S O U R C E : B P T H E S A N S - P L A I N 5 / 1 2 S M A L L C A P S T R A C K 5 0 INVESTING IN REITs S O U R C E : B P T H E S A N S - P L A I N 5 / 1 2 S M A L L C A P S T R A C K 5 0 Also available from B L O O M B E R G PR E S S The Money-Making Guide to Bonds Hildy Richelson and Stan Richelson Investing in Hedge Funds Joseph G. Nicholas Hedge Fund of Funds Investing: An Investor’s Guide Joseph G. Nicholas New Insights on Covered Call Writing: The Powerful Technique That Enhances Return and Lowers Risk in Stock Investing Richard Lehman and Lawrence G. McMillan Cracking Your Retirement Nest Egg Without Scrambling Your Finances Margaret A. Malaspina The Trader’s Guide to Key Economic Indicators Richard Yamarone A complete list of our titles is available at www.bloomberg.com/books A TT ENT ION C OR POR ATI ON S THIS BOOK IS AVAILABLE for bulk purchase at a special discount. Special editions or chapter reprints can also be customized to specifications. 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First edition published 1998 Second edition published 2002 Third edition published 2006 1 3 5 7 9 10 8 6 4 2 Library of Congress Cataloging-in-Publication Data Block, Ralph L. Investing in REITs : real estate investment trusts / Ralph L. Block. -- 3rd ed. p. cm. Includes index. ISBN 1-57660-193-5 (alk. paper) 1. Real estate investment trusts. I. Title: REITs. II. Title: Real estate investment trusts. III. Title. HG5095.B553 2006 332.63’247--dc22 2005025538 Edited by Tracy Tait S O U R C E : B P T H E S A N S - P L A I N 5 / 1 2 S M A L L C A P S T R A C K 5 0 To my father, Jack, who has always been the original “REIT man” and without whom this book, in more ways than one, would never have been possible. My only regret is that he was not able to witness its birth and popularity. S O U R C E : B P T H E S A N S - P L A I N 5 / 1 2 S M A L L C A P S T R A C K 5 0 I N T R O D U C T I O N 1 P A R T I Meet the REIT 4 C H A P T E R 1 REITs: What They Are and How They Work An essential framework for investors 6 C H A P T E R 2 REITs versus Competitive Investments How they stack up against common stock, bonds, and utilities 2 2 C H A P T E R 3 Today’s REITs A revolution in real estate investing 4 0 C H A P T E R 4 Property Sectors and Their Cycles From apartments to malls, office buildings to prisons 5 4 P A R T I I History and Mythology 8 8 C H A P T E R 5 REITs: Mysteries and Myths Setting the record straight 9 0 C H A P T E R 6 A History of REITs and REIT Performance From the trials of the 1960s to the rebirth of the 1990s and beyond 1 0 8 S O U R C E : B P T H E S A N S - P L A I N 5 / 1 2 S M A L L C A P S T R A C K 5 0 P A R T I I I Choosing REITs and Watching Them Grow 1 3 8 C H A P T E R 7 REITs: How They Grow Growing cash flows and dividends 1 4 0 C H A P T E R 8 Spotting the Blue Chips Types of REITs and investment styles 1 7 0 C H A P T E R 9 The Quest for Investment Value Methods to value REIT stocks 2 0 8 C H A P T E R 1 0 Building a REIT Portfolio Choosing the right mix of REIT investments 2 3 2 P A R T I V Risks and Future Prospects 2 5 4 C H A P T E R 1 1 What Can Go Wrong It pays to know the pitfalls 2 5 6 C H A P T E R 1 2 Tea Leaves: Where Will REITs Go from Here? New opportunities for today’s investors 2 8 4 R E S O U R C E S 3 2 0 C O N T I N U I N G - E D U C A T I O N E X A M 3 5 3 for CFP Continuing Education Credit and PACE Recertification Credit I N D E X 3 6 1 This page is intentionally blank. A C K N O W L E D G M E N T S The investor’s chief problem— and even his worst enemy— is likely to be himself. — B E N J A M I N G R A H A M Much to my surprise and delight, Investing in REITs has been popu- lar enough to justify this third edition. I cannot, of course, claim all, or even most, of the credit for the book’s success. REITs’ transition from the sleepy backwaters of the world of equities to a mainstream investment choice has been key to the interest in Investing in REITs. Even more important, many kind, perceptive, and dedicated profes - sionals have been instrumental in the creation of the original edi - tion of the book and its subsequent revisions. I would be remiss if I didn’t mention a few of these outstanding individuals. Bill Schaff and Gary Pollock, founders of Bay Isle Financial, pro - vided the essential encouragement and support for the book’s pre - decessor, and Alan Fass, Jared Kieling, John Crutcher, and many other outstanding professionals at Bloomberg Press got the book into its present form and exposed it to the marketplace—to sink or swim. Thanks, too, to Veronica J. McDavid, Kathleen Peterson, and Jim Douglas, whose editing skills were very helpful to me in the first and second editions. And, of course, as a computer semi - literate, I owe much gratitude to Steve Block for helping me with the graphs and charts, particularly for this current edition. Steve isn’t an exact chip off the ol’ Block—he’s better-looking and a lot smarter than me. I’d also like to express my appreciation to Jon Fosheim, Mike Kirby, and their all-star analysts at that quintessential research firm, Green Street Advisors, for their outstanding research and analysis on REITs over the years. Jon has left to pursue REIT portfolio man - [...]