Empty office buildings, sinking home prices--real estate is the leper of the investment world, right? Well, you can still get respectable returns on property by putting money in real estate investment trusts. REITs, which are companies that own buildings or mortgages, issue publicly traded stock. And those issues outstripped the Standard & Poor's 500-stock index in 1991 with a total return (capital appreciation plus reinvested dividends) of 35.6%, vs. the S&P 500's 30.5%.
Trouble is, REITs are a mixed bag, so you have to be careful about which one you choose. Last year was the first time REITs topped the S&P 500 since 1986 (chart). And because of the excesses of the 1980s, real estate has some rocky times ahead.
The chief benefit of REITs is that they're highly liquid: They're traded on exchanges like any other stock. Also, they are managed by pros who aim to assemble a large portfolio of profitable holdings. Most of the nation's 200 REITs, with $43 billion in assets, shy away from speculative ventures--a blessing in today's market. That's atonement for their high-flying ways of the mid-1970s, when many got burned. The result is that, overall, REITs should continue to do well.
Today's REITs are often superior to the other two forms of property investing--individual ownership and real estate limited partnerships. If you alone own an office building, good luck trying to unload it in this lousy market. Managing the place and getting tenants are hassles, too. The advantage of the partnerships vanished in the 1986 tax reform: You no longer get a tax break for your losses. And since many partnerships invested in risky properties, a lot are underwater or are being snapped up by larger entities in roll-up plans that pay investors a pittance.
REITs have varying investment specialties. Thus, it pays to know how different segments of the real estate market are faring. Some REITs focus on a specific type of property, such as warehouses or shopping centers, and some concentrate their holdings in one region. "You're wise to be careful about a REIT that has holdings all over the place," says Catherine Creswell, an analyst at Alex. Brown & Sons. "No one can know retail outlets in Baltimore and apartments on the West Coast." Creswell says other signs of a good REIT are whether management does its own leasing and maintenance and whether its debt is less than half of asset value.
Another distinction is between so-called equity REITs, which own buildings outright, and mortgage REITs, which hold property loans. "Hybrids," about 10% of all REITs, do both. Equity REITs performed better in 1991 (up 35.7%) than the mortgage kind (up 31.8%), whose underlying loans suffered from refinancings, a problem that will continue into this year. Declining interest rates prompt borrowers to pay off old, higher-rate loans, depriving these REITs of fat yields.
ON THE MOVE. What's really hot in the world of REITs? Health care. Hospitals and nursing homes are doing very well, thanks to the aging of the population. Nationwide Health Properties, for instance, has seen its stock jump 90%, to $27 a share, since January, 1990, when the U.S. real estate downturn first got under way. No wonder. Now boasting 112 facilities coast to coast, Nationwide's net income has moved up smartly (table).
The apartment market is another winner, particularly in growing areas of the country, since apartments are the usual abodes of young people from elsewhere. United Dominion Realty Trust has ridden that trend by concentrating on multifamily housing in the Southeast.
Shopping-center plays are a bit riskier, since they hinge on an economic recovery. Consider Federal Realty Investment Trust, which concentrates on retail outlets in the mid-Atlantic states, a region devastated by the recession. Although revenues are down lately, analysts expect a strong post-recession surge because Federal's shopping centers are mostly in built-up areas with little chance of new competition coming in. In anticipation of that happy day, the stock has edged up from 17 1/2 in November to 21 now.
A longtime standout is New Plan Realty Trust, the largest REIT, recently topping $1 billion in assets. New Plan, whose stock has risen 35% in the past two years, likes old, well-established shopping centers on the East Coast and in the Midwest. The virtue of these centers is their low rentals, about a third of those in regional malls. That makes keeping tenants and attracting replacements easier. "In bad times, $5 a square foot is a good rent," says William Newman, New Plan's chief executive officer. The biggest criticism of New Plan is that it has not been bold in buying new properties with its $275 million cash hoard--at a time when bargains abound.
REITs suffering difficulties have invested in condominiums, offices, and hotels--all of which were overbuilt in the 1980s and have huge troubles now. That's the case with Hotel Investors Trust. This REIT posted an operating loss of 30 a share in its third quarter, and the stock has swooned. BRT Realty Trust went into the New York office and condo market in a big way in the 1980s and is paying for it today. Says Myron Ginsburg, BRT's treasurer: "We're spending all our time foreclosing on mortgages."
One once-popular trust in disrepute is the finite-life REIT, whose heyday was the mid-1980s, when real estate prices seemed destined for never-ending growth. The allure of these REITs was that they are obliged to sell off their buildings in eight years or so, giving investors a big gain. But the market of the early 1990s hasn't been receptive. Sierra Real Estate Equity Trust '84, which closed in 1985, faces a possibly grim experience selling its six industrial properties and one shopping center. To escape, Sierra '84 is considering shifting to a less-restrictive REIT setup.
The worst is probably ahead for mortgage REITs, especially for the many trusts that are heavily invested in collateralized mortgage obligations (CMOs). The massive refinancings of late are having a delayed reaction on CMOs, which are bonds based on pools of hundreds of residential mortgages. Because refinancings take time to process, significant numbers of bonds won't be affected much before early spring. Then, the REITs will get their principal returned, which means they'll have to reinvest at currently less-opulent rates.
`UNCHARTED TERRITORY.' Since CMOs were only invented in the mid-1980s, Wall Street has no idea how they'll weather the new low rates. "This is uncharted territory," says analyst Elaine Derso of Prudential Securities. Whatever the severity of the next few months for CMOs, the lush days are certainly over for major CMO holders such as Asset Investors. In two years, the stock doubled in price, to 16 1/2 by November. But since then, the market has dragged it down to 12 because of refinancing worries. The company doesn't dispute analysts' predictions that Asset Investors will end up cutting its $2.70 yearly dividend to $2.
Bear in mind, however, that REIT rebounds can come sooner than you might expect. Present dilemmas may mask underlying strengths. Consider Dial REIT, an owner of shopping malls in the Midwest. Despite the recession, its stores were 95% leased in late 1990. Then, it had to empty 4 of its 20 centers for renovations. The result: Earnings are down, the dividend was cut, and the stock has skidded. But to Bruce Garrison, president of Garrison Brothers, a Houston investment bank specializing in REITs, these woes are temporary. "Once the renovations get out of the pipeline, they'll be O. K.," he says. After all, in real estate, what goes down is likely to go up again someday.
REIT'S STAGE A COMEBACK THE LEADERS... Explanation Stock performance* NATIONWIDE HEALTH PROPERTIES Focuses on sizzling nursing-home market 90% NEW PLAN It has well-located, fully leased shopping centers 35 UNITED DOMINION Owns apartment buildings in the growing Southeast, where tenant demand is high 23 ...AND THE LAGGARDS FIRST UNION Heavily invested in retail and office buildings, which are hit hard by recession 47% HOTEL INVESTORS Its industry is suffering from room vacancies because of 1980s hotel overbuilding 71 SIERRA 84 Trust structure requires it to sell its buildings soon even though market is depressed 84 * Price change, Jan. 1, 1990, to Feb. 1, 1992 DATA: BRIDGE INFORMATION SYSTEMS INC., BW