Real estate firms profiting from homebuilding boom

Industry consolidation driving up growth rate of larger companies

Your Money

February 22, 2004|By Andrew Leckey

Whatever people might say about the general economy, there's a boom in the building of new homes and steady growth in shopping malls. Thank low interest rates for much of that activity.

Many investors have prospered from the stocks of companies involved in real estate. Because these don't move in lock step with the rest of the market, they also provide diversification.

But real estate also moves in cycles, which is why it should be viewed as a long-term investment.

The CGM Realty Fund rose 87.67 percent over the past 12 months by investing nearly two-thirds of its portfolio in homebuilder stocks.

"Consolidation in the home-building industry is driving up the growth rate of the larger companies," said Ken Heebner, portfolio manager of that fund.

"National, financially strong, publicly traded companies are gaining market share and buying other companies," he said.

Even if interest rates rose a full percentage point, the growth in homebuilding would not be derailed because demand remains strong, Heebner contends.

"We're in a period of low interest rates and low inflation, which is very good for real estate in general," said Samuel Lieber, chief executive of Alpine Funds, whose domestic real estate fund gained 87.37 percent and international real estate fund rose 59.85 percent the past 12 months.

Median home prices have grown at a 6 percent average annual clip for the past 20 years. Furthermore, 2004 home inventories are at historic lows, giving homebuilders strong pricing power.

Hovnanian Enterprises (HOV), a builder of homes, condominiums and townhouses in 200 communities in seven states, has been a strong stock for the portfolios of Heebner and Lieber.

D.R. Horton Inc. (DHI), a national builder of single-family homes, and the Ryland Group Inc. (RYL), a homebuilder in 306 communities in 25 states, also are owned by Heebner.

Toll Brothers Inc. (TOL), a builder catering to move-up, empty-nester and active-adult homebuyers in 21 states, is a Lieber favorite.

Another type of real estate stock also has excelled in this boom.

The real estate investment trust, or REIT, averaged a 37 percent total return (price appreciation plus dividend yield) last year, the best performance since 1976.

This year, the average total return has been 7 percent.

A REIT owns and often manages properties ranging from shopping malls to hospitals, apartments, hotels, office buildings or warehouses.

There are 180 registered REITs, two-thirds trading on major national stock exchanges. REITs are required by the federal government to distribute at least 90 percent of their taxable income to investors and in return do not have to pay corporate tax.

But while REITs have strong dividend payouts, all the dividends and capital gains are fully taxable to the investor.

"Investors are very focused on yield," said Barry Vinocur, editor of the Realty Stock Review newsletter in Ocean, N.J. "Although REIT dividends don't qualify for the government's new favorable dividend tax status, investors are still interested, and many hold their REITs in tax-advantaged accounts anyway."

Among REITs, Vinocur's recommendations include Ventas Inc. (VTR), with 44 hospitals, 220 nursing facilities and nine other health-care and senior housing facilities in 37 states, and Weingarten Realty Investors (WRI), which has community shopping centers and industrial properties, half of them in Texas.

Andrew Leckey is a Tribune Media Services columnist.

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