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


Praise for The Intelligent REIT Investor

"Together, Brad Thomas and Stephanie Krewson-Kelly form the perfect 'Dynamic Duo' to write the 'Bible' for investing in REITs. Brad's years of writing on REITs in numerous publications, along with Stephanie's background as both a current REIT executive and former sell-side REIT analyst, provide a wonderful background to lead readers through the basics and intricacies of public real estate securities. Well done!"
—Tom A. Lewis, retired Chief Executive Officer, Realty Income (NYSE: O)

"Whether you are new to the world of REITs or a more sophisticated investor looking to gain a greater understanding of REIT investment strategy, The Intelligent REIT Investor is an indispensable resource. Brad and Stephanie's combined experience spans all aspects of the REIT sector, commercial real estate, and securities investing, and that valuable knowledge is imparted to the reader thoroughly, yet in an easily digestible manner."
—Dave Henry, former Vice Chairman and Chief Executive Officer, Kimco Realty Corporation; Board Member of four public REITs: Columbia Property Trust; HCP, Inc.; Tanger Factory Outlet Centers, Inc.; and VEREIT, Inc.

"The Intelligent REIT Investor not only helps investors understand the top- level benefits of REIT investing—strong long-term wealth creation, portfolio diversification, steady current dividend income, liquidity, and the like—but also gives them a carefully structured approach for identifying which property segments, and even which individual REITs, would make the best additions to their own investment portfolios."
—Brad Case, PhD, CFA, CAIA, Senior Vice President, Research & Industry Information, National Association of Real Estate Investment Trusts

"The Intelligent REIT Investor is a comprehensive go-to resource for Real Estate Investment Trusts. The authors share their tremendous knowledge of the REIT industry and provide an in-depth guide to investing in REITs during all economic times."
—Drew Alexander, CEO, Weingarten Realty

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.

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


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


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