Real Estate PE vs. REIT

hey,
my buddy works for a private REIT company in NYC. He was saying how his company has different "funds" and investors pool their money into certain funds, then go out an purchase RE.

Doesnt this sound more like RE PE??

Could someone differentiate between the two?

Is my friend an idiot and works at an RE PE firm and doesnt even know it?

 

A REIT is a tax structure. I think the requirement is 100 investors; if you have that, you can have a REIT. If it's a private REIT operator, it's not surprising that they would raise multiple different REITs to do different types of deals.

 

REIT: Low risk High liquidity - publicly traded just like stocks / mutual funds Tax exemptions Most profit is distributed to investors May or may not directly invest in real estate assets (e.g. mortgage REITs) Investors include both retail and institutional

RE Private Equity High risk Low liquidity High profit retention / carried interest retained by PE firms as compared to REITs Invest directly in real estate assets Investors include institutional and/or HNIs

Turns out your friend isn't an idiot! :P

 
Best Response

REIT is a tax structure that requires 90% payout of income to investors... therefore they have high dividends. It's true that REITs need to have a certain number of investors, but that 90% payout is what's critical. REITs were designed primarily so that normal, retail investors could participate in the commercial real estate market without having huge sums of money to invest.

^the above poster has all that right.... those are generalizations, but all correct

It should also be noted that your friend may work at an REPE shop or other RE firm that manages a REIT. The expertise required for managing a REIT is similar to that which you need for REPE and so some of the best firms in real estate manage REITs as well as standard RE PE partnerships (Funds).... REITs can be private, as well as public.

 

I'm not sure about the correlation between a REIT and low risk/return. To name one, SL Green is known to take on structured finance positions, "loan-to-own" opportunistic strategies, etc. Further, a large number of REITs are developers which by nature is usually on the extreme opportunistic side.

The reality is that the acquisitions role will be similar at both depending on the objectives of the firm or fund. If you are seeking "exciting" opportunistic investments, make sure this is something the REIT is involved with. As people said earlier, a REIT is a tax structure and not an investment strategy,

 

Sorry to hijack the thread, but I have some questions of my own. I'm currently looking into different fields of RE and was wondering about some other differences between REITs and RE PE that were not mentioned yet in this thread. I couldn't find any answers that were given recently so I'm hoping that some of you will have more up-to-date ones.

For starters, how does compensation compare between working in a REIT and working in a RE PE firm? Work-life balance? What's harder, transitioning from a RE PE firm to a REIT or vice-versa? What are some of the best REITs/RE PE firms to work for?

Much thanks!

 
Aspiring Monkey:
Sorry to hijack the thread, but I have some questions of my own. I'm currently looking into different fields of RE and was wondering about some other differences between REITs and RE PE that were not mentioned yet in this thread. I couldn't find any answers that were given recently so I'm hoping that some of you will have more up-to-date ones.

For starters, how does compensation compare between working in a REIT and working in a RE PE firm? Work-life balance? What's harder, transitioning from a RE PE firm to a REIT or vice-versa? What are some of the best REITs/RE PE firms to work for?

Much thanks!

Pretty sure these have been answered before, but anyway:

comp: Definitely better at an elite opportunity fund. REITs don't tend to pay well, except possibly at the C-level. Work-life balance: Great at a REIT, at a PE fund it really varies. Some funds will work you to death, others are more laid back. The best: just see who's making headlines or raising a ton of money, read the news, check old threads. Keep in mind some of the BBs, such as Citigroup, have washed their hands of investing in real estate (as far as I know).

 

I think broadly speaking Prospie is right but generalizations are tough.

The strong NY REITs like Green and Vornado pay their acquisition guys market. Work/life balance depends on work flow, ie. if you are on a live deal that hit the fan vs. not working on a serious deal. That holds true both at REITs and investment shops. Some have more bullshit work (ie. doing full underwritings on deals that nobody is seriously interested in or have the acquisitions team cover asset management/marketing/investor relations) which can increase hours but it all depends on the company itself and is not a REIT vs. fund conversation.

I agree that the few Blackstone RE shops of the world are going to pay out more than most REITs or investment shops will, but that is the case in both real estate and vanilla PE.

 
Krakauer:
The strong NY REITs like Green and Vornado pay their acquisition guys market. .

Market rate for what, IB, PE or something else? What about bonuses? Specifically wondering about post-MBA.

