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The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts

ISBN: 978-1-119-25271-9
240 pages
August 2016
The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts (1119252717) cover image

Description

The go-to guide for smart REIT investing

The Intelligent REIT Investor is the definitive guide to real estate investment trusts, providing a clear, concise resource for individual investors, financial planners, and analysts—anyone who prioritizes dividend income and risk management as major components to wealth-building.

Later this year, the REIT industry will experience a watershed event when Standard & Poors creates a new Global Industry Classification Standard (GICS) sector called Real Estate. On September 1st, publicly traded equity REITs will be removed from Financials, where they have been classified since their creation in 1960, and begin trading as their own S&P Sector. This separation from banks and financial institutions already is attracting new investors, but REITs require an industry-specific knowledge that is neither intuitive or readily accessible to newcomers—until now. Using straightforward language and simple example to illustrate important concepts, this book will enable any reader to quickly learn and understand the lexicon and valuation techniques used in REIT investing, providing a wealth of practical resources that streamline the learning process. The discussion explains terminology, metrics, and other key points, while examples illustrate the calculations used to evaluate opportunities. A comprehensive list of publicly-traded REITs provides key reference, giving you access to an important resource most investors and stockbrokers lack.

REITs are companies that own or finance commercial rental properties, such as malls and apartment buildings. Despite historically high total returns relative to other investments, such as the Nasdaq or S&P 500 index, most investors are unfamiliar with the REIT industry, and wary of investing without adequate background. This book gets you up to speed on the essentials of REIT investing so you can make more informed—and profitable—decisions.

  • Understand REITs processes, mechanisms, and industry
  • Calculate key metrics to identify suitable companies
  • Access historical performance tables and industry-specific terminology
  • Identify publicly-traded REITs quickly and easily

REITs have consistently outperformed many more widely known investments. Over the past 15-year period, for example, REITs returned an average of 11% per year, better than all other asset classes. Since 2009, REITs have enjoyed positive returns; large cap stocks and cash are the only other classes that paralleled that record. Even in 2015, a 'year of fear' related to rising rates, REITs returned 2.4%, beating most all other asset classes.

REITs have a long history (over fifty years) of performance, and are about to enter the big leagues. If you feel like you've been missing out, don't keep missing out. Prepare yourself, and your portfolio, to benefit from the demand for REITs that will follow the creation of a Real Estate GICS sector. The Intelligent REIT Investor gives you the information you need to invest wisely and manage your real estate risk effectively. By maintaining a tactical exposure in the brick and mortar asset class, investors should benefit from the information contained in The Intelligent REIT Investor. Join the REIT world and look forward to owning stocks that will help you to sleep well at night.

