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You likely don't know Ralph Block, but trust me: When Block is talking real estate investment trusts (REITs), you'll want to pull up a chair and listen. A former lawyer, Block is an expert on REITs and has literally written the book on investing in them. The fourth edition of his Investing in REITs is in the works right now.
He's also a former co-manager of the Undiscovered Managers REIT fund, and has been personally investing in REITs for more than 40 years. I interviewed Block at the end of January on a variety of REIT-related topics, including his favorite stocks in the space right now. What follows is an edited portion of our conversation.
Brian Richards: What are some of your favorite ideas in the REIT space?
Ralph Block: One is a company I absolutely love; I have more of my personal funds in it than anything else. It's a company called Nationwide Health Properties (NYSE: NHP ) . They have a very, very conservative balance sheet. They're in the health-care sector, which I like ... and which I think is a pretty conservative sector to be in. And the management is experienced; they're smart but they're also conservative, and they don't like to take a lot of risks.
And the stock now is trading at one of the lowest-priced AFFO multiples of the major REITs -- it's about 16 times earnings. And the growth rate is going to be pretty respectable, 5% or 6% a year. They're making some good acquisitions, and the dividend yield is over 5% -- I think it's 5.2% today.
For a mix of value and conservative management, conservative balance sheet, in what I still think is a pretty good sector, I really like that one.
And then one that a lot of Motley Fool people like, I also like. It's a small one that is still pretty much undiscovered: Retail Opportunity Investments (Nasdaq: ROIC ) . It's an interesting one because they just became a REIT about a year ago. They started off as a SPAC (special purpose acquisition company) and decided not to liquidate.
They wanted to become a REIT, and they went out and found a guy named Stuart Tanz who was the CEO of Pan Pacific, which did very well. They sold out at near the top of the market to Kimco Realty and I guess Tanz was just looking around for something to do. So they brought him on board, he invested a lot of his own money in the stock and they've been going out and acquiring retail shopping centers for all of 2010. And I think they're getting some very attractive values.
They're not stealing properties -- nobody is these days -- but they're getting some very good values and they're cranking up their cash flow. I think the dividend will be increased significantly next year and it's a stock that's just very much underfollowed. The big sell-side firms don't follow it and I think it's got a lot of potential.
Richards: Do you think the sell-side firms don't follow it because of its new REIT status or is it that it's just too small?
Block: I think that's part of it. It's also fairly small, but I think the main thing is because it's just too new. BMO Capital Markets came out with a report on it [recently]. Their initial rating was overweight, I think they said. And if you listen to the conference calls, the management's on top of things but there's only roughly two or three questions on each conference call. So --
Richards: It makes it pretty easy on them.
Block: Oh, it's great. I remember the last time that happened there was an outlet center REIT called Chelsea that was just doing well, but there wasn't anybody on the call. Finally Simon bought them out and I was sorry to see them go.
And then the third one is my growth REIT here, Avalon Bay (NYSE: AVB ) .
I like the apartment sector ... but I've always liked this company. They've always been conservative with their balance sheet but they've been excellent developers. I think they're the best development team in the apartment sector. They have a balance sheet which is still very strong, and I think the apartment sector has clearly turned.
We're going to see some double-digit growth for a lot of the apartment REITs in the next two years, but what I think makes Avalon Bay particularly good is that they're already starting the development process. And I think as these developments get completed there's going to be a really nice sweet spot for them because there are still not a lot of new apartments being developed, and if they can get some job growth -- they're already doing pretty well without job growth. If they can get that I think they'll do real well.
Richards: Where's their heavy exposure nationally? Are they in the good cities to be in for job growth? Are they in the D.C. area, for example?
Block: Yeah, they really have kind of two major areas. One is along the West Coast -- the Bay area is doing better than southern California but southern California's starting to firm up now -- and then they have a lot of stuff in the mid-Atlantic and up in the Northeast. So you know, those markets are coming along pretty good. They're really recovering faster than most people had thought they would.
Read up for more of Block's thoughts on REITs: