Real estate investment trusts (REITs) were transformed from somewhat obscure instruments to overnight sensations during the past 12 months.
A high-flying stock market seeking some defensive alternative, coupled with a solid real estate market that's somewhat short of buildings, helped generate all the positive press clippings."There was fear of market volatility and desire for high dividend yields," explained Louis W. Taylor, senior real estate analyst with Prudential Securities. "In addition, many real estate markets really look good for the next two or three years."
The best-performing money management firm among more than 800 nationwide was New York's Cohen & Steers Capital Management, which turned in a 40 percent gain in the past 12 months for its investors by selecting the right REITs. Mutual funds specializing in REITs also prospered, with Boston's CGM Realty Fund notching the top 12-month return of 36.59 percent.
The industry is almost embarrassed by such returns, preferring to think of the REIT as a steady character actor, not a star pressured to maintain marquee billing. A REIT total return of 13 to 15 percent, including a 5 to 7 percent dividend, is considered typical.
Not that it's been nonstop upward movement. REITs were whacked during March and April like most other sectors. The concern is whether the group is a flash-in-the-pan that benefitted from an unusual market period, or really is the steady, low-maintenance jewel REIT executives and portfolio managers make it out to be.
Though today's balance sheets are more conservative with less debt than before, real estate is cyclical. REIT values were battered by failed construction and development loans in the 1970s, the savings and loan debacle in 1990 and rampant overbuilding from late 1980 through the early 1990s.
"The REIT sector is maturing, with around $125 billion in assets, and this is the first generation of REITs to face a rocky stock market with sound real estate fundamentals at the same time," observed Thomas Rizk, president and chief executive officer of Cali Realty Corp., Cranford, N.J., a REIT specializing in offices in northern New Jersey and New York's Westchester County.
Fundamentals are still in place and REIT valuations lower since since their correction, Rizk said. Growth is ongoing. Cali since 1995 has expanded through acquisitions from $300 million in total assets to nearly $2 billion. Its investors received inspiring total returns of 50 percent in both 1995 and 1996.
In fact, Cali is Taylor's favorite REIT, along with two Southern California REITs: Kilroy Realty Corp. in office and industrial space, and Pacific Gulf Properties in apartments and industrial properties.
"While the group had gotten ahead of itself for a while, now's a good time to be getting back in because overall REIT prices are down about 7.5 percent from their highs," said John Litt, real estate analyst with PaineWebber Inc. "I wouldn't expect a huge runup in prices, but the total return we historically expect."
Litt favors FelCor Suite Hotels, with $250 million in acquisitions completed year-to-date. He likes IRT Property Co., an Atlanta shopping center company that recently completed $17 million in acquisitions. Others are Bay Apartment Communities, likely to gain from a cyclical upturn in multifamily demand, and Reckson Associates, expanding its properties from Long Island to other suburban New York markets.
"REITs don't generally correlate with the financial markets but lead a life of their own," pointed out Martin Cohen, co-portfolio manager of Cohen & Steers Realty Shares, a REIT mutual fund run by Cohen & Steers Capital Management that's up 33.68 percent the past 12 months. "The `hot' money, the short-term money, exited REITs and they'll be able to perform more normally now."
His top REITs include southwestern office owner Crescent Real Estate Equities; major regional mall owner Rouse Co.; and northeastern shopping center and office owner Vornado Realty Trust. Cali Realty and California industrial development firm Speiker Properties also remain good choices.
The top real estate funds the past 12 months available to individual investors, according to Lipper Analytical Services, were:
CGM Realty Fund, Boston; $162 million in assets; "no-load" (no initial sales charge); $2,500 minimum initial investment; up 36.59 percent.
Columbia Real Estate Equity Fund, Portland, Ore.; $95 million; no-load; $1,000 minimum; up 34.91 percent.
Cohen & Steers Realty Shares, New York; $2.6 billion; no-load; $10,000 minimum; up 33.68 percent.
Davis Real Estate Fund, Santa Fe, N.M.; $71 million; Class A with 4.75 percent load and Class B with declining back-end load; $1,000 minimum; up 33.55 percent.