By ELIZABETH HAYES

Staff Reporter

L.A.'s once-sizzling real estate investment trusts are cooling off considerably.

Of L.A.'s 10 biggest REITs that are at least a year old, the average stock price fell more than 7 percent over the first six months of the year. Some of the trusts have seen their share prices drop by as much as 15 percent.

Nationwide, REIT prices also sank almost 7 percent during the first two quarters of 1998, according to the National Association of Real Estate Investment Trusts. That means that the REITs which are required to pay out 95 percent of their income in dividends are trading at historic lows compared with the value of the real estate they hold.

The value of the S & P; 500 Index, by contrast, surged nearly 17 percent during the same period.

"Our feeling is that REIT stocks have reached bottom," said Craig Silvers, a senior analyst at Sutro & Co. "I can't see them going much lower."

Why the slump? The real estate cycle is at the point where values have recovered. As a result, property prices are higher, slowing the pace of acquisitions and diminishing growth prospects for the trusts.

"A lot of the low-hanging fruit in acquisitions has been picked. What we're going to see now is slower growth but more quality growth," said Jim deBree, partner with Deloitte & Touche LLP. "I think REITs in Southern California have probably outperformed other REITs in the last couple of years because two years ago we were just beginning the recovery and the rest of the country was farther along."

Now that the recovery is well under way, opportunities for REITs to buy depressed properties at bargain-basement rates are almost impossible to find especially for office REITs such as Arden Realty Inc., which has a reputation for buying low and selling high. Arden's stock price fell from about $30 in January to approximately $26 last week.

"Late in the cycle, they're dependent on development and increasing rents and occupancy rates," said Seth Feinstein, a partner and senior analyst at Crowell, Weedon & Co.

REITs also may take measures such as metering air conditioning in office buildings, passing more common-area maintenance charges onto tenants and fine-tuning their portfolios by weeding out non-performing properties, deBree said.

"All REITs are trying to figure out how they can continue to grow, but not at the rates over the last 18 to 24 months," he said.

While many companies rely on acquisitions or internal growth, Kilroy Realty Corp. is taking a different approach development.

Kilroy has about $600 million in projects in various stages of planning and construction encompassing 4.5 million square feet.

"There's no other REIT in Southern California that has the development pipeline Kilroy has," said John B. Kilroy Jr., the trust's chief executive. He said the various projects under way will lead to higher earnings next year.

Those include campus-style office projects in West L.A., Burbank, Calabasas and Long Beach, industrial projects in Orange County and office projects in Northern San Diego.

While the company's stock is off slightly it fell from about $29 in January to $25 now Kilroy takes some comfort in the fact that it has slipped less than the competition. As for new property purchases, Kilroy plans another $100 million in acquisitions by the end of the year less than half the $220 million in acquisitions completed during the first two quarters of 1998.

"We're very selective in what we're acquiring now," Kilroy said.

Not all REITs are being hit so hard. Pasadena-based Alexandria Real Estate Equities Inc. actually has seen its share price rise almost 50 percent over the past 12 months, going from about $22 to $30. Still, the share price is down slightly from its $32 high at the beginning of the year.

Analysts attribute such relative strength to the fact that Alexandria is a niche player, specializing in biotech properties and laboratories, and has that market to itself.

Similarly, the Macerich Co., which concentrates on shopping malls, was closer to its 52-week high than its low last week. Arthur Coppola, the company's president and chief executive, said regional mall REITs are performing better than those in other sectors. That's because regional malls are not overbuilding, sales and occupancy levels are strong and bankruptcies of small stores are few, he said.

"Most view the regional mall area as the most safe and solid to put money," he said.

Another specialty REIT Santa Monica-based National Golf Properties hasn't fared as well. The stock had fallen to $30 at the end of June from $34.75 the year before. Two other golf REITs have formed in the past year, providing new competition, and golf course prices have risen, said James Wilson, managing director of equity research at Jefferies & Co.

"National Golf is still an attractive business and well run, but growth prospects are not as good as they were a couple of years ago," Wilson said.

G & L; Realty Corp. a Beverly Hills-based health care REIT is relatively small, so the stock tends to fluctuate more. But G & L;, like Kilroy, is focusing on development, with five sites under construction, said CEO Dan Gottlieb.

Public Storage Inc. whose stock, at $28 a share, was down less than a dollar from the beginning of 1998 has been highly profitable overall. But it had continuing losses generated by its pickup and delivery business, in which the company drops off a crate to the customer, who loads it up, then picks up the crate and stores it in a central warehouse. It will take several more quarters before that division is profitable, analysts said.

Other contributing factors hurting REIT prices include the Asian financial crisis; concerns about overbuilding; misperceptions about legislation pending in Congress; and the fact that some "momentum investors" have shifted money into the more high-flying S & P; 500 stocks.

"It started months ago and built on itself," Silvers said. "At some point, investors will wake up and realize what bargains there are."

While REIT prices are down, some investors still view the sector as a good defensive play, especially if the rest of the market proves to be overvalued, deBree said.

Also, real estate is a long-term investment, whereas Wall Street is often focused on the short term.

"Are we late in the cycle and going into a down trend, or are there exceptional bargains buyers should jump on?" Feinstein asked. "Both."

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