining your REIT status is obviously important, as is being able to cover (and hopefully grow) your dividend. This incentivizes REITs to invest in conservative, cash-flowing assets which are generally less sexy than buying (or managing) value-add real estate and producing big returns. Culture: Many REITs are public companies and in my experience are susceptible to having a much more "corporate" vibe.
Obviously these are all massive generalities, but these are some reasons that I see a bit of a stigma about working for a REIT as opposed to REPE
I remember reading an article that showed how REIT CEOs do not make as much as their "counterpart" CEOs who manage similar-sized companies in other industries. AGain, disclaimer: I know some brilliant people in the REIT business, I've met some VERY smart REIT CEOs.
I think it also comes down to the mindset (which I don't fully agree with) that private money is sexier than public money.
Couple things come to mind particularly development at a REIT, all generally speaking: - tendency for property management / Asset Management centric leadership with development being the bad word when Wall Street dissects risk profile - Top brass concerned with quarterlies, Wall Street analysts and FFO which your compensation has a negative effect - Longer investment periods, less emphasis on IRRs also less liquidity events, so potentially smaller bonuses - Fewer variable interest entities, so you get less exposure raising outside capital. This can be a good thing also for work life balance.
So at my school a lot of guys went into REITs if they couldn't get into banking. At least in Texas, REIT jobs are more abundant in supply (tons of real estate funds everywhere) and generally started by anyone (money just pours into Real Estate so you need less of an all star track record than starting say an activist HF. So I think people pick other fields over REIT because the high supply of jobs reduces the perceived exclusivity of the field. Additionally, because the best kids go elsewhere, the REITs end up hiring the less-than-rockstar kids, so when a qualified candidate is looking at REIT vs. Generalist PE, he's gonna pick PE because who wants to work under associates/analysts who aren't as qualified as you?
I appologize but you really don't seem to know anything on this topic.
The answer is simple, and has been touched on by a few people, but not fully fleshed out.
The reason REPE > REITs has to do with the sophistication of the investments. REITs, by definition, need cash flow in order to sustain their dividends, and not just cash flow, but stable cash flow. Keeping this in mind, REITs are only able to invest in highly stabilized assets able to provide the above referenced cash flow, or less risky deals that provide a level of security that enables a REIT to still hit their return thresholds. This brings us to cost of capital. Think of a public REIT. Their cost of capital is relatively simple. If they need cash, they can simply raise it in the public markets. Because their cost of capital is so low, their return thresholds are not necessarily as high as a typical closed end fund (i.e. REPE). Lastly, REITs don't have an investment horizon in the traditional sense. If they can buy an office building @ a 5% cap rate, and that appreciates to a 7-8% cap in 5 years, there is no reason for them to sell, as that investment enables the REIT to more than make their dividend payment (which will be less than the 7-8%).
Now, contrast that with a typical REPE fund. Funds are typically closed ended, with a finite investment timeframe and harvesting period. Additionally, funds have return hurdles that need to be met (i.e an opportunity fund is a promise to investors that you will take risk with the goal of returning ~20% IRRs over the fund's lifetime). Two very important constraints. The other big item is the mandate on potential investments. Funds are pools of discretionary capital that allow (within reason) the fund operator to invest in a wide variety of investments in the RE universe. Contrast that with a REIT (such as Vornado) who's mandate is core office investments.
tl;dr REITs offer less sophisticated investment strategies that shoot for lower returns. REPE funds have broad mandates and can look at a huge variety of deals and take on multiple types of risk in the name of risk adjusted returns. There is nothing wrong with a REIT, but at the junior levels, your experience will be much better at a REPE firm (as long as it has $$)
I don't really get the whole "REIT is not as risky as REPE" thing. In theory, all that you said is true. But look around, who is doing all the big developments now? At least all I see are mixed-use, residential, and retail developments by large REITs, although I'm only looking at core markets like New York and DC. Unless you tell me the developments those REITs do are not "risky" given the core location, I don't understand why people always say REITs don't do risk investments.
On the other hand, I don't really see many REPE involved in large and high-profile developments recently, no more than REITs to say the least.
With that said, I'm just basing my opinion on what I see, which is of course limited. I do agree that in theory, REPE requires higher return and thus more risky investments. If anyone can point me to any large developments REPE are involved in recently, that will be helpful and persuasive.
It all comes down to cost of capital. A public REIT's cost of capital is the cost of raising additional capital in the public markets through a follow on offering. A REPE firms cost of capital is the return threshold they have promised to investors (take for example an opportunity fund targeting 20%/2x). Because of this discrepancy, REITs generally invest in less risky assets. That's not to say REITs don't take risk, of course they do, but in general, they don't have to take as much risk to meet their return thresholds. No one wants to take risk... it's a question of how much you have to take to meet your return threshold.
There are a bunch of very sophisticated REITs out there (Northstar comes to mind). But there are just as many REITs which act as core investment vehicles that provide exposure to RE through stabilized income producing properties (a lot less sexy than say, BX taking down a $30B RE platform)
To your comments about developments in core markets, you see these being done by REITs because those developments don't provide the returns necessary for a REPE firm. Yes, they come with development risk, but people always need a place to live and downtown, infill locations such as DC will always be desirable places to live, ipso facto, becauase of the risk profile, REPE firms are priced out of the market by lower cost of capital investors (REITs, pension funds, open ended core funds, etc.)
One thing to point out, when I say REPE, i mean commingled funds of capital raised from institutional investors. I do not mean small shops that scrap together $$ on a deal by deal basis (or have a small fund of money raised from F&F).
I'll also add and this is true for many RE companies with heavy headcount due to high numbers of onsite staff, the standard benefits packages tend to be less generous compared to a REPE. Even though you might be paid top tier in the big RE company, the standard Heath ins, PTO, even education reimbursements are same as the leasing agent at the property.
The analogy is people generally are over paid (above market) at hedge funds. Especially the accountants, tenured executive assistants, whoever because that's the culture - make money - and with the small headcount, there is plenty of money to go around. Contrast with a large REIT, more mouths to feed. Large ops team, finance and SEC reporting, marketing, C-suite, all the people needed to run a business. In contrast, REPE tend to have less mouths to feed per $ managed. They are allocators of capital and try to add value, but they are investors first with high cost of capital.
Investment lifecycle
Few examples
http://therealdeal.com/miami/blog/2014/06/24/hilton-cabana-miami-beach-…
http://www.cpexecutive.com/cities/raleigh-durham/duke-realty-completes-…
http://www.bizjournals.com/washington/breaking_ground/2015/03/atlantic-…
You consider those projects more risky than ground up development? You're insane. The large portfolio deal was 90% leased!
Though this has been semi hit on in this thread. Generally REITs are going to have a much more defined investment criteria and strategy than REPE shops. Obviously the size of the firm factors into this as well.
Equity REITs tend to make incredibly boring investments, mortgage REITs less so, the nature of high yield debt, whereas REPE makes for lack of a better term sexier investments, distressed debt, opportunistic development, etc..
REITs are a great place to get transaction experience b/c of the amount of capital they have at their disposal and (typically) their returns are far lower on an aggregate basis than REPE groups - allowing them to do more deals . They are larger more "corporate" firms that typically require less hours, lower pay, but a great place to "climb the ladder" get your 401k match, collect your benefits, and work on deals that you could never actually syndicate/acquire/develop as an individual business owner.
Aside from the IB rejects who end up in real estate, most professionals who choose to spend their career in real estate (eventually) realize that the real estate sector is appealing from an entrepreneurs perspective given that you can take advantage of the multitude of arbitrage opportunities with your own cash in a horribly imperfect marketplace, where bribery and political corruption are very common and often result in above average yields.
I think the REIT stigma is true in some cases, but not true in others. When Boston Properties first started they were doing suburban class A deals with 1 or 2 downtown Boston deals. They have recently (relatively) acquired iconic buildings in Boston, NYC, San Francisco and DC. They have also been doing a ton of ground up development in San Francisco, DC and Boston Suburbs/Metro. I'd say their risks are real but they have redefined themselves as a long term buyer and holder into a development REIT. BXP is also fully integrated so, other than their investors, they do have 600-800 employees to feed, including building engineers etc. Companies can transform into new companies without a name change. BXP has done this.
I really hope this REITs not being appealing thing gains momentum that way as I gain more experience and apply for a VP position at SL Green or Vornado I won't have as much competition. That being said in my opinion the main reasons people are more drawn to REPE is that investments are generally risker and because of that more interesting and it is typically less corporate and more entrepreneurial. If it was me I would happily take an acquisitions role at a top REIT vs. a middle market REPE and most would take a top REPE gig over everything else. (Full disclosure I work for a REIT)
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