Technology and Real Estate & Retail

BEHIND THE NEWS: REIT run leaves analysts 'worried and optimistic'Ex-executive settles with SEC

January 31, 2005

Mall developer Simon Property Group Inc. and many of the nation's other top real estate investment trusts have earned investors huge returns since 2000, so huge that continued gains seem unlikely.

Or do they? That's the million-dollar question as investors close the book on 2004, one of the best years in the history of REITs. For the 12 months, Simon posted a total return of 47 percent, while REITs overall returned 31 percent.

It was the fifth straight year REITs outperformed the major stock indexes. During that span, REITs have posted an average annual return of 24 percent. The average annual return for Simon during the period was 32 percent.

Another big Indianapolis REIT, Duke Realty Corp., has rewarded investors as well. Shares in the industrial-and-office developer last year returned nearly 17 percent, bringing their five-year average return to nearly 20 percent.

What's the best move now? On the one hand, analysts say stocks in the sector may still have room to run. On the other, they say the lofty returns aren't sustainable and draw comparisons with tech stocks before their 2000 crash.

"REIT investors may mistakenly believe that only technology bubbles are the ones that burst," cautioned Tony Howard, an analyst with Hilliard Lyons, in a report this month.

In another report, David Fick, an analyst with Legg Mason in Baltimore, added: "We do admit to being worried and optimistic at the same time."

Fick continues on a bullish note: "REITs are either crazy expensive, or most analysts and investors missed something big. We think we missed something."

Indeed, analysts say they've seen a sea change the past decade in investor enthusiasm for the once-staid and littleunderstood sector. REITs are like other public companies except that they're exempt from federal income taxes. In return, they must distribute most of their earnings as dividends, which historically made them attractive for retirees and other dividend-oriented investors.

Helping to broaden investor interest in recent years have been low interest rates, which reduced developers' borrowing costs and also thinned the options available to income-hungry investors.

Just three years ago, the Standard & Poor's 500-stock index included no REITs. Today, it has Simon and two others. The number of mutual funds specializing in real estate stocks has proliferated to more than 270, providing fresh capital for REITs to expand.

And unlike many of the once-highflying tech stocks, top REITs have strong fundamentals. Take Simon, for instance. It's raising rents an average of 25 percent when it re-leases mall space, notes Legg Mason's Fick.

"These results reinforce our view that Simon has the ability to drive rents at a pace far greater than the increases in store sales because it controls more 'must-have' retail space than any of the other mall REITs," Fick said in a report.

"Put simply, retailers are willing to pay up to be in Simon's malls-and at a premium not found in other mall portfolios."

The U.S. Securities and Exchange Commission has agreed to accept a $40,000 settlement from one of the three former Analytical Surveys Inc. executives charged with participating in a broad financial fraud.

Brian J. Yates was serving as controller of the company in 1999 when it used accounting trickery to report an annual profit of $11.4 million, 300 percent higher than it should have been, the SEC charged when it filed suit against the three in October 2003.

ASI, a maker of computerized maps, was headquartered in Indianapolis at the time. It has since moved to San Antonio and brought in new managers, who are attempting to nurse it back to financial health.

The SEC's suit remains pending against the other defendants, former CEO Sidney Corder and former Chief Operations Officer Randal Sage. Court papers charge Corder fostered a makeyour-numbers-at-all-costs culture and "often shouted, threw documents or threatened jobs."

At one point during 1999, according to court papers, Corder learned that revenue was significantly short of expectations and assigned Sage and Yates to "work out the problem."

"Within 24 hours," the suit says, "Sage and Yates told Corder that ASI would meet its commitment after all. They did not explain how this would happen, and Corder did not ask."

Kara Washington, a senior attorney in the SEC's Chicago office, said the agency does not believe Yates has the financial wherewithal to make a larger settlement. The pact calls for him to make an initial $10,000 payment, with the remainder due in quarterly installments over three years. It also bars him from serving as an officer or director of a public company for five years.

"We're satisfied with the terms, given his conduct and financial circumstances," Washington said.

Yates' attorney, Norman Mueller, could not be reached for comment.
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