STOCKS/23 inches/1stjc/mark2nd

By BENJAMIN MARK COLE

Senior Reporter

With the stock market choppy on the bear side, and investors looking for more-secure returns, what’s the picture now for real estate investment trusts?

Fans of publicly traded REITs say they offer superior yields and stability in the current see-saw market, but others are dubious about what they see as REITs’ Achilles heel the market cap on most publicly traded REITs far exceeds the underlying value of real estate in the investment vehicle.

Investors, for now, are finding REITs attractive. “Investors have been flocking to REITs as a defense mechanism against an increasingly volatile market,” concludes a report from PaineWebber, the New York-based securities brokerage.

“The REITs are an interesting play right now,” said Russ Belinsky, managing director at Chanin & Co., a Westside brokerage, who likes to buy distressed REITs. “The better ones offer the best of both worlds good yields, plus the potential for appreciation.”

For investors, one appealing feature of REITS is that they offer, in general, higher dividends than run-of-the-mill stocks.

“You are talking about a universe that include many New York Stock Exchange-listed stocks, with dividends in the 7 to 9 percent range,” said Scott Wendalin, managing director in the West Los Angeles offices Sutro & Co. Inc., the brokerage house.

In contrast, the average S & P; 500 stock pays a dividend of about 2 percent.

“The attraction for the investor is yield, pure and simple,” said John Merriman, managing director at Dabney/Resnick/Imperial LLC, the Beverly Hills-based brokerage.

Merriman discounts talk of REIT appreciation. “If you really think property, say, in the Pacific Northwest is going to appreciate, you ought to buy a house up there,” he said.

Typically, a REIT invests in a set of properties, sometimes diversified, and sometimes with a unifying theme, such as better-quality office buildings in central business districts, or shopping malls in the Northeast.

Drawing upon rental income, REITs flow-through cash to investors, in the form of dividends. Under the federal tax code, REIT income passed on to investors is not subject to the corporate income tax, another benefit.

REITs have traded up with the bull market of the last several years. From January 1996 through the end of March, REIT stocks, as a group, were up nearly 40 percent, and slightly outperformed the S & P; 500, a broad measure of the overall stock market, according to a recent report issued by PaineWebber.

Four local REITs, which have gone public in recent years, have done reasonably well on the Big Board, reflective of the entire group.

For example, the Beverly Hills-based Arden Realty Group Inc. had its initial public offering last October, at $20 a share. Last week, it traded in the $26-a-share range.

The four local REITs have lost, on average, about 10 percent since Feb. 28. But in the case of Santa Monica-based Macerich Cos., the loss has been just a few cents on a trading price above $27 a share.

Overall, the stock market is off about 7.5 percent, based upon the Dow Jones Industrial Average.

For all of the positives, eyebrows have been raised among some Southern California investors and money managers about the trading ranges on many publicly traded REITs.

A recent PaineWebber study found that, as a group, office building REITs were trading for 62 percent above their net asset value the market value of the buildings, minus debt.

A joke even circulates among some Los Angeles real estate professionals that the thing to do is buy 10 office buildings, and then package the properties into a REIT for sale on Wall Street thus capturing the 62 percent spread between the cost of the buildings and the trading price on the Big Board.

“That’s a great idea. If you’ve got the money, let’s do it,” said Belinsky.

Some larger investors actually cite the spread between the stock market value of REITs, and the underlying value of the assets, as a reason they are more comfortable just buying buildings outright.

“As a pension fund, we have very long-term horizons. We don’t necessarily need the liquidity of the stock market and I prefer to buy an office building for a lower price, rather than a higher price,” said Ken Shaffer, chief investment officer for the Pasadena-based Los Angeles County Employees Retirement Association, the $20 billion-in-assets county employee pension fund.

Indeed, the spread between the stock market value of REITs and the underlying assets is so great that Shaffer is contemplating selling off his pension fund property holdings into a REIT. Thus, Shaffer would group the office buildings or other properties owned by LACERA, form a REIT, and sell them to the public.

Other analysts warn that investors should check a REIT’s liabilities debt structure before plunging in. A rise in interest rates will boost REIT costs, if the REIT has adjustable rate financing in place.

“How have they structured their borrowings. That’s what I would look at,” said Jeff Rollert, managing director with Pasadena-based ALM Advisers Inc., a bond shop. “A rise in interest rates would mean less money down at the bottom line.”

But one REIT executive said that exposure to interest rate upswings can be limited, and, besides that, REITs offer stability while the stock market gyrates.

“Only a portion of our debt is variable – more than 50 percent is fixed-rate,” said Victor Coleman, president and chief operating officer of Arden Realty. “Even if interest rates go up 200 basis points, it will won’t affect us much.”