The Intelligent REIT Investor Guide - Brad Thomas - E-Book

The Intelligent REIT Investor Guide E-Book

Brad Thomas

21,99 €


Demystify real estate investment trusts with this masterful guide from an industry expert. In The Intelligent REIT Investor Guide, author Brad Thomas walks you through both basic and advanced topics in the profitable, sustainable world of real estate investment trusts. From historical industry performance to the equations needed to calculate key metrics in REIT stocks, this book covers the history, vocabulary, principles, and analysis you'll need to invest wisely in this growing asset class. Find out how you can strengthen your investment decisions and conclusions with publicly traded REITs in the short- and long-terms alike. With this book you'll: * Understand exactly what REITs are, how they work, and why they've achieved such impressive historical returns * Discover how REITS have performed over the decades up against other asset classes * Compare and contrast the various subsectors - such as residential, retail, office, healthcare, self-storage, lodging, technology, and more - to understand which ones can work better in your personal portfolio. Perfect for personal and professional investors alike, The Intelligent REIT Investor Guide is an invaluable guide to a crucial asset class that is often overlooked or poorly understood despite its undeniable impact on portfolios over the past 60 years.

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Table of Contents


Title Page




A Building Block for REITs


CHAPTER 1: REITs: What They Are and How They Work

REITs Are Liquid Assets

Types of REITs

General Investment Characteristics

Higher Current Returns

CHAPTER 2: REITs Versus Competitive Investments


Convertible Bonds

Preferred Stocks

Other High‐Yielding Equities

Other Real Estate Investment Vehicles

The Private REIT Phenomenon

CHAPTER 3: REITs over the Decades

The Tax Reform Act of 1986

The 1990s: The Modern REIT Era Begins


REIT Modernization Act, RIDEA, and Capital Recycling

The 21st Century (So Far)

Lending REITs Versus Ownership REITs

CHAPTER 4: Residential REITs

Ups and Downs

The Real Estate Cycles



The Mall Sector

Factory Outlet Centers

Shopping Centers

Nothing but Net Lease

CHAPTER 6: Office, Healthcare, Self‐Storage, and Lodging REITs

Office Buildings




CHAPTER 7: Technology REITs

Tower REITs


CHAPTER 8: Specialized REITs





Farmland (

Contributed by

David Gladstone)

Cannabis (

Contributed by Paul Smithers


CHAPTER 9: REITs: Mysteries and Myths

Myth #1: REITs Are Packages of Real Estate Properties

Myth #2: Real Estate Is a High‐Risk Investment

Myth #3: Real Estate Is Merely an Inflation Hedge

Myth #4: REIT Performance Is Anchored to REIT Property Performance

Myth #5: REIT Stocks Are Trading Vehicles

CHAPTER 10: REITs: Growth and Value Creation

The Significance of FFO

Funds from Operations (FFO)

