by Brian DeChesare Comments (6)

Real Estate Investment Banking: The Best Way to Make Yourself Indispensable?

Real Estate Investment Banking

Talk to anyone looking to move into investment banking, and they’ll have one big, overriding fear.

No, not the hours, the psychological and physical abuse, or the extreme difficulty of breaking in.

They’ll be worried about the exit opportunities – specifically, working in a group that doesn’t offer many.

This explains why many prospective bankers avoid overly specialized groups, with financial institutions and oil & gas at the top of the list.

But there may be one exception to this rule: real estate investment banking.

If you work in REIB, you’ll most likely stay in a real estate-related role afterward.

But the difference is that there are far more finance roles in and around real estate than in the other sectors.

You can go into commercial real estate and work with individual properties, join a real estate private equity firm, work in real estate lending, go to a commercial mortgage-backed securities (CMBS) group, and more.

But before putting the exit-opportunity cart before the breaking-in horse, let’s start with some key definitions:

Investment Banking Industry Groups: Real Estate

Real Estate Investment Banking Definition: In real estate investment banking (REIB), professionals advise entire companies in the REIT, gaming, lodging, homebuilding, development, and real estate services segments on raising debt and equity and completing mergers, acquisitions, and asset sales.

You have to be careful with this definition because many firms, such as CBRE and Jones Lang LaSalle (JLL), also have “real estate investment banking groups.”

In most cases, however, these groups help raise debt and equity for individual properties, not entire companies – so it is not actual “investment banking.”

Similarly, banks such as Goldman Sachs might have separate “Real Estate Financing” teams, but these groups raise capital for deals involving individual properties.

If the group advises entire companies on equity and debt issuances and M&A deals, it is REIB; otherwise, it’s more like a brokerage role.

The main verticals within REIB are usually:

  1. Real Estate Investment Trusts (REITs) – These entities constantly raise debt and equity to acquire and develop properties, and they’re subject to special rules that eliminate or greatly reduce their corporate taxes. There are also mortgage REITs that invest in loan portfolios rather than property equity, but they operate more like commercial banks and may be covered within FIG.
  2. Gaming – Casino companies, but “gaming” sounds more sophisticated. Restaurant and live-event operations may also be included.
  3. Lodging – Hotels, resorts, and cruise lines.
  4. Home Builders – These firms construct and sell homes, often focusing on specific geographies, price ranges, or home types.
  5. Real Estate Operating Companies (REOCs) and Developers – REOCs are similar to REITs but do not comply with the same rules and restrictions; in exchange, they also pay corporate taxes and may not need to issue debt and equity as frequently. Developers are similar to home builders but operate across all property types, often focusing on commercial rather than residential buildings.
  6. Real Estate Service/Leasing Companies – These are “miscellaneous” companies that offer other services in the sector. One infamous example is WeWork, which attempted to make a business out of leasing office space and re-leasing it at higher rates – until it imploded in a mix of cocaine, MDMA, and cult-like behavior.

Sometimes, RE bankers also advise on the property portfolios of non-RE companies, such as a consumer/retail company that wants to acquire space and build more stores.

Recruiting: Who Gets Into Real Estate Investment Banking?

The same types of candidates who are competitive for other investment banking roles at bulge brackets, elite boutiques, and middle market firms are also competitive for real estate IB roles.

So, it mostly comes down to the quality of your university or business school, your GPA, your previous work experience, and your networking efforts and technical preparation.

You have an advantage if you’ve had previous industry experience, and you probably have an even bigger advantage here because real estate is specialized.

But you’re probably wondering about this question: Can you use other RE roles, such as lending or brokerage, to break into REIB “through the side door”?

The best answer I can give is: “Maybe, but don’t hold your breath because it’s harder than you might expect.”

The problem is that the skill sets are quite different because in most other RE roles available to university graduates, you don’t work with corporate entities the same way bankers do.

So, it’s possible to use one of these RE-related roles to move into IB, but it’s more realistic to use them as an entry point into something like real estate private equity.

