Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 2, 1990 TAG: 9006300014
SECTION: BUSINESS PAGE: A-5 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Long
Besides, you don't have the money to spring for a building all your own.
There is an easy way, though, to tuck into your investment portfolio a hassle-free share in office parks, apartment complexes and shopping malls.
It's called a real estate investment trust, or REIT, which avoids the problems of direct ownership and the dangers of limited partnerships.
Limited partnerships are costly, have few legal controls and cannot be resold on a secondary market. Steve Lucion and Elmer Craft, recently sentenced in Roanoke for racketeering, dealt in limited partnerships, for example.
REITs are packages of real estate holdings that trade on various stock exchanges. They may focus on mortgages to produce income, on equity ownership for capital gains, or both.
Investors buy shares in a real estate trust, much the way they buy common stock in a public company.
A Virginia example is United Dominion Realty Trust of Richmond, which owns the Grumman plant's headquarters building on Seibel Drive in Northeast Roanoke and a few small apartment complexes in the Roanoke Valley.
But REITs are not for everyone. They are for people who have cash savings, insurance and safer mutual funds and are ready to venture into further risk.
REITs are "up there a little bit" on the scale of risk, according to W. Jeffrey Roberts, Roanoke manager for Branch Cabell. He called the risk moderate.
"It's not for the 65-year-old widow," Roberts said, but might be attractive to people in their 40s who foresee long-term recovery in real estate.
Andrew Hudick of Fee-Only Financial Planning Inc. rated the risk as high. "It's safer to buy something you can drive to and see."
Hudick said REITs are for the "contrarian," the person who moves in the opposite direction from the market.
John C. Parrott II, financial planner with Wheat First Securities, said the level of risk depends on the REIT. "You hear of good situations and horror stories," he said.
J. Gregory Tinaglia of Investment Management Corp. said REITs have a place in the right portfolio.
Like mutual funds, he said, REITs offer diversification by spreading risk among many pieces of real estate.
He pointed out that stock dividend income is taxed twice, with both the corporation and the individual stockholder paying levies. REITs, however, must distribute 95 percent of their income directly to investors, who pay the tax.
With its potential for appreciation, real estate is a traditional inflation hedge, he said.
Best of all, Tinaglia said, REITs are liquid. Selling real estate can be onerous and time-consuming. But REIT shares trade in a day over the counter and on exchanges.
Unlike a direct investment in real estate, REITs are within the financial reach of the average person who has money to invest.
Parrott owns shares in a REIT that recently was selling for $16 a unit. So a 100-share lot would cost $1,600 plus commission.
Roberts said Branch Cabell has a REIT trading at about $5 a share or $500 for a lot. That's down from $10 a share when REITs flew high during the real estate boom of the '70s, but Roberts said it's run by a proven company with properties in Arizona, Illinois and California.
REITs are a play on a turn-around in real estate, Roberts said. His prediction is that the market will worsen first, so an investor must prepare to wait.
In that sense, REITs are a bargain. Roberts said some shares are discounted 50 percent from underlying value of the properties.
The value of a REIT fluctuates with the fortunes of the real estate industry, now hurt by the savings and loan crisis and overbuilding.
Parrott said anyone looking for a quick gain will be disappointed. REITs are for "the patient, conservative investor who wants to diversify into real estate."
Tinaglia said REITs, like a diversified stock or bond portfolio, should be held at least five years.
He said investors should look for a trust that has a lot of cash invested and little money borrowed.
The projects in the REIT should produce income, Tinaglia said, and the sponsor should have a good track record in the industry.
He and other advisors warned against buying a "blind trust," in which shares are sold prior to purchase of the properties.
They said it is much safer to buy shares of a proven REIT on the open market. That means a potential investor can evaluate the REIT, look at the real estate it owns and its cash flow.
Roberts said existing REITs, at today's prices, yield 8 1/2 to 9 percent. A new trust often charges 15 to 25 percent up front, sharply reducing the return on investment.
Brokers recommend reading a REIT's prospectus and annual report before buying shares.
Tinaglia said a good REIT has a history of consistent dividend growth. The dividends should come from earnings, not sale of land.
The financial statement should show a low debt-to-equity ratio, Tinaglia said, probably one-to-one.
The underlying real estate should be diverse in type and in geographic location, he said, with only a small percentage in office buildings.
Look at vacancy rates for the various complexes and malls. And consider the listed appraisals with some skepticism because they are basically only the appraiser's opinion of value.
by CNB