Look for REITs Back on Earth

Meanwhile, Alpine's Lieber says a new signature building on Manhattan's Lexington Avenue will help spur earnings for bankrupt retailer-turned-REIT Alexander's(ALX), as well as Vornado Realty Trust(VNO), which controls about one-third of Alexander's shares.

On the earnings front, AIM's Rodriguez says that for all the attention being paid to REITs over the past five years, earnings growth has actually been "anemic" over the period. He expects that to change this year now that the industry's fundamentals have caught up with the rapid price appreciation.

"Real estate is a lagging industry," says Rodriguez. "Multiple expansion has been driving prices higher, but when earnings start increasing investors might see those multiples contract."

Rodriguez is predicting high-single-digit returns for REITs in 2005 and warns investors that they best be prepared for a scenario where the best they can do is clip coupons. Speaking of those all-important coupon payments, the average dividend yield on an equity REIT is 4.6%, according to NAREIT, while Morningstar says the average yield from a REIT fund is around 2.9%. The approximate difference between the two is the average 1.6% in fund expenses, according to Morningstar REIT fund analyst Dan McNeela.

Like the fund managers themselves, McNeela does not see REIT funds stretching their 30%-per-year winning streak through 2005. He expects most fund managers would be satisfied with returns in the 7% range this year, but readily admits that he shortchanged the group last year at this time and was proven wrong.

"My expectations were for modest returns in 2004 and we were proved wrong, so you never know," says McNeela. "But the source driving these returns is more demand for the stocks than fundamentals, which makes me even more suspicious."

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