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REITs come through with solid gains

Stock-pickers must evaluate each separately

SHARE REITs come through with solid gains

Land. They're not making any more of it.

Location, location, location.

"I can't let Tara go," Scarlett O'Hara told Rhett Butler in "Gone With the Wind." "It's home. I won't let it go. Not while I've got a breath left in me!"

Real estate can attract both cliches and passion, but those investing in its publicly traded firms the past two years got a solid payoff while other investments declined.

Real estate investment trusts (REITs), which own and operate properties such as offices, apartments, shopping centers and hotels to obtain lease revenue, had an average total return (dividend yield plus price appreciation) of 26 percent in 2000 and 14 percent in 2001.

Meanwhile, mutual funds investing in REITs rose an average of nearly 9 percent last year, one of the few fund groups to post an increase. Those results helped make up for dismal 1998 and 1999 REIT returns, but then, you already knew that real estate has its down cycles.

By law, REITs must pay out almost all their taxable income to shareholders as dividends, an income stream that continues whether the stock price goes up or down. Performing differently from traditional stocks or bonds, they're considered a safe haven. Retirees especially like the dividend yield, currently averaging 7 percent. There are about 180 publicly traded REITs, plus nearly 70 mutual funds emphasizing REIT shares. The big question is whether their good times will continue in this economy.

"Occupancy rates have been falling and rent growth slowing — or even dropping in some places — due to less demand for offices, industrial space and apartments, though the retail (shopping center) side of the business has done well," observed Matt Dembski, analyst with Credit Suisse First Boston. "The main reason investors are interested in REITs is that prices aren't high and earnings growth will remain positive even with a real estate slowdown."

Many experts have reduced expectations.

"I expect this year's average REIT dividend to be about 6 percent, with price appreciation flat to 3 percent, making the total return 10 percent or less," predicted Steve Sakwa, director of real estate research for Merrill Lynch. "I'm most concerned about office REITs because even an economic upturn at some point won't provide much help to them this year."

Stock-pickers must determine exactly what each REIT does and whether it's undervalued.

"Our fund made a lot of money last year, but investors still haven't missed the boat, for REITs were too undervalued to begin with," said Ronald Weiss, portfolio manager of Spirit of America Investment Fund Class A, with a 12-month return of 23.84 percent. "There's still a lot of room to grow and no reason why REITs, except for hotels and some office buildings, can't continue the same yields with higher prices."

If REITs fit your needs, consider them for a small portion of your portfolio.

"Don't look at REITs as a horse race, but for diversifying your portfolio and helping obtain a better risk-adjusted return," said Barry Vinocur, editor of Realty Stock Review ( www.realtystockreview.com), 802 W. Park Ave., Suite 222, Ocean, NJ 07712. "If you're focused on income, especially in a low-interest-rate environment, they're attractive."

Equity Residential Properties Trust (stock symbol EQR), a Chicago-based REIT with 30 management offices and a portfolio of 1,100 properties with 228,000 apartment units in 36 states, is recommended by Dembski and Vinocur. Dembski also suggests SL Green Realty (SLG), an office owner in midtown Manhattan; Pan Pacific Retail Properties (PNP), a shopping center company in five western U.S. markets; and Public Storage (PSA), which has 1,400 storage facilities.

Sakwa favors The Mills Corp. (MLS), a Virginia REIT with retail and entertainment properties in 10 states, Canada and Spain; Taubman Centers (TCO), which has 16 regional shopping centers in seven states; and The Rouse Co. (RSE), with retail centers, offices and mixed-use projects around the country as well as land development in Maryland and Nevada.

Vinocur's choices include Equity Office Properties Trust (EOP), owner of 381 office properties and nine parking facilities in 37 markets; Vornado Realty Trust (VNO), involved in office properties, retail properties and temperature- controlled refrigerated warehouses; and Archstone-Smith Trust (ASN), an apartment company with 71,000 units in 229 communities in 31 of the nation's largest markets.

Big winners for Spirit of America Investment Fund Class A have been New Plan Excel Realty Trust (NXL), with 290 shopping centers and 53 garden apartment complexes; MidAmerica Apartment Communities (MAA), which has 114 properties with 31,000 apartment units; and Nationwide Health Properties (NHP), with 328 facilities in 37 states.

The top real estate funds over the past 12 months, according to Morningstar, were:

Spirit of America Investment Class A (SOAAX), Syosset, N.Y.; $53 million in assets; 5.25 percent "load" (sales charge); $500 minimum initial investment; 1-800-367-3000; current yield 7.8 percent; three-year annualized return of 11 percent; up 23.84 percent.

Stratton Monthly Dividend REIT (STMDX), Plymouth Meeting, Pa.; $85 million; no load; $2,000 minimum; 1-800-634-5726; current yield 7.18 percent; three-year annualized return of 11 percent; up 20.17 percent.

Third Avenue Real Estate Value (TAREX), New York; $77 million; no load; $1,000 minimum; 1-800-443-1021; current yield 1.18 percent; three-year annualized return of 17 percent; up 16.47 percent.

Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, CA 94901-3581, or by e-mail at andrewinv@aol.com.