Heading for Cover

In such a tumultuous market, are REITs the right stuff?

As a sector, real estate investment trusts have sheltered investors from the storm. Over the past year, the Morgan Stanley REIT Index, or RMS, has gained nearly 30% compared to a 15% drop in the S&P 500 and a Nasdaq Composite that has been more than cut in half.

REITS Rock Floating above the fray

Since Jan. 1, the RMS has been flat. That's not bad when one considers that the S&P 500 has dropped about 10% and the Nasdaq has declined more than 20%.

REITs are viewed by many as defensive market plays: They provide above-average dividends and own hard assets -- real estate -- that provide relatively stable and predictable cash flows. And, as REIT stock prices languished during the go-go tech markets of the late 1990s, many REITs were priced well below their net asset value -- the price their assets would likely fetch if sold. Hence, the relative outperformance in the past year shouldn't be surprising.

Now, however, as REITs have posted double-digit returns, many are trading at or near their net asset values. And, with REITs generally viewed as value-oriented plays, investors are likely to become more cautious as valuations increase.

That means stock picking in the sector becomes more important. And, that's where our "growth-at-a-reasonable-price" analysis of REITs can prove useful.

Last July I screened for stocks that I thought were poised to outperform the average REIT based on growth and valuation metrics. I screened -- by property sector -- for companies that had higher-than-average growth rates, trading at lower-than-average multiples, paying an above-average dividend with an average payout ratio and lower-than-average leverage. Eight REITs fit the criteria.

The results were rewarding. According to data compiled by SNL Securities, the average total return of stocks on that list was 12.4% compared to a 7% for the SNL Equity REIT Index. And only two names -- Reckson (RA Quote) and Crescent Real Estate Equities (CEI Quote) -- lagged the index. (I did warn that Crescent was a possible anomaly in the original column.)

GARP Revisited Reasonably Priced Growth Provides Solid Returns
Company	Price 7/20/200	Price 3/9/2001	Change in Stock Price	Total Return (Including Dividend)
Pan Pacific(PNP Quote)	$20.13	$22.05	$1.93	13.20%
CBL & Assocs.(CBL Quote)	24.75	26.91	2.16	13.75
Camden Properties(CPT Quote)	29.75	32.35	2.60	11.56
Summit Properties(SMT Quote)	22.25	23.84	1.59	9.41
RFS Hotel Investors(RFS Quote)	12.19	14.51	2.32	29.28
Reckson Assocs.(RA Quote)	24.00	23.15	(0.85)	-3.37
Crescent Real Estate(CEI Quote)	22.06	21.88	(0.19)	3.52
Health Care REIT(HCN Quote)	17.50	19.55	2.05	18.21
Average Total Return				12.38%
Source: SNL Securities

Given that kind of relative performance, I decided to repeat the exercise to determine if growth at a reasonable price analysis would still give us an edge. Again, applying the same criteria, eight REITs make the grade. Interestingly, the same sector mix -- two apartment, two office and two retail REITs, as well as a lodging and health care REIT, complete the list. However, only one name -- Pan Pacific Realty (PNP Quote) -- makes a repeat appearance.

REITs According to GARP, Redux Today's REITs at a Reasonable Price
Company	Recent Price	Property Sector	Growth Rel. to Sector 2000-01	2000 P/FFO Rel. to Sector	Current Yield
Apartment Investment & Management(AIV Quote)	$43.07	Apartment	136%	82%	7.20%
Duke-Weeks Realty(DRE Quote)	22.75	Office/Industial	131	99	7.20
Equity Office Properties(EOP Quote)	29.70	Office	114	99	6.00
FelCor Suite Hotels(FCH Quote)	23.97	Hotels	123	94	9.10
General Growth Properties(GGP Quote)	34.23	Retail	137	96	6.20
Healthcare Realty Trust(HR Quote)	22.45	Health Care	183	100	10.10
Pan Pacific Realty(PNP Quote)	21.90	Retail	140	98	7.80
Summit Properties(SMT Quote)	23.73	Apartment	102	95	7.30
Source: Goldman Sachs, First Call/Thomson Financial, SNL Securities, Company Reports

While the property sector mix remains unchanged, this screen provides a diverse mix of companies. For example, in the office sector Equity Office Properties (EOP Quote), the office portion of the Sam Zell real estate empire, is focused on central business district properties. Conversely, Duke-Weeks Realty (DRE Quote) has a mix of properties, many in suburban locations.

In retail, General Growth Properties (GGP Quote) is focused on upscale, regional malls, while Pan Pacific continues to execute its strategy in the regional, grocery-anchored centers in the Western U.S.

The apartment selections are also diverse. Summit Properties (SMT Quote) is focused on luxury apartment communities in the Eastern U.S. AIMCo (AIV Quote) is focused on becoming the country's largest, low-cost operator of B-Class apartments.

In the lodging sector, Felcor (FCH Quote) operates 186 hotels. primarily under the Embassy Suites, Crowne Plaza, Holiday Inn and Doubletree flags. And, Healthcare Realty (HR Quote) owns a portfolio of primarily outpatient health care properties.

And, while I'll stick with the statistical screen used last July, a couple of caveats are in order. First, as noted in the past, a slowing economy is not generally good for real estate. And, a slowing economy is likely to have a more marked and immediate impact on the lodging sector. Likewise, if consumer spending is slowing as Tuesday's data suggests, retail REITs could feel the pressure.

Also, the growth rates featured in the screen are for this year only. Hence, the screen will favor companies that have growth already built into this year. A good example is AIMCo, which is in the process of completing several limited partnership roll-ups and absorbing the Oxford portfolio. While that tends to give a REIT good visibility this year, it says little about the growth potential beyond December.

That said, in a market where value appears increasingly important, REITs can provide good cover. And REITs with above-average growth prospects, good fundamentals and fair valuation may provide the best cover of all. If the success of our July screen is any indication, this list should provide some good places to hide.

And, after all, with an average dividend yield north of 7%, you get paid to wait out the storm.