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Quarterly REIT Numbers Disappoint Readers and Pros Alike

Christopher Edmonds wraps up the first-quarter figures in the REIT sector and measures how the reader and expert portfolios fared.

It's just not pretty.

That's one characterization of REITs in the first quarter. For the first three months, the

SNL Securities REIT Index

lost 5.2% compared with a 5% gain in the

S&P 500

. In fact, REITs have lagged the S&P 500 by more than 40 percentage points over the past year.

Interestingly, REITs have performed more in line with small-cap stocks. Compared with the

Russell 2000

, which lost 5.2% in the first quarter, REITs look somewhat better. "Many REITs are a lot like small-caps," says one buy-sider. "They are hungry for capital and illiquid."

With that in mind, here's our quarterly look at the REIT markets and


REIT portfolios and some answers to your queries.

A Growing Disparity?

"We are beginning to see separation in REITs," says

Donaldson Lufkin & Jenrette's

Larry Raiman. "Large-cap REITs have outperformed

the average by 221 basis points in 1999 while small-cap REITs have underperformed by 160 basis points."

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That's reflected in the fact that the quarter's best performers were the multifamily and office sectors, a group that includes many of the large REITs. In contrast, the worst-performing sectors -- strip centers and health-care REITs -- are littered with small-caps.

Going forward, Raiman believes REITs will have to convince investors that they can effectively manage both capital and growth. "Investors don't trust REITs to display financial discipline," he says.

In Readers vs. Pros, Readers Pull Ahead

In the continuing race between the portfolios of the

Readers vs. the


REIT Roundtable Pros, the readers reign! Your portfolio had a loss of just 1.08% vs. the


loss of 2.4%, according to data compiled by SNL Securities.

Both portfolios were helped by the performance of

Equity Office Properties


, up 7.26% for the quarter. "It's a large-cap name in a strong sector," says DLJ's Raiman, a member of our REIT Roundtable. "It's further indication of the separation among REITs."

The real difference is in the losers. The experts' portfolio was hindered by the picks of Roundtable member Chris George of

Reckson Associates


Host Marriott


, which was down 16.9%;

Prison Realty

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, down 12.6%; and

Franchise Finance

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, down 10.3%. "They can't go much further, can they?" says George. "Let's just say it wasn't a very good quarter."

Readers weren't perfect either, with three picks posting big losses:


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, which was down 14.7%;

Commercial Net Lease

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, down 13.6%; and

New Plan Excel


, down 11.7%.

In the silver-lining department, both portfolios outperformed the SNL index, which lost 5.6% in the first quarter. Stay tuned for the next update in July!

Can Meditrust Return to Health?


Glenn Karp

is first up with this question:

With the forward equity commitment soon to be behind Meditrust, how does the company look from here? Should I be a buyer or a seller, or should I just fall on my sword?

Meditrust may be ready to turn the

corner. The company's sale of its golf assets will provide cash to settle its outstanding forward equity commitments, and it is scheduled to pay

Merrill Lynch

the final $89 million due by the end of this week.

"Settlement of the equity forward should remove a major cloud from over the company," says

Sutro & Co.'s

Craig Silvers. He rates the stock a buy with a 12-month price target of 17. "Our price target would provide a total return of over 15%," he says. "The 11.5% dividend yield is among the highest of all REITs, but the 77% payout appears easily sustainable." Sutro has not provided banking services to Meditrust in the past three years.

The next challenge for the company will be the spinoff of its

LaQuinta Inns

into a separate company. Originally scheduled to occur this summer, the spinoff now may be postponed until early next year.

From a technical standpoint, Meditrust is in poor health. Just take a look at the handiwork by

Gary B. Smith


friendly technician, below:

A Union in Transition


Jason Juno


Thanks for your great work! What's your take on First Union Real Estate?

Jason knows how to get his name in print. Praising the columnist always works!

First Union Real Estate


is a company searching for direction. After undergoing a brutal, almost fatal, battle for control of the company,

Gotham Partners

got what they asked for -- and

then some. Since then, the company has worked feverishly to restructure its debt, find new management and regain investors' confidence.

While its latest quarterly report is full of special charges, it may be a sign the company is putting the worst behind it. However, with only an average stable of property assets, nobody is terribly excited about the prospects.

Like the fundamental story, the technical story remains clouded:

Shopping for Kimco

Finally, reader

Glenn Busch

asks for our take on

Kimco Realty

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, which owns and operates the largest portfolio of neighborhood and community shopping centers, with 436 properties in 40 states.

Opinions on the shopping-center business vary. Even so, many experts like Kimco. For example, Jay Leupp at

BancBoston Robertson Stephens

rates the stock as attractive with a 12-month price target of 43. He cites the company's conservative balance sheet, large-cap status and portfolio diversification as reasons to own the stock. Robertson Stephens has not provided banking services to the company.

Though it's one of the premier strip-center REITs, many question its high valuation. "We like the company -- it's just too rich," says one buy-sider.


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plan to expand its combination department-store/grocery-store superstores in the Northeast poses a challenge to some of Kimco's most dominant markets.

Technically speaking, Mr. Smith suggests investors think it's a bit rich as well.

Do you have a question about REITs, other property companies or real estate in general? Chime in with an

email, and we'll see if we can't construct an answer for you in a future column. Happy Building!

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds' firm was long Wal-Mart, 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