A Theory of the REIT
Real Estate Investment Trusts (REITs) are companies that raise money from the public to invest in real estate. Distinct from almost all other companies, REITs exhibit two unusual governance characteristics. REITs are essentially immune to hostile takeovers and prohibited from reinvesting their profits. These REIT features defy the scholarly consensus on good corporate governance. Corporate […]
Jason Oh is a Professor of Law and the Lowell Milken Chair in Law, and Andrew Verstein is a Professor of Law at UCLA School of Law. This post is based on their article forthcoming in The Yale Journal on Regulation.
Real Estate Investment Trusts (REITs) are companies that raise money from the public to invest in real estate. Distinct from almost all other companies, REITs exhibit two unusual governance characteristics. REITs are essentially immune to hostile takeovers and prohibited from reinvesting their profits. These REIT features defy the scholarly consensus on good corporate governance. Corporate law permits takeovers because they serve an important role in keeping managers accountable. Likewise, corporate law grants management discretion over whether to reinvest profits, because reinvestment is often the most economical way for businesses to grow.
With accountability and growth potential diminished, one might expect investors to shun REITs. Yet investors clamor to buy REITs. Thirty years ago, they barely existed. In the intervening decades, America’s public REITs have doubled in size essentially every four years. Almost half of American households own REIT stock. REITs hold more than $4.5 trillion in assets, approximately 3% of all of America’s wealth, and make up 5% of the S&P 500. REITs span a large variety of industries: there are REITs that own a quarter-billion square feet of shopping centers, communication towers that span the globe, and over $100 billion of mortgages.
How can REITs exhibit such “bad” governance characteristics and yet remain an investor favorite?
