Key to Real Estate Stocks Is Know the Neighborhood

Allen Parker earned a 55% return in real estate-related stocks last year, when he had just $10 million to work with. This year, as word has gotten out about his United Services Real Estate mutual fund, investors have quickly thrown another $10 million at Parker.

So far, he's made the right decisions with those new dollars: The San Antonio-based fund is up 11% year to date, the best performance among the six mutual funds that specialize in real estate stocks, according to fund-tracker Lipper Analytical. In contrast, the average general stock fund is up just 3% this year.

Investing in specialty funds such as Parker's isn't for everyone. Though his fund's 55% gain in 1991 looks great, it followed a 20% plunge in 1990, when real estate-related stocks such as home builders, lenders and property trusts were crushed by the recession.

What's more, though Parker's fund is no-load (no sales charge), its annual operating expenses are high: 2.7% of assets, about double the fees of the typical fund. So Parker must produce big returns to make it worth his shareholders' while.

The big question now: Is the real estate industry's 1992 rebound already reflected in the stocks' prices--or is there money yet to be made?

Parker says it's time to take a very selective approach toward the industry. Forget savings and loan stocks and shares of most mortgage brokers, he says--there are better opportunities elsewhere. Some home builders remain alluring, because Parker expects their earnings to explode later this year. He owns such names as Presley Cos. in California and retirement community developer Del Webb Corp. Meanwhile, he's still excited about many real estate investment trusts, or REITs.

Indeed, REITs make up the bulk of Parker's portfolio. A REIT essentially is a big shareholder-owned landlord. A REIT can own apartments, commercial properties and/or medical buildings in a specific region or across the country. The rent or mortgage payments from the properties' tenants are passed through to the REIT shareholders. Generally, that makes these great income stocks, with high dividend yields.

In 1990, when real estate markets began to crack, many REIT shares plunged as investors feared that their properties would go belly-up, jeopardizing the dividends. Some REITs did see trouble, but most have thrived, in large part because they often own premier properties. When investors recognized that last year, the stocks rebounded.

Today, many REITs still boast annual dividend yields of 8% or more. Parker, who figures interest rates will come down further this year, sees more investors being drawn to REIT yields.

"I look for property-specific or region-specific plays," he says. For example, he believes that properties along the U.S.-Mexico border are excellent long-term investments because of the traffic between the two countries. So one of his REITs is Burnham Pacific Properties, a major shopping-center owner in San Diego County.

Parker's fund also holds many health care REITs, which own hospitals and other medical properties. Some investors are edgy about these REITs because of worries about potential cuts in health care spending down the road. On Thursday, the American Health Properties REIT plunged $2.50 to $29.50 after the Denver-based firm said it may allow one of its 24 properties--a psychiatric hospital in Katonah, N.Y.--to defer interest payments because of a drop in patient count.

American Health's president, Robert Diener, says investors badly overreacted. "We could write that property off completely and our dividend would be safe," he contends. "There are no other problem properties in the portfolio." Parker believes that: He says he bought more American Health shares Thursday as they tumbled.

While Parker admits that there is good reason to be suspicious about REITs that own hospitals in an era of deep public anger over health care costs, he's betting that "the strong health care providers will survive any industry shakeout."

As with anything else in investing, he says, if you own the strongest REITs with the best-run properties--which Parker believes he does--your chances of a healthy long-term payoff increase substantially.

The Dow's Debt to Disney: Thank Walt Disney Co. for waiting until now to split its stock four-for-one, says Salomon Bros. analyst David Shulman: If the split had taken place last year, the performance of the Dow Jones industrial average so far this year might have been dismal.

Disney is only one of 30 stocks in the Dow. But as the Dow is computed each day, the price changes of its highest-priced stocks affect it much more than the changes of its lowest-priced stocks. And because Disney is the highest-priced of all Dow stocks now--at $151.75 a share--its gyrations have the greatest impact on the Dow of any stock in the index.

Shulman argues that the Dow is only higher this year because Disney has skyrocketed by $37.25 a share, and now accounts for 8.1% of the Dow index. After the stock split takes place, on April 20, the lower-priced Disney shares will account for just 2.2% of the Dow. If Disney's stock had begun the year making up that small share of the index, any Disney rally would have had little effect on the Dow, and the index itself--hurt by its many lagging issues--"would just be treading water" instead of hitting new highs, Shulman argues.

Real Estate Plays

Here are some of the stocks in the United Services Real Estate mutual fund, the top-performing fund in its category last year and so far this year. "Div. yield" is a stock's annualized dividend yield.

Thurs. Pct. change Div. Stock close year to date yield Presley Cos. $16 +52% nil Del Webb Corp. 19 7/8 +21% 1.0% Ryland Group 27 3/8 +18% 2.2% Burnham Pacific Properties REIT 16 7/8 +13% 8.1% Health Care REIT 21 1/2 +3% 8.5% Universal Health Realty REIT 18 1/4 +1% 8.7% FNMA 62 7/8 -9% 1.9% American Health Properties REIT 29 1/2 -14% 9.1% S&P; 500 index 413.90 -1% 2.9%

All stocks trade on NYSE except Health Care REIT (Amex)

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