Interview Question

J P Morgan Investment Bank IB Risk Summer Analyst Interview(Student Candidate)

Explain the risks faced by a REIT. What could a REIT do

  with $100 million?
Answer

Interview Answer

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An REIT is a real estate investment trust which owns or manages commercial real estate in diverse sectors including retail, office space and industrial and benefits in terms of lower corporate tax over other real estate non trust companies. However REIT face risks in terms of having high levels of debt as they are compelled to pay up to 90% of their earnings to their shareholders as dividends. This means that when they need to expand they have to keep borrowing money in the form of debt finance since they are not able to reinvest most of their earnings as these are paid to shareholders. This means that there is not much room for organic growth. An REIT could invest $100 million in a new site acquisition in order to build a new shopping mall for example.

Ludovic on Jun 5, 2013

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