Investing in REITs: Real Estate Investment Trusts, 4th Edition

External Growth

Let's assume, for purposes of discussion, that a widely respected REIT can obtain annual rental revenue increases slightly better than the rate of inflation, say 3 percent, and that property expenses and overhead expense growth can be held to less than 3 percent. Let's further assume that with modest, fixed-rate debt leverage, such a REIT can increase its per-share FFO by 4 percent in a typical year. Finally, let's assume that the well-managed REIT can achieve another 0.5 percent annual growth in FFO through tenant upgrades, refurbishments, and other internal means. How do we get from this 4.5 percent FFO growth rate to the 6 to 7 percent pace some REITs have been able to achieve quite often in the past? The answer is through ...