Investing in REITs

The new Fourth Edition of the definitive handbook on investing in Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs), which provide some of the best total returns in the investment world, along with above-average dividend yields and stable earnings, have become increasingly popular with both individual and institutional investors. Investing in REITs, Fourth Edition has established itself as the definitive guide to understanding this attractive asset class. The book is invaluable for investors, financial planners, and investment advisers interested in understanding REITs and REIT investment opportunities.

As their earnings and dividends are beginning to grow again after the Great Recession—and as they are in a unique position to take advantage of distressed sale opportunities—now is an excellent time for investors to consider REITs for both diversification and strong total returns. The new edition covers:

• A comprehensive history of the REIT industry
• How REITs compare with other competitive investments
• How to spot blue-chip REITs and control investment risk
• How to value individual REIT stocks, and REIT shares generally
• How to build a diversified REIT portfolio, directly or with REIT mutual funds
• Understanding the risk-and-reward dynamics of commercial real estate
• Assessing non-US REITs and how to invest in them
• Important new developments and strategies in the REIT industry

Author Ralph L. Block, who has been investing in REIT stocks for 40 years and is widely considered a leading authority on REITs, brings the historical success of Investing in REITs right up to date. This book is an essential read for both individuals and institutions who desire to invest in commercial real estate through REIT stocks.

Introduction xi

Acknowledgments xv

Part I Meet the REIT

Chapter 1 REITs: What They Are and How They Work 3

Types of REITs 5

General Investment Characteristics 6

Higher Current Returns 11

Summary 17

Chapter 2 REITs versus Competitive Investments 19

Bonds 20

Convertible Bonds 22

Preferred Stocks 23

Other High- Yielding Equities 24

Other Real Estate Investment Vehicles 26

Summary 31

Chapter 3 Today’s REITs 33

The First REIT 33

The Tax Reform Act of 1986 34

UPREITs and DownREITs 35

REIT Modernization Act and RIDEA 37

Lending REITs versus Ownership REITs 39

Expansion of REIT Property Sector Offerings 40

Summary 41

Chapter 4 Property Sectors and Their Cycles 43

Ups and Downs 45

Property Sectors 49

Summary 87

Part II History and Mythology

Chapter 5 REITs: Mysteries and Myths 91

Changing Attitudes toward REITs 91

Myths about REITs 97

Summary 108

Chapter 6 A History of REITs and REIT Performance 109

The 1960s: Infancy 109

The 1970s: Adolescence and Turbulence 111

The 1980s: Overbuilding—The Troll Under the Bridge 113

The 1990s: The Modern REIT Era—Plus More Growing Pains 115

2000 to 2007: Credibility and Market Acceptance 124

2007 through 2010: REITs Survive the Great Recession 127

Recent Trends 134

Summary 139

Part III Investing Intelligently in REITs

Chapter 7 REITs: Growth and Value Creation 143

The Significance of FFO and AFFO 144

The Dynamics of FFO/AFFO Growth 149

Internal Growth 152

How to Build Internal Growth into a Lease 157

Other Ways to Generate Internal Growth and to Create Shareholder Value 158

External Growth 163

More External Growth Avenues 172

Summary 173

Chapter 8 Searching for Blue Chips 175

Investment Styles 175

Growth REITs 176

Value or “Turnaround” REITs 178

Bond- Proxy REITs 179

The Virtues of Blue-Chip REITs 180

The Importance of Allocating Capital Wisely 190

Summary 212

Chapter 9 The Quest for Investment Value 215

The Investor’s Dilemma: Buy-and-Hold versus Trading 215

The Buy- and- Hold Strategy 217

REIT Stock Valuation 218

Valuing REITs as a Group 231

Summary 237

Chapter 10 Building a REIT Portfolio 239

How Much of a Good Thing Do You Want? 239

Diversification among REITs 245

Toward a Well- Balanced Portfolio 248

How to Get Started 251

Summary 259

Chapter 11 Investing in Global REITs and Property Companies 261

How the U.S. REIT Revolution Spread around the Globe 264

Mapping the Size of Global Property Stock Markets 274

Managing a Global Real Estate Securities Portfolio 284

The Practicalities of Investing Overseas for the Individual Investor 287

A Summary: Stocks for All Investment Seasons 298

The Long- Term Evidence Supporting Investments in Global Real Estate Securities 300

Part IV Risks and Future Prospects

Chapter 12 What Can Go Wrong? 309

Issues Affecting All REITs 309

Problems Affecting Individual REITs 323

Summary 333

Chapter 13 Tea Leaves: Some Thoughts about the Future 335

Additional Real Estate Owners Will “REITize” 337

Increasing Investor Demand for REITs 344

Larger REITs: Is Bigger Really Better? 353

Additional New Trends 360

So Much More to Come 366

Summary 367

Appendix A Death and Taxes 369

Appendix B Case Study: FFO, AFFO, FAD, and CAD 373

Appendix C Cost of Equity Capital 377

Appendix D REIT Portfolio Management 381

Appendix E Largest Global Real Estate Companies as of December 2010 391

Glossary 413

About the Author 423

About the Contributors 425

Steven D. Burton 425

Kenneth D. Campbell 425

Index 427

Ralph L. Block, has been an active participant in the REIT industry for four decades, as an individual investor, investment advisor, professional money manager, author, publisher, and consultant. Mr. Block is currently the owner and proprietor of Essential REIT Publishing Co. For his many contributions to the REIT industry, Block received the 2004 Industry Achievement Award from the National Association of Real Estate Investment Trusts (NAREIT).

Real Estate Investment Trusts (REITs) are companies that invest directly in commercial real estate properties, but whose shares trade as stocks on the major exchanges. As the interest in REITs grows, so does the need for an in-depth, reliable, yet accessible resource for understanding these investments. The newly revised and updated Investing in REITs: Real Estate Investment Trusts, Fourth Edition does exactly that.

