Real Estate & Retail

Real estate investment trusts buck slump predictions: REITs outperforming major stock market indexes so far this year; Simon, Duke and Kite doing well locally

August 15, 2005

For the second quarter, the National Association of Real Estate Investment Trusts Composite Index posted a return of 13.52 percent, boosting its year-to-date return to 4.9 percent.

For the quarter, that's more than three times any of the other equity indicators, the highest of which, the Russell 2000, posted a 4.32-percent return. The Russell 2000 also has the second-highest year-todate returns at 5 percent.

Real estate investment trusts are due for a downturn, according to many stock analysts, but they've bucked predictions so far this year.

A composite index of REITs has outperformed almost every other market indicator this year, including the Dow Jones industrials, the S&P 500, the Russell 2000 and NASDAQ composite, which are all in

REITs (pronounced "reets") are a $350 billion industry of companies that own shopping centers, office and industrial complexes and residential properties, including apartments, condominiums and retirement communities.

Several Indianapolis-based companies, Simon Property Group, Duke Realty Corp. and Kite Realty Group, are among REITs that comprise the NAREIT Composite Index.

The index includes companies that own and operate commercial real estate properties as well as those that specialize in financing them.

A proven record of strong performance makes REITs a no-brainer when it comes to diversified investment portfolios, said Abigail F. McCarthy, director of industry and information statistics at NAREIT headquarters in Washington, D.C.

Over 30 years, REITs have provided a 13.5-percent annual return, she said. The next closest is the S&P 500 at 12.78 percent, followed by the NASDAQ composite at 11.51 percent.

"I think [the numbers] are starting to resonate with investors," McCarthy said.

If there are furrowed foreheads about REIT investments, it comes from analysts who worry the stocks are overvalued.

"We currently believe the REITs may deliver flat-to-down-10-percent total returns over the net 12 months, implying multiple contractions due to unprecedented valuations," said Jonathan Litt, research analyst at Citigroup Smith Barney in New York City.

Litt made his comments in recent reports about Simon and Duke.

"However, acknowledging that investors' appetite for real estate continues to be strong, the REITs could deliver positive total returns in the next 12 months, suggesting multiple expansion," Litt wrote.

"To reconcile these two opposing views, we raised our risk rating to high or kept them in some cases as speculative to reflect the rich valuations and the susceptibility of the group to a correction.

"We have high or speculative risk ratings on all of the REITs in our coverage universe. While we do not see an imminent catalyst to derail the sector's continued rally, several factors could cause the group to retreat, including higher interest rates, a broad equity market rally or a shock to the credit markets."

William Rocco, an analyst with Morningstar, told The Christian Science Monitor last month that the last time REITs had such a good run was in 1997, followed by two years of "poor performance. Investors shouldn't be fooled by sizzling REIT returns of recent years. Returns won't continue at the pace," he said.

Don't tell that to the top Indianapolis REITs, which are reporting good numbers.

Duke, the largest publicly traded mixed office-industrial company, posted second quarter net income of $40.3 million, up from $34.7 million in the second quarter of 2004.

Duke's funds from operations, or FFO, rose to $87.8 million in the second quarter, up from $86.7 million for the same quarter last year. Revenue for the second quarter was $228.9 million, up from $199 million.

Simon, the largest public real estate company in North America, posted $349.4 million in FFO for the second quarter 2005, up from $268.5 million for the same quarter in 2004.

Simon's net income available to common shareholders was $154.8 million in the quarter, compared with $70.7 million for the second quarter of 2004. Revenue for the second quarter was $756.26 million, up from $591.56 million.

Kite, which went public about a year ago, reported second quarter FFO of $8.1 million, up from $1.5 million in 2004.

Kite's net income for the second quarter was $1.7 million, up from a loss of $381,462 for the same quarter in 2004. Kite's total revenue for the second quarter was $22.74 million, up from $7.88 million in 2004.
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