REITs Float in Troubled Waters

The recent buoyancy in the sector may signal investors' craving for companies with earnings and hard assets.
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Are investors looking to REITs as a safe haven amidst the storm? Recent gains in REIT stocks suggest this week's volatility is recreating interest in a sector that is often ignored and maligned.

In a week where the carnage seemed universal, real estate stocks are poised to be the winner. For the week, the

Morgan Stanley REIT Index

is up nearly 3%. Today, the REIT index is down only half a percent, vs. 5.8% for the

S&P 500

.

REITs' buoyancy in a turbulent market may signal investors' rediscovered craving for companies with earnings, hard assets and stable dividends. "It's a return to a focus on value and income," says

Robinson Humphrey

REIT analyst Patrick Hickey. "The volatility in tech stocks has spilled over and created a downdraft in the blue-chips."

Besides the 7% gain in the average REIT stock this year, the companies still provide investors a dividend of nearly 9%. "The defensive characteristics of REITs have become more visible to the mainstream investor," says Hickey. "You can't ignore safe 9% yields forever."

One real estate fund manager agrees that the shift in sentiment bodes well for the sector. "This is good for REITs," says Carl Tash of

Cliffwood Partners

. "I think people are finally starting to worry about value, yield and stocks with low betas."

The REIT rally has been led by the more liquid, larger REITs, especially in the apartment and office sectors. Companies like

Speiker Properties

(SPK)

,

Equity Residential Properties

(EQR) - Get Report

,

Cousins Properties

(CUZ) - Get Report

and

Avalon Bay

(AVB) - Get Report

have seen nice gains in the past several trading sessions. "This is generally a large-cap rally," says Hickey. "They have performed at the top of the class." Also, hotel REITs like

Host Marriott

(HMT)

and

Meristar Hospitality

(MHX)

have rallied in the past week.

While near-record volatility has encouraged a flight to safer pastures such as REITs, even those encouraged by the rally question its staying power. "The real test will be over the longer term, whether people are willing to leave their money in REITs when technology turns around," says Sam Leiber, portfolio manager of the

Alpine Real Estate Fund

. If they do, Leiber says REITs could provide investors with 20% total returns by the end of the year.

Hickey agrees and is concerned about the rally's sustainability. "If REITs are just a parking lot for cash, people will leave sooner rather than later," he says. "REITs are still a relatively small-cap industry and are very susceptible to fund flows. That means the recent move is a two-way street."

For now, however, REIT investors are content with holding their own in a market when everyone else is licking their wounds.

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 .