I have no experience in IB, PE, or real estate, but REITs sound like a really interesting area and I have some pretty good connections to top REITs. Seems like it could be a good place for someone interested in finance and a relatively better work/life balance.

 

In terms of skillsets, I'd say REIT investments are mostly core assets / fully constructed assets ready to lease (due to restrictions in exchange listings), whereas REPE investments could be development focused as well as core investments. So, an understanding of project finance would be required in REPE, while REITs would be more acquisition / exit focused with requisite knowledge on property valuation, cap rates, etc.

Generally speaking, REPEs are more competitive to break into v/s REITs. In terms of breaking into a REIT w/o IB/PE exp, I'd say very doable with the right prep and networking.

 

I have a hard time what people are talking about when they say REPE is more competitive than REITs to break into. Assuming we are talking merely of acquisitions, the skillsets are identical and the analyst/associate backgrounds are pretty much the same. The exception is really that the elite shops (ie. Blackstone and a few others) that are more focused on entity-level takeovers will usually have more exclusive tilt towards former bankers and a lot of single-asset focused shops have a blend between former bankers and guys that started in real estate acq. (or other relevant RE finance gig like a debt fund etc) out of undergrad.

The prestige factor in real estate has nothing to do with the firms corporate structure (ie. private REIT, public REIT, investment management, or a self-declared REPE shop) but more so related to its 1) ability to fund raise, 2) ability to source and close deals and 3) ability to repeat and repeat. So while Carlyle might get more junior level people excited, I'm not sure that I would choose that experience over something at Vornado (or vice versa). It would be dependent on a lot of other factors.

Lastly, the idea that REPE is more development focused is ridiculous. Some REPE do invest in development deals but they are largely alongside REITs that have an operating and development platform to actually carry out the business plan. Again, I don't think it is relevant to say a REIT is more development oriented than REPE or vice versa. It is shop specific. On the REPE, unless you are on a dedicated asset management team, you're really relying on either JV partners or third-party partners and simply checking the draw reports and briefly looking at constuction updates. You get significantly deeper in the details when you work at a REIT or investment shop that does the operations and development themselves.

I'm not sure what premium a post-MBA associate would have in terms of pay. It is usually less structured so there isn't a clear figure. I think it is tough to break into the acquisitions arena without IB or RE finance experience. As a first year associate (ie. two years out of ugrad), market at most large, NY-based shops is around $175-$200.

 
Krakauer:
Lastly, the idea that REPE is more development focused is ridiculous. Some REPE do invest in development deals but they are largely alongside REITs that have an operating and development platform to actually carry out the business plan. Again, I don't think it is relevant to say a REIT is more development oriented than REPE or vice versa. It is shop specific.

Firstly, I never said REPEs are more development focused, I said they have the ability to do more development deals than REITs as REITs are restricted by exchange listing restrictions. For instance, an exchange may say that no more than 10% of investments can be development focused - no such restriction on REPEs. The investments REPEs make will obviously be specific to the investment strategy chosen by the shop. Secondly, to say that REITs have an operating and development platform is absurd - REITs typically have a property management entity specifically to manage fully constructed properties / assets on behalf of the REIT. Development is a different game altogether, and development deals are usually done by relying on the RE developer to take care of operations.

Krakauer:
I have a hard time what people are talking about when they say REPE is more competitive than REITs to break into.

It's simple really, people make more money in REPEs and prefer REPEs to REITs, making REPEs more competitive to break into than REITs. Obv, this would be a generic statement and there would be premier REITs that are much more competitive than the smaller REPEs.

 
Nobama88:
Does any one know some REIT / REPE's to look into for job opportunities on the west coast? I have made a oaky sized list on the firms located on the left coast, but have found very few hiring.

As has been mentioned RE recruitment is usually on an ad hoc basis and half of it is luck and the other half is contacts. If I get an email from a random person looking for a job then I usually won't give it much attention (although I will do an information interview if they are genuinely interested in learning about me or the company I work for).

If you have few contacts in the industry, find someone who does and use them as a go between. I will grant an interview to a person who has come to me via a friend in the industry, even if we are not hiring. If I like the person I will forward their CV to people that I know are hiring.

The other way is to find RE focused headhunters. I don't know any in the US, but in Europe there are a bunch: Redset, Sousou, PERecruit (has RE jobs),brattle cameron, cobalt to name a few. They usually know who is hiring.

