Cincinnati's skyline exemplifies the growth of real estate investment trusts (REITs). About half of downtown's skyscrapers are by the trusts.
You or your neighbor could own a piece of one of those buildings in a 401(k), individual retirement account or stock portfolio. Owning a share of, say, Duke Realty Investments Inc. stock, means owning a piece of the 311 Elm, 312 Walnut, 312 Plum and 525 Vine buildings, among others.
''This is an asset class that has just exploded over the past few years,'' said Mark Roberts, managing partner of Bull Group Advisors in Mason. ''I use REITs as an alternative to bonds.''
REITs allow investors to invest in real estate without a lot of capital. Rather than buying a building, an investor can buy shares in a company that buys and manages property (or property mortgages). REIT popularity has ballooned during the past decade because real estate, in general, is booming and a 1986 tax law change significantly reduced the tax advantages of traditional real estate investments.
Thanks to publicly traded REITs, millions of Americans are dabbling in real estate these days. The public REIT capitalization shot to $140 billion by the end of 1997 from $9 billion in 1990, according to research by Gruntal & Co. LLC in New York. The growth opportunity in the REIT property ownership industry is strong, considering that REITs own only 7 percent of the total managed real estate nationwide.
With an average annual percentage yield of three-quarters to one percentage point higher than the average Treasury bond yield, REITs have become an attractive income and growth option for conservative investors.
The average total return on all REITs in 1997 was 20.49 percent, according to SNL Securities. Compared with the Standard & Poor's 500 Index's 1997 performance -- 33.37 percent -- REITs weighed in last year as a strong, if conservative, investment choice.
Congress created REITs with the Real Estate Investment Trust Act of 1960. The two types of REITs created in the act are equity, which owns and manages property, and mortgage, which is designed like a corporate bond to provide financing to developers and to hold mortgages that generate interest and principal.
Equity REITs have been more popular, controlling about 94 percent of the REIT market. These vehicles generate income through buying or developing new properties and collecting rent from tenants. Capital growth potential lies in rising property values, increasing rents and the sale of properties that the REIT owns.
Today, REITs can offer a mixed bag of properties or mortgages, or they can specialize in office, hotel, health care or industrial properties. Some operate within certain geographical areas, some are international.
To qualify with the Securities Exchange Commission as a publicly traded REIT, the trust must pass on at least 95 percent of its untaxed earnings to shareholders in dividends.
''REITs are a bit of a different animal. A REIT investor, typically, is someone who is looking for a higher-yielding, lower-risk investment. Someone looking for income,