As another REIT craze sweeps Wall Street, real estate developers are rushing out dozens of new real estate investment trusts.
But investors who are flocking to these stocks for their high current yields--dividends divided by share price--have short memories. Similar REIT booms in the 1970s and 1980s ended badly, as many companies went under.
A look at four local REITs reveals some of the inherent risks.
The quartet is LTC Properties Inc., a fast-growing Oxnard trust that invests in nursing homes; Storage Equities Inc., part of a Byzantine empire of dozens of REITs and limited partnerships fielded by Glendale-based warehouse syndicator Public Storage; Medical Properties, a struggling Encino company that owns a hospital and other medical facilities, and Mortgage and Realty Trust, a commercial real estate lender that is also financially troubled, with dual headquarters in Burbank and Elkin, Pa.
LTC Properties is the only local REIT that rates a “buy” recommendation from Jon Fosheim, a principal in Green Street Advisors, a Newport Beach firm that analyzes REIT investments for pension funds and other institutional investors.
“LTC is only a year old,” Fosheim said. “It still has to deliver on a lot of promises, but the management has done a good job so far. The others are not really deemed to be of institutional quality.”
REITs own and operate real estate properties or may solely make mortgages. Because REITs pass most of their earnings through to shareholders, they theoretically provide investors more income compared with most other stocks.
“Unfortunately, the only thing many people look at when they buy a REIT is the yield,” said Michael Oliver, president of PRA Securities Advisors, a Chicago-based investment firm. There have been classic cases, he added, when investors have bought a REIT with a high yield “only to see the yield go higher and then the trust go bust.”
To be sure, the quartet of local REITs is a tiny sample of the nearly 200 real estate trusts that are listed on the major stock exchanges.
In the current new-issue boom, the number of REIT stocks is mushrooming. More than $5 billion of new REITs has come to market so far this year, according to Securities Data Co., a New York research firm.
Billionaire investor David Murdock, chairman of Westlake Village-based Dole Food Co., could be the latest major real estate developer to jump into the REIT market.
Earlier this summer, Murdock’s closely held North Carolina holding company, Atlantic American Properties Inc., said it agreed to buy more than $200 million of office buildings in four states from Sun Co. Inc. The Philadelphia oil and gas company markets its products under the brands Sunoco and Atlantic brands.
Murdock reportedly is interested in someday packaging $1 billion of diversified real estate into the nation’s largest property-owning REIT. If he pulls it off, such a company would be nearly twice the size of New Plan Realty Trust, currently the largest property REIT, with about $530 million of assets.
As for LTC, it was formed last August in a $142-million stock and convertible debt offering, and has invested in 10- to 12-year mortgage loans to partnerships that own and lease nursing homes in 16 states. In July, LTC raised an additional $75 million by selling participations in those mortgages to institutional investors.
The current REIT craze also worries LTC Chairman Andre C. Dimitriadis. “When I see too much of something, I worry about what can go wrong,” he said. “People ought to be careful when they select a REIT to make sure the properties it owns or lends to are not overpriced.” Initially offered at $10 a share, LTC’s stock has an 8% yield at its current share price of about $13. The stock’s total return this year through June 30 was 32%, according to the National Assn. of Real Estate Investment Trusts, a Washington, D.C.,-based trade group.
Storage Equities, yielding 6.3% at a current price of about $13 a share, produced an even more impressive 36% total return--which includes any rise in the stock price plus dividends--for the first half of this year.
Even so, a number of analysts are critical of Storage Equities’ management because of its apparent conflicts of interest.
Storage Equities, which also owns office parks, was formed in 1980 by Public Storage. Public Storage is controlled by B. Wayne Hughes Sr., who is the company’s chairman and co-founder. However, Hughes is also chief executive of Storage Equities. And Hughes controls or is involved in four other affiliated companies that receive fees for advising Storage Equities on investments and managing its properties.
In 1990 and 1991, Storage Equities also paid nearly $10 million to Hughes (or companies he controls) for the rights to cash distributions from five Public Storage partnerships.
Although all of these relationships are described in documents that various Public Storage entities have filed with the Securities and Exchange Commission, the web is hard to untangle.
“The disclosure (by Storage Equities) hasn’t been as good as we’d like,” said Fosheim. “When you have related party deals, you usually get a stock price that is artificially low because of insiders.”
Hughes declined to comment.
Medical Properties hasn’t paid a dividend for two years. The company was started in 1987 by Nu-Med Inc., an Encino hospital operator. Nu-Med sold to the new REIT a hospital in La Mirada and an adjacent medical office building. Nu-Med then leased those facilities. Medical Properties later became financially troubled and was forced to close the hospital and file for Chapter 11 bankruptcy protection.
Earlier this month, Medical Properties said it lost $519,000 in its quarter ended June 30, compared to a $729,000 loss a year earlier. The REIT’s revenue climbed 66% to $303,000 from $182,000. However, Medical Properties said it could lose the La Mirada facilities and its other major holding, a medical center in Oregon, to foreclosure because it has defaulted on its debt.
Medical Properties’ shares were delisted by the American Stock Exchange in June because stockholders’ equity fell below the exchange’s required minimum.
Mortgage and Realty, which also eliminated its dividend some time ago, went into Chapter 11 in 1990. But even though it emerged from bankruptcy a year later, the company has been struggling ever since. The trust announced earlier this month that its creditors had agreed in principal to a $290-million debt restructuring.
Filing Chapter 11 gives a company protection from creditors while it attempts to reorganize.
Mortgage and Realty’s net loss in the three months that ended June 30 was $17.5 million, down from a $30.6-million loss a year earlier. But its revenue in the latest quarter fell to $9.6 million from $10.3 million in 1992.