 

A real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.

 

The historical standard for fee structure for opportunistic RE funds was a ~1.5% management fee and a 20% split over a ~10% hurdle rate. There was usually a catch up after the hurdle rate was hit where the sponsor would earn 50%+ of the profit until they'd hit 20% of the overall profit (negating the effect of the hurdle if the deal did well).

A fee structure like that for a REIT is nonsensical. Almost every public REIT is internally managed, so the management team gets paid salaries and bonuses, not a promote. There isn't a distinction between limited partner investors and a general partner / sponsor.

What do you mean by a family-owned REIT? A family would typically own real estate through a partnership vehicle that gets pass-through tax treatment anyway. The benefit of the REIT structure is that it allows the entity to become a widely-held public vehicle that can pass through income to investors tax-free like a partnership. If you're family-owned and not widely-held, I can't see why you'd structure your holdings through a REIT (although some non-profits use REIT blocker structures to prevent having profit treated as something called "unrelated business tax income" or UBTI).

Both REITs and partnerships have difficulty retaining earnings given the distribution requirement. In order to retain earnings, you generally have to pay a corporate income tax. So when either type of entity wants fresh capital for reinvestment, it will generally have to raise new equity from existing or new investors.

If you've ever seen a public company's income statement, there's usually a line item called taxable income. Yes, income from rents and gains from sales increase taxable income; operating costs, depreciation, and interest expense reduce taxable income.

There is no set convention for quoting return targets, but it is generally on the project-level (in other words, the return received by the general partner and limited partners treated as one entity, before fees charged by the general partner and before factoring in the general partner's disproportionate share of profit). This is often referred to as the Gross IRR. The Net IRR is the bottom-line return to limited partners. Funds will often report both numbers.

 
re-ib-ny:
The historical standard for fee structure for opportunistic RE funds was a ~1.5% management fee and a 20% split over a ~10% hurdle rate. There was usually a catch up after the hurdle rate was hit where the sponsor would earn 50%+ of the profit until they'd hit 20% of the overall profit (negating the effect of the hurdle if the deal did well).

If you guys are curious about fee structures, see link. Look up "Fee Scorecard".

http://www.realert.com/ranks.php

There is no general approach to fee structures; they tend to be all over the place.

Man made money, money never made the man
 

REIT > REPE

http://www.reit.com/portals/0/PDF/Morningstar-Report-REITs-and-Private-Equity-Real-Estate-Funds-2011.pdf

"Publicly traded equity REITs have outperformed core, value-added, and opportunistic funds consistently over the long term, experienced stronger bull markets, recovered faster from downturns, and had lower fees and expenses on average compared with private equity real estate funds. This analysis supports the case for pension funds and other institutional investors having larger allocations to publicly traded equity REITs than they typically do today as part of a real estate portfolio invested in both REITs and private equity real estate funds."

REPE is going the way of the dodo bird. The model made sense in boom times when GPs could get +20% IRR; that doesnt happen nowadays. Only REPE firms that employ creative strategies can achieve extraordinary returns in today's operating market.

Man made money, money never made the man
 

RE....how much do you think fund size plays a role in your conclusion? Do you think there is an ignored mid-sized CRE market that is not worthwhile to institutional investors but out of reach for micro funds? Do you think outsized returns can be achieved there?

 
reLA:
RE....how much do you think fund size plays a role in your conclusion? Do you think there is an ignored mid-sized CRE market that is not worthwhile to institutional investors but out of reach for micro funds? Do you think outsized returns can be achieved there?

Not sure what you are asking.

Man made money, money never made the man
 

RE CM, that fee scorecard is interesting and informative. I have a subscription to RE Alert but never bothered to scan through that database. Thanks.

I disagree with the assertion that RE PE is "going the way of the dodo," but generating excess returns is definitely a challenge that many of new entrants into the field during the last cycle failed to overcome. While there is certainly some evidence that public real estate equity (REITs) deserve a larger share of real estate portfolios, the evidence is conflicting as to whether REIT investment in the long-run has outperformed opportunistic returns (it's difficult to compare a constantly-traded, continuous return investment in public stock against fund-by-fund investments in various pools of private equity across vintages, and the data conflicts depending on how you treat reinvestment, timing, and weighting of investment over time).

