Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, August 1, 1994 TAG: 9408020015
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: By MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Only multimillionaires can dream of buying such high-profile real estate outright, but the rest of us can grab at least a piece of that action. Small investors can buy shares in a real estate investment trust, commonly called a REIT.
Richard Wertz, vice president at the Roanoke office of A.G. Edwards & Sons, said a REIT is similar to a mutual fund, except that it invests in properties and mortgages instead of in stocks and bonds. It's a conduit through which rental income from a real estate portfolio is distributed to shareholders in the form of dividends.
Shares are bought and sold through public exchanges, most often the New York Stock Exchange.
Wertz said a REIT boasts several advantages over owning the real estate directly:
REITS carry the advantage of liquidity. That means the shares can be bought or sold daily through the stock exchange. Real estate is rarely that liquid an investment. It generally is difficult, time-consuming and expensive to buy or sell a piece of commercial property.
They are instantly priced. The value of REIT shares is quoted all day long on stock exchanges if they are traded publicly. The value of real estate can only be estimated before an actual sale, even a property appraisal is only an educated guess.
REIT owners, like those who invest in stock mutual funds, have access to expert management of the portfolio, in this case commercial real estate.
Investors can pick their type of real estate. Some own properties only in certain geographical areas; others buy only one type of real estate. Wertz said people can buy a REIT that invests only in stores built and leased for the Harris Teeter supermarket chain or for Hardee's restaurants, for example.
REITs are attractive to investors seeking a total return of both growth and income, Wertz said. From March 1990 to March 1994, REITs had an average total return of 14.8 percent vs. 6.1 percent for the Standard and Poor's Composite Index and 1.4 percent for the S&P Electric Utility Index.
The REIT industry is growing rapidly, yet it remains small compared to other types of investments.
Although 49 new real estate investment trusts were introduced in 1993, raising $9 billion, only 2 percent of total U.S. real estate is held in investment trusts, Wertz said. Some $40 billion is invested in realty trusts, about half the public's investment in the stock of Exxon Corp. Mutual funds, by contrast, had assets of more than $1.1 trillion in 1993.
Peter Milward, manager of the Roanoke office of J.C. Bradford & Co., said the price of REIT shares varies widely, just like stock or the shares of mutual funds.
A popular REIT in this area, he said, is United Dominion Realty Trust, which is based in Richmond and owns apartments and shopping centers in the Southeast, including the Roanoke Valley. Milward said it was selling last week for $13.625 a share, so that a lot of 100 shares would cost about $1,400, including the sales commission. The dividend was 78 cents a share, for a yield of 5.8 percent.
Washington Realty Investment Trust, which owns properties in the Washington metropolitan area, cost $18.50 a share and had a yield of 5.1 percent.
As an example of a specialized trust, Milward cited Roc Communities, which invests in mobile homes. It was selling last week for $20 a share with a dividend of $1.52 a share for a yield of 7.5 percent.
Milward said real estate trusts are a good investment for those who are looking for income and some opportunity for growth. He called them an opportunity to own real estate with professional management for people who lack the time and expertise to manage commercial property.
The trusts, Milward said, are designed for people who want to diversify their portfolio with real estate.
But he warned that the shares, like bonds or bond mutual funds, fluctuate in value inversely to the direction of interest rates.
Marshall Loeb, managing editor of Fortune magazine, said in his book "Money Guide" that real estate investment trusts soared in value in the early 1970s, then crashed when construction loans failed. They recovered, then plunged again by 16.3 percent in the first eight months of 1990 as property values dropped and thrifts failed.
On the other hand, Loeb said, real estate holdings that increase in value push up the price of the shares. If a REIT sells property, shareholders get additional dividends above the rental money or else the shares will go up in value.
He said investors should look to invest in realty trusts with skilled managers who have a record of success.
Wertz recommended buying shares in trusts that invest in real estate directly rather than in mortgages. He, too, said it's important to find a REIT with a proven management team and a successful track record.
Also seek out a REIT with a sound financial structure, including a reasonable debt level and a dividend that is well-covered by cash flow, Wertz said.
Read the prospectus, he said, and invest only where the fund managers have significant ownership themselves and limited conflicts of interest. Management's interest should be aligned with those of the shareholders.
Wertz said a good REIT will have attractive prospects for growth of dividends and cash flow through rent and occupancy increases.
REITs should do well as the economy recovers because vacancies in commercial buildings will begin to fill, Wertz said.
And he pointed out that REITs carry some protection against inflation because most commercial rents - and, therefore, the REIT dividends - are tied either to the Consumer Price Index or to a percentage of a tenant's sales.
by CNB