Have I Got A Reit For You

YOUR BROKER MAY NEVER PITCH YOU on the beauty of a commodity boom, but chances are you'll be hearing about real-estate investment trusts. These so-called REITs are proliferating because real-estate companies can no longer raise cash from banks and insurance companies, which were badly burned by the last real-estate bust. Developers are turning themselves into REITs by issuing stock to the public. And investors are flocking to them. Buy REIT shares, which trade just like ordinary stocks, and you'll collect a healthy yield while participating in the industry's best deals, the brokers say.

Don't fall for this script too readily. Real estate is staging a comeback, but no industry has greater tendencies toward excess. ""We've already seen aquarium REITs, marina REITs, farmland REITs. You name it and somebody wants to make a REIT out of it,'' says Sam Hillers, an analyst for Alex. Brown & Sons. If you're shopping for a REIT, look for companies run by experienced real-estate pros who won't overpay for a property. One favorite among analysts is Merry Land & Investment Co., which has been successfully buying apartment buildings in Georgia, North Carolina and South Carolina since 1981, with exceptional results. The company has generated an average 24 percent return for the last 10 years. A good way to judge a REIT's discipline is to watch how it spends its cash. Many REITs raise a bundle by going public and hurry to spend it -- whether the price is right or not. Merry Land finds the property first, borrows to buy it and then raises cash from the public to pay off the debt.

One of the most important questions to ask: do the REIT managers want to see the price of their shares go up as much as shareholders do? The answer is yes if managers are actually shareholders. Merry Land's own 12.5 percent of the company, more than twice as much as the average REIT's managers.

Think hard about a REIT's regional focus, too. Merry Land operates in landlord heaven -- the robust Southeast, where it can raise rents yearly. But a location that's not overtly desirable has its attractions, too. Associated Estates Realty Corp., for example, owns apartments in Cleveland. That's why Associated ""doesn't get the valuation it deserves,'' says Hillers. At $22.68, the stock is a bargain among REITs and is yielding a rich 7.1 percent, more than 2 percentage points higher than the payout on a one-year certificate of deposit.

The smartest way to find quality REITs amid the boom may be to hand the job over to a mutual-fund manager. There are now more than a dozen REIT funds to choose from, but, again, experienced managers have the shrewdest eye. Barry Greenfield is the veteran behind Fidelity Real Estate Investment, which has an excellent 14.1 percent average five-year return. The fund is currently edging into industrial and hotel REITs, which should do well in a rebounding economy. Marty Cohen hasn't been running Cohen & Steers Realty for quite as long, but he's every bit as adroit. While the S&P 500 dropped 4.4 percent in the first quarter, Cohen's fund climbed 6 percent.

One new kid on the block worth considering: CGM Realty Fund. It's being run by Ken Heebner, no slouch when it comes to spotting value -- and no stranger to REITs either. More than a quarter of CGM Mutual, one of two other top-rated funds he manages, is stowed in REITs. And nary an aquarium, marina or highway-median-strip REIT is among them.