... that REITs will be slow-growing investment vehicles In the mid -19 90s, however, some REITs were acting in a very un-REITly way, growing by 10 –20 percent annually It’s as if grandma suddenly got off her rocking chair and started doing handsprings What happened? The phenomenon can probably be explained by the fact that many REITs during that period combined their capital-raising capabilities with many institutions’... to their investors—but will this continue? Can we still make money in REITs regardless of the ups and downs of real estate cycles? This book answers those questions and more It not only makes a convincing case for investing in REITs, but also provides the details, background, and guidance investors should have before delving into these highly rewarding investments Here’s what’s in store: Part I: Meet... “momentum investing. ” This strategy claims that the investor can maximize gain by following whatever trend is in favor at the time, in other words, buying those investments that have positive earnings or price “momentum” and selling those that do not Of course, this is an over-simplification, but in recent years we have indeed seen a trend in which a large number of investors deploy their investments only into... about REITs We’ll take a look back to study the forty-twoyear history of the REIT world since its inception in 19 62, and trace REITs progress up to today, when they have finally come of age Part III: Choosing REITs and Watching Them Grow provides the basic tools investors need to understand the dynamics of REITs revenue and earnings growth, distinguish the blue-chip REITs from their more ordinary... by the S&P 500, during that period Theoretically, in a hot market, when the S&P 500 is rising sharply, REITs relatively low correlation will act as a drag on their performance relative to the broad stock market indices This happened in 19 95, when REIT stocks lagged behind the popular indices but still provided investors with total returns of 15 .3 percent, and in 19 98 and 19 99, when REITs returns were... other real estate investments EFORE DECIDING SOURCE: BPTHESANS-PLAIN 5 /12 SMALLCAPS TRACK 50 B I N R E I T S V E R S U S C O M P E T I T I V E I N V E S T M E N T S 25 REITS VERSUS ELECTRIC UTILITIES SOURCE: BPTHESANS-PLAIN 5 /12 SMALLCAPS TRACK 50 Way back in 19 94 I did an informal study of REITs popularity in relation to utility stocks According to a Barron’s mutual fund section in April 19 94, seventy-one... diversified in sector, geographic location, and tenant roster For example, if one tenant is doing badly, there are usually other tenants who are doing fine This kind of thing happened repeatedly in the history of the retail industry, and the retail REITs have continued to do well; they continually find new tenants to replace the losers Beware, however, of real property designed for a single use, where the departure... 500 index fund with the S&P 500 index is complete, that is, 1. 0, then a 2 percent move in the S&P 500 index would predict that the move in the index fund for the same period would also be 2 percent Correlations range from a perfect +1. 0, in which case the movements of two investments will be perfectly matched, to a (1. 0), in which case their movements will be completely opposite Correlations in the investment... investments, and thus many REITs created rapidly growing cash flows through major property acquisitions This trend ended in 19 98, and REITs growth rates returned to the more normal singledigit range after 19 98 Cash flow growth actually went negative for many REITs in the early years of the twenty-first century, due to weak office, indus- SOURCE: BPTHESANS-PLAIN 5 /12 SMALLCAPS TRACK 50 When selecting... as an introduction to REITs The first order of business is to explain why REITs are excellent investments that belong in every well-diversified portfolio From there, we’ll explore the “nature of the beast,” and obtain a good working familiarity with REITs and their characteristics We will follow with a description of the types of properties REITs own and the invest- SOURCE: BPTHESANS-PLAIN 5 /12 SMALLCAPS . published 2006 1 3 5 7 9 10 8 6 4 2 Library of Congress Cataloging -in- Publication Data Block, Ralph L. Investing in REITs : real estate investment trusts. success. REITs transition from the sleepy backwaters of the world of equities to a mainstream investment choice has been key to the interest in Investing in REITs.