Friday's revelation that billionaire investor

Warren Buffett

has taken a 5% stake in

JDN Realty

(JDN)

will create a flurry of interest in the stock and, quite possibly, other REITs. At the close of trading Monday, JDN was up 13% at 12. Yet one has to wonder what Buffett sees in a company with a tarnished reputation and only a glimmer of light at the end of the tunnel.

The move reflects Buffett's continuing interest in REITs, which

began last April with his disclosure that he held stakes in

MGI Properties

(MGI) - Get Report

and

Tanger Factory Outlets

(SKT) - Get Report

.

JDN's attraction for Buffett may be its dividend. At

Berkshire Hathaway's

(BRK.A) - Get Report

annual meeting last year, shortly after Buffett began his foray into REITs, he

said his purchases were driven by the income. This morning, Jim Kammert of

Goldman Sachs

reiterated that. "We believe, regardless of JDN's management and financial reporting issues, the attractive 14%-plus dividend yield was the catalyst for

Buffett's investment," Kammert said. "The

investment in JDN is not an investment by Berkshire Hathaway, but instead a personal position by Buffett." Goldman rates JDN "market underperform" and has not provided banking to the firm in the past three years. Buffett's 1.7 million shares of JDN will provide an annual dividend of nearly $2.7 million.

Still, many question Buffett's investment in JDN at a time when the company is mired in management mischief. "This runs counter to everything Buffett believes in corporate governance," says a REIT analyst at a leading Wall Street firm. "He speaks so eloquently about accountability and credibility and then buys JDN. It makes me scratch my head."

As reported recently in

this column, JDN replaced its chief executive officer, J. Donald Nichols, and ousted two senior development officers after disclosing that unreported payments to the officers were made with Nichols' knowledge. The company is determining what impact those payments may have on past earnings as well as yet-to-be-reported 1999 earnings.

Under an extension from the

Securities and Exchange Commission

, JDN has until Friday to report earnings and file its 1999 annual report. Moreover, although the company was able to negotiate a temporary fix to its credit issues (the unreported payments violated covenants in its credit agreements), that extension also expires Friday. And, while the company said a permanent resolution would be reached by March 28, no announcement has been made. The company will not comment further, instead directing investors to its recent press release and SEC Filing.

While the news is troubling, one analyst thinks Buffett may be looking at the long term. "It doesn't appear there will be much more bad news from JDN," says

McDonald Investment

REIT analyst Rich Moore. "It's unlikely the fourth quarter will be hurt terribly by the problems and Buffett may have decided it's worth the chance. The dividend looks fairly safe." Moore rates the stock "underperform" and McDonald has not provided banking services to JDN in the past three years.

Moore also thinks Buffett may be developing an interest in the shopping-center REITs and thinks JDN looks cheap. Last week, Buffett revealed a stake in

Aegis Realty

(AER) - Get Report

, a New York shopping-center REIT. "Retail REITs have been unduly hurt by fears over e-commerce," says Moore. "Investors are beginning to realize it has been overdone and that may signal an eventual turnaround in retail REITs." He is quick to say that doesn't necessarily justify Buffett's recent move. "There are better choices in the sector than JDN that are cheap and have solid, credible management."

Interestingly, Buffett's recent filings come almost exactly one year after his first REIT disclosures, a fact not lost on one buy-side manager, who said fund flows into REITs traditionally accelerate around tax time. "Buffett may know more than it appears," says Carl Tash, principal at

Cliffwood Partners

, a Los Angeles-based real estate investment management firm. "REITs tend to do well around tax time, a function of long-term investments flowing into tax-preferred plans. REITs did well the last two years in early April, even in the depths of a bear market." Indeed, given the emerging pattern, Buffett may very well be playing into market strength, simply adding fire to an already smoldering REIT market. "If I didn't know better, I would say he is quite the market timer as to when he chooses to announce these 5% holdings."

So will Buffett's latest revelation spark a REIT rally as it did last year? At best, a false one says Moore, noting Buffett's picks haven't made him a REIT ax. "Buffett's buying alone is meaningless," he says. "After all his first three picks,

Town and Country

(TCT)

,

First Industrial

(FR) - Get Report

, and Tanger Factory Outlets, have all been dogs."

In the short term, however, it may give beleaguered JDN shareholders something to cheer about.

Building Blocks

AIMCo takes aim:

In an apparent response to questions raised in this

column last week and analysts' concerns over accounting issues at

Apartment Investment and Management

(AIV) - Get Report

, the company published a "Memorandum Regarding Recent Issues" on its Web site. While the memo is dated April 5, it was not received by analysts or available, at least to us, on the Web site until Friday. For the full text,

click here.

Zell Redux:

In case you missed it this weekend, check out my

chat with real estate mogul Sam Zell.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds had no 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

invest@cjnetworks.com .