Revisiting GARP

Last year and in March, I screened for REITs that looked to have good growth prospects and reasonable valuation, a modified "Growth at a Reasonable Price," or GARP, model.

Simply, I looked for REITs with estimated growth rates above their property sector average with multiples -- price to FFO -- below the average. In addition, I screened for companies with above-average dividends in their sector, a below-average payout ratio and a below-average debt-to-market-cap ratio.

The March screen provided eight REITs to consider. Collectively, for the past quarter (plus a few weeks), they provided an average return of 12.86%, vs. an 11.02% return for the REIT universe, as measured by the SNL Securities Equity REIT Index.

Gawking at GARP's Returns REITs according to GARP shined in the second quarter
Company	Price 3/12/01	Price 7/3/01	Total Return*	Current Yield
Apartment Investment & Management (AIV:NYSE)	$43.07	$48.90	15.35%	6.50%
Duke Weeks Realty (DRE:NYSE)	22.75	25.23	12.79	6.90
Equity Office Properties (EOP:NYSE)	29.70	30.90	5.56	5.70
FelCor Lodging Trust (FCH:NYSE)	23.97	24.13	2.96	9.40
General Growth Properties (GGP:NYSE)	34.23	38.25	13.29	5.40
Healthcare Realty Trust (HR:NYSE)	22.45	26.27	19.58	8.70
Pan Pacific Realty (PNP:NYSE)	21.90	25.60	18.89	6.70
Summit Properties (SMT:NYSE)	23.73	26.70	14.46	6.90
Average Return			12.86%
SNL Equity REIT Index**			11.02%
*Includes quarterly dividend; **Index of all publicly traded equity REITs, dividends reinvested on the ex-dividend date Source: SNL Securities, Company Reports

Healthcare Realty Trust (HR:NYSE - news - commentary) and Pan Pacific Realty (PNP:NYSE - news - commentary), a shopping-center REIT, led the GARP performance parade. Only two REITs lagged behind the average. FelCor Lodging Trust (FCH:NYSE - news - commentary), an upscale hotel REIT, gained just less than 3% on concerns about a slowing economy's impact on hotel companies. And, Equity Office Properties (EOP:NYSE - news - commentary) was stagnant as a result of its pending merger with Spieker Properties (SPK:NYSE - news - commentary).

As REITs have increased in value, the number of REITs that pass the GARP test declines. While most growth estimates remain intact, valuations are not as compelling as in March, when I last ran the screen.

I ran the screen again based on Friday's prices, and seven stocks pass the test. Three are repeats: Apartment Investment & Management, or AIMCo (AIV:NYSE - news - commentary), Duke Weeks Realty (DRE:NYSE - news - commentary) and Equity Office. Camden Properties Trust (CPT:NYSE - news - commentary) returns to the portfolio after dropping off the screen in March.

REITs According to GARP: Another Look Growth potential and value all in one
Company	Price 7/3/01	Property Sector	Growth Rel. to Sector 2000 to 2001*	2001 P/FFO Rel. to Sector**	Current Yield
Apartment Investment & Management (AIV:NYSE)	$48.90	Apartments	145%	87%	6.50%
Camden Property Trust (CPT:NYSE)	36.64	Apartments	100%	94%	6.60%
CBL & Associates (CBL:NYSE)	30.46	Retail - Regional Malls	119%	94%	6.90%
Developers Diversified Realty (DDR:NYSE)	18.28	Retail - Shopping Ctrs.	164%	84%	8.10%
Duke Weeks Realty (DRE:NYSE)	25.23	Office/Industrial	130%	97%	6.90%
Equity Office Properties (EOP:NYSE)	30.90	Office	111%	100%	5.70%
Regency Centers (REG:NYSE)	25.48	Retail - Shopping Ctrs.	123%	99%	7.90%
* Based on property type as indicated; ** FFO is funds from operations, a REIT's measure of cash flow. Source: Goldman Sachs, First Call/Thomson Financial, SNL Securities, Company Reports

Newcomers include CBL & Associates (CBL:NYSE - news - commentary), a regional mall operator, and Developers Diversified and Regency Centers (REG:NYSE - news - commentary), two shopping-center retailers.

After sporting entries in the past two portfolios, both health care and lodging have no companies that pass the current test. For hotels, growth rates have been revised downward as the economy slows. And, for health care, while growth prospects have modestly improved, the stocks have appreciated significantly, reducing relative value.

This screen is purely statistical. Hence, investors need to also consider qualitative issues. I discussed the methodology and its limitations in greater detail in the March column. Certainly, some will argue that a slowing economy will have an impact on retailers and, hence, retail REITs. Yet, current growth estimates place three retail REITs in this screen's portfolio.

Yet, in general, the REIT modified GARP screen has provided solid results so far. In a REIT market that is rapidly approaching fair value, a search for reasonably valued REITs with above-average growth prospects and stable yields should provide investors with a solid base in the sector.