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Table of Contents

Foreword xi

Preface xv

Acknowledgments xix

About the Author xxi

Part I An Introduction to REITs 1

Chapter 1 What Is a REIT? 3

Size of the REIT Industry 4

Categories of REITs 4

Equity REITs 4

Mortgage REITs 6

Classification by Property Type 7

Size and Index Inclusion 7

Geographic Focus 9

Growth Strategy 12

Where to Find Information on REITs 15

FTSE NAREIT All REITs Index 15

Company-Specific Websites 15

Indexes for Tracking REIT Performance 15

Exchange-Traded Funds for Investing in REITs 17

Chapter 2 Why Invest in REITs? 19

Double-Digit Total Returns 19

Dividends 20

Liquidity 20

Portfolio Diversification 21

Hedge Against Inflation 23

Transparent Corporate Structures 25

Chapter 3 REIT Dividends 27

Rockland REIT 27

REIT Yields 27

Are REIT Yields Safe? 30

Quantifying Dividend Safety 31

Dividend/FFO Payout Ratio 31

Debt Ultimately Determines Dividend Safety 32

Debt-to–Total Market Capitalization Ratio 32

Debt-to–Gross Book Value Ratio 32

Legal Standing of Leases Supports Dividend Safety 33

REIT Dividends and Taxation 34

REITs Do Not Pay Out All of Their Cash in Dividends 35

The Components of a REIT’s Common Dividend 36

REIT Dividends and the Bush Tax Cuts 39

Preferred Stock Dividends 40

Preferred Stock Basics 40

Risks to Owning Preferred Shares 40

Conclusion 42

Chapter 4 Leases 43

Lease Terminology 44

The Four Major Types of Leases 48

Leases and Tenant Bankruptcy 51

FASB and the New Standard for Accounting for Leases 52

Lease Duration and REIT Stock Price Performance 52

Chapter 5 REITs by Property Type 55

Diversified and Specialized REITs 55

REITs that use Triple-Net-Leases 56

Risks and Rewards of REITs That Use Triple-Net Leases 59

Health-Care REITs 59

Risks and Rewards of Health-care REITs 61

Industrial REITs 62

Risks and Rewards of Industrial REITs 63

Lease Terms 63

Lodging/Resort REITs 63

Hotel Revenue 64

Hotel Expenses 64

Technical Aspects Specific to Hotel REITs 64

Risks and Rewards of Hotel REITs 66

Mortgage REITs 66

Risks and Rewards of Mortgage REITs 69

Office REITs 70

Lease Terms 72

Risks and Rewards of Office REITs 72

Residential REITs 73

Apartment REITs 73

Manufactured Housing REITs 75

Single-Family-Home REITs 76

Retail REITs 77

Shopping Center REITs 77

Mall REITs 79

Freestanding Retail REITs 80

Risks and Rewards of Retail REITs 81

Self-Storage REITs 82

Risks and Rewards of Self-Storage REITs 82

Conclusion 83

Part II Investing in REITs 85

Chapter 6 Getting Technical 87

REIT Structures 87

UPREITs 88

OP Units 89

OP Units and Estate Planning 90

DownREITs 91

Publicly Traded, Public Nonlisted, and Private REITs 92

Volatility versus Liquidity 92

Transparency and Corporate Governance 92

Costs and Fees 95

Externally Advised and Externally Managed REITs 95

Qualifying as a REIT 96

REITs Are Not Limited Partnerships 98

Chapter 7 REIT Performance 99

Historical Total Returns 99

Factors Influencing Demand for REIT Shares 101

Events That Increased Demand for REIT Shares 102

REITs versus the Attractiveness of Other Investments (Lessons from History) 108

Growth Stocks versus REITs, 1998–1999 108

Treasury Yield versus REITs, 2004–2006 109

Safety and Yield, and the Big League of Benchmarks, 2000–2006 110

REITs During the Financial Crisis of 2007–2008 111

Company Attributes That Affect Performance 113

Real Estate Fundamentals and REIT Performance 113

Performance by Property Type 116

How Lease Length and Structure Affect REIT Returns 122

Weighted Average Cost of Capital and REIT Performance 127

Debt as a Four-Letter Word 127

Competitive Advantage or Disadvantage—Why Cost of Capital Matters 127

REIT Performance in a Rising Interest Rate Environment 129

Conclusion 131

Chapter 8 Analyzing REITs 133

Operating Metrics 134

Net Operating Income (NOI) 134

Same-Store (Organic) Earnings 134

‘Earnings Growth‘ for REITs Is ‘FFO Growth‘ 135

Management’s Track Record as a Screening Tool 136

Profitability Metrics 137

Funds from Operation 137

Adjusted Funds from Operations (AFFO) 139

Cash Available for Distribution (CAD) 140

Balance Sheet Metrics and Analysis 140

Leverage 140

Debt-to–Total Market Capitalization Ratio 141

Debt-to–Gross Book Value Ratio 142

Debt-to-EBITDA Ratio 142

Weighted Average Cost of Capital (WACC) 143

Valuation Metrics 145

Price/Earnings Multiple 145

PEG Ratios 145

Dividend Yield 146

Dividend Safety 147

Dividend Coverage, or Payout Ratios 147

Dividend Discount Model 148

Net Asset Valuation (NAV) 149

Implied Capitalization Rate 158

Conclusion 161

Appendix A REITs Listed Alphabetically by Company Name 167

Appendix B REITs Listed Alphabetically by Ticker Symbol 175

Appendix C REITs by Sector 182

Appendix D REITs with Credit Ratings 193

Glossary 199

Index 209

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Author Information

Stephanie Krewson-Kelly analyzed REITs for top Wall Street firms from 1994 through 2009 and, today, heads the Investor Relations department for a publicly traded REIT. Her prior publications include REIT Roadmap: An Insider's Guide to Successful Investing in Real Estate Investment Trusts (2nd edition, 2012).

R. Brad Thomas is an acknowledged expert in commercial real estate investing and REITs. He is editor of the Forbes Real Estate Investor newsletter and writes for Forbes and Seeking Alpha.

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Press Release

August 29, 2016
How to Build Wealth with Real Estate Investment Trusts

Between 2001 and 2015, real estate investment trusts (REITs) delivered average annual total returns of 11 percent—significantly outperforming the five percent average annual total returns achieved by the S&P 500 and NASDAQ indexes. In September 2016, 'Real Estate' will become the eleventh investment sector tracked by Standard & Poor's—a watershed event that is already attracting new investors and greater fund flows into REITs. Investors need to learn how to invest wisely in this unique, new investment class. The Intelligent REIT Investor is the ultimate, clear, and concise guide for achieving investment success.

Using easy-to-understand language and simple examples to illustrate industry-specific concepts, The Intelligent REIT Investor enables even novice investors to quickly gain fluency in REIT industry terminology and valuation techniques. Moreover, because it focuses on the most pertinent risks and rewards of REIT investing, The Intelligent REIT Investor can be read cover-to-cover in a few hours.

Whether a reader's goal is to intelligently discuss adding REITs to a well-diversified portfolio or to offer expertise in REIT strategies to clients, this brilliantly constructed resource contains all the information and tools required. The Intelligent REIT Investor is the go-to primer and practical road map to understanding essential aspects of REIT investing, including how to:

  • Apply easy-to-use equations to assess the strength of a REIT's balance sheet and dividend safety
  • Understand research reports and public information on REITs across the spectrum of different commercial property types
  • Weigh the risks and benefits of each property type to optimally balance investment portfolios with specific goals

Filled with illustrative charts, useful summary tables, and historical anecdotes that explain how different property types have performed in various market conditions, no other resource on the market more fully prepares readers for making informed, successful REIT investments than The Intelligent REIT Investor.

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