Fundamentally, I can say that the type of real estate a REIT buys is very different from your typical opportunistic fund. Whereas REITs are looking for fully-leased, stabilized properties with no rehab, repositioning, or renovation requirements; RE PE funds seek out these properties to pursue excess return (not much unlike distressed corporate PE). Although you can have a long debate about what makes the better long-term investment, I think you definitely get the better learning experience at the junior level working on opportunistic deals.

ReLA, there's definitely a constant debate within the RE community as to whether there is a "sweet spot" of deal size that is too small for institutional funds and too large for individual / high net worth investors. Some people say that deal size is somewhere around $5 - $15 MM. Frankly, I'm not sure that is the case.

 
re-ib-ny:
I disagree with the assertion that RE PE is "going the way of the dodo," but generating excess returns is definitely a challenge that many of new entrants into the field during the last cycle failed to overcome. While there is certainly some evidence that public real estate equity (REITs) deserve a larger share of real estate portfolios, the evidence is conflicting as to whether REIT investment in the long-run has outperformed opportunistic returns (it's difficult to compare a constantly-traded, continuous return investment in public stock against fund-by-fund investments in various pools of private equity across vintages, and the data conflicts depending on how you treat reinvestment, timing, and weighting of investment over time).

Fundamentally, I can say that the type of real estate a REIT buys is very different from your typical opportunistic fund. Whereas REITs are looking for fully-leased, stabilized properties with no rehab, repositioning, or renovation requirements; RE PE funds seek out these properties to pursue excess return (not much unlike distressed corporate PE). Although you can have a long debate about what makes the better long-term investment, I think you definitely get the better learning experience at the junior level working on opportunistic deals.

I agree that REPE will always have a place in the real estate investing universe, but the REPE investemt strategy is inferior to the REIT model with respect to compound net total after-fee returns over time.

*REIT vs Core REPE over 20 Yrs -> 500 bps *REIT vs Value-add REPE over 20 Yrs -> 580 bps *REIT vs Opportunistic REPE over 20 Yrs -> 320 bps

You could argue the minutia (some REPE funds perform better than some REITs, obviously), but the aggregate data is overwhelmingly one-sided. The gross AUM of the REPE funds in that article total $310.6B (across 277 commingled funds) - I would say that is a significant portion of the total AUM in the REPE universe, enough to represent an accurate cross-section of REPE returns.

Man made money, money never made the man
 

I'm not so sure that there is a sweet spot. The reality is that large funds have demonstrated a remarkable willingness to dip into small assets, either themselves or through small deal platforms. And there's plenty of smaller groups who are willing to play at that level. Perhaps I'm a cynic, but I think the notion that there's a deal size that's truly ignored and underpriced (at least in major, core markets) by the universe of RE investors today is somewhere between overplayed and false.

 

Do the REIT return calculations take into account dilution from the constant equity raising? Most REPE is levered beta. A one way bet with the market with higher fees than a typical REIT so the aggregate results are not surprising.

For the professional, I think only the higher levels of management at a top REIT (or the acquisitions team) is as lucrative as being a carried interest earning professional in REPE. In both financial terms and terms of how interesting the work is. Not sure what i would choose in terms of Asset Management though. What do you guys think?

 
Relinquis:
Do the REIT return calculations take into account dilution from the constant equity raising? Most REPE is levered beta. A one way bet with the market with higher fees than a typical REIT so the aggregate results are not surprising.

For the professional, I think only the higher levels of management at a top REIT (or the acquisitions team) is as lucrative as being a carried interest earning professional in REPE. In both financial terms and terms of how interesting the work is. Not sure what i would choose in terms of Asset Management though. What do you guys think?

Now we're talking, this is exactly the type of conversation this otherwise useless website needs.

The REIT returns in that doc are benchmarked by FTSE NAREIT All Equity REITs (120 companies, $393 B Mkt Cap).

All REITs must acquire investments at a certain FFO benchmark (FFO yield). If that benchmark isn't met, the investment is dilutive to the company. Otherwise, the investment will be Accretive for the investors. So basically, dilution is more or less irrelevant if the REIT is following its business plan (which is to invest in Accretive investments - properties that meet a certain FFO yield benchmark).

REPE def. pays more than REIT, but there are a couple of reason for that - higher fees, carry (if investments perform), higher risk investments, etc. But not all REPE funds perform and pay as well as BX. As far as the excitement factor goes, I think it depends - I would rather be at a boring REIT that consistently performs well than at a REPE that doesn't.