Capital Recycling


CHAPTER 11: Searching for Blue Chips

Growth REITs

Value or “Turnaround” REITs

The Virtue of Blue‐Chip REITs

CHAPTER 12: Breaking Down the REIT Balance Sheet

Debt Ratios

Interest Coverage Ratios

Debt Maturity

Variable‐Rate Debt

Secured Debt

Conservative and Consistent Dividends

Corporate Governance


CHAPTER 13: REIT Preferred Stocks

Primary Characteristics of REIT Preferred Stocks

Types of Preferred Stocks

Credit Ratings and Analysis

Yield to Call

Interest Rate Risk

Stock Market Risk and Recessions

Types of Preferred Stocks


ETFs, Mutual Funds, and Closed End Funds


CHAPTER 14: The Quest for Investment Value

Real Estate Asset Values

Valuing REITs as a Group

CHAPTER 15: Building a REIT Portfolio

Modest Risks and Sustainable Retirements

Looking for the “Holy Grail” Allocation

Diversification Among REITs

How to Get Started

CHAPTER 16: Investing in Global REITs

Institutionalization of Real Estate

The Three Big Drivers

The Case for a Global Real Estate Portfolio

Defining Global Investment Opportunities

Risks Associated with International Investing

CHAPTER 17: Management Matters


The Intelligent REIT Glossary

Contributor Biographies


End User License Agreement

List of Tables

Chapter 2

Table 2.1 REITs Should Produce Better Total Returns than Bonds

Chapter 4

Table 4.1 18‐Year Real Estate Business Cycle

Chapter 12

Table 12.1 U.S. Equity REIT Debt Ratios in Q4 2019

List of Illustrations

Chapter 1

Figure 1.1

Figure 1.2

Figure 1.3

Chapter 3

Figure 3.1

Chapter 4

Figure 4.1

Figure 4.2

Figure 4.3

Figure 4.4

Figure 4.5

Chapter 5

Figure 5.1

Figure 5.2

Figure 5.3

Figure 5.4

Chapter 6

Figure 6.1

Figure 6.2

Figure 6.3

Figure 6.4

Chapter 7

Figure 7.1

Figure 7.2

Figure 7.3

Figure 7.4

Figure 7.5

Figure 7.6

Figure 7.7

Chapter 8

Figure 8.1

Figure 8.2

Figure 8.3

Figure 8.4

Figure 8.5

Figure 8.6

Chapter 10

Figure 10.1

Figure 10.2

Figure 10.3

Chapter 12

Figure 12.1

Chapter 13

Figure 13.1

Figure 13.2

Chapter 14

Figure 14.1

Figure 14.2

Figure 14.3

Chapter 15

Figure 15.1

Chapter 16

Figure 16.1

Figure 16.2

Figure 16.3


Cover Page

Table of Contents

Begin Reading




































































































































































































































































Praise for The Intelligent REIT Investor Guide

“The simple genius of public REITs is that they turn bricks and mortar into transparent and predictable liquid assets. Since they tend to pay high dividends, REITs can serve as a terrific addition to an investment portfolio. Thomas’ book helps break down this asset class for the average person, making REITs more understandable and therefore more accessible to everyone.”

Sam Zell Founder and Chairman of Equity Group Investments

“In just 30 years, the REIT market has grown to a diverse $2 trillion global opportunity. Yet there remain a great number of misconceptions about the nature and behavior of equity REITs. Brad Thomas’ book provides readers a wealth of tools and insights to appreciate – and potentially profit from – this asset class.”

Joseph M. HarveyPresident of Cohen & Steers

“Brad Thomas has been guiding REIT investors through many economic cycles. His common‐sense, bottom‐up approach identifies the financial, operational, and strategic characteristics that separate winners and losers over the long term. This book is an essential overview for anyone looking for the tools for success investing in REITs.”

Paul E. Adornato CFA, veteran REIT analyst

“In this book, Brad Thomas continues to display his in‐depth knowledge and expertise of the REIT industry. Through several decades of interviews and discussions with the top management of many major REITs, detailed research into the industry… and his own experience as a commercial real estate developer, Brad brings a unique insight and perspective to the world of REITs.”

Dave HenryBoard member of several large REITs, former Kimco CEO, former ICSC chairman, former vice chair of Nareit

“By publishing this book, Brad Thomas is allowing the general public to have access to his many years of successful professional expertise in listed real estate… [that] will help generations of individual investors to profit from a very attractive and diversified class of stocks.”

Eric Nemeth Private equity investor, independent board member

“The structure of a REIT is generally and essentially simple: Collect rent and distribute rent after debt service and basic corporate expenses to equity owners as dividends. But the general simplicity and similarity of the REIT structure in some ways makes it harder to distinguish a good REIT from a mediocre REIT.”

“To make those distinctions and thus to make the right investment decisions takes investigative work, historical knowledge, and actionable insight. Brad Thomas works the REIT field energetically and diligently, and anyone who follows his work acquires a big advantage in understanding America’s REITs.”

Edward B. Pitoniak CEO of VICI Properties

“Brad has been a voice of reason in the REIT space for many years. This book provides a comprehensive guide to REIT investing.”

Jonathan Litt Founder and CIO at Land & Buildings Investment Management

“Brad has been a longtime follower of REITs and a contributor to the growth of the REIT industry. He has a broad knowledge of the industry, deep connections, and an intellectual curiosity that help shine a light on this often misunderstood investment vehicle. One of Brad’s mentors, Ralph Block – to whom the book is dedicated – was not only one of the greatest gentlemen I’ve had the pleasure of knowing, but also a disciple and true visionary of the REIT industry.”

Craig Robinson CEO of GSI Capital Advisors

“The Intelligent REIT Investor Guide is the definitive and comprehensive resource for investing in real estate investment trusts. Brad uses his in‐depth knowledge from his 25 years of experience in the business to offer unique insight and provide an invaluable resource for both novices as well as sophisticated professional investors.”

Randy Blankstein President of The Boulder Group

“Brad Thomas has once again delivered a highly accessible roadmap to investing in the REIT sector. In addition to the foundational overview of REIT valuation, performance measurement, and portfolio construction, this new volume tackles current innovations, including the growth of technology and specialized REITs and the pandemic’s impact on real estate.”

