First thing first, the type of business that the REIT is in determines everything.  REITs comprises of a wide variety of properties.  Many REITs invest in a broad list of commercial real estate while others specialize by investing in particular sections such as apartments, strip malls, shopping malls, hotels and offices.  Some specialize in particular regions of the country.  Others invest in the debt related to real estate, such as mortgage-backed securities.  Thus, like any other stock purchases, you want to be in the stronge segment during the holding period.

Second, movement of interest rates matters.   Since REITs are income stocks; therefore, they tend to fall in price as interest rates increase and vice versa.  Furthermore, REITs usually comprise of large debt and some equity in their real estate portfolio.  High interest incurs higher borrowing costs.  However, rising interest rates can be an indication of a stronger economy including lower vacancy rates and higher rentals.  We have been enjoying the best of both worlds.  The economy is strong and interest rates are still low.

Third, you should be interested an REIT that has a history of increasing dividends.

Fourth, look for a REIT with a favorable ratio of price to FFO.  FFO stands for Funds From Operations.  With most companies, investors focus on net earnings to price.  With REITs, the most commonly accepted and reported measure operating performance is FFO.

Fifth, look for a REIT that has a favorable market price to the value of underlying assets.  You would like to own a REIT that could theoretically sell all its assets for more than the market value of its stock.  There are two ways to make an estimate of this. 

 

1. A rough calculation is to take the FFO and divide it by a capitalization rate.  Generally, the number will not be too far from what the REIT must pay for financing.

2. A better way to estimate the value would be to perform an appraisal on each of the REIT’s properties.  This, of course, is beyond the ability of nearly all investors.  Large brokerage firms that have analysts following the industry do work on valuation issues.  You can find a list of these brokers on the NAREIT website linked above.  If you have an account with such a broker you can ask to receive their most recent research report.

Note it is typical for the total market value of the REIT to sell for less than its total liquidation value.  These discounts tend to persist over time.  However, deep discounts can be viewed as an opportunity for buying low.