REITs feature growth, stability and high income

The Ticker

November 27, 1996|By Julius Westheimer

ARE YOU looking for high income, low volatility and moderate growth? Want to buy depressed real estate without selecting and managing individual properties?

If so, consider real estate investment trusts (REITs).

A REIT is a publicly traded company that manages a portfolio of real estate to earn profits for its stockholders. You buy and sell REITs through a stockbroker.

Barron's says, "It's been three years since REIT investors felt as good about this growing sector as they do these days."

And Barry Vinocur, editor, Realty Stock Review, adds, "Institutions now say they plan to commit a lot more capital to REITs."

Although REITs underperformed the S&P 500 from 1993 through last year, in 1996 REITs exceeded many analysts' expectations. Through mid-November, REITs gave a total return of 18.9 percent, only slightly lagging the S&P 500 and Nasdaq.

And, although REITs can't compete with the explosive recent stock market, the decreased likelihood of continuing Wall Street lofty returns positions REITs favorably as attractive defensive holdings.

"REITs allow you to invest alongside real estate's big names," says Martin Cohen, president of a large New York-based REIT.

Patterned after mutual funds, "equity" REITs invest in diverse properties such as shopping centers, medical facilities, nursing homes, office buildings, apartment complexes, industrial warehouses and hotels.

Stockholders get income from rents received and from capital gains as buildings are sold at a profit. Examples are Mid-Atlantic Realty Trust (yield 9.3 percent) and First Washington Realty Trust (yield 9.5 percent.)

"Mortgage" REITs specialize in lending money to building developers; such REITs pass interest income on to shareholders. Example: Allied Capital Lending (Yield 8.3 percent.)

To avoid being taxed at the corporate level, 95 percent of REITs' earnings must be paid out to stockholders. And because REITs must distribute those profits, they pay high yields of 6 percent to 10 percent or more.

But there are risks. First, possibly higher interest rates. Also, there's the chance of a general economic downturn that would adversely affect hotels, apartments and retail, office, industrial and self-storage facilities.

Nevertheless, experts recommend that for diversification and high income you devote about 5 percent to 15 percent of your stock portfolio to real estate investments.

REIT RUNDOWN: Many advisers suggest that investors who are heavy in utilities diversify into REITs.

Alex Hart, local REIT analyst, says, "A strong, dedicated management team is the most critical factor that will drive a REIT's long-range performance."

Happy Thanksgiving! Hope your REIT and other purchases don't turn out to be turkeys.

Pub Date: 11/27/96

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