If you want to use this strategy to get into banking, you should look for a RE-related role at a large bank; it will be easier to transfer once you’re already inside a big firm.

What Do You Do as an Analyst or Associate in Real Estate Investment Banking?

You can expect to work on the standard transactions: follow-on equity issuances, debt issuances, the occasional IPO, and M&A deals.

But there are a few differences:

  • Asset Disposals / Spin-Offs – Asset-level deals are far more common among REITs and gaming/lodging operators because it’s much faster and easier to acquire a few properties than an entire company.
  • Highly Variable M&A Deals – It’s not that common to work on REIT-to-REIT M&A deals because there aren’t that many publicly-traded REITs. Acquisitions of entire companies tend to be more common in the non-REIT verticals.
  • More Deal Variety – Since real estate is specialized, you’ll be more likely to contribute more to deals like IPOs and debt restructurings that are handed off to other teams (ECM or Restructuring) when they come up in other industry groups.

At most large banks, the model is to cover a few of the largest companies in each vertical and be “on call” for their transaction needs.

But huge M&A deals are not that common among REITs and a few of the other company types, so you’ll spend a fair amount of time pitching and working on follow-on equity offerings, debt issuances, and asset deals.

Real Estate Trends and Drivers

The trends and drivers depend heavily on the sector, even within a specific area such as REITs.

For example, a nursing-home REIT is influenced by different forces than a multifamily (apartment) REIT or an industrial (warehouse) REIT, even though they’re all “real estate investment trusts.”

And once you go outside of that vertical, a high-end casino operator is even more different from, say, an affordable home builder.

Real estate is all about location, which means: “How many people/businesses are moving into an area vs. moving out of it?”

For example, companies like home builders and multifamily REITs are driven by demographics, average income levels, and rent vs. homeownership costs in specific areas.

If younger, higher-income people move into an area at a high rate, and new homes are relatively inexpensive next to renting, new home demand will be higher.

Sectors such as office REITs are driven by business activity in the region and whether companies are expanding, shrinking, or telling employees to work from home.

In the gaming and lodging verticals, consumer discretionary spending drives growth.

These areas are tightly linked to economic conditions and income levels, and they suffer disproportionately when there’s a downturn.

They’re also affected by factors like barriers to entry (licensing and regulations for gambling) and the areas surrounding their key properties.

Finally, technological shifts play an increasingly important role in real estate.

For example, consider the impact of more white-collar professionals working from home:

  • Offices tend to suffer because fewer employees will be in the office, which reduces demand for space, drives down rental rates, and reduces the probability of existing tenants renewing their leases.
  • Multifamily properties and home builders benefit because people want larger, separate spaces if they’re working from home.
  • Industrial assets, i.e., warehouses, also benefit because people working from home tend to shop online, and all those orders are aggregated and distributed from warehouses.
  • Gaming and lodging companies experience a mixed impact. Casinos near suburbs and exurbs might benefit because they’re closer to peoples’ homes, but fewer people will be inclined to take cruises and fly to distant locations.

Real Estate Sector Overview by Vertical

Banks divide their real estate groups in many different ways, but we’ll continue with the categories above:

Real Estate Investment Trusts (REITs)

Representative Large-Cap, Global, Public Companies: Weyerhaeuser Company (Timber), American Tower Corporation (Cell Towers), Equinix (Data Centers), Prologis (Industrials), Simon Property (Retail), Welltower (Senior Housing), Ventas (Healthcare), Public Storage, Boston Properties (Offices), Equity Residential (Multifamily), and AvalonBay (Multifamily).

There are thousands of REITs worldwide, but fewer than 100 are public companies with over $1 billion USD in revenue.

The largest REITs are based in the U.S., but countries like Australia, the U.K., France, and Canada also have a good number.

REITs allow “normal people” to invest in the property sector without buying entire properties.

So, if someone wants exposure to hotels, apartment buildings, or healthcare facilities, they can just buy a few shares in REITs that invest in them.

