Investing in REITs Book Tackles New Topics

REIT historian and longtime investor, Ralph Block debuted the fourth edition of his book "Investing in REITs" this week. In an interview with, Block said the updated version will appeal to the more sophisticated investor and offers insights into the developments and strategies that have taken place in the REIT industry over the past several years. How would you say that the process of investing in REITs has changed the most in the last few years?

Ralph Block: Well, I think there are probably several things. One is that there's more focus on REITs' balance sheets and debt leverage, for obvious reasons. I think there's also a lot more focus on REITs' cost of capital and how they are going to invest that capital, because a lot of value was destroyed in the aftermath of the Great Recession as REITs had to raise equity at some pretty diluted prices.

I would also think that a lot of investors, individuals and even some professionals are using a lot more mutual funds and particularly ETFs, which make REIT investing easy. But the downside is I think there is a lot more correlation. Any particular down day for REITs and they're all going to be down about the same percent. I think it also results in more volatility. Do you think that investor's perceptions of REITs are evolving. Are they gaining popularity as an investment choice?

Block: That's a really good question. As I think about this and as I wrote the new edition of the book, I really felt there were some positives and negatives in terms of investor perception. I think the positives are that REITs have shown that they have much better access to capital, both equity and debt, and as a result could react favorably to the credit crunch that really affected so many private and even institutional commercial real estate investors.

Another positive perception is that I think there is more respect for REIT management teams. They swallowed a lot of bitter pills at the beginning of spring 2009, and they did what had to be done in terms of raising equity and cutting the dividends .

I think a third positive change in perception is that there's simply been better disclosure, better corporate governance, and I think REIT management teams have been receptive to requests for information.

Probably the only negative change in investor perception that I can see is that I think there's probably some annoyance, at least on the part of institutional investors, that REIT stock performance, at least in the short term, seems to be more highly correlated with other asset classes. So the concern there is that REITs are not as much of an asset diversifier as they had been in prior years.

I think the other negative is that REIT stocks have just simply become more volatile, which really frustrates me, because if you understand what REITs are all about and the stability of their cash flow and, in most cases, long-term leases, there's no reason for them to be all that more volatile.

However, I think the positive perceptions are going to be outweighing the negative changes of perception. I think a lot of it depends on whether REIT stocks can become a little less volatile, because that tends to freak people out. Until people stop worrying about short-term, day-to-day valuation, it's still going to be an issue. I think it's something we have to watch, but not sure if REITs can do anything about it. Are you targeting the same readers for this edition of the book as in your previous editions?

Block: No, I'm really not. I think there's certainly going to be a lot of overlap. Over the years, what I've learned is that as each edition came out, it was less brand new and inexperienced investors that were reading the book.

The more experienced investors, even professional investors and a lot of non-REIT-dedicated investors are trying to understand REITs. Also as reorganization is becoming increasingly important in the large real estate industry, I think a lot of commercial real estate people are trying to understand REITs.

I think the book is a little more nuanced and sophisticated in terms of how the discussions of REITs within the equities markets and commercial real estate markets have evolved, so it might be a little more difficult for someone who doesn't know anything about investing to pick it up and understand. I think it'll be more meaningful for people who do have some understanding of commercial real estate and the equities markets. What can readers expect in this fourth edition of the book that wasn't in the previous version?

Block: One of the things that I spend a fair amount of time on is the lessons learned from the Great Recession and credit crunch. Debt and balance sheet issues are much more important for investors to look at, as well as how REITs are allocating their precious capital. So that's something that goes throughout the entire book.

There's also a new chapter in this edition on investing in REITs outside the U.S. It's written by Ken Campbell and Steve Burton.

The other thing is that there's just a lot more emphasis on the fact that commercial real estate and REIT stock performance is more cyclical. It used to be that cap rates didn't change too much. You'd buy a property at an 8 percent cap rate, and it didn't matter what the stock market did or what the bond markets were doing. They weren't going to change much.

But what we've seen in the last five years is cap rates coming down to crazy low numbers, 5 percent and below, in late 2006, and up to 9 percent and 10 percent and now if you believe Green Street's estimates, cap rates are way down again. It's been a roller coaster ride, and I think investors need to be aware of that. What would you say is the single most important piece of advice that you hope readers will take away from reading your book?

Block: If you look at the data that NAREIT puts out, REIT investing has been very rewarding over many long-term time periods. But, they can be very cyclical in the short term because of increasing cyclicality in the economies and commercial real estate values. I think the one thing I would say to readers of the book would be, unless you really want to try and time commercial real estate markets and equity markets, it's best to invest in good quality REITs and hold onto them for many years.