Man made money, money never made the man
 

It depends on the size/capitalization of the companies. Fundamentally, its important to remember that most REITS are buy and hold entities. By default that means the majority of capital is being deployed in Class "A" assets and other lower risk investments that will provide long term dividends to investors aka they want ROE. Also most REITS specialize in one asset class and have to keep their leverage levels low, which means underwriting deals at 40-50% LTV.

REPE firms are often trying to maximize their IRR as opposed to focusing so much on an a YOE. They will go further on the risk spectrum, use more JV partners, and invest in a number of different property types. So as an analyst you may get more exposure to value-add transactions, re-developments, and other interesting investments.

 
infinittiii:

Why do reits have to keep their leverage low and underwrite 40-50%?

they don't have to, but a REIT shareholder is looking for something different from what an LP in an opp fund is seeking.
thetwohacker:

OP

REValuation above summed it up well, but what does that mean for a junior/analyst guy? to answer your question, the job isn't radically different, but at an opp fund, pay should be better on avg and hours could possibly be worse.
 
infinittiii:

Why do reits have to keep their leverage low and underwrite 40-50%?

I guess its important to point out the difference between an exchange traded REIT and a non-traded REIT. A non-traded REIT shareholder can't go online and cash in his shares the way a traded REIT shareholder can, therefore a lot of the non-traded REITS have a bit more flexibility when it comes to leverage. I don't work in IB and can't provide a high level response but I can tell you that leverage ratio's (debt to equity) are a key valuation metric that is analyzed when valuing real estate companies. Having lower leverage essentially translates to lower risk, as well as lower debt payments. Lower debt payments should theoretically translate to a higher dividends, b/c their is less debt service to cover.

REITs leverage ratios often go up and down depending on where we are in the economic cycle, cost of capital, availability of quality investments, etc..

Anyways, I'd be curious to hear some other differences from guys who have also worked on both sides of the fence

 
infinittiii:

Why do reits have to keep their leverage low and underwrite 40-50%?

I'm no expert but I have worked on both sides. I can't tell you how leverage got to 40-50% though it seems to be the accepted "limit" that industry analysts use to determine a REIT's financial health. GGP got a little too crazy with debt several years ago and they paid for it.

Part of another reason is that publicly traded REITs have the ability to tap the public debt market and get unsecured debt at the corporate level. This provides flexibility and speed, and the spreads are based on the REIT's credit rating. Taking Simon Property Group, for example, their 2013 Supplemental showed that they have twice as much unsecured debt than secured debt. Back in December 2012, they were able to get unsecured debt at 1.50% fixed rate. Getting this isn't nearly as painstaking as getting secured financing where you have lenders poking and prodding your property for weeks before close.

In addition, most REITs have a revolving credit facility that allows them to take down acquisitions quickly (all cash) and for other operational items. The underwriting for the credit facility often times is dependent on the amount of unencumbered assets a REIT has. It's not really collateral (unless structured that way) but the underwriter takes solace in the fact that these assets provides an out for the REIT in case they need money to pay down the credit facility. If you scroll through SPG's Supplemental you'll notice that they have a ton of unencumbered assets. So in essence, even though it seems like it's not efficient from a cost of capital standpoint, there's a lot of flexibility for REITs.

Just my take, I'm sure there are those of you out there smarter than me who can provide better info.

 

Everything I read above seems correct. I've worked in both capacities, and as far as hours go, you'll have a better work/life balance at a REIT. There will be times during quarterly and yearly reporting periods where you'll work some long hours, even if you're in acquisitions. I've had some crazy hours recently but that was due to a potential merger, but I digress. You'll also have the benefit to be exposed to a public company (unless non-traded & private). If I had to chose between the two I would go with REPE - more exciting/interesting deals & structures without all the bs.

 

Emphasize your underwriting and due diligence experiences on your resume (quantify it and break out what markets, property types, and clients you were preparing BOVs for). Explain what you solved for too (value, IRR, cash on cash, stabilized yield...etc). Get Argus experience before your graduate. Also, network.

If you want to get buy-side experience, and eventually wind up in investment/portfolio management, stick to a REPE firm. You probably won't get as much buy-side/portfolio management experience at a publicly traded REIT as you would at a PE firm for reasons you can probably guess,

 

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