It could be, some sophisticated Wall Streeters tell me, one of the best stock-market plays of 1978. No, not the movie stocks, the energy game, the resurging airlines or the potential revitalization of the glamours (the likes of I.B.M., Zerox and Eastman Kodak). It's one of yesterday's shining heroes - those 219 mostly publicly owned real-estate investment trusts (referred to as REITs) that sink their assets into real-estate properties or mortgages, or both, and pay out 90 percent or more of their income. These are the very same REITs that collapsed in price (90 percent in many cases) during the late 1973-75 debacle, in which the high-flying real-estate industry fell victim to rising interest rates, overbuilding, a sluggish economy, tight money and accelerating inflation. But these very same REITs, mind you, have rebounded sharply with average gains of more that 60 percent from mid-1975 to late 1977.
After that kind of sizzling run-up, one might well expect these stocks to run afoul of brisk profit taking, or, at the very least, to slow appreciably - especially in the face of this year's declining market. Well, it's not happening that way. A fair number of REITs are off and running again in early 1978. Just listen to some of these gains in the first several weeks of the new year: American Realty, up 72 percent; First of Denver Mortgage, 17 percent; T.I.E.R.C.O., also 17 percent; Kentucky Property Trust, 13 percent; Midland Mortgage Investors, 10 percent, and Atlanta National, 7.5 percent. In the same period, the Dow Jones Industrials fell more than 7 percent. Not every REIT, of course, is up this year, but the group's vigor is unmistakable.
The big buying is largely coming from the so-called smart money. This can be seen in the rising institutional purchases, growing participation by sophisticated individual investors and stepped-up buying by insiders. Another factor boosting REIT stocks is the accumulation of shares by groups interested in a major stake or control of the trusts for themselves.
Almost daily, it seems, a new buying group seeks to acquire a hefty block of a REIT's shares. For example, a Chicago condominium marketer recently bought 300,000 shares, or 11.5 percent, of C.I. Realty. Federated Development Company, a former REIT that has since become an operating company (focusing on real estate and reinsurance), has acquired 5.5 percent of the shares of Property Trust of America, 11.8 percent of Maryland Realty Trust and 5.6 percent of United Realty Trust. Private investors in Buffalo and Nebraska have acquired 10.4 and 8.2 percent, respectively, of the shares of Northwestern Financial Investors and First Mortgage Investors. And further, insiders have now bought 5.5 percent of Pacific-Southern Mortgage Trust, 10.3 percent of B.F. Saul and 4 percent of U.S. Bancorp.
For an insight into what's behind the surging interest and for a view of future investment prospects, I rang up Ken Campbell, one of the country's leading experts on REITs. Campbell, forty-eight, a former field analyst at Standard & Poor's, has been publishing a semimonthly newsletter on real-estate trusts for the past eight years. His clients, roughly a thousand all told, include Chase Manhattan, Citybank and Chemical Bank.
A non-touty, hard-nosed analyst who tracks the fortunes of 142 leading REITs, Campbell thinks improving industry fundamentals and "bargain basement" stock prices should lead to continued good news for REIT shareholders. He points out that most REITs - currently strong beneficiaries of rising sales of assets (about $15 billion), healthy capital gains and of sharply rising values of underlying real-estate properties - are still down an average 72 percent from their 1972-73 highs.
One of Campbell's chief arguments is the growing viability of the REIT. In this context, he notes that the big borrowers from the trusts - the real-estate mortgagors - are stepping up their repayments because of a better real-estate market and the availability of more mortage money from traditional lenders. Another healthy sign: commerial incomeproperties, the single biggest part of the REIT market (they account for about 75 percent of all revenues), are rising in value because of the limited production of new office space. Campbell also observes that a fair number of REITs already have low-interest-rate loans, thereby blunting much of the impact of any in interest rates.
Campbell hastens to toss in one other significant plus - the very likely prospect of continued agressive buying of REIT shares by insiders to forestall takeover efforts.
All right, let's say investors agree with Campbell's rosy assessment. Which are the best REITs to buy? After running down the 142 he follows, Campbell chose seventeen. Each, he believes, has the potential to rise 13 to 16 percent in price (covering dividends and capital appreciation) over the next six to twelve months. "I think it'll happen regardless of what the market does," says Campbell, who reminded me that the average REIT rose nearly 20 percent last year (if dividend payments are included) despite the market's sharp decline.
Of the seventeen REITs, Campbell picked his six best bets. For the more conservative investor, he favors Connecticut General Mortgage & Realty Trust, Federal Realty Investment Trust and General Growth Properties. Each offers an average dividend yield of about 8 percent. For the more speculative-minded. Campbell likes Baird & Warner. Hospital Mortgage Group and Pacific-Southern Mortgage Trust. These three sell at an average 53 percent below book value, yield a subpar 5.6 percent and , says Campbell, have strong recovery potential in both yield and capital gains.
Though enthusiastic about trusts, Campell warns that "you can't buy indiscriminately because there are still many problem REITs." Among the chief headaches (an industrywide problem) heavy concentration of properties in intensively competitive areas, and complex recapitalization plans. Accordingly, Campell thinks investors should shun for the present such REITs as Chase Manhattan Mortgage & Realty. Citizens & Southern Realty, Barnett Mortage Trust, Guardian Mortgage Investors, Tri-South Mortgage Investors, NJB Prime Investors, C. I. Mortgage Group and IDC Realty Trust.
Well, now you have one expert's view. But it should be kept in mind that it is still just one man's view, expert though he is. But more often than not, the strongest stocks in a weak market often display even greater pep when the market eventually turns up. And the REITs - those dogs of the '74-'75 market - are clearly demonstrating the kind of market power that usually signal higher stock prices.
The 260,900 shareholders of RCA Corporation had every right to be jubilant when its management shared programming whiz Fred Silverman away from ABC. Well, they may soon have a lot more to cheer about - namely, a fatter dividend. As of this writing, RCA sources were telling me there's a very possibility - at least an 80 per cent chance - that RCA's directors, at the today's board meetings, will vote to raise the annual dividend to the $1.30-$1.40-a-share range from its present $1.20.
In its aggressive probe of companies whose executives may have used corporate assets for personal benefits, the Securities and Exchange Commission has just added wheeler-dealer Warner Communications ot its list. Sources tell me the agency, in its investigation into excessive use of such "perks" as company-paid apartments, vacation homes and personal use of the company plane, will focus on Warner chief Steven J. Ross, as well as other company officials. Ross, a onetime funeral-parlor operator, has a reputation in some quarters as a big-time spender on the corporate expense account. Last year, in fact, he is reported to have taken his personal barber along with him to Europe on the corporate jet to cut his hair each day. Ross, though, has said it isn't so, explaining that the barber simply wanted to go to Italy for a week "and so we took him and his lady friend along."
Following is Ken Campbell's list of 17 REITs that he thinks ought to average about a 15 percent gain in price (covering both dividends and capital appreciation) over the next six to twelve months:
Atlanta National, Baird & Warner. BankAmerica Realty Investors, Barnes Mortgage, Bay Colony Property, Central Mortgage and Realty, C. I. Realty, CleveTrust Realty, Connecticut General Mortgage & Realty, Federal Realty. General Growth Properties, Hospital Mortgage Group, Lomas & Nettleton, Nationwide. North American Mortgage Investors. Pacific-Southern Mortgage Trust, Summit Properties.