The following is an excerpt from an interview with Mike Kirby, Green Street Advisors' chairman and director of research, in the upcoming November/December 2010 issue of REIT magazine celebrating 50 years of REITs.
REIT: Do you think investors still have any misperceptions about REITs? If so, what are they?
Mike Kirby: The biggest misperceptions are in the institutional community.
The institutions—and I mean pension funds, primarily—continue to plow money into investment approaches that I believe are clearly inferior. There’s just a litany of ways in which public REITs are just flat-out better.
Yet, institutions continue to fool themselves that these other vehicles are a closer proxy to real estate. It’s just not true.
The fact that REITs only get maybe 5 percent of the institutional dollars allocated to real estate is a shame. I’m hoping that attitude can change, although it hasn’t much yet.
REIT: If you could give REIT executives one piece of advice based on your experience studying the industry, what would it be?
Kirby: I would tell the average REIT exec to not use funds from operations (FFO) or any earnings metric as a goal or benchmark.
REITs that focus on FFO growth tend to make systematic errors that are far less likely when managers really focus on long-term value. Execs who have worshipped at the FFO altar tend to have too much leverage, they tend to get into businesses that they shouldn’t get into and they generally have underperformed those who come to work thinking about creating value.
It’s a bad goal, because it leads you astray. Were I sitting on the boards of REITs, that would be piece of advice number one.