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REIT industry weathers storm

Oakland Tribune, Oct 21, 2005

THE GULF COAST hurricanes have devastated the lives of thousands of people, wrecking their homes and dimming their hopes for a bright future. The hits taken by investors throughout the country in stock, real estate and utilities are trivial by comparison.

It appears the real estate investment trusts (REITs), at least the ones I have covered in my columns and newsletter, are either undamaged or well covered by insurance, according to Jay Hyde, spokesman for the National Association of Real Estate from Business Investments Trusts, a Washington, D.C.-based trade group.

While REIT performance was down in August and September, the NAREIT Index was still up 4.7 percent for the year through September.

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Investors glom onto REITs for their attractive dividend yields -- some in the 5 and 6 percent ranges -- and because REITs allow them an easy way to diversify into the real estate market.

The one exception on my list is Annaly Mortgage Management Co., a mortgage REIT, as opposed to the nine equity REITs that I have covered. An equity REIT owns and operates income-producing real estate, such as office buildings, apartments and shopping centers.

A mortgage REIT, on the other hand, lends money directly to real estate owners and operators or extends credit indirectly through the acquisition of loans or mortgage-backed securities.

Annaly's price dropped about 37 percent through September as shareholders bailed out after the company cut its dividend again in the face of rising interest rates.

Annaly borrows money to buy mortgage-backed securities and as rates rise its profit is squeezed and its dividend must suffer.

Annaly cut its dividend to 13 cents a share in the third quarter, down from 36 cents in the second quarter. So the annual yield at this writing is only 4.2 percent.

But the fact that the company has done quick turn-arounds in restoring dividends in the past means holding Annaly might be a good idea, unless you're over-allocated. Do your own research.

The equity REITs I have covered are Duke Realty (DRE), office buildings; Entertainment Properties Trust (EPR), movie theaters; Equity Residential Trust (EQR), residential buildings; Health Care Property Investors (HCP), medical facilities; Kimco Realty (KIM), shopping centers; New Plan Excel (NXL), shopping centers; Pan Pacific Retail Properties (PNP), shopping centers; ProLogis Trust (PLD), storage facilities; and Washington REIT (WRE), residential properties. Entertainment Properties and Kimco are enjoying good run- ups this year and Kimco just split its stock 2-for-1.

New Plan Excel, projecting lower earnings, has cut the quarterly dividend to 31 cents a share, from 41 cents, but has paid a special distribution of $3 a share to shareholders.

Marty Cohen of Cohen & Steers, one of the sharpest REIT pickers in the country, likes 12 REITs, according to a Barron's article, none of which are on my list.

This demonstrates the breadth of the REIT market.

Cohen's choices are AvalonBay Communities (AVB), Verando Realty Trust (VNO). Boston Properties (BXP), Mission West Properties (MSW), BioMed Realty Trust (BMR), American Campus Communities (ACC), Simon Property Group (SPG), Mills (MLS), plus four foreign REITs. I see no need to go abroad.

But is Cohen smarter than I am? Yes.

On top of all these choices, some 15 REITs that are not on either list are covered by Value Line Investment Survey, a copy of which is available for research at most public libraries.

REITs should hold up if the economy continues to grow, which could mean an increasing demand for rental space.

The supply of such space for residential purposes should increase with the boom in hotels and other structures converting to condominiums.

Also, consolidation in the REIT industry is coming in the form of multi-billion dollar transactions.

Cliff Pletschet's Personal Finance column appears Friday and Monday. Write him at P.O. Box 28147, Oakland, CA 94604, phone (510)531-5620, or visit http://www.investment-educator.com.

REIT industry weathers storm

Oakland Tribune, Oct 21, 2005

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