What is Real estate investment Banking?
You’ve heard those words plenty of times when it comes to real estate – whether you’re just casually interested or you fully intend to become the next real estate guru.
And if you overlook the occasional housing crisis or three, you can see why the real estate market is so essential to all sorts of different industries:
- Utilities: Need to deliver electricity somewhere…
- Consumer Retail: Need to fit those Brooks Brothers suits somewhere…
- Industrials: Need to park your private jet somewhere…
But there’s surprisingly little information out there about what you actually do in a real estate investment banking group – even though lots of people are interested in the field.
We’re going to fix that with an interview from an analyst who networked his way into real estate IB, coming from a non-target state school.
Today’s interviewee has covered lodging, gaming, and home building, and he can tell you all about properties and REITs as well – so let’s get started and learn how the sector is divided, how valuation works, and what you need to know when interview season begins. This interview features valuation and financial analysis commentary provided separately by .
Laying Down the Foundation
Q: Okay, let’s get started with your story and how you broke in. Were you more interested in investment banking, or in real estate?
A: Sure. I went to a state school and networked quite a bit with alumni to find my role.
It’s incredibly vital to find someone who can sponsor (similar to mentoring, but more like one step above) your entry into an investment banking team, and from there help to look after your progress in terms of assignments.
And in turn, you, as the mentee, need to perform well to ensure that your superior looks great.
When I found myself on a real estate-related team, I thought about getting a real estate license but that sort of background is not necessary from an entry-level standpoint.
So I was definitely more interested in investment banking from the start, and just happened to network my way into a real estate group.
Q: I know we’re not focused on networking here, but any tips on how to stand out?
A: To do well, you just need i) the right attitude, ii) attention to detail, and iii) a real sense of teamwork.
- Attitude: If I give you an assignment at 3AM, will you have a smile on your face the following morning? Or at least not be drooling on your desk?
- Attention to Detail: Are you able to check your own work? If I don’t have time to do all of my own assignments, then I definitely don’t have time to do your assignments.
- Teamwork: Can you anticipate the needs of your teammates? If someone is working on sector pages, and you happen to come across a useful article, will you be able to create a quick 3-point summary so your team doesn’t waste time?
Q: And what other tips do you have on getting in if you can’t use on-campus recruiting? Anything specific to real estate?
A: Here’s how I think about the different recruiting channels, if opportunity were a house and you were looking to “break in”:
- Front Door: On-campus recruiting, applying online, diversity programs, etc…
- Side Door: Networking through alumni and internal referrals.
- Back Door: Taking another role and then transferring internally.
- Window: Volunteering to work for free and then creating a position for yourself.
- Chimney: Help an analyst out on his / her own assignments, so you effectively create an externship. Maybe chip in to do acquisition idea profiles, etc…
- Through the Wall: Get in during a Superday by fostering the right relationships way in advance.
I don’t think too much of what I’m saying here is specific to real estate – networking in any area of investment banking is the same.
Here, you just need to be certain that you show passion for the sector to maximize your chances of being placed in our group.
Real Estate 101
Q: That’s good to hear… so let’s jump into what you actually do in a real estate group at a bank. How is it divided?
A: Real estate is one of the broader coverage areas in investment banking, and each sector is quite a bit different:
Real Estate Investment Trusts (REITs): These firms are sort of like private equity firms, but for properties rather than companies. They buy and sell properties, operate and improve them, and sometimes even develop new properties.
REITs might be diversified, or they might focus on a specific sector like commercial, residential, retail, industrial (ex: warehouses), healthcare, and so on; some firms might have a geographic concentration as well.
REITs are required to issue 90% of their taxable income as dividends to avoid corporate-level income tax – and that requirement combined with their constant acquisition and development of new properties results in minimal cash on-hand most of the time.
So they have huge financing needs and need to issue debt and equity constantly just to continue operating.
Home Builders: These firms construct and sell homes, often for particular geographies. A company such as KB Home (NYSE: KBH) might have a particularly strong presence in the Southwestern and Southeastern US.
Sometimes these firms also offer financing services through a separate arm. You might expect to see similar offerings from construction equipment (Deere and Deere Finance) or even automotive (ex: GM) makers.
Demand for houses is the strongest indicator of where this sector is going – in a poor economy with high unemployment, home building is not a great place to be.
Certain bankers might also cover aggregates, which are related to the materials used in home building or even infrastructure development (NB: companies in this space include Martin Marietta Materials, or Vulcan Materials).
Gaming: They should just call this one “Casinos, ” but I guess “Gaming” sounds better.
The key driver here is how well casinos can keep gamblers inside the casino and spending money (hence all those free bottles when you gamble away your bonus in Vegas…).
Casino operations also include expensive restaurants with some of the best chefs in the world, and elaborate shows with the biggest names in the entertainment (ex: Cirque du Soleil). So then it’s not surprising that the sector often features…
Lodging: Mostlyhotels and resorts (cruise lines sometimes fall under transportation). Pricing, promotion (think Priceline.com or Kayak.com), and the occupancy rates for hotels influence this sector.
The hotels themselves also offer conference/convention/trade show services as another source of revenue (if they’re in a major gaming hub).
Length-of-stay is critical and can be boosted by amenity expansion and upscale hotel additions. Proximity to other major cities is a driver in the Asia market, as is transportation infrastructure (See here for an example of a lodging company’s overview).
Unlike residential or commercial buildings, which feature long-term leases, hotels have “lumpier” and more seasonal revenue – which presents both a challenge and an opportunity.
Q: You discussed REITs above, but how often do you work with individual properties in a real estate IB group?