REITs tend to specialize in certain geographies and property types, and some even focus on core, value-add, or opportunistic strategies.

But their unique feature is that they pay little to nothing in corporate income taxes if they comply with certain requirements:

  1. Dividend Distributions – A “high percentage” of Net Income must be distributed as Dividends. The percentage varies, ranging from 90% in the U.S. to 75% in South Africa to 100% in some countries.
  2. Revenue or Net Income – High percentages of these must come from real estate sources. It’s 75% of Revenue in countries such as Canada and Germany and 75% of Net Income in the U.S. and U.K.
  3. Real Estate Assets – A high percentage of assets, such as 75% in the U.S. and U.K. and 80% in India, must be real estate-related.

Since REITs are always buying, selling, and developing properties and issuing Dividends, there are several consequences:

  1. Constant Debt and Equity Issuances: REITs cannot build up huge Cash balances because of their high Dividends and acquisition/development spending, which creates the need to issue debt and equity all the time. More fees for bankers!
  2. Alternate Metrics: Selling properties results in Realized Gains and Losses on the Income Statement, which distorts Net Income, and U.S.-based REITs also record huge Depreciation figures on their Income Statements. IFRS-based REITs mark properties to market value, which results in large Fair Value Gains and Losses on the Income Statement, also distorting Net Income.

As a result, you’ll see metrics such as Funds from Operations (FFO) that reverse Gains and Losses and add back Depreciation under U.S. GAAP (some non-U.S. REITs also use this metric but calculate it differently):

FFO Calculation

Many European REITs use EPRA Earnings, which reverses Fair Value Gains and Losses and adjusts for Deferred Taxes.

Gaming

Representative Large-Cap, Global, Public Companies: Flutter Entertainment (Online), Entain Plc (U.K.), Caesars Entertainment (U.S.), MGM Resorts (U.S.), Tabcorp (Australia), Penn National Gaming (U.S.), Las Vegas Sands (U.S.), International Game Technology (U.K.), Wynn Resorts (U.S.), and Genting Berhad (Malaysia).

Casinos operate worldwide, but activity is concentrated in a few hot spots, such as Las Vegas and Atlantic City in the U.S. and Macau in Asia.

Online gaming companies are now major players in the market as well, but sometimes they are considered technology or media companies, depending on the bank.

Like retail companies, offline casino operators care a lot about the # of square feet or square meters and the $ per sq. ft. or $ per sq. m figures.

They also manage metrics such as the # of slot machines, # of table games, # of hotel rooms, and # of food and beverage outlets for each property:

Bally's Casinos

Accounting and valuation are fairly standard in this sector because companies do not have to follow the special rules for REITs unless they happened to be structured as REITs.

Since gaming companies are heavily dependent on leases, it’s critical to understand the rules for lease accounting.

EBITDA under U.S. GAAP is not the same as EBITDA under IFRS due to these rules!

M&A deals in the gaming sector are often motivated by geographic expansion, especially since gambling is heavily taxed and regulated by most regions and cities.

Lodging

Representative Large-Cap, Global, Public Companies: Accor (Europe), Marriott International, InterContinental Hotels, Huazhu Group, Hilton, TUI Group (Germany), H.I.S. (Japan), Shangri-La Asia (HK), and Shanghai Jin Jiang Capital.

You could also include companies like Expedia and Airbnb in this list, but they don’t own or lease properties directly, so we’re not listing them here.

The lodging sector is, in some ways, the opposite of areas like office and industrial properties with long-term leases: there’s almost no revenue visibility because hotels stays are short-term, and the rates are highly variable.

Therefore, hotel operators are much closer to “normal companies without recurring revenue” in terms of risk and potential returns.

Key drivers here include the occupancy rate, the average daily rate (ADR), and Revenue per Available Room (RevPAR, which equals the ADR * Occupancy Rate).Each company’s business model also differs slightly. For example, does a hotel company own its hotels directly, or does it franchise them out to independent operators? Or does it do a mix of both?

