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Rei Ts Still Offer A Solid Defense


Where to Invest -- Strategies for Stocks

REITs Still Offer a Solid Defense

But returns probably won't be as hot as this year's

Real estate investment trusts promise salvation for risk-averse investors in 2001. While the sector will never have the oomph of tech stocks, it should continue to do its job. Although REITs, which are real estate holding companies, trade like stocks, most of their earnings are paid out as dividends. So they have some of the growth potential of stocks and some of the stability of bonds.

When the Nasdaq index took a nosedive in March, money managers suddenly saw the defensive value of REITs. Equity REITs had a 21.6% average total return in 2000 vs. the Nasdaq's 28.2% slide. "The collapse of the tech stocks was a major factor in the REIT rally," says Barry Vinocur, editor of Realty Stock Review.

Most experts think the sector will do well in 2001, but not as well as in 2000. Merrill Lynch & Co. recently lowered 2001 earnings estimates on nearly 35% of the companies it covers. "We're not throwing in the towel," Merrill analyst Steve Sakwa stresses. "We still think the group is going to deliver 10% to 12% total returns next year."

Even if earnings drop, REITs currently have a 7.6% average yield, which is protected by their strong balance sheets. Any stock price appreciation above that just adds to your total return. Nor are the estimates all that bad, given that the entire economy is slowing. "There are estimates out there for the S&P 500's growth next year that are lower than REITs," says manager David Jellison of Columbia Real Estate Equity Fund.BARGAINS. Certain sectors will hold up better than others. Take REITs that own office and apartment buildings in the Northeast and Northwest. Demand is strong, and supply limited, says Martin Cohen, manager of Cohen & Steers Realty Fund. Office REITs also look attractive because their leases are typically for 5 to 10 years, locking in high earnings growth. Cohen likes Vornado Realty (VNO), Equity Office Properties (EOP), and Boston Properties (BXP). His favorite is Spieker Properties, the largest office landlord in Silicon Valley. Such popular names have higher valuations and lower yields.

Bargain hunters can look at health-care and nursing-home REITs. "But they're not for the faint of heart," says Vinocur. Indeed, cuts on government reimbursements to nursing homes have led to losses. But the worst has been priced into these stocks, and because the U.S. population is aging, their earnings may soon pick up. Cohen and Vinocur both favor Nationwide Health Properties (NHP) and Health Care Property Investors (HCP), which yield 14% and 10.5%, respectively. Cohen thinks those yields are sustainable.

Columbia's Jellison thinks industrial REIT ProLogis (PLD) is a great bargain. With a big part of its warehouse and cold storage business in Europe, ProLogis has been hurt by the euro's decimation. But Jellison says "the underlying industrial business is extremely healthy." When the euro turns the corner, this stock should do well.

Managers are avoiding two REIT sectors--hotels and retail--because of their economic sensitivity, but the others should have bright futures. Everyone needs a place to live and work. In that respect, REITs could be one of the safest places to invest as the economy cools.By Lewis BrahamReturn to top

TABLE

Real (Estate) Opportunities

STOCK/SYMBOL PRICE* YIELD

EQUITY OFFICE PROPERTIES (EOP) $31.12 5.8%

Largest office REIT in the U.S.

HEALTH CARE PROPERTY INVESTORS (HCP) 28.69 10.5

Largest health-care REIT

PROLOGIS TRUST (PLD) 21.44 6.2

Industrial REIT with properties in Europe

SPIEKER PROPERTIES (SPK) 53.06 5.3

Largest landlord in Silicon Valley

VORNADO REALTY TRUST (VNO) 37.81 5.6

Largest owner of office properties in NYC

DATA: ANALYST SURVEY, BLOOMBERG FINANCIAL MARKETS, BUSINESS WEEK

* As of Dec. 8, 2000

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