Sam Chandan Silverstein chair and Dean of the NYU Schack Institute

“Brad Thomas’ book provides a comprehensive overview of REIT investment, from the basic concepts of what REITs are and why they belong in investors’ portfolios, to more advanced subjects like understanding REITs’ financial statements. It’s a highly useful source of information on REITs and the REIT marketplace for beginning and more advanced investors alike.”

Steven A. Wechsler President and CEO of Nareit

“Whether you’re an experienced investor or a novice investor, this is a MUST READ book for anyone exploring REIT investing or education. As Ben Graham is known as an icon for value investing, Brad has become an icon in REIT investing.”

Jonathan Hipp Principal of U.S. Capital Markets, head of U.S. Net Lease Group

“Brad Thomas has gained a well‐deserved reputation as the pre‐eminent REIT expert of our time and has compiled this comprehensive book on all aspects of investing in REITs. Whether you are new to REITS or well‐versed in the sector, this is a must‐read.”

Alex Bossert Founder and Portfolio Manager of Bossert Capital

“Brad is a dedicated and thorough REIT connoisseur who has been following the sector and companies [in it] for decades. His insight has helped Main Street investors navigate events.”

Floris van Dijkum Managing Director, REITs of Compass Point Research & Trading

“The world is fascinated by the opportunity to invest in real estate but is often overwhelmed by the world of REITs. Brad has been a leading resource in the REIT industry; and his The Intelligent REIT Investor Guide provides an incredibly useful roadmap for the benefits of REITs, the differences between REIT asset sectors, and the unique investment characteristics that REITs exhibit. REITs are a notable opportunity for diversified real estate investments within the stock market, and Brad’s book is a must‐read for anyone considering allocating a portion of their investment portfolio into REITs.”

Michael Riopel Assistant General Counsel at Northwestern Mutual

“The Intelligent REIT Investor Guide is a must‐read for any investor who wants a great introduction and guide to REIT investing. A timely publication for those looking to REITs for income, an inflation hedge, and dedicated to REIT legend Ralph Block, to boot! Well done, Brad!”

Tom Lewis Former CEO of Realty Income

“Brad has produced another excellent textbook on REITs for those seeking a solid foundation. The book provides a valuable resource, giving students the definitions and descriptions they need as we build from there.”

J. Morris Professor at Georgetown University, founder of REIT Academy

“Brad Thomas has taken the mystery out of investing in REITs. The Intelligent REIT Investor Guide is a timely and useful guide to navigating this often overlooked asset class.”

Greg Morillo Managing Partner at Lionbridge Capital, L.P.

“From the basics to how to think about analyzing and investing in REITs, this book offers a valuable perspective for investors of any experience level.”

Brian Nelson CFA, President of Valuentum Securities, Inc.

“Brad’s skillful guide to the world of REIT investing is a must‐read for anyone considering sustainable liquid real estate investments. His deep knowledge of commercial real estate combined with the constant study of REITs is a combination producing rich takeaways.”

Michael Bull CEO of Bull Realty

“I worked with Brad as a development partner in my firm and have always been awestruck by his creativity and grasp of capital and markets.”

Ed Kobel President of DeBartolo

“Brad Thomas is one of the most trusted voices in real estate investing. REIT investors who follow Brad’s research and analysis have benefitted from consistent dividends and long‐term value creation.”

Brad Watt President and managing partner at Petra Capital Properties

“There is a reason that Brad Thomas is among the most followed REIT analysts and writers. He harnesses his broad knowledge of the players and familiarity with various real estate businesses to make REIT investing accessible and simple. Brad has long believed that REIT investing is foundational to creating a solid personal long‐term stock portfolio. This book shows you why.”

Christopher VolkCofounder and Executive Chairman of STORE Capital

“I believe in and follow Brad Thomas, my go‐to for REIT investing knowledge.”

Prince Dykes Veteran, host of The Investor Show, and author of the Wesley Learns book series

The Intelligent REIT Investor Guide



Brad Thomas





Copyright © 2021 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per‐copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750‐8400, fax (978) 750‐4470, or on the web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748‐6011, fax (201) 748‐6008, or online at

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Library of Congress Cataloging‐in‐Publication Data

Names: Thomas, R. Brad, 1966‐ author.

Title: The intelligent REIT investor guide : how to sleep well at night with safe and reliable dividend income / Brad Thomas.

Description: Hoboken, New Jersey : Wiley, [2021] | Includes index.

Identifiers: LCCN 2021020641 (print) | LCCN 2021020642 (ebook) | ISBN 9781119750307 (cloth) | ISBN 9781119750352 (adobe pdf) | ISBN 9781119750376 (epub)

Subjects: LCSH: Real estate investment trusts. | Dividends.

