May 4, 2003 - After falling out of favor during the high-tech boom of the '90s, real estate investment trusts, or REITs, are once again a hot investing commodity. 

These real-estate-backed securities are required to pay 90 percent of their taxable income to their shareholders, which has made them attractive to investors looking for diversity and steady returns in a tumultuous stock climate. 

"REITs have become more of a mainstay investment following the dot-com bomb," said Tom Corcoran, president and chief executive of FelCor Lodging Trust, an Irving-based hotel REIT. 

Historically, REITs have provided about a 7 percent to 8 percent return, much of it in the form of dividends. This looked paltry to many investors compared with the 10 percent to 20 percent return some people were getting during the high-tech boom. 

But, after the tech bubble burst, a 7 percent return on a company with tangible assets such as office buildings and apartments began to look more attractive, not to mention realistic, to investors. 

"We're stuck in this single-digit range," said Michael Grupe, senior vice president of research and investment affairs with the National Association of Real Estate Investment Trusts. "If professionals are saying you shouldn't expect more than a 7 percent return on stocks, here are these real estate stocks. They pay you a 7 percent yield." 

Grupe said investors can put their money in growth stocks and hope to get a 7 percent return on capital appreciation when they sell their stock. But with REITs, investors get a check at the end of each year without having to sell their stock. 

"It doesn't take a lot to begin to realize that's not a bad investment," Grupe said. 

REITs, in fact, are traded like any other stock. Mutual funds include them in their portfolios and, in 2001, REITs made their first appearance on the Standard & Poor's 500 index. 

But the REIT industry hasn't been immune from the economic woes that have battered companies up and down the major stock exchanges in the past three years. REIT indices are outperforming the S&P 500 and other major indicators, but some property types are faring better than others. 

While the S&P 500 returns fell 24 percent between Dec. 31, 1998, and Dec. 31, 2002, REIT returns rose. On the low end, hotels gained 9 percent, and on the high end, industrial properties soared 58 percent, according to Bloomberg REIT indexes. On an annualized basis, the S&P returns fell 6.8 percent; REIT returns rose from 2.3 percent to 12.3 percent. 

Hotel and lodging REITs have been struggling in the wake of a slowdown in business travel, the 9-11 terrorist attacks, problems in the airline industry and the war with Iraq. 

Office REITs, though not suffering as badly as their brethren in the hotel sector, have had to contend with waves of corporate layoffs that shrunk the need for office space. The dot-com bomb also put a glut of high-dollar office space back onto the market. 

Apartment REITs, which thrived in the early and mid-1990s, have seen occupancy rates in their properties wane as layoffs and low interest rates siphoned off a number of potential tenants who instead became homeowners. 

Retail REITs seem to be the brightest spot for the industry, as consumers continue to spend, keeping retailers busy and spaces filled at the nation's shopping centers, malls and restaurants. 

Although REIT stocks have been available to investors for more than 40 years, they didn't have much of a place in the public's consciousness until the early '90s. They were created as a way to give the public a chance at owning real estate that was more liquid than owning the actual bricks and mortar. 

There just weren't a lot of REITs in operation, and investors didn't understand the ones that were out there. They were also cumbersome to operate, with REITs forced to farm out management of the properties they owned to third parties. 

But in the late '80s, rule changes allowed REITs to manage their own properties. 

When REITs became easier to operate, more private real estate companies opted to become REITs, selling stock to the public. Their initial public offerings generated billions in cash, which they used to pay down the mountains of debt built up after the real estate crash of the late '80s. 

A REIT boom was born. 

"That was the big economic spur that drove growth in the REIT industry in the '90s," Grupe said. "They took the equity raised in public offerings to pay down debt. That was the only way to survive. 

The market was bringing pressure. The market was forcing a decision." 

The number of REITs skyrocketed from 119 in 1990 to a peak of 226 in 1994. The market capitalization also jumped from $8.7 billion in 1990 to $44.3 billion in 1994. 

Some REITs consolidated or dissolved since then, bringing the total down to 176 at the end of 2002. But the money flowing into REITs continues to grow, according to figures from the National Association of Real Estate Investment Trusts, and their stock prices have stabilized in the past couple of years. The entire industry has a market capitalization of $160 billion. 

"There's just all this information available now regarding real estate," said John Goff, chief executive of Fort Worth-based Crescent Real Estate Equities Co. "It's given people a new comfort level to invest in real estate. It's a unique opportunity to invest in real estate and have liquidity." 

Goff said the growth in the mid-1990s caused a lot of excitement among investors who treated them like growth stocks. He said they fed on the recapitalization of the real estate industry. 

Now they are being seen as a good way to diversify a portfolio by investors who no longer expect a 10 percent, 15 percent or 20 percent return on their investment but instead are happy with the 7 percent average returns that REITs have turned in. 

REIT managers recognize that some property types are faring better than others. Yet despite some lagging performance year after year, the securities continue to pay dividends. 

Things are really going well for retail REITs like Dallas-based U.S. Restaurant Properties. 

"People want to continue to buy hamburgers and eat at reasonably priced casual dining restaurants," said Harry Davis, chief operating officer for U.S. Restaurant. "While the days of the double-digit annual sales growth are behind us for the time being, we're seeing essentially stable sales through most of our portfolio." 

Hotel REIT executives continue to hope that the worst is over for their industry and that a recovery is somewhere on the horizon. 

"We've been in an economic downturn for the last two years," said Steve Schafer, director of investor relations for FelCor. "The decline in demand has bottomed out. We were having to replace the high-paying corporate traveler with lower-rated group and leisure business. Over the last couple of months, our mix had stabilized. We weren't losing any more of the higher-paying customers. The good news is, the war's over. There were people who were waiting for resolution to begin traveling again." 

Office REIT executives have had to contend with a lack of job growth, Goff said. The stagnant work climate has driven down occupancies in the company's portfolio, which includes such buildings as Carter Burgess Plaza in downtown Fort Worth. But Goff also said he expects a recovery. 

"We expect to see occupancies pick up in 2004," he said. "The current climate gives investors the opportunity to buy stocks at the down cycle. The value of our assets is far greater than where the price of the stock is today. We certainly expect our cash flow will increase over time. What we need is job growth." 

Apartment REITs are also facing a decline in occupancy because of job cuts and low interest rates, which are providing unprecedented opportunities for homeownership. 

Despite the occupancy downturn, Camden Property Trust is still putting up new apartment buildings because it has the capital to build, said Ric Campo, chairman and chief executive of Houston-based Camden. The new product still allows Camden a 7 percent return for its investors. 

REITs are "dividend stocks and low-volatility stocks in businesses people understand," Campo said. "Even though the businesses may be bad, people like them. Our investment fundamentals are good, relative to people's alternatives. It's caused new development to continue in a market where you wouldn't expect new development to be happening." 

-----To see more of the Fort Worth Star-Telegram, or to subscribe to the newspaper, go to http://www.dfw.com 

(c) 2003, Fort Worth Star-Telegram, Texas. Distributed by Knight Ridder/Tribune Business News.