Customer Reviews

Investing in REITs: Real Estate Investment Trusts: Third Edition (Bloomberg)

5 star:		(17)
4 star:		(6)
3 star:		(5)
2 star:		(0)
1 star:		(1)

 

 

I am the author of "Investing in REITs," and would like to contribute a few comments regarding the new 3rd edition released in January 2006, and how it differs from prior editions. The new edition improves upon and updates the prior editions in two principal ways:

First, it provides current information concerning the major events that have occurred and continue to evolve in the REIT industry. These include the REITs' bear market of 1998-1999, their subsequent amazing 6-year bull market, widespread acceptance of REITs as proxies for commercial real estate, and merger and acquisition activity. Further, all graphs and charts have been updated, and a new appendix on managing an all-REIT investment portfolio has been included.

Second, the new 3rd edition provides commentary on recent REIT industry trends that will affect all REIT investors, including the apparent "disconnect" between the 2001-2005 softness in the commercial real estate "space" markets and booming commercial real estate capital markets, the much-discussed "bubble" in residential real estate, changes in REITs' business strategies as they seek to create value in a very competitive marketplace, and the increasing pace of asset sales and joint venture activity.

If you liked the prior editions, you will love this new 3rd edition; if you didn't, well, don't buy this one. If you haven't bought "Investing in REITs" yet, well, decide whether you should own some REIT investments and act accordingly. The case for REIT investing has been proven convincingly, and it is my firm belief that every investor should own REIT stocks (or a REIT mutual fund) as part of a diversified investment portfolio. And, as each of us is responsible for our own investment strategies and success, there is no substitute for understanding both risk and reward.

Footnote and disclosure: Abe Lincoln refused to vote for himself in the 1860 presidential election, but I cannot figure out how to avoid assigning stars to this review of my own book. Accordingly, I hope you will forgive me if I immodestly give it 5 stars.

Ralph Block

First, I have no connection with Ralph Block or any of the enterprises he was previously or is currently associated with.
When the current edition of his book ("cobalt cover") was newly out, I took an online course from Block using the book as text. I was engaged in a total immersion crash course in investing (long overdue), being newly retired and confronted with managing for income a rollover IRA (having disengaged a 401K from my former employer) which was my primary asset outside of my house. The market had just crashed, and would go down further. Better late than never, but a painful six months educational process, as I learned how to reconfigure and manage the IRA myself.

The book and course convinced me that REITs belonged in my portfolio and I allocated a portion of it (initially 7%) to a combination of individual REITs and a highly rated REIT mutual fund. Prices were down along with the rest of the market, so in that respect it was beginners luck.

However, I used Block as a mentor and watched which REITs he favored in a fund he managed (which had too high an entry investment threshold for me to get into myself). I acquired a few more individual REITs in the following year when the market dipped. It has turned out to be a valuable investment and helped noticeably to reduce risk by diversifying the portfolio, and has also yielded a steady portion of income. The book was essential for review and reference in the practical business of managing my REIT segment of a "long haul" and income portfolio, vetting possible acquisitions and navigating the jargon of REIT annual reports.

I would note that Block puts out a monthly newletter discussing the REIT world, online at Essentialreit.com site: recommended for keeping uptodate. Block's discussions are not for casual reading, but like the book, if you're willing to put in the time and effort, it can be very rewarding. (And amusing too, as he has a great sense of humor and pulls no punchs) Thanx Ralph!

Real Estate Investment Trusts, or REITs, that, in my opinion, are more of an asset class, like fixed income bonds, than a sector of the general stock market. Every investor should be familar with this asset class just as every investor should be familar with fixed the income class. One can choose not to invest in REITs, just as one can decide to be 100 per cent in equities, but the choice should be an informed one. "Investing in REITs" by Ralph Block is an informative and clear introduction to REITs suitable for new investors. Investors who have followed REITs for a couple of years will also benefit from the book.

Part 1 of this book give an overview of REITs. In particular Chapter 2 shows why REITs are different (not better) than than electric utilities, bonds, and preferred stocks.

Part 2 of this book discusses the history of REITs and then some of the myths regarding REITs. REITs have been around since 1962 when a law was passed that excluded REITs from corporation tax if they paid out 95% of their taxable income as dividends. Before 1962 small investors could invest in real estate in limited partnerships. The myths probably arose because investors confused REITs with these limited partnerships.

Part 3 discusses how professionals evaluate REITs. For most equities earnings are the important number to look at. But real estate can throw off alot of depreciation for tax purposes, but the real estate is not really depreciating (very much hopefully). The numbers used to evaluate REITs FFO, AFFO, NAV (and much more) are explained in this part. By the way the balance sheet and income statements of REITs are much easier to understand, in my opinion, than other corporations. That's because most of the assets are hard assets and the revenues are stable. You don't have to worry about foreign competition and technological obsolesence.

Part 4 looks to the future. The total market capitalization of REITs was about $1 billion in 1982, now it is about $133 billion. Of course this growth primarily came about by starting new REITs, and REITs issuing stock to purchase more real estate. This part looks at the economic forces that caused this growth and whether it can continue. It also looks at the risks of REITs

A clear, well written book about REITs which can benefit the new as well as experienced investor.

klee12

As an investment consultant, as well as an oft-harried, small apartment owner to boot, I personally witnessed, in the early 90s, the trials and tribulations of being directly involved in managing one's real estate investments - all this during a period in which, contrary to popular opinion, disciplined equity REITs still profited nicely.

Despite my pre-existing biases, day by day, it was becoming ever more clear to me that REITs had become the lower risk, more highly liquid, no-fuss, no muss, preferred vehicle for participating in commercial real estate profits. Still, somehow, it was not until I picked up Ralph's first book that I was able to garner the enthusiam necessary to truly embrace REITs, ultimately altering my career course mid-stream and dedicating it to REIT investing and analysis. I read his book in one sitting, literally not being able to put it down.

While that "sold out" first book will forever have an emotional attachment for me, as an "analyst", I must acknowledge that this new and improved version is even better still, both from an informational standpoint, as well as being more colorful and thus, much easier on the eyes - courtesy of Bloomberg's fine editor, I suspect.

But you don't need to be a professional to understand and appreciate Ralph's down-to-earth, folksy style of writing. In fact, because this book was written for the un-initiated, armchair investor, its price tag is extremely low. But even if it were not so inexpensive, to anyone who loves either real estate or the high dividends REITs provide (over 7% on average, as of this writing), I'd say: "INVESTING IN REITS is worth its weight in gold".

Since the original "Investing in REITs" was published in 1998, much has changed in REITville. REITs endured a minor bear market in 1998 and 1999, the Congress passed the REIT Modernization Act of 1999, and the investing public found REITs a profitable place to invest as the rest of market fell away from them in 2000 and 2001. This book is an interesting and enjoyable text as the reader is guided through the history of REITS, property sectors, and a plain math approach to REIT analysis. The author revises the original book to include discussion of recent legislation which changes the amount of income that must distributed to shareholders and the rules which allows REITs to own taxable subsidiaries, and on a recent study that demonstrates the merit of including REITs in every diversified portfolio to provide currrent income, less volitility, and better returns. He also updates his "reading of the tea leaves", where he predicts the future for REITs. "Investing in REITs" is a must read for everyone who wants to know how to build a REIT portfolio.

Ralph has done a great job of leading the new REIT investor through the tangle of understanding REITs from their humble inception in 1960 through 2001. He does a good job of explaining why things have happened as they have, and to build our confidence in this from of investment...particular those who wish to invest for the long term dividend.

What would be nice is to carry this concept through its logical conclusion, and demonstrate how to get the data on the internet to measure a REIT's ability to maintain and continue to grow its dividend going forward, with practical examples of how to pull numbers off of a REIT's 10Q and 10K annual earnings reports, calculate FFO and AFFO and Fixed Cost Coverage Ratios.

I hope he follows up with a book that will take us to this next step.

While the book serves well as an introduction to the sector, it devotes a mere single chapter, the last, to what could go wrong. What a missed opportunity.

The author could have brought the caveats of REIT investing to life by using more real world examples, even some drawn from real world SEC statements.

The author spends an inordinate time selling the idea of investing in the sector. My guess is people who reach for this book are already interested or even invested in REITs, and are looking for help in navigating the potential minefields.

The book needs a second edition, to bring it more current.

Per KPA's 10k, President Clinton signed a new law Dec 99 that allows a REIT to own up to 100% of stock in a taxable subsidary. How does this impact paired share reits? What will be the long term impact of this legislative change on the REIT landscape?

A good effort, yet one that can be improved upon.

Having heard of REITs and noticed their significant investment returns with relatively low risk, I wanted a book that would help me understand as much as possible about REITs. This book came highly regarded from the financial planning community in Northern California, so I decided to read it. It is excellent. The author's long history in following REITs made this book stand out from the rest. It thoroughly covers every topic one could consider when investing in REITs, and not only is it particularly insightful, the author's casual style makes for interesting reading. The book does need a new edition, however, as the REIT world has evolved over the past couple of years.

I learned more about investing in REITs from Ralph Block's first book "The Essential REIT" than from any of the other numerous sources I was plumbing at that time. His latest book, "Investing in REITs" expands on and updates his first book. This is a great book for anyone interested in investing in REITs. It's easy to read, proceeding thoroughly and logically from first principals. Ralph Block is an excellent writer with a knack for anticipating questions that neophytes might have.

I came across the first edition of this book in my local library (along with Mullaney's book on REITs). That edition hit all the right notes, and as expected from someone who manages an REIT fund, Block reserves considerable space in the book for his pitch for the REIT as a great investment vehicle. Overall, I found the first edition to be balanced, even-handed and a solid introduction to the REIT, though I did have a few criticisms about REITs in general. These are the following:

1. REITs generally are high yield investments. Block failed to address the common dangers associated with any high yield investment, and he did not mention any specific means for the investor (particularly small investors like myself) to shield these juicy yields from the tax man. In passing, over the long term, I am of the opinion that carefully selected REITs will provide an adequate total return, and the prudent small investor would do well to include a select few of them in a Roth IRA.

2. Block tries to compare REITs with other income producing stocks, and generally fails in this regard. Though REITs have similarities to utilities and preferred stock (the one over-riding similarity being the fat yield), there are too many differences between REITs and other income producing investments to make a fair comparison.

3. I believe that an REIT should be evaluated as a common stock first, and then as a real estate play second, rather than the other way around, as Block preferred to do. Granted, the basic nature of the activity should be taken into account, but one should never forget that the publicly traded REIT is a stock. That said, less attention should be paid to the FFO (funds from operation) or AFFO and more should be paid to net income. FFO can be gamed, as Block correctly pointed out, by the creative interpretation as to what constitutes depreciation (FFO is typically defined as net income, less capital gains on sale of real estate, plus depreciation).

4. Block correctly identified the importance of capital structure for the REIT, and did a good job of explaining the REITs need for capital infusions. Intelligent investors in this activity would do well to keep in mind that institutional players get to participate in REITs as either bond-holders or preferred holders, and thus they get sweeter deals than the little guy, who, unless he participates through a mutual fund, will almost always participate as a common stock holder. Moreover, the little guy gets paid his dividend AFTER the institutional players get their cut. Also, I disagree with Block's notion that market cap is a good indicator of REIT capitalization. Essentially, I feel that REIT capitalization is best measured by the balance sheet ( debt load plus cash position and equity), and while not the best measure of capitalization, it is, in my opinion (which granted ain't worth much)better than the use of a subjective measure which changes as market conditions change.

5. I found it odd that Block did not mention the importance of cash flow for the REIT. At a minimum, the REIT has to be able to service its debts. An REIT with a weak cash position and cash flow constraints can not deliver a fat yield for long. Intelligent investors in this activity would do well to be very wary of an REIT that pays out more in dividends than it actually earns in net income per share. An outfit doing this is generally eroding its cash position, thus weakening its ability to service its debts and making it vulnerable to adverse external conditions.

6. My last point is perhaps the most important. The little guy looking to profit in this space is up against 1) insttitutional players who can get sweeter deals as mentioned before and 2) real estate pros who are closer to the various real estate markets and eat, sleep and breathe real estate 24/7. The little guy would do well to know market cycles, specific property types and demographic trends very well before looking at REIT investments. Also, the pros more typically have access to a greater variety and volume of information than is typical in more traditional common stock investment, so on that score, the small investor is fairly well disadvantaged. Thus, I am of the opinion that REIT investment may require a lot more work for a little extra gain, so it is best to dabble lightly in this space.

In sum, this book, now in its third edition, makes for a good starting point for REIT investment. In passing, a more accessible, albeit dated text on REIT investment is John A. Mullaney's REITs: Building Profits with Real Estate Investment Trusts. Those of you looking to invest with safety and success in this space would do well to pick up the latter book and memorize Chapter 16 of the text word for word.