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"Value crushed growth in 2001," a recent research report from Goldman Sachs' REIT research team proclaimed.

In analysis of last year's return, Goldman's managing director of Real Estate Investment Trust research, David Kostin, says that a difficult economic and market environment created an opportunity for income-oriented equities like REITs to shine. "A deeper-than-expected downturn in the U.S. economy as well as declining interest rates led to underperformance in most growth companies as value and yield were in vogue," Kostin wrote.

Mixing Growth and Value

While the tension between value and growth continues, this column has provided a statistical approach to investing in REITs that bridges the gap and consistently outpaces the averages. "REITs at a Reasonable Price," our modification of the growth at a reasonable price (GARP) strategy, has outperformed the REIT average over the past year.

Take, for example,

our fourth-quarter picks. The return of 7.17% was 209 basis points better than the NAREIT Equity REIT Index, which returned 5.08% during the period. And, consistent with our methodology, the picks have a robust yield of 7.6%.

Every name in our portfolio posted a total return, although apartment owner

Camden Property Trust

(CPT) - Get Camden Property Trust Report

lagged with a gain of just more than 1%. Apartment REITs were generally weak in the fourth quarter on fears of new supply and weak demand.

The strongest names in the portfolio were

Developers Diversified


, a retail REIT specializing in large community centers, and

First Industrial Realty

(FR) - Get First Industrial Realty Trust, Inc. Report

, a Chicago-based company specializing in industrial warehouses. Not surprisingly, in a period where REIT investors focused on income, both sport the highest yields of the group.

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2002: Valuing Growth Is Key

With REITs outperforming the broader markets for two years and as many REITs approaching new highs, stock selection becomes increasingly important. As analysts and investors

predict a more challenging year for REIT investors, a focus on relative value will be key to solid performance.

Our GARP method focuses on relative value. The model divides REITs into property types -- from retail to self-storage -- and begins by assessing the relative price of growth. REITs that make the first cut have estimated growth rates above their peers, yet trade at a valuation below the property sector average. We are looking for companies where you can buy growth at a discount.

The companies that make the cut then must meet the following criteria: pay a dividend above the property-sector average with a payout ratio below the sector average; have a below-average debt-to-market-cap ratio; and trade at or below current net asset value, or NAV.

All of these financial metrics, with the exception of the Net Asset Value calculations, are purely objective. While subjective assumptions are used to determine the net asset value of a REIT, the fact that the REITs on the list trade below NAV indicates current stock price valuation is not excessive. In difficult economic times where commercial property values typically remain stagnant, a look at asset value estimates is important

Our analysis yields a list of six REITs that fit the "REITs at a Reasonable Price" criteria.

Two REITs make encore appearances from last quarter --

Developers Diversified




(PLD) - Get Prologis, Inc. Report


Apartment Investment and Management

(AIV) - Get Apartment Investment and Management Company Class A Report

returns to the portfolio after

appearing in the second and third quarters of last year.

Among retail REITs, newcomer

JP Realty

( JPR) owns malls and community centers in the Northwest from Colorado to Washington. While relatively unknown, its rising growth profile and 8.6% yield pushed it into the portfolio.

Two other GARP newcomers are well-known REITs.

CarrAmerica Realty

( CRE) is an office REIT with properties in 14 metropolitan markets including Washington, D.C., Chicago, Atlanta and both Northern and Southern California. While Carr could feel the impact of a slowing economy, especially in California, the stock trades at a significant discount to NAV.


Vornado Realty

(VNO) - Get Vornado Realty Trust Report

is a major New York City office landlord, recently increased its dividend and will continue to benefit in the rebuilding and growth in the New York market.

As REIT values continue to move higher, relative value and the ability to buy growth at a discount are keys to superior performance. The GARP method provides the framework to identify companies that should outperform in more difficult markets.

Remember, however, this is purely a statistical exercise. While it eliminates subjective judgments, it also eliminates qualitative analysis, something that can be very important in more difficult property markets. And, of course, revisions to growth rates by any of these companies could change their position in the GARP portfolio. As earnings season arrives and these companies provide guidance for the year ahead, use this portfolio as your REIT roadmap for the coming quarter.

We'll be back in April to report the results and adjust the portfolio as necessary.

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 and invites you to send it to

Chris Edmonds.