By Jada A. Graves

1. You've been involved in the REIT industry for a number of years. What has been the biggest change in the industry, and what developments do you expect to see in the next decade?
I think the biggest change has been REITs evolving from merely collections of assets to companies that have sophisticated and very savvy Fortune 500-type management teams. While I see advancements like the rotational analyst programs at certain companies, extensions of core competencies into other business lines, and international expansion, I think we have a much more intellectually stimulating sector than we used to have and one with superior returns for investors.

The next decade will be the decade of globalization. New international frontiers have opened up for U.S. REITs, and property securitization by other nations presents a broad range of opportunity for investors. As more countries bring about REIT legislation, I think it will be interesting for everybody in the industry.

2. What is the biggest misconception investors have toward investing in REITs?
I have two—one for retail investors, and one for institutional investors. First, a misconception in my mind is that because REITs pay dividends, investors assume that interest rates should have a big impact on whether you invest in REITs. That's absolute silliness. REITs are better earnings growers in general than they are yield investments. But investors are often concerned that if interest rates move up, the yield will no longer be attractive enough versus the 10-year yield to warrant REIT investment. Give me 10 percent earnings growth with a 4 percent dividend yield, and I really don't care if the 10-year Treasury is at 4.5 percent or 7.0 percent.

The second thing is that there's too much emphasis on NAVs. When you think about it, the NAV is simply the private market's effort at valuing real estate, much like the public market uses stock prices to value real estate. Because properties vary a great deal in terms of age, vacancy, growth potential, leverage, etc., the averaging of cap rates in the market to produce an NAV is often a fool's game and a potential investment trap.

3. Over the next 12 months, which real estate sector or sectors will perform the best, and why? Which sector will face the biggest challenge?
There are two ways to look at this question. In terms of earnings growth, the best sectors are going to be retail and apartments. The biggest challenge will be from the general office sector, where you have rents rolling down. The earnings in retail are going to be strong because there's very little supply, but an enormous amount of demand. With apartments, you've seen a lot of them disappear into the condo market. On the other hand, as housing prices have gone up, the demand for apartments has also gone up. There are fewer apartments, but more people asking for that space.

Now, in terms of stock performance, it depends on how investors view the multiples. I feel good about REITs in general, and we're looking for a 15 to 20 percent increase in total returns this year. However, out of the two sectors with strongest earnings growth potential, retail is the cheaper sector, and I think it will outperform this year.

4. If you were starting your own REIT, which executives would you recruit to help you build your company?
I hesitate to name names, because there are a lot of talented men and women in the industry. In general, I would choose individuals that understand both real estate and organizations. It is no longer enough to simply know the product. You've got to have executives that know how to motivate people, how to build core skills into the organization, and how to extend those skills either horizontally or vertically in the food chain. It's about more than just owning real estate, and your best performing REITs are going to have executives that do it all. The other REITs will be absorbed.