Academic journal article International Journal of Business

The REIT Industry's First 55 Years: Keys to Longevity

Academic journal article International Journal of Business

The REIT Industry's First 55 Years: Keys to Longevity

Article excerpt


Since the origin of the Real Estate Investment Trust (REIT) industry in 1960, the industry has undergone many changes in its 55 years in existence, arriving at its current standing as one of the major capital providers of real estate in the United States. On September 14, 2010, the REIT industry celebrated its 50th Anniversary, and in 2016, it continues to gain prominence with the establishment of a new Global Industry Classification Standards (GICS) Real Estate sector. President Eisenhower signed REITs into law to enable Americans to invest in large-scale and diversified real estate portfolios. Nineteen public offerings of REITs occurred in the first two years of passage of the REIT law (Killen, 1973), and three of them still existed 55 years later: Washington Real Estate Investment Trust, Pennsylvania Real Estate Investment Trust, and Winthrop Realty Trust (formerly known as First Union Real Estate Equity and Mortgage Investments).

Financial data for the three companies, along with financial data on other companies that have been part of the industry during its first 55 years, are analyzed in a triple case study to illustrate the progression of the REIT industry and possible keys to industry longevity. Selected qualitative factors on the three companies are analyzed as a complement to this quantitative analysis. The following research question is addressed, "Do the three companies with the most longevity in the industry reveal any differences from other REITs that left the market?"


REITs have become an important component of the market since their initial introduction in 1960. Just as mutual funds allow for investments in stocks, REITs allow for investments in real estate ("REITs - What are they? How do they work?", 2007). Parmelee (2005) states that many individuals are not as familiar with REITs; however, they are an attractive investment since entities must pay out 90% of its income in dividends.

Investors, creditors, and the public look to financial measures to evaluate the performance of companies. A company's strong performance motivates investment and growth, which increases its chances of long-term survival. Typically, analysts evaluate REITs using "Funds from Operations (FFO)" which is defined as net income calculated per Generally Accepted Accounting Principles (GAAP), plus depreciation and amortization, eliminating gains (losses) on the sales of property, and after adjusting for the effects of unconsolidated partnerships and joint ventures (NAREIT, 2002). Removing the effect of gains and losses allows one to get a better picture of the future income producing potential of the REIT. NAREIT (National Association of Real Estate Investment Trusts) formally implemented the definition of FFO in 1991 to endorse a supplementary industry-wide measure of REIT performance, without the problems related to GAAP net income (NAREIT, 2002). In 2003, the Securities and Exchange Commission (SEC) permitted companies to use FFO per share in SEC filings (Santucci and Newell, 2003). The industry adopted FFO due to the deemed irrelevance of GAAPbased depreciation for income-producing real properties. Proponents of FFO believe that the residual value of real estate, in particular income-producing properties, is much higher than its depreciated value indicates. In addition, the properties do not decline in value as suggested by GAAP depreciation, but in many cases, appreciate in value (Khang and Zao, 2009). Depreciation is typically the largest expense excluded from FFO in measuring operating performance (Tsang 2006), and with its exclusion, proponents of FFO argue that using FFO provides a better operating measure. REIT specific metrics, such as Funds from Operations (FFO), Modified Funds from Operations (MFFO), and Adjusted Funds from Operations (AFFO) assist investors and analysts in determining a firm's dividend-paying ability and future profitability (Shields, 2010). …

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