Remember REITs? It's been a long time since the public remembered real estate investment trusts -- at least with any fondness.
In four short years between 1969 and 1973 their assets mushroomed twentyfold to$21 billion. Then came the bust during the recession, followed by years of headlines chronicling their losses, foreclosurers, bankruptcies and property liquidations. Just last February, Chase Manhattan Mortgage & Realty Trust, once the fastest-growing REIT, with over $1 billion in assets, filed for bankruptcy, unable to pay $37 million in notes due.
But REITs are not dead. They are alive, and if not entirely well, recovering. That was the message conveyed Wednesday to the Washington Society of Investment Analysts by the National Association of Real Estate Investment Trusts. Its president, John A. Cervieri, Jr. of Property Capital Trust, urged the analysts to value REITs based on their earning power, not on the depreciated cost of their property holdings, as the Securities and Exchange Commission requires.
"If REITs were valued today at the same rate that investors value real estate projects, you'd see substantial upward price adjustments among the REITs," he said.He emphasized the hidden market value of REITs, many of which hold properties now worth more than their pre-recession purchase price.
Wall Street had tended to ignore REITs, Cervier added, because brokers can make more money on selling limited partnerships in real estate.
A REIT is a pooled investment, the profits of which are tax-exempt as long as they are passed along to their stockholders. A decade ago, REITs invested in real estate equities, but as the number of good investment properties lessened, they also went into mortgage lending. The REITs urged the housing industry to build and develop more and more property at increasingly high interest rates.
When the credit market dried up and the construction industry collapsed in 1974-1975, REITs were forced to foreclose on builders and take possession of the properties. Yet the properties did not generate enough cash flow to enable them to pay off their creditors, namely the big banks.In many cases, the banks wound up with the buildings and the investors were left holding the bag.
Today there are 225 REITs in existence, 160 of them traded on major and local exchanges. Seventy-nine of those currently pay dividends; of the remainder, two-thirds are still in the red.
It is precisely these characteristics, undervaluation and the possibility of tax loss carryforward, that have made REITs appear attractive once again to sophisticated investors and speculators. Within the past year the average price per share has climbed 40 percent. The average yield of tax exempt REITs is now just above 9 percent a year. Only eight are still in bankruptcy proceedings.
About 18 months ago, individual investors, limited partnerships and brokers began to buy into REITs. "Where else could you have bought $1 worth of real estate for 30 cents?" asked Ron Utt, the trade association's chief economist.
The early speculators have already taken their profits, so REIT stocks are unlikely to see such a rise again, Utt explained. Now buyers are development companies and even some pension funds.
Somewhere between 15 and 20 percent of the buyers are foreign, according to Utt -- mainly British, Dutch and Canadian. Individuals have bought large blocks of shares in at least 40 REITs with the objective, in some instances, of forcing liquidation of the properties held by the REITs.
This can often be more profitable than retaining the properties. The equity yields on commercial real estate have been declining steadily due to rising mortgage interest rates until they now average less than half the 12 percent yield of two decades ago.