Real Estate Investment Trusts (REITs)

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 ...