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Trust Lusting : REITs Have Been Red Hot, Making Attractive Prices Hard to Find

March 04, 1997|JAMES F. PELTZ

Real estate investment trusts have been among Wall Street's hottest sectors for the last year, and that's a problem for investors considering whether to buy REITs today.

It's been hard to post anything less than stellar gains with REITs, no matter what type of real estate they manage. Just one example: The list of "sector" mutual funds with the highest total returns over the last year is dominated by REIT funds, all showing total returns--dividends plus price appreciation--of 36% or more.

Indeed, the Chicago Board Options Exchange's REIT index shows an average total return for 1996 of 30.8%, compared with the 23% return earned by the Standard & Poor's 500.

Another bullish sign: Initial public offerings of two office building REITs, Arden Realty Inc. (ticker symbol: ARI) and Prentiss Properties Inc. (PP), were warmly received by investors in October.

REITs manage a portfolio of properties, and in exchange for passing at least 95% of their profits on to shareholders in the form of dividends, they avoid taxation at the corporate level. Naturally, that also gives them above-average dividend yields.

Various REITs specialize in office, industrial, health-care, public storage and retail properties, and some manage a portfolio of real estate mortgages.

The trusts have benefited from a national upturn in real estate values after the industry's severe slump in the late 1980s and early 1990s. Low interest rates (which make the REITs' lofty yields even more appealing) and a growing willingness among institutional investors such as insurance companies to own REITs (rather than real estate outright) have propelled the trusts higher.

The stock market's climb to historic heights has also helped REIT shares, because investors fretting that the market is poised for a pullback have bought REITs as a high-yielding hedge.

REITs specializing in California property have done especially well, owing to Southern California's general economic recovery and rising property values and rents in the San Francisco Bay Area.

Case in point: Irvine Apartment Communities Inc. (IAC), which owns 50 apartment complexes in Orange County and has plans to expand into Northern California. The trust, currently trading at about $27 a share, has posted a sizzling total return of 43% over the last 12 months.

All of those favorable trends for REITs are expected to stay in place for at least the next year. But the stocks' hefty gains mean investors buying REITs today have to be awfully choosy to find those that still have attractive growth potential, analysts say.

"We certainly concur that 'cheap' stocks are much harder to come by in REITland," analyst Lawrence Raiman of Donaldson, Lufkin & Jenrette Securities said in a recent report. "We find few (if any) top-quality REITs trading at or below their underlying 'bricks and sticks' value."

Jonathan Litt of PaineWebber Inc. wrote recently that "despite the positive fundamentals for the REIT group and the strong total return expectations for 1997, we believe share prices may pause during the first half of the year as earnings catch up to [the market's] valuations."

For example, Raiman still likes Irvine Apartment Communities for its robust fundamentals and growth outlook. But because its price has shot up so far so fast, he doesn't expect the REIT to post standout gains "in the near future."

But there are selected well-performing trusts that are still trading at attractive prices that make them buys, analysts said.

Salomon Bros.' Jordan Heller is touting Excel Realty Trust Inc. (XEL), which focuses on shopping centers and other retail outlets, primarily in the East and Midwest. At $24 a share, Excel is sporting an eye-catching dividend of 7.6%, and Heller also maintains that it's trading at "a significant discount" to other REITs involved with community shopping centers.

Equity Residential Properties Trust (EQR), despite a red-hot total return of 52% over the last 12 months that's lifted it to $45.50 a share, is still recommended by Closed-End Fund Digest and Real Estate Securities, a Santa Barbara-based newsletter. It cites the recent announcement by Equity Residential--an apartment trust run by noted Chicago financier Samuel Zell--to buy another REIT, Wellsford Residential Property Trust (WRP), for $1 billion in stock.

For investors looking for REITs in several markets, Everen Securities' chief investment strategist, Rao Chalasani, suggests American Health Properties Inc. (AHE) in the medical field; Imperial Credit Mortgage Holdings (IMH) in the mortgage loan area; and Sunstone Hotel Investors Inc. (SSI) in the lodging market. All three carry yields of 7.5% or higher.

Bedford Property Investors Inc. (BED) is a pick of James Wilson at Jefferies & Co., in good part because it's one of the REITs with holdings in the vibrant Silicon Valley and other Northern California areas. Bedford, at a recent $18.50 a share, also sports a 5.6% yield.

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