After a little more than a year of suffering, investors in real estate investment trusts finally have something to celebrate. Thanks in part to investments by

Warren Buffett

and to the fact that they'd been beaten down in the previous 12 months, REITs shone in the second quarter: The

SNL Securities Equity REIT

index returned 9.6% compared with the

S&P 500

's 6.9% return.

The gain in REIT stocks seems only natural to many analysts, especially considering the high yields and many companies trading below the value of their underlying real estate assets. "Trading at or near net asset value seems to be appropriate in the current environment," says Chris Marinac, head of REIT research at

Robinson Humphrey

. "Most of these stocks were undervalued, and the second-quarter rally simply pushed prices to more reasonable levels."

Among the best-performing REITs of the quarter was

Tanger Factory Outlets

(SKT) - Get Report

, up nearly 38% on

news that Buffett took a personal stake in the company.

The worst performers included

Prison Realty Trust

(PZN) - Get Report

, which lost more than 40% of its value on

news the company would restructure its financial relationship with

Corrections Corp. of America


Interestingly, in a strong quarter for REITs,

Sam Zell


Equity Office Properties


-- one of the bellwether office REITs -- finished down 0.6%.

In general, as REITs approach net asset value, or NAV, many find it hard to move higher. Although the second quarter was strong for the sector, the movement of most REITs' stock prices for the remainder of the year will be sideways instead of upward. Only companies that can prove their ability to grow earnings will lurch to the front of the pack; those that simply mind the store will either tread water or slowly sink.

Here are three companies to watch in the coming months.

The Enthralling Three

Highwoods Properties

(HIW) - Get Report

is an office REIT based in Raleigh, N.C. Since its acquisition of

JC Nichols

last year, Highwoods has struggled, trying to regain its focus as an upscale office REIT in the Southeast and Midwest. Analysts and investors have thought many times that the company would be sold.

But Highwoods president and CEO Ron Gibson and his management team have emerged with a clear vision for the company, focusing on a handful of Southeast and Midwest markets where they feel Highwoods can be a dominant player in class-A office space. They've already sold properties that don't fit into that focus, including office buildings in Baltimore and south Florida. The company also recently settled its outstanding equity-forward loan from

UBS Securities

, which removed the last big blemish from Highwoods' balance sheet.

The company's stock is trading slightly below its NAV and has a dividend yield of more than 8%. It's also trading at eight times next year's estimates of funds from operations, or FFO, a measure of a REIT's cash flow. That said, once investors regain confidence in Gibson and the company, Highwoods may be a highflier.

Cousins Properties

(CUZ) - Get Report

is an Atlanta-based REIT with interests primarily in office and retail developments. Although Cousins trades at a premium to the REIT universe -- at 14.3 times next year's FFO estimates and a yield of 4.7% -- the company's ability to use capital for new developments continues to impress investors.

But Cousins' success in the second half of 1999 will come from a new retail concept, the upscale outdoor mini-mall. In August, the Avenue at East Cobb will open in suburban Atlanta, with retailers like

Ann Taylor




(GPS) - Get Report






(WSM) - Get Report

. The design is the novelty: The mall is completely outdoors with parking spaces right at the doors of each store, and it looks like an old-town main street.

Look for investors and other REITs to closely watch Cousins' success with the Avenue concept. And look for Cousins to make a number of announcements regarding similar projects very soon. The company has plans to open a similar mall this year south of Atlanta and says it has more inquiries from cities nationwide.

One business that will spark some interest this summer and fall is


(MT) - Get Report

, a health-care and hotel REIT rolled into one. Dark horse, long shot -- whatever you want to call it -- I have an educated hunch that this onetime highflier is beginning to turn the corner. The golf courses are gone, the racetrack has been sold and the company will focus on health-care facilities and its


lodging business.

Granted, health-care and midscale lodging aren't great growth businesses, but management's focus on improving both businesses should yield much better results in the remaining six months of 1999, and especially in 2000. Moreover, the company would like to spin the lodging portion of the business back into a freestanding company that could unlock additional value.

Meditrust's balance sheet certainly isn't pristine, but it's vastly improved from last year, because the company settled all of its equity-forward obligations. So it appears the current yield of more than 14% is reasonably safe for the rest of 1999. And management is committed to keeping the income flowing to shareholders beyond that. If that's true, then holding onto the shares a few months -- or even years -- isn't such a bad thing. Trading at only 5.8 times next year's FFO estimates, there's at least a hint of value in the stock.

I'll keep tabs on these three REITs as the year winds down and see how they do. In the meantime, do you have three of your own? If so, shoot me an

email. We may highlight your ideas in an upcoming column.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at