For higher yields, consider real estate investment trusts

Andrew Leckey

April 07, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

American investors in search of high yields no longer are petrified at the prospect of putting money in the commercial real estate market.

Real estate investment trusts, or REITs, publicly traded companies that hold real estate portfolios, are gaining popularity. Investing in real estate, mortgages or both, REITs pay out 95 percent of their income as dividends.

The average REIT dividend yield is now more than 7 percent. REITs featured an average total return (dividend yield plus price appreciation) of more than 14 percent last year, after a 35 percent increase in 1991.

Unless interest rates rise dramatically, REITs are expected to outperform the Standard & Poor's 500 again this year. While the return is more likely to be in single digits this time, it should handily outstrip bank and money-market returns.

That has made the REIT industry a hot commodity, and an improving economy should help. Also, some of President Clinton's proposals may provide tax breaks encouraging to real estate development.

"We're seeing interest in REITs from investors across the board, from pension funds to little old ladies with retirement accounts," said Gregory Whyte, first vice president at Dean Witter Reynolds Inc. "The REIT can be used as an income tool for the individual investor, and I see two or three more years of good buying opportunities in the real estate market."

There are 143 actively traded REITs -- 64 on the New York Stock Exchange, 60 on the American Stock Exchange and 19 through the Nasdaq system.

Making a selection is complicated and requires study.

"Don't just look at dividend, since ongoing cash flow of the REIT is really what's most important," advised Jon Foshiem, a principal at Green Street Advisors of Newport Beach, Calif., a REIT research firm.

"Remember, REIT stock prices have gone to the moon the past two years, while real estate hasn't, so REIT share values will go down unless real estate values fulfill those shareholder expectations."

Two REITs were recommended by more than one analyst interviewed for this column, even though their stock prices have escalated dramatically, as have many REITs' stock prices in anticipation of a real estate market revival.

Weingarten Realty Investors of Houston is recommended by Foshiem and Catherine Creswell, analyst with Alex Brown & Sons Inc. It features a 5.1 percent dividend yield and had a 1992 total return of 17.6 percent. In seven states with 138 properties, Weingarten invests in shopping centers anchored by supermarkets and drugstores.

Washington Real Estate Investment Trust of Bethesda is suggested by Foshiem and Whyte. It has a 3.8 percent yield and had a 1992 total return of 19 percent. Owning 32 properties, primarily in the Washington area, it emphasizes office buildings, strip shopping centers and high-rise apartments.

"A REIT is best for someone looking for steady income and capital appreciation who seeks a steady vehicle with a 15 to 20 percent annual return," said Creswell. "Historically, REITs are half as volatile as regular stocks, since they have the dividend yield which protects them in times of economic fluctuation."

Another Creswell recommendation is United Dominion Realty Trust of Richmond, Va., 4.8 percent yield, an owner of apartment buildings that has properties from Baltimore to Florida.

Other REITs suggested by Whyte:

* Taubman Centers, Bloomfield Hills, Mich., 5.6 percent yield, 19 super regional shopping malls near major cities.

* Developers Diversified Realty Corp., Moreland Hills, Ohio, 5.5 percent yield, properties in 17 states, mostly shopping centers, with some industrial property.

"Since a REIT is much like a mutual fund for real estate, the most successful REIT is one you buy for great management and focus," added Mark Decker, president of the National Association of Real Estate Investment Trusts in Washington. "An investor should stick with well-known REITs."

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