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REAL ESTATE: FINDING SHELTER--AND A BIT OF COMFORTThere's reliable income for investors with long horizonsMartin Cohen, of Cohen & Steers Realty Shares, has good reason to feel depressed. ''It's a tough environment when your stocks go down every day,'' says the portfolio manager. Cohen & Steers's $3 billion fund, which had total returns of 38.5% in 1996 and 21.2% in 1997, is down more than 6% in 1998. Meanwhile, the Standard & Poor's 500-stock index is up 12.4%. Says Cohen: ''I think people look at real estate investment trusts [REITs] being down and the broad market up more than 12% and say, 'I'm in the wrong asset.''' Can you blame them? The stocks have been battered by mounting concerns that returns will fall as the industry enters a more mature, slower growth phase and on fears that the large pool of available capital sloshing around the industry will lead to overbuilding. Worries about changes in the taxation of REITs are also giving investors jitters. According to AMG Data Services, the market performance of real estate mutual funds has been negative for the past eight weeks and assets have shrunk to about $11.7 billion, from $12.5 billion earlier in 1998. Unlike REITs, homebuilders have been doing well, topping even the broad market with a 17.4% year-to-date gain. But analysts think valuations are more reasonable--and that more appreciation may be in the cards. In the REIT market, many worries may be overdone. Indeed, investors concerned about the high level of the broad stock market may find REITs to be solid defensive holdings. REITs provide a reliable income stream since they must pay 95% of what would be their taxable profits to shareholders in dividends to retain their tax-advantaged status. ''With REIT yields 120 basis points better than the five-year Treasury bond and companies expected to hike dividends faster, people are going to rediscover the yield story at some point this year,'' says Louis W. Taylor of Prudential Securities. SETTLING IN. As momentum players flee REITs, investors with longer-term horizons can find good values. ''We've tracked REIT multiples back over 10 years, and they're at their lowest levels since the gulf war,'' says Cydney C. Donnell, of New York-based investment manager European Investors Inc. ''Given that their earnings-growth potential is five times that of the 1999 estimates for the S&P 500 and that their multiple, based on 1999 projections, is 10--or about 40% of the S&P's--I don't get [current REIT valuations] at all.'' Some of the highest-flying REITs of the past few years may be far better buys now. That includes Starwood Hotels & Resorts Worldwide Inc. (HOT) and Crescent Real Estate Equities Co. (CEI), says Cohen. At a price around 38, Vornado Realty Trust (VNO) appeals to Donnell. It has been a big buyer of properties in recent years, but as the real estate market has revived, competition for properties has driven up the prices of deals and made them less economical. ''But,'' says Donnell, ''To date, Vornado has bought assets that have a natural upside in the rent roll or that have been totally underutilized in their prior history.'' There's another element to the Vornado story and to the appeal of real estate stocks in general that may play out profitably: development. ''Over the next few years, we will see a shift in the economics favoring an emphasis on development over acquisition,'' says C.T. Fitzpatrick, of Longleaf Partners Realty Fund. Vornado owns a lot of property around Manhattan's Pennsylvania Station, a neighborhood expected to become a vibrant retail environment in a few years. Ferreting out real estate stocks with good development stories isn't easy, says Fitzpatrick. ''A lot of what we buy doesn't show up in the immediate numbers,'' he says, so tends to be mispriced by the market. One example: a new company, Excel Legacy, trading on the NASDAQ Bulletin Board. It was spun out of a REIT but is structured as a regular C-corporation. ''It has some very attractive development sites and opportunities across the country,'' says Fitzpatrick. A far larger stock with some upside from development that Fitzpatrick likes is Host Marriott (HMT), also a C-corp. ''It has land adjacent to existing properties where they can add room capacity at extremely high rates of return,'' he says, and has several hotel sites that it will be developing over the next few years. For a play on land, William K. Morrill, CEO of ABKB/LaSalle Securities, likes Catellus Development Co. (CDX). ''They should benefit from an acceleration in the growth of land prices on the West Coast that should continue for a couple of years,'' he says. Sam Lieber, who runs two real estate funds for Alpine Management & Research, looks for value among homebuilders that he expects to be consolidators in their industry. Since the broad stock market's April high, the S&P 500 is down 3.5%, S&P's REIT index is down 1.8%, and homebuilders are down 9.7%. ''With interest rates low, housing affordability high, and the fundamental activity in real estate strong, we think homebuilders are the cheapest sector,'' says Lieber. REITs may be down, but don't count them out. Investors can expect good returns--but may have to wait longer for them. Of course, in a bull market, counseling patience is a hard sell.
By Suzanne Woolley in New York RELATED ITEMS
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Updated June 4, 1998 by bwwebmaster
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