Sunday, February 04, 2007

REIT stocks rebound

REIT stocks rebound
A ‘prime time’ to jump into sector, analysts say
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By Matt Andrejczak, CBS Marketwatch.com
Last Update: 2:45 PM ET Aug 17, 2000
WASHINGTON (CBS.MW) --Buying stock in real estate investment trusts has never been considered a sexy investment. But with dot-com bombs dotting the landscape, this sector is enjoying a revival that is hard to ignore.
For investors burned by the demise of once high-flying technology companies, this has become a safe haven to weather the storm. The Dow Jones Equity REIT Index has climbed 18.5 percent year-to-date, compared to a 10.5 percent rise in the S&P 500 and a 208.1 percent plunge in the Nasdaq.

And the good times are far from over. Analysts said it’s a prime time to jump into the game because these stocks have further upside potential of 15 to 20 percent.
That’s based on the belief that well-managed REITs will be able to sustain funds from operations growth -- the reported measure of REIT operating performance -- in the neighborhood of 7 to 9 percent through 2003.
“REITs are still trading far below their historical levels,” said David Fick, a managing director at Legg Mason.
On average, REITs are trading at a five percent discount to their net asset value, compared to a 20 percent discount at year-end 1999, Fick pointed out.
Bouncing back
The sector fell into a terrible slump during the last two years amid concern that overzealous real estate companies would overbuild in certain markets due to the strength of the economy -- a problem that led to the industry’s downfall in the 1980s.
But that hasn’t been the case. For the most part, supply has matched demand as the capital markets have kept builders in check by limiting the amount of new funds to jumpstart construction.
“We are in a state of equilibrium,” said Tony Davis, an analyst at UBS Warburg in New York. “We are not looking at a train wreck in terms of supply and demand.”
In addition, the real estate market has defied its critics and proved to be resilient. Industry fundamentals are on solid footing with spiking rents and high occupancy rates in such markets as Boston, San Francisco, New York and Washington, D.C.
The on-going flow of money from disillusioned tech investors into real estate mutual funds this year has also propped up once-ailing REIT stocks.
“Second quarter earnings were superlative. It really knocked everyone’s eyes out.”
— Ken Campbellmanaging director of the CRA Realty Shares Portfolio
According to AMG Data Services, approximately $401 million of fresh money has shifted into these funds. Year-to-date fund flow, however, is still in negative territory at $131 million, but it is still much better than a negative $532 million during the same period last year.
And the latest earnings roundup has further reinforced the positive attitude emanating from analysts and fund managers.
“Second quarter earnings were superlative,” said Ken Campbell, managing director of the CRA Realty Shares Portfolio, whose fund has soared about 26 percent this year. “It really knocked everyone’s eyes out.”
So much so that UBS Warburg increased its 2000 and 2001 estimates for the 20 REITs it covers on average by 3 cents and 4 cents per share, respectively.
How to play the game
An ideal way to begin investing in REITs is through real estate funds, which primarily tend to be income-oriented rather than growth-oriented.
Data complied by Morningstar indicates that 132 real state-oriented funds have racked up an average return of 21.6 percent year-to-date.
Some of the year’s better performing funds include SSgA Tuckerman Active REIT (SSREX :
SSgA:Tuckmn Act REIT
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Last: 23.39+0.10+0.43%6:05pm 02/02/2007Delayed quote data
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Sponsored by:
SSREX23.39, +0.10, +0.4%) , Franklin Real Estate Securities Advisors (FRLAX :
Franklin Real Est;Adv
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FRLAX28.46, +0.40, +1.4%) , and Security Capital U.S. Real Estate (SUSIX :
JP Morgan:US RE;A
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SUSIX24.69, +0.10, +0.4%) .
But investors shouldn’t necessarily chase the latest big thing; long-term performance is naturally important. Other respected funds include Fidelity Real Estate Investment (FRESX :
Fidelity Real Estate
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FRESX39.85, +0.28, +0.7%) , Columbia Real Estate Equity (CREEX :
columbia balanced fd inc new real est eqt z
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CREEX29.84, +0.19, +0.6%) , and CGM Realty (CGMRX :
CGM Tr:Realty Fund
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CGMRX29.86, +0.11, +0.4%) .
Morningstar analyst Kunal Kapoor said investors who hold diversified value funds should also check their portfolios because these funds have been adding real estate holdings of late.
Observers further suggested that REITs are better to own in tax-deferred accounts like IRAs because REITs have large dividend payouts ranging from 5 percent to 14 percent.
In addition to Morningstar, the National Association of Real Estate Investment Trusts offers a list of mutual funds and contacts on its website http://www.nareit.com/. NAREIT is also a solid point of reference to understand the industry. Matt Andrejczak is a reporter for CBS.Marketwatch.com

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