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REITs Seeing Renewed Investor Interest as Their Stocks Climb

Real estate: Ignored for 2 years in favor of faster-rising shares, the sector is again becoming popular, as a refuge from turbulent tech.


Real estate investment trust stocks are getting some respect again.

Amid a generally lower stock market this year--and a crash in technology issues--the average REIT stock has risen 7.3% year-to-date, as measured by a Bloomberg index of 145 REIT shares.

With their high cash dividend yields, REITs are finding new favor with investors who are looking for safer havens in a volatile stock market, analysts and REIT executives say.

"We're seeing a lot more activity in the REIT sector, both from retail and institutional investors, because people are realizing that there are such things as risk and reward," said analyst Craig Silvers of Sutro & Co. in Los Angeles.

For REITs--which typically own and manage portfolios of properties, passing rental income through to shareholders via dividends--the renewed investor demand follows nearly two years of declining share prices caused in part by rising interest rates and in part by Wall Street's fascination with other stock sectors.

The improving lot of REITs was a topic at the annual shareholders' meeting of El Segundo-based Kilroy Realty recently. From a price of $19.75 on March 14, Kilroy stock has jumped 16%, to $22.94 now. In the same period the tech-dominated Nasdaq composite index has plummeted 32%.

Silvers projects that many REITs will generate "total" returns--share price appreciation plus dividend yield--of 25% to 30% this year. He names Kilroy, Los Angeles-based Arden Realty and Glendale-based PS Business Parks among his favorite REIT picks.

He also likes Palo Alto-based Essex Property Trust apartment REIT and Spieker Properties Inc., a Menlo Park-based office REIT, both with substantial holdings in Southern California.

Over the last five years, Essex has averaged 25% annual returns in combined dividend and stock price growth, and it's up more than 20% so far this year, said Michael Schall, the company's chief financial officer.

Keith Guericke, president and CEO of Essex, noted the company completed construction on a new 188-unit apartment complex called Mirabella in Marina del Rey late last year and already has leased all 188 units. Essex also has a number of apartment renovation projects underway in Southern California, Guericke said.

Recent financial results at Spieker typify the kind of growth that office REITs have been reporting.

Spieker's funds from operations, a financial performance measure specific to REITs, rose to $72.4 million or 95 cents a share for the first quarter ended March 31, compared with FFO of $60.2 million or 81 cents a share for the first quarter of 1999, according to the company.

Spieker's growth resulted in part from rent hikes typical of the increases that many landlords are commanding because of rising demand for office and industrial space, according to John Davenport, Irvine-based president of Spieker's Southern California operations.

Spieker negotiated rent increases averaging more than 60% on more than 300 leases signed during the first quarter, Davenport said.

The current wave of increased investor interest in REITs is part of "a shift from technology and Internet stocks to safety stocks," he said.

Senior analyst Jim Sullivan of Newport Beach-based REIT specialist Green Street Advisors Inc. said REIT stocks are looking better this year, but he estimates REIT returns will be considerably lower than Silver's projections.

"REITS should return anywhere from 10% to 12% [price appreciation and dividend], which to us is a reasonable expectation for a long-term holder," Sullivan said.

Sullivan said the 25% to 30% returns projected by Silvers "could happen," but he advised that investors shouldn't expect such performance on an ongoing basis.

"Year in and year out, REITs can't produce those kinds of returns, except in especially opportunistic times like the early 1990s," Sullivan said.

What the early 1990s provided was a depressed real estate industry in which REITs could buy properties at a discount. As Southern California pulled out of the recession, the values of those properties rose dramatically. For a time, REIT shares were viewed as popular growth stocks.

Despite steady earnings growth and an underlying real estate industry considered fundamentally sound, REITs have appeared stodgy compared with rocketing tech stocks, and REIT shares have been out of favor for several years.

"The reality was that people didn't want slow growth," said Victor Coleman, president of Arden Realty.

As the stocks declined in 1998 and 1999, many REITs could no longer raise capital cheaply through stock offerings. But they've found other capital sources, according to real estate attorney Matt Wyman of Cox, Castle & Nicholson.

Joint ventures have become a popular way for REITs to raise equity dollars through sources other than public capital markets. Wyman said REITs are forming two basic types of joint ventures.

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