Widely considered the classic book on real estate investment trusts for the sophisticated investor, this new edition provides up-to-date information and discusses industry trends. Written by REIT investment pro Ralph L. Block, it looks at all the key developments and strategies that have taken place in the REIT industry over the last several years, presenting invaluable information and guidance on how to value individual REITs (as well as REIT shares generally), the risk-and-reward dynamics of commercial real estate, and how to spot blue-chip REITs and control investment risk. In addition, an entirely new chapter, written by industry veterans Kenneth Campbell and Steven Burton, looks at non-U.S. REITs and options for investing in them.

REIT investing has become increasingly popular in the aftermath of the real estate crisis. A liquid, dividend-paying way to participate in the real estate market, investing in REITs has a long track record of providing excellent investment returns. Their consistency, together with the low correlation of REIT stock prices with the prices of other asset classes, make such investments a unique opportunity.

An essential read for both individuals—investors, financial planners, and investment advisors—and institutions interested in investing in commercial real estate through REIT stocks, Investing in REITs continues to set the bar for REIT information and advice.

Praise for Investing in REITs

"A necessary starting tool for anyone interested in building a foundation in understanding the REIT market."
—Steve Buller REIT Portfolio Manager, Fidelity Investments

"REITs are a great investment idea as they provide a way for investors to gain exposure to an important asset class that is otherwise hard to access. The sector can, however, be daunting for the uninitiated, as it is filled with jargon, performance metrics, and valuation tools that are not typically employed elsewhere. Ralph Block has cut through the clutter and created a must-read road map for anyone investing in REITs."
—Mike Kirby Cofounder, Green Street Advisors

"A perfect blend of street talk and clear thinking that will provide the advice and knowledge that both first-time as well as seasoned REIT investors can benefit from".
—Bryce Blair CEO & Chairman, AvalonBay Communities, Inc.

"If you are a REIT investor, or are thinking of becoming one, Investing in REITs will unlock opportunities for you. Since its first publication in 1998, it remains a must-read for anyone interested in REITs. The first thing I did when I joined NHP in 2003 was read Ralph's book and the best advice I can give you is to do the same."
—Douglas M. Pasquale Chairman of the Board, President & CEO, Nationwide Health Properties, Inc.

Additional Praise for Investing in REITs, Fourth Edition

“I have enjoyed reading Ralph’s insightful and refreshing commentary on the REIT industry for years, and his REIT guide is an invaluable resource for those of us who work in the industry and also invest in REIT stocks. His extensive knowledge comes through clearly in an easy-to-follow guide for both the novice and real estate expert.”
—Robert Elms, Head of Debt & Equity Placement, Cushman & Wakefield, Inc.

Praise for Previous Editions of Investing in REITs

“For over thirty years, Ralph Block has observed and studied Real Estate Investment Trusts and has accumulated a storehouse and reservoir of knowledge and insights, which in this book he dispenses to the reader—simply, lucidly and logically. It is a must-read for anyone interested in the growing market of REITs.”
—Milton Cooper, Chairman & CEO, Kimco Realty Corporation

“Ralph Block has long advocated the merits of investing in REITs, and investors who have heeded his advice have profited handsomely. By making complicated issues accessible for investors of all types, Investing in REITs provides a great introduction to an investment vehicle that offers solid returns, moderate risk, and good diversification benefits.”
—Mike Kirby, Cofounder, Green Street Advisors

“In a clear, direct, and authoritative manner, Ralph Block provides and opens an extensive and illuminating window on investing in real estate investment stocks. He fully explains the story of REITs, flags their investment attributes, and underlines their role in a diversified portfolio. I highly recommend it to the investor considering REITs for the first time, as well as the investor with some knowledge about and experience with real estate stocks.”
—Steven A. Wechsler, President and CEO, The National Association of Real Estate Investment Trusts

“REIT investing has always been something of a ‘no-man’s land’ in the investment world. Common stock investors often look at REITs as real estate while real estate investors consider REITs to be stocks. Ralph Block has written a wonderful book that sheds light on an asset class that is becoming an increasingly important building block for the well-diversified portfolio.”
—Roger C. Gibson, CFA, Author of Asset Allocation: Balancing Financial Risk

“The well-informed author has written the most complete and easy-to-read book about real estate investment trusts yet. The stunning graphics are matched by excellent detailed information concisely arranged.”—The Los Angeles Times

“Ralph Block has made the world of REITs accessible to all. This is a superb book for every investor.”
—Tom Gardner, cofounder of The Motley Fool

“Finally, a book that demystifies REIT s for both armchair investors and seasoned professionals. Investing in REITs by Ralph Block is a balanced, clearly written guide that fills a major void in today’s investment literature.”
—Jonathan Litt, Senior Real Estate Analyst, Salomon Smith Barney

“Whether you’re an individual or institutional investor, you won’t find a better primer on REIT investing. Ralph Block takes the complex issues that must be addressed to produce above-average results when investing in REITland, and makes them simple and easy to understand. A must for every serious REIT investor’s library, and a fun read, to boot.”
—Geoffrey Dohrmann, Publisher and Editor in Chief, Institutional Real Estate Securities

“Investing in REITs is a must-read for anyone wishing to gain a better understanding of this thriving sector of the capital markets. Given the continued transformation of private real estate to the public markets, this book is an essential resource for students, individual and institutional investors, and anyone else interested in understanding the REIT market.”
—David J. Hartzell, Distinguished Professor of Finance and Real Estate and Director of the Real Estate Program, The Kenan-Flager Business School, The University of North Carolina at Chapel Hill