Classification: LCC HG5095 .T46 2021 (print) | LCC HG5095 (ebook) | DDC 332.63/247—dc23

LC record available at

LC ebook record available at

Cover images: Front: © LRuthven/Getty Images; Back: © Domin_Domin/Getty Images

Cover design: Tony Merola

In many ways, my love of REITs can be correlated to my love for my five kids. That's why I dedicate this book to Lauren, Lexy, Nicholas, Riley, and A.J. They're always worth investing in.

“The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.”

– Benjamin Graham


Anyone who's written a book recognizes the time, energy, and effort it takes to turn an idea into a finished product. In bringing The Intelligent REIT Investor Guide to fruition, it took an army of individuals; and I'm honored and blessed to have collaborated with all of them.

Most importantly, I want to acknowledge my family for being patient and understanding in support of this project. It took me over eight months to complete the book, and that means spending almost every weekend away from home.

A very special thank you is in order for my editor, Jeannette DiLouie. She is an amazing and gifted professional, and I'm honored to have her on the Wide Moat Research team. I also want to thank other WMR teammates, such as Noah Blacker, Tony Merola, Stephen Hester, and Frances Popp, who were all helpful in the creation of this book.

My experienced team of contributors who are listed at the end of the book deserve special mention as well. They include Mark Decker, Sr., Scott Robinson, Jennifer Fritzsche, David Gladstone, Jay Hatfield, Eva Steiner, and Paul Smithers.

Also, special praise goes out to Nareit, FactSet, and Seeking Alpha, which all provided me with data. That third source deserves a second mention as well for being a terrific investment platform to work with over the years. Without the Seeking Alpha platform, I would have never been able to build my audience and become a global influencer in the world of real estate investing. In that regard, I would like to especially recognize the thousands of followers who trust me there, as well as Eli Hoffman, who worked at Seeking Alpha until he passed away in 2020.

In addition to Ralph Block, who was a mentor to me and inspired me to write this book, I want to thank others who were instrumental in my career as a real estate analyst, such as Tom Lewis (former CEO of Realty Income), Norman Scarborough (my professor at Presbyterian College), and Chuck Carnevale (owner of FAST Graphs).

Perhaps one day I will write an entire book on my career in commercial real estate. But for now, I must highlight two friends who hired me when I graduated from college in 1988. Arthur Cleveland and Lewis White both took me under their wings and inspired me to get rich by owning real estate.

Finally, I want to thank my mother, Louise Thomas, who raised my brother and me while working tirelessly in real estate. I obtained my real estate license when I was 18 years old but, had it not been for her, I would have never become an intelligent REIT investor. Thank you, Mom!

A Building Block for REITs

Innovations in the world of finance tend to be incremental, rather than revolutionary, but every now and then one comes along that truly enhances societal value. Two that quickly come to mind are the introduction of the first mutual fund nearly 100 years ago and a refinement of that idea – the ETF – about 30 years ago. Both provided a means for investors of all sizes to efficiently gain access to diversified portfolios that otherwise would have been cumbersome and costly to construct. A similar quantum leap occurred with the formation of the first Real Estate Investment Trusts (REITs) in 1960, which, like mutual funds and ETFs, are non‐taxable, pass‐through entities. Whereas mutual funds and ETFs own stocks or bonds, REITs provide a comparable mechanism for investing in properties.

The primary appeal is obvious: Publicly traded REITs turn an asset class that is otherwise illiquid and hard to access into something that can be bought or sold with a few clicks on a keypad. In addition, today's REITs are best‐in‐class companies that own some of the highest‐quality real estate. In most U.S. property sectors, REITs dominate the list of largest property owners, and they bring a level of managerial acumen and operational expertise that is often not found among smaller players. Their size also affords efficiency on overhead and borrowing costs, and their corporate governance practices provide reasonable alignment of interests between managers and investors.

As a result, the REIT model has thrived. In the United States, REITs now own more than $1.5 trillion of real estate. In addition to traditional property sectors such as retail, office, industrial, and apartments, REITs are dominant owners of cell towers, data centers, healthcare facilities, single‐family rentals, and numerous niche sectors. This exposure to non‐traditional property types poised to prosper in tomorrow's economy is impossible to replicate via other investment vehicles. Outside of the United States, the REIT template has now been adopted in 40 countries, and there are nearly 500 REITs scattered across the globe. Further expansion both domestically and globally is a certainty.

