Real Estate Investment Trusts: The Reit Stuff

Article excerpt

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 non-stop 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 benefited 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, p resident and chief executive officer of Cali Realty Corp. …