By Ralph Block

Having invested in REITs almost since "the creation," I would like to share a few memories with you—both good and otherwise—as well as the lessons learned from them.

Construction lending REITs gave the fledgling industry a black eye in the early '70s. No bank wanted to be the last kid on the block to launch one, but loan quality was poor and debt leverage was enormous. When interest rates spiked and office markets tanked, these REITs crashed and burned. Lesson: Excessive leverage, combined with lax underwriting standards, create a toxic mix.

On a cheerier note, I began buying Washington REIT in the early 1970s at a 9 percent yield. Investors didn't distinguish between construction lending REITs and quality equity REITs. Washington, run by Franklin Kahn, was a splendid local sharpshooter in D.C., creating value for shareholders for years. Lesson: Not all REITs are alike.

I remember worrying about Weingarten Realty during the oil bust of the mid-1980s, when crude fell to $9 a barrel. Economic conditions in Texas, home to most of Weingarten's assets, tanked—but occupancy rates barely dipped at Weingarten's retail properties. I also recall New Plan, during a troubled time for retailers in the '80s, successfully re-leasing space that had been occupied by bankrupt tenants. Lessons: Excellent underwriting skills, coupled with extensive contacts with the retailer community, provide strong protection even under miserable economic conditions; well-located neighborhood shopping centers, managed properly, are defensive investments; and landlords have alternatives, even in tough times.

The real estate depression of the early '90s decimated real estate owners, and I recall the hand-wringing in REITdom. But REITs came out of that debacle almost unscathed; 1990 was a bad year for the stocks, but only a few dividends were cut. And REITs raised and deployed capital timely for excellent acquisitions. Lesson: Keeping leverage low and dividend payouts modest are wise, as nobody can see around the bend.

Kimco Realty's 1991 IPO still lingers fondly in my memory. I am cautious of IPOs, but Milton Cooper and his team were impressive; I bought Kimco stock and have held onto it since. This was a fitting beginning to the "Modern REIT Era." Lesson: REITs with creative management teams, strong capital allocation skills and concern for shareholders can provide outrageously good returns, particularly when adjusted for risk.

On a sadder note, Wyndham International (nee Patriot American) went on an acquisition binge in 1997, driven by its "paired-share" privileges. Buying nearly every hotel in sight, it took on massive debt that it couldn't roll over, forcing a very dilutive refinancing. Lesson: Those with excessive appetites often lose more than their lunch. The bear market of '98–'99 mauled us investors badly; total returns were negative in both years, and even stalwarts such as Simon Property got no respect, yielding 8.2 percent in early 2000. It wasn't pleasant, but several lessons were learned: REITs should raise equity only to create significant value for investors; and REIT stocks will often be buffeted by the winds of fickle fashion.

My 35 years of REIT investing have taught me several important principles. The stability and predictability of REIT cash flows is awe-inspiring. Great things can be accomplished by REIT executives who are motivated, who understand risk (as well as reward), and whose interests are aligned with shareholders. Dividends, while not the sole reason to own REIT stocks, should never be underrated. And, most important, the past 45 years have proven that REIT stocks belong in every investor's portfolio.