REITs part of healthy portfolio, advisers say

Investing in real estate doesn't always mean stomping through grassy lots or renovating old buildings.

Real Estate Investment Trusts, or REITs, have become a popular way to join a pool of investors who earn money on portfolios of buildings most of the investors will never see.

"It's a way of investing in real estate without having to fix the toilet," said Jim Eagleton, vice president of investments at A.G. Edwards & Sons Inc. in Tulsa.

Although the dividends paid by REITs have gone up along with the fortunes of the real estate market as a whole, local investors caution that the payouts already may have passed their peak.

"Any time a particular asset class has the astronomical rise REITs have had, it's a good idea to be cautious," said Jake Dollarhide, chief executive of Longbow Asset Management Co.

Although REITs are tied to portfolios of regional, national or worldwide real estate properties, in some aspects they're like a mirror image of the stock market. Investors in any given REIT are shareholders, and the price of each trust's shares can go up or down based on the amount of enthusiasm people have for buying into the trust.

So, to some extent, REIT investors hope to make money by buying into the trust when its value is low and selling when it's high.

"Investors have the expectation that the share price will go up over time," Eagleton said.

But the true appeal of REITs are the dividends they pay. By law, at least 90 percent of the income from renting as well as selling properties must go to a REIT's shareholders.

The amount of income REITs pay out has remained high over the past five years. A.G. Edwards' index of 120 REIT companies shows the aver age yield moved above 9 percent of stock value through 2001, although it has since dropped to 6 percent as REIT stock prices have risen.

Dollarhide said the main factors in real estate's rising status were the demise of the tech bubble and falling interest rates.

"The tech boom implosion occurred, and high-powered stocks were down 20 percent," he said. "Billions of dollars of paper profits vanished overnight."

As people lose their taste for stocks, they often move their money into low-risk dividend payers, such as bonds or CDs, Eagleton said. But these investments suffer when interest rates fall as they did at the start of the decade.

The real estate market, on the other hand, benefits from low interest rates.

"When the banks wanted to renew an 8 percent CD at 2 percent, they (investors) turned to REITs," Eagleton said.

REITs have performed well over the past five years, though industry watchers caution that their values have started to drop. Jim Brock, senior financial adviser of Brock & Associates, a division of Amerprise Financial Services in Tulsa, feels the peak time for REITs has passed.

"I'd be hesitant to get into them, because when I look at the historic performance, it looks so good," he said. "People would be coming in at the end of the cycle."

The biggest threat to REITs is rising interest rates, which will cause bonds and CDs to become more attractive, Eagleton said. If a large number of people leave REITs, their share prices may go down.

The local investment advisers said interest in REITs has cooled significantly as yields decline and more people worry about the future of real estate.

"Most people are reserved about them," Brock said.

Dollarhide also expects the dividends to fluctuate, especially if vacancies in commercial buildings increase.

"People who are retired shouldn't depend on a certain dividend, because dividends change as prices change," he said.

However, no one expects REITs to crash entirely. Eagleton said they will remain a good choice for investors who want to combine low risk with a regular income, provided they hold onto their investment for the long term.

Local investors said REITs can be a healthy part of most investment mixes, provided investors put 2 percent to 5 percent of their portfolios in them.

Brock said that most investment disasters occur not because certain investments are inherently bad, but because people fail to diversify.

"The biggest problem people can cause themselves is making big bets in one area or another," he said.