Ownership means more control, brand consistency, and pricing power, but it also incurs higher costs.

Also, does the company simply own/operate/franchise hotels, or does it offer other services, such as guided tours and travel agents?

The more a company depends on these other services, the closer it is to a “normal” services company rather than a real estate-specific company.

As with almost everything in real estate, geographic expansion often motivates M&A deals here:

Lodging M&A Deals

Home Builders

Representative Large-Cap, Global, Public Companies: Lennar Corporation, D.R. Horton, Sekisui House (Japan), Iida Group (Japan), PulteGroup, NVR, Toll Brothers, HASEKO (Japan), PIK-specialized homebuilder (Russia), Barratt Developments (U.K.), KB Home, Persimmon (U.K.), Meritage Homes, and Taylor Wimpey (U.K. and Spain).

These firms construct and sell homes, usually specializing in a specific home type or geography.

For example, a company might focus on luxury condominium units in the Southeast U.S., while another might build townhomes in the suburbs of the Northeast.

These firms may also offer financing services, so they effectively become lenders in addition to developers.

Demand for new homes is the most important driver in this sector, and it’s affected by everything from the unemployment rate to the family formation rate, wage growth, and the costs of renting vs. owning.

The biggest difference in this sector vs. lodging, gaming, and REITs is that home builders do NOT own or lease their properties for the long term – they build to sell.

Home builders put the homes they’re developing on their Balance Sheets as Inventory, usually split into the “Under Construction” vs. “Finished” categories.

When they sell the homes, they record the sales as Revenue and show the development costs under Cost of Sales or COGS on the Income Statement.

As a result, they cycle through Inventory far more slowly than companies in most other sectors, and the “Change in Home Inventory” may even be a separate line item in a DCF model.

If the company also provides financing, the associated mortgages will appear on the Assets side of the Balance Sheet.

If these operations are significant, banks might even use a Sum of the Parts Valuation or a NAV Model to capture the company’s lending and development activities separately.

For the most part, though, accounting and valuation are fairly standard, so traditional multiples like TEV / EBITDA and methodologies like a DCF based on Unlevered FCF still work.

If you want to see a few differences, take a look at this home builder valuation presentation from Morgan Stanley, based on Brookfield Asset Management’s acquisition of the remaining 30% of Brookfield Residential:

Homebuilder DCF

Real Estate Operating Companies, Developers, and Service/Leasing Companies

Representative Large-Cap, Global, Public Companies: Greenland Holdings (China), China Evergrande, Daiwa House Industry (Japan), CBRE, China Fortune Land Development, KE Holdings (China), Jones Lang LaSalle, Cushman & Wakefield, Vingroup (Vietnam), CapitaLand (Singapore), Vonovia (Germany), Leopalace21 (Japan), IWG, Deutsche Wohnen, and Colliers International.

Everything “miscellaneous” goes in this category, ranging from real estate operating companies to companies that develop all sorts of properties, provide title services, and offer property management and brokerage services.

Most of the big companies in this sector are in China because the construction needs in a country of 1.4 billion people are so vast.

It’s more diversified outside of developers, with representation from countries across North America, Europe, and Asia.

It’s difficult to generalize the analytical differences in this sector because they depend on the company type.

Developers are similar to home builders, while REOCs are similar to REITs but with more flexibility around capital raises and dividends.

Meanwhile, leasing, title, brokerage, and property management firms are closer to “normal companies” driven by transaction volume and fees.

Real Estate Accounting, Valuation, and Financial Modeling

Except for REITs, standard modeling practices, valuations, and transaction models apply to most verticals.

This explains why we have an entire course on REITs and property modeling, but no such courses on casino companies or home builders:

course-1

Real Estate Modeling

Master financial modeling for real estate development and private equity and REITs with 8 short case studies and 9 in-depth ones based on real properties as well as companies like AvalonBay.

learn more

We’ve touched on some of the differences for REITs above, and we even have a crash-course video on REIT valuation.

My short summary would be:

1) Model Drivers and Flow – You start by projecting the company’s “same-store” (existing) properties and then build in acquisitions, developments, and asset sales and forecast the associated revenue and expenses.

2) Key Metrics – As a result of the high Gains and Losses for all REITs and the high Depreciation for U.S.-based REITs, you use alternative financial metrics, such as Funds from Operations (FFO), Adjusted Funds from Operations (AFFO), and EPRA Earnings.

 3) Valuation – You also use multiples based on these metrics, which are all linked to Equity Value. For U.S.-based REITs, the Net Asset Value (NAV) Model is a useful way to value the company based on its Balance Sheet:

REIT NAV Model

It’s less useful for IFRS-based REITs because they mark their properties to market value periodically and do not record Depreciation on them.

You could use a standard DCF model based on Unlevered FCF for any REIT, but a DCF based on Levered FCF and a Dividend Discount Model are also acceptable, given the specific requirements to qualify as a REIT:

REIT Levered DCF

4) M&A Modeling – Since all REIT-to-REIT M&A deals involve a significant Stock component, you focus on the Contribution Analysis (Will Buyer A and Seller B own the appropriate percentages of Combined Company C?) and the Value Creation Analysis (Could Combined Company C trade at higher multiples than Buyer A or Seller B separately?).

You also care more about accretion/dilution for metrics such as FFO per Share and AFFO per Share than traditional EPS.

5) LBO Modeling – Since REITs constantly issue Debt to acquire and develop properties, the traditional “repay Debt over 5 years” framework doesn’t quite work. Instead, most REIT LBOs depend heavily on EBITDA Growth and Multiple Expansion, and they assume that the company’s Debt load will increase over time.

Outside of REITs, there are some minor differences in the other sectors, but nothing huge; you can get the main ideas from the examples in the next section.

One final note: we are considering only entire companies in this section.

If you want to learn about asset-level analysis, please see our guide to real estate financial modeling.

Example Valuations, Pitch Books, Fairness Opinions, and Investor Presentations

Here are some examples:

REITs

Brookfield / GGP – Goldman Sachs

Ventas / New Senior Investment Group – Centerview and Morgan Stanley

Brookfield / Rouse Properties – BAML

Equity Commonwealth / Monmouth Real Estate – Goldman Sachs, JPM, and CSCA Capital Advisors

Gaming

Crown Resorts / Star Entertainment Group (Australia) – UBS and Credit Suisse

Bally’s / Gamesys (U.S. and U.K.) – Deutsche Bank and Macquarie

Lodging

Hilton Grand Vacations / Diamond Resorts International – BAML, PJT Partners, and Credit Suisse

Marriott / Starwood – Deutsche Bank, Citi, and Credit Suisse

Home Builders

Lennar / CalAtlantic – JPM and Citi

Brookfield Asset Management / Brookfield Residential – Morgan Stanley

Galliford Try / Bovis Homes (U.K.) – Lazard, Numis, HSBC, Rothschild, and Peel Hunt

Real Estate Investment Banking League Tables: The Top Firms

Banks with large Balance Sheets tend to perform well because so many real estate deals are financing-related.

So, you’ll see firms like Bank of America Merrill Lynch, Citi, JP Morgan, and Deutsche Bank at or near the top of the league tables.

Goldman Sachs and Morgan Stanley are also among the top performers, and you can add RBC, Wells Fargo, and Barclays to the top 10-15 list.

MS and GS tend to be comparatively stronger in M&A and advisory work, and the others are stronger in equity and debt.

Among the elite boutiques, both Evercore and Lazard perform well, focusing on M&A advisory work.

In terms of other boutiques in the sector, everyone likes to mention Eastdil Secured.

Wells Fargo used to own the entire firm, but they sold the private division while retaining the “public market real estate investment bankers.”

As a result, the current iteration of Eastdil Secured, while a top real estate firm, is not a true “real estate investment bank” that advises entire corporate entities.

On that note, there aren’t many true boutique banks that specialize in real estate; many firms that call themselves “real estate investment banks” are more like debt and equity brokers for property deals.

A few legitimate names include CS Capital Advisors (healthcare and commercial real estate), Ziegler (senior living, among other verticals), and Browns Gibbons Lang & Company (healthcare real estate).

Exit Opportunities

Real estate investment banking offers a good number of potential exit opportunities: REITs, real estate private equity, gaming/lodging/development companies in corporate finance or corporate development, RE-focused hedge funds, and more.

Also, there are vastly more REPE firms than private equity firms are specializing in financial institutions or energy if you compare real estate to the other “specialized” sectors.

You could potentially even move into a real estate lending, real estate debt fund, or CMBS role.

The bad news is that your options are still more limited outside of real estate, even if you happen to have worked with “standard companies” in the sector.

Industry-focused firms and groups still like to recruit candidates with matching experience, so a healthcare PE firm will always prefer healthcare IB Analysts.

The other bit of bad news is that real estate investment banking doesn’t necessarily set you up for all real estate-related opportunities.

For example, property development would be a stretch coming from REIB because the skill sets are so different; you don’t learn the “nuts and bolts” of construction when you work in Excel and PowerPoint all day.

Pros and Cons of Real Estate Investment Banking

This article has been long and detailed, so I’ll make it even longer by including this pro/con list at the end:

Pros:

  • It’s a fairly stable sector in which different verticals always come in and out of favor, meaning that overall deal activity stays in a similar range from year to year.
  • Since REIB is very specialized, you’re more likely to contribute to all aspects of deals than in other sectors with more “standard” companies.
  • The group also gives you access to more exit opportunities than other specialized sectors, such as FIG. That said, it’s still worse for exits than a truly “general” group such as healthcare or technology.
  • You’ll get exposed to a wide variety of deal types because real estate companies frequently raise debt and equity and buy and sell individual assets.

Cons:

  • You could get stuck working on a lot of capital markets deals, especially at the bulge bracket banks; these deals tend to be less interesting than M&A and Restructuring work.
  • If you’re at a smaller firm, you will do more M&A advisory work, but you’ll also be less likely to work on the biggest, most complex deals.
  • Since real estate is a more specialized group, it’s not the ideal place for exits into traditional private equity firms and hedge funds (only ones that focus on real estate).

So, you may not quite become “indispensable” after working in real estate investment banking.

But of the more specialized groups, it’s the best option if you like the sector, but you’re not 100% certain you want to commit to it for the long term.

In other words, your career will be a lot more “mobile” than the assets you work with.

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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  1. Avatar
    Andrew Chua

    If you can choose an industry coverage group, which would you choose in 2021 to better position for an exit?

    1. Well, what do you want? What exit opportunities are you interested in? Which industry or industries do you want to work in? You should pick something that aligns with those. If you want to do VC or startups, tech or healthcare. If you want to do private equity, groups like M&A, Leveraged Finance, or industrials. There’s no correct answer because it depends completely on your desired exit opportunity.

  2. Any goss on latest analyst pay increases across the street? Could be worth a write up

    1. I added a note in the article on IB Salaries, but there isn’t much to say yet. “IB jobs have become less appealing, so banks increased base salaries by $15K+. Base salaries are now higher for most Analysts through VPs except for a few banks that haven’t yet increased them. The effect on year-end bonuses remains to be seen.” That’s the article.

  3. Avatar
    Andrew Chua

    Thanks very much for posting these interesting articles. Would you be able to release an article that discuss on “future-proofing” IB coverage groups? Thanks!

    1. Thanks. Not sure what you mean – nothing is really “future proof” because unexpected, dramatic events can change industries quite a bit. Just look at what happened in 2008, 2016, 2020, etc. Some groups are more or less cyclical than others, but even that is hard to predict, especially when a recession is caused by something other than a standard drop in economic activity.

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