REITs take a hit in housing slide

Subprime fallout affects stocks with few ties to residential real estate

August 28, 2007|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN REPORTER

Real estate investment trusts, most of which have little or nothing to do with the housing market and home mortgages, have taken a stock-price pummeling this summer as investors fled anything remotely connected to those out-of-favor industries.

Columbia-based Corporate Office Properties Trust, for instance, builds high-security offices for government agencies and contractors and says business is steady. But its stock is down 27 percent since its peak of $56-a-share in February. That drop is roughly average for publicly traded real estate investment trusts, known as REITs.

Maryland has a significant number of the approximately 170 publicly traded U.S. REITs because state law makes it a favorable place to form such companies, the National Association of Real Estate Investment Trusts says.

Analysts say the REITs' stock-price swoon started in February with simple profit-taking because the sector had enjoyed years of price run-ups, and other industries were starting to look more attractive. But growing concerns about residential real estate and lending in the last three months pushed REIT stocks much lower.

"Certainly, a really rocky period," said Ron Kuykendall, a spokesman for the National Association of Real Estate Investment Trusts. "The REIT industry basically felt collateral damages, essentially, out of the subprime fallout."

The FTSE NAREIT All REITs Index, which tracks prices on almost every publicly traded REIT, closed down 1.8 percent for the day yesterday. But prices have been mostly on the upswing in recent days as bargain-hunters have moved in. The index closed yesterday about 7 percent above its low for the year on Aug. 15, recovering about a sixth of the value lost since February.

Those signs of upward movement don't surprise Lawrence Longua, director of the New York University Real Estate Institute REIT Center, who said the sector is "doing fine" on business fundamentals. Mortgage REITs that lend to homeowners are taking a hit, but the shift in the housing and lending markets has no effect on the majority of REITs beyond the economic ripples that could hit any American business.

"Share price is down, but it's the same buildings in the same location with the same tenants paying the same rent," said Longua. "I think it's a buying opportunity. Whatever I have in my portfolio, which is not going to move the market, I'm sure as hell not selling."

Local REITs include Federal Realty Investment Trust in Rockville, which specializes in retail and bought The Avenue at White Marsh in March; Washington Real Estate Investment Trust in Rockville, which owns offices, retail, industrial buildings and apartment complexes; and Omega Healthcare Investors Inc. in Timonium, which owns and provides financing for about 230 nursing homes and assisted-living facilities.

REITs allow investors to own shares in a company with real estate investments. The companies must turn over at least 90 percent of their taxable income to shareholders, so their dividends are typically high.

Roger A. Waesche Jr., chief operating officer with Corporate Office Properties Trust, agrees that housing and lending worries have deflated REIT stock prices, but he also believes the prices "got a little ahead of themselves."

"REITs have outperformed for seven straight years," he said.

Corporate Office Properties Trust's $56-a-share price on Feb. 7 was an all-time high for the company, which has been publicly traded for 14 years. Its stock closed at $40.77 yesterday, down $1.22 from Friday.

The 27 percent drop from the February high came despite a solid second quarter. The company reported an increase of more than 16 percent per share in funds from operations, a key benchmark of REIT performance. Nearly 250,000 square feet of new office space came on line, all leased.

"Things are steady, and obviously we're looking forward to BRAC and what that's going to do for this area in terms of job growth and need for more office space," said Waesche, referring to the base realignment and closure process that is slated to send thousands of jobs to the Baltimore region. "We're hoping that the stock price has stabilized and will start going back up."

Jerry L. Doctrow, a managing director at Stifel, Nicolaus & Co. Inc., said health care REITs are seeing renewed interest from "generalist investors" looking for companies that are well-insulated from the effects of an economic downturn. Omega Healthcare's stock, which slid more than 30 percent in price from February through almost the end of July, has recovered about a third of that loss since then.

"Most health care REITs basically have long-term leases on health care facilities with operators," Doctrow said. "They get a steady increase in their rents, and it doesn't really matter whether the economy goes up or down."

One way in which REITs are directly affected by the rippling turmoil from the subprime mortgage industry is that credit of all sorts -- even for commercial outfits -- is more expensive now, he said.

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