During the high-tech and dot-com boom several years ago, real estate investment trusts (REITs) fell out of focus. Because of the high potential profits touted by these other industries, many investors felt that it was a good time to shift a lot of their capital to investments where they could make short-term gains. "Unfortunately, this probably led to more short-term losses for most of those investors," says Chuck DiRocco, senior director of industry analysis with the National Association of Real Estate Investment Trusts (NAREIT). Fortunately, REITs have since regained any attention that may have been lost. Stability and solid returns, two of REITs' most attractive qualities, seem to be favorable characteristics for many individuals and institutional investors.

The Appeal of Short-Term Gains

"REITs typically pay a nice dividend, but they do not offer the huge upside that everyone expected from the high-tech and dot-com stocks," says John Euart, managing director of investments for Regency Centers' Southeast region. "REIT investments are generally solid, and you're going to get a good return -- maybe not the opportunity to hit a home run like people thought they would in the high-tech and dot-com industries, but typically a very stable investment." "REIT stocks are not considered to be growth stocks like dot-coms," says Larry Gildea, region director for Mid-Atlantic region with Liberty Property Trust. "This means that REIT share prices would never be expected to escalate in the same manner as the dot-com or tech companies share prices would be expected to escalate."

David Steinwedell, vice president, managing director of acquisitions and dispositions with Wells Real Estate Funds, agrees. "REITs have always been an investment vehicle designed by current income -- they are not designed to be growth stocks," he says. "REITs fell out of favor because the market realized they aren't growth stocks and went after the dot-com and high-tech stocks. Now, with the economy cooling off, people are coming back and saying that having some income is a good thing."

Needless to say, most high-tech and dot-com stocks did not come through with the high returns that were expected for a long term. In turn, real estate is becoming more appealing for investors. REITs provide good returns -- perhaps not as high as other stocks that are more risky investments -- but many investors are realizing that a steady, less volatile investment is not bad, especially in today's economy.

A Shift in Perspective

"A combination of expectations being lower for the stock market and the fact that REITs are so attractive from a yield standpoint have made real estate a much better-performing sector in the last year or so," says Tom Peck, senior vice president of investor relations with Duke Realty Corporation. "If you want to get a high yield, I don't think there are very many investments that offer a better yield than what real estate offers to investors."

"I think that over the past year and a half many individuals have started to question the economy," says DiRocco. "A lot of investors are starting to look for a less volatile investment that offers a nice, steady stream of dividends and has also shown a nice flow of returns over the last 20 years."

Gildea agrees, adding that larger, well-capitalized REITs are being viewed as safer investment vehicles. "Most REITs have built-in earnings increases through contractual rent increases, so there is a certain predictability in income from year to year," he says.

Steinwedell notes that much of Wells' success has occurred because people recognize the company's ability to pay a dividend and have tenants backing that dividend with long-term leases. This ability along with the firm's diversified portfolio -- across industries and across the United States -- is attractive to investors.

Current Strategies

"If you look at the activities of retail REITs over the past few years versus their existing and go-forward objectives, you will definitely notice a shift in strategy," says Gary Saykaly of Atlanta-based NewBridge Retail Advisors. "During the post-1998 capital market fallout, REITs turned to alternative avenues for capitalization: joint ventures and capital recycling programs (non-fit asset sales). With REITs having better access to capital and the war chest that they have built up, many are again focused on revenue growth via acquisitions and/or development."

Citing business as usual for 2002 with increased expectations, Regency Centers is a prime example of this strategy. The company is currently selling some of its assets, buying properties on which to develop grocery-anchored centers and buying existing properties as pure acquisitions or for redevelopment.

"For 2002, all of our goals and objectives for new development starts, acquisitions and completions are higher than they were for 2001," says Euart. "Because of our strategy of dealing with the Number 1 or 2 neighborhood, grocery-anchored centers in the market, we really haven't suffered as much of an economic setback as some of our competitors have."

Wells Real Estate Funds is also having a successful year -- the company plans to complete $1 billion in acquisitions in 2002. The fully integrated real estate investment management firm offers three ways to invest in real estate: through a limited partnership, a mutual fund and a non-traded REIT. Wells works hard to make sure its national portfolio is as diverse as possible.

The firm recently completed a REIT investment in the Atlanta area, its first in 8 years. Wells acquired the Novartis building, a 100,087-square-foot facility in Duluth, Georgia. "We are trying to get back into markets or enter new markets. Atlanta has been a market that we would like to invest in, but the pricing has not been what we would have liked," says Steinwedell. "And what we've found is that some of the institutional investors and other investors have shied away from Atlanta because of the short-term vacancy problem. We can still take a look at Atlanta on a long-term basis, because the long-term prospects of a city like Atlanta are excellent. It's going to have great population growth and great job growth over time. These things make it attractive for us to buy in a market like Atlanta."

Wells has also made recent purchases in several Florida markets, and Steinwedell says the company will consider purchasing properties in almost any market. "The driver in our investment strategy starts with understanding the tenant and its credit. The way we work is the exact opposite of the way many real estate companies work. Most real estate deals start with the real estate, then move into the return and hope that the tenants are there. We start with tenants, then we move into making sure the returns work and the real estate is usable."

On the development side, Peck says Duke Realty is doing some development but not as much as the company would during a more normal economy. Duke's current focus is on keeping occupancies high. "We love to do acquisitions and developments, and we plan to do more as the economy improves," says Peck. "We have over $1 billion of debt capacity right now, and we have the rare situation of having more money than we have opportunities. The current acquisition market is not all that attractive from a buyer standpoint."

Liberty Property Trust's primary thrust right now is also to maintain occupancy within its portfolio. "These are not easy times for real estate companies, so our feeling is that our focus needs to be squarely on higher occupancy," says Gildea. "We are only constructing buildings on a pre-leased or build-to-suit basis because most markets -- the ones I am active in -- have higher vacancies than we are comfortable with." Gildea is responsible for Baltimore; Virginia Beach and Richmond, Virginia; Greensboro, North Carolina; and Greenville/Spartanburg, South Carolina.

The story is the same for acquiring and selling properties. "Now is not a particularly good time to be a buyer or a seller," Gildea continues. Sales are of course still happening, but there is not the same volume of sales that normally occurs. "Companies that are selling are selling because perhaps they are re-strategizing. For instance, we sold our entire portfolio in Charleston, South Carolina, in December 2001. We did that because we felt Charleston did not have enough growth opportunity for us. The company that purchased this portfolio, Jupiter Realty, bought the property because they wanted to be in that marketplace and they operate on a more entrepreneurial basis in smaller markets."

The Future of REITs

"The REIT market right now is performing strongly," says DiRocco. "Our index is up about 10.5 percent so far in 2002. It is outpacing the Dow Jones, S&P 500 and the Nasdaq."

Saykaly agrees: "The future is positive for the REIT sector. Dispositions of non-fit sales will continue as many REITs divest of assets in smaller markets." For example, Acadia Realty Trust recently disposed of 17 centers, four of which were in the Southeast. Saykaly continues, "From a stock market perspective, REITs will continue to secure market interest for a variety of reasons, which include increased size of existing REITs, historical performance of the strong operators, volatile nature of the other stock indices and low available returns in competing investments."


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