An Inside View on Real Estate Profit Margins

Earnings matter. This is as true in energy, industrials and consumer staples as it is in real estate. After all, people invest in real estate to make money, so keeping an eye on profit margins is a must. MPF Research thought it would be interesting to view real estate performance in term of net profit margins similar to the way corporate profitability is measured. We define net profit margin as reported net income / rental revenue. More specifically, this analysis is based on publicly traded REITs with a minimum of $100 million in annual revenue and at least 10 years of operating performance. There were two exceptions: Monmouth Real Estate Investment Corporation, an industrial REIT which fell below the revenue threshold, and Douglas Emmett, Inc., an office REIT which went public in 2006, falling short of the time requirement. (A full list of component companies is provided at the end.) The findings are interesting. First, real estate is a profitable industry. Based on research by Dr. Ed Yardeni, the reported net profit margin for the S&P 500 was 7.7% in 2014. For comparison, all four major property types were well in excess, ranging from 15.2% in the office sector to 61.7% in retail during the same time period. Second, since reporting a disastrous 2010, industrial has shown incredible momentum as longer-term lease expirations are being marked to market. Third, in terms of net profit margins, retail and apartment performance stand out. Over the past 10 years of operating results, the average profit margin is as follows: Retail (28.7%) Apartment (23.7%)c Office (16.5%) Industrial (10.8%) It is important to remember reported net income is subject to one-time events which can dramatically impact the results. For instance, in 2010, industrial performance was heavily impacted by ProLogis’s roughly $1.2 billion loss due principally to a write down of goodwill, impairment charges and loss on early extinguishment of debt, according to company filings....