This growth has been accompanied by excellent returns. The industry reached adulthood about 25 years ago, and listed property‐owning REITs have delivered total returns that are slightly better than those of either small‐ or large‐cap stocks over that time frame. They have also delivered better risk‐adjusted returns than private‐market real estate investment vehicles. As important, REIT share prices often stray from the market herd, a trait that can soften the blow of broad market downturns. Their demonstrated propensity to enhance returns while reducing risk makes them a valuable addition to any broadly diversified portfolio. These attributes have been quantified and validated by reputable academics and investment consultants employing state‐of‐the‐art portfolio allocation models, with most recommending a weighting of at least 10%.

Common sense also supports an allocation at least that large. Investors should have a roughly proportionate exposure to every asset class, and real estate is a very large asset class. Estimates of the size of this country's commercial property market run a wide gamut, but a credible midpoint that includes a broad array of property types is $17 trillion. That compares with capitalization for the U.S. stock market of $50 trillion, $11 trillion for corporate bonds, and $4 trillion for municipal bonds. Debt obligations backed by the U.S. Treasury tally $30 trillion, but with the Federal Reserve increasingly dictating prices in that market, it's fair to question whether a proportionate allocation is optimal for most investors. There is no “right” allocation for real estate, but portfolios lacking an explicit target of at least 10% are not as well diversified as they should be.

Investing in property, whether via private vehicles or publicly traded REITs, can seem daunting, as the arena is littered with jargon and valuation approaches that are often foreign even to trained investment professionals. Indeed, until the early 1990s, this issue served as an impediment to the acceptance of REITs into the mainstream. At about that time, however, a critical mass of sophisticated investors, analysts, and executives descended on the space, and they invented and popularized the specialized performance and valuation metrics that are ubiquitous today. Their contributions served as foundational building blocks for the subsequent growth and prosperity the industry has enjoyed.

Ralph Block, the author of Investing in REITs, was one of those pioneers. There weren't very many of us back then who took it as self‐evident that publicly traded real estate was a transformative idea, but the vision had no more passionate adherent than Ralph. His enthusiasm for REITs (his email was [email protected]) was contagious, and his regular newsletters were both informative and fun to read. A quote from Samuel Johnson appeared above each edition: “No one but a blockhead ever wrote, except for money.” As the newsletter was free, the quote was a clever, self‐deprecating joke. And no one ever gleaned more investment insight from a golden retriever than Ralph, but his interviews with his beloved Sammy were classic. The newsletter, certainly a seed for this book, was perhaps a way for Ralph to give back to an investment sector that had given him so much in both financial and intellectual rewards.

Like its legendary namesake, The Intelligent Investor by Ben Graham, the book is full of common‐sense approaches to uncovering value. At the same time, it provides a comprehensive overview of the quantitative metrics necessary to make well‐informed investment decisions. Why does the REIT industry use funds from operations (FFO) and adjusted funds from operations (AFFO) in lieu of earnings per share? Why is “cap ex” so important? Why look beyond dividend yields? What is NAV? How is it calculated, and why does it matter? These and many other questions are adroitly handled.

The Intelligent REIT Investor Guide is a must‐read, not only for investors in REITs, but for anyone hoping to gain perspective and understanding of the commercial real estate industry at large.

Mike Kirby – Co‐founder and Director of Research, Green Street

About Green Street:

Green Street is the preeminent provider of actionable commercial real estate research, news, data, analytics, and advisory services in the U.S. and Europe. For more than 35 years, Green Street has delivered unparalleled intelligence and trusted data on the public and private real estate markets. Green Street is widely recognized as the unbiased authority on REITs, offering a time‐tested approach to valuation with a strong track record for identifying the most attractively priced REITs and property sectors. The firm helps clients gain a thorough understanding of the entire REIT ecosystem at the macro, sector, REIT and property level to drive more informed investments. Learn more at


In 1998, a very impressive man named Ralph Block published the first edition of a very big book titled Investing in REITs. He was so impressive and the book was so big that it’s now seen four editions. Together, they have helped educate millions of investors around the globe, including me, about real estate investment trusts.

That’s only a small portion of his legacy though. Ralph, who began investing in real estate investment trusts in the 1970s, led a career that spanned four full decades and established him as a significant voice for the industry and a well-respected institutional REIT investor. Like me, he had a passion for writing, which is why he formed Essential REIT Publishing Company, where he published hundreds of articles and books and inspired thousands in the process.

I know that Ralph was a great reader as well, though I admittedly can’t tell you if he ever read Repeatability: Build Enduring Businesses for a World of Constant Change by Chris Zook and James Allen.

With that said, I think my old friend would have agreed with them that, “Differentiation is both the essence of strategy” and “the prime source of competitive advantage.” The co-authors also wrote how, “You earn money not just by performing a valuable task but by being different from your competitors in a manner that lets you serve your core customers better and more profitably.”

I can’t help but think of that insight when I think about REITs and what they offer. A misunderstood asset class in too many ways, REITs perform a unique service to their customers and investors alike. By providing capital to those that need access to real estate, they also offer reliable cash flow, growth, and liquidity to investors. In that way, REITs truly can make an enormous difference in portfolio profitability, as I’ll show in this book.

This brings to mind yet another great thinker: The father of value investing, Benjamin Graham. He once said that, “When I started, [investments] were almost entirely limited to bonds. Common stocks, with relatively few exceptions, were viewed primarily as vehicles for speculation.”

Of course, that view would change during his career. In two of his books – Security Analysis and The Intelligent Investor – Graham detailed the importance of stocks and fixed income. And those who took his advice, like his protege Warren Buffet, went on to make millions and millions and millions of dollars as a result.

REITs weren’t established until 1960 (as we’ll discuss further in Chapter Three). So Graham, who passed away some 16 years later, would have been far less familiar with them. Even so, I believe he would have had a very good opinion of what they’ve evolved into: a force to be reckoned with, to be sure. They represent over $1.4 trillion in equity market capitalization, provided over $69 billion in dividend income distributions in 2019 alone, and have inspired similar structures in several dozen countries around the world since.

Put together, U.S. REITs own over $3.5 trillion in gross real estate assets. And those that are publicly traded own more than 520,000 properties, which is roughly 10%-15% of all institutional-quality commercial real estate in the country. So the potential for consolidation and further growth within this highly fragmented marketplace is powerful – as is the collective influence of the estimated 87 million Americans who now own REITs through their retirement savings and other investment funds.

Doesn’t that sound like something you’d like a piece of too?

That’s the purpose for this book: to teach you how to get exactly that. It unites Ralph’s dedication, Graham’s proven and profitable philosophy, and my passion for real estate securities to form something truly worth reading. A common tie between the three of us and a common theme of REITs is a solid appreciation of dividends, with Graham specifically including that investment perk in his time-tested principles:

A sufficiently strong financial condition

Stable and growing earnings

A strong dividend record

Shares that trade at a moderate price-to-earnings multiple that offers a margin of safety.

It’s exceptionally hard to go wrong long-term when you follow those rules. Trust me. I know.

Why This Book?

Graham once explained that “the most durable education is self-education,” and that’s what I’ve done over the decades, including as a developer for over 20 years. That role taught me how to create value in real estate “from the ground up,” giving me the building blocks I needed to eventually become an investment analyst with a deep understanding of real estate securities.

All told, I now have 30+ years’ experience as a real estate investor, all of which I’ve put into this book – along with chapters’ worth of insider information from the long list of expert contacts I’ve compiled along the way.

My main goal is to help educate readers by utilizing my experience in leasing, finance, development, and capital markets so they can better build their own wealth by owing shares in real estate investment trusts. As you may have already noticed, I titled The Intelligent REIT Investor after Graham’s The Intelligent Investor. This was done on purpose to boldly highlight the link between valuation and real estate, which you now have access to.

I’m also proud to acknowledge the dream team of contributors who helped make this book happen – one more reason to make it the blockbuster of all works on the subject. Much of The Intelligent REIT Investor was, in fact, structured around Ralph’s fourth edition (published in 2011).

While he passed away in 2016, I was fortunate to have considered him a friend in his later years. And so I’m extremely honored to carry his torch today. Knowing both his character and legacy, I dedicate The Intelligent REIT Investor to his memory in hopes that his knowledge, passion, humor, and love will be just as motivating and transformative now as they were during his lifetime.

A lot has, admittedly, changed since 2011. So I did add and revise quite a lot in the process of putting the following chapters together. There are new property sectors to expand on, important events and updates to note – including, of course, the 2020 pandemic’s effects on the sector, parts of which may surprise you – and other key aspects to include.

I also decided to create a separate study guide to this book instead of including bulky appendices at the back. That way, there’s less risk of overwhelming new REIT investors, while my more academic following will still have another resource they can turn to.

That additional information should be useful to anyone looking to dive deeper into current trends and statistics. And those who want even more up-to-date education can turn to my REIT Masterclass series, which will add even more day-to-day observations and analysis.

With that said, I truly hope that whether you’re a novice in this area, an expert, or somewhere in-between, you find great insights into understanding the world of real estate investment trusts… and how to use them to achieve your unique financial goals.

Happy and successful investing,Brad Thomas

CHAPTER 1REITs: What They Are and How They Work

“The true investor … will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.”

—Benjamin Graham

What's your idea of a perfect investment?

That's a trick question, for the record, since there is no such thing. Greater returns come with greater risk, while lesser risk comes with lower returns. You're just not going to find a stock that offers intense gains and intense safety at the same time.

Even so, those looking for above‐average current returns, reasonably strong long‐term price appreciation, and only modest risk should definitely consider commercial real estate that can generate reliable streams of rental income.

In the past, real estate investing was only available to wealthy entrepreneurs with deep pockets and the ability to acquire and actively manage portfolios of properties. Real estate investment trusts, or REITs (pronounced “reets”), were born out of that environment with the intent to allow small investors the same kinds of benefits.

Congress officially recognized REITs in 1960, patterning them after mutual fund laws. In the beginning, they were severely restricted, mostly meant to just provide investors with a non‐taxed, passive flow‐through form of income. The REIT vehicle received a dividend‐paid deduction from corporate tax for every dollar distributed. And income was taxed only at the shareholder level instead of being double‐taxed like most corporations.

They've since evolved into a highly attractive overall package that's very much worth considering: an uncomplicated way to buy and own real estate run by experienced professionals who give you some of the profits anyway. REITs offer access to reaping income from major office buildings, shopping malls, hotels, and apartment buildings. In fact, they work with just about any kind of commercial real property you can think of. Better yet, this all comes in an easily traded common stock like Apple or Amazon.

Perhaps best yet, they do all this while giving you the steady and predictable cash flows that come from owning and leasing real estate – and on a much larger scale than a mere individual can handle. Essentially, REITs put their corporate‐strength access to public equity and debt capital into acquiring and building additional properties to grow their businesses. Combined, these features can add stability to their investors’ portfolios.

Real estate as an asset class has long been perceived as an inflation hedge that, during most market periods, enjoys fairly low correlation with the performance of other categories.

As mentioned in the introduction, REITs have been around for 60 years now, though it's only been in the past 30 that they've become widely known. That's true because of several pivotal moments in their evolution, some of which were out‐and‐out crises at the time. We'll discuss those in more detail in Chapter 3, but suffice it to say for now that REITs evolved in very positive ways as a direct result of those experiences.

From the end of 1992 through the end of 2019, the size of the REIT industry has increased by more than 75 times, rising from a market cap just under $16 billion to almost $1.33 trillion. Since that's only about 10–15% of all institutionally owned commercial real estate, this extremely attractive sector is filled with vertically integrated operating companies that still have plenty of room to grow.

REITs Are Liquid Assets

I've already mentioned that REITs are easy to buy and sell. But you're excused if you'd like to point out how unwieldy commercial real estate can be.

A liquid asset or investment is one with a generally accepted value and accommodating market, where it can be sold easily and quickly at little or no discount to that value. In which case, direct investment in real estate – whether a shopping mall in California or a major office building in Manhattan – is far from liquid. People aren't exactly lining up outside of such buildings ready to buy them at the drop of a hat.

Most publicly traded stocks, however, are liquid, a rule that holds true for REITs. They're real estate – owning investments that enjoy the benefit of a common stock's public market trading and liquidity. So when you buy into them, you're not just buying properties; you're also buying the businesses they belong to. It's like when you buy stock in Exxon; you're buying more than oil reserves.

The vast majority of REITs are public real estate companies overseen by financially sophisticated, skilled management teams with the ability to grow their companies’ cash flows (and dividends) at rates higher than inflation. It's not uncommon to get total annual returns of 8%. All you need is a 4% dividend yield and 4% capital appreciation resulting from 4% annual increases in operating cash flow and property values.

As we'll discuss in a later chapter, management and good corporate governance are critical to those kinds of results. Like other operating companies in the public market, REIT shares have a strong likelihood of increasing in value over time as their properties generate higher cash flows, the values of their properties increase, and they grow their portfolios – all of which management can, should and, in most cases, does add active value to.

Running a REIT isn't always a stress‐free job (especially in the face of a global pandemic and subsequent shutdowns). But there are teams of men and women out there nonetheless who knock it out of the park. They operate their properties to generate steady income, only accepting risk where the odds of success are high. Because they recognize REITs’ unique ins and outs, most of them are exceptionally careful when and where they invest retained earnings.

They search out ways to grow their property portfolios, values, and cash flows by taking advantage of new opportunities as they come along.

Types of REITs

There are two basic categories of real estate investment trusts to consider. An equity REIT, for one, is a publicly traded company that buys, manages, renovates, maintains, and sometimes sells real estate properties as its principal business. Many also develop new properties under favorable economic conditions. Meanwhile, mortgage REITs (mREITs) make and hold loans and other debt instruments that are secured by real estate collateral.

The focus of this book, it should be stated, is on the former. That's mainly because, while mREITs have higher dividend yields and can deliver spectacular investment returns at times, equity REITs are less vulnerable to changes in interest rates. And they've historically provided better long‐term total returns, more stable price performance, lower risk, and greater liquidity.

In addition, equity REITs allow the investor to determine the type of property he or she invests in and often even the geographic location of the properties in question. Most equity REITs today are specialized, best‐in‐class operating companies that invest in only one or two property types. This makes them concentrated experts in their fields of business, which gives investors greater chances to reap significant benefits over time.

General Investment Characteristics

Performance and Returns

Although equity REITs’ long‐term performance varies depending on the exact timeline used, they typically relate very well with those of broader stock indices such as the S&P 500. Data provided by the National Association of Real Estate Investment Trusts (Nareit) shown in Figure 1.1 show that, during the 40‐year period through June 2020, REITs delivered an average annual total return of 11.38%. This compares closely with other indices’ returns during the same period.

Figure 1.1

Source: Nareit website.

Admittedly, that makes them sound indistinguishable. So here's the difference: REITs enjoy largely unique benefits that include merely modest correlation with other asset classes, less market price volatility, more limited investment risk, and higher current returns – each of which we'll look at next.

Lower Correlations

Correlations measure how much predictive power the price behavior of one asset class has compared to another. So if we want to predict what effect a 1% rise (or fall) in the S&P 500 will have on an investment category – REITs, stocks, small caps, bonds, and so on – for any particular time period, we look at their relative correlations.

For example, if the correlation of an S&P 500 index mutual fund with the S&P 500 index is perfect (written out as 1.0), then a 2% move in the S&P 500 would predict a 2% move in the index fund as well. On the opposite end of the range, correlations can trend down to −1.0, in which case their movements are completely opposite. And in between is 0.0, which suggests no correlation at all.

This concept is important in the investment world, since it allows financial planners, investment advisers, and individual or institutional investors alike to structure broadly diversified investment portfolios with the objective of having the ups and downs of each asset class offset each other as much as possible. This ideally results in a smooth increase in portfolio values over time, with much less volatility from year to year or even quarter to quarter.

Cohen & Steers Senior Vice President and Global/U.S. Portfolio Manager Laurel Durkay – along with Senior Vice President and U.S. Senior Portfolio Manager Jason Yablon – gave some interesting insights on the subject in their September 2020 publication, “How REITs Benefit Asset Allocation.”

They noted, “REITs have historically served as effective diversifiers, as they tend to react to market conditions differently than other asset classes and businesses, potentially helping to smooth portfolio returns.”

They also wrote that “share aspects of both stocks and bonds – responding to economic growth like equities, but with yields and lease‐based cash flows that give them certain bond‐like qualities.” In addition, they're “subject to real estate cycles based on supply and demand, with the added stability of commercial leases. And they tend to be more sensitive to credit conditions due to the capital‐intensive nature of real estate.”

The co‐authors add that “these distinct performance drivers” have actually resulted in “low long‐term correlations with stocks and bonds. Since 1991, U.S. REITs have had a 0.57 correlation with the S&P 500 and a 0.21 correlation with U.S. bonds (see Figure 1.2). Global REITs have also exhibited diversifying correlations, albeit to a more modest degree, due largely to higher correlations of Asia's real estate market with both [Asian] and U.S. equities.” (See Figure 1.3.)

Accordingly, in markets where stocks are rising sharply, REITs may lag relative to the broad stock market indexes. This happened in 1995, when REIT stocks underperformed comparatively speaking while still providing investors with 15.3% total returns. And it happened again in 1998 and 1999, when their returns were actually negative. Conversely, during many equity bear markets – such as 2000–2001 – lower correlating stocks such as REITs tend to be more stable and may suffer less.

Figure 1.2

Source: Cohen & Steers.

Figure 1.3

Source: Cohen & Steers.

Durkay and Yablon add that “sudden changes in bond yields can have a meaningful influence on short‐term REIT performance. However, such periods tend to be temporary. In the long run, REIT returns are driven primarily by the distinct cash flows and growth profiles of the underlying property markets and the added stability of leases [that provide] the potential diversification benefits of an allocation to real estate.”

Bottom line: Correlations will vary over time, particularly during short time frames. However, because commercial real estate is a distinct asset class with distinct attributes, it's reasonable to expect REITs to maintain fairly low relativity to other asset classes over reasonably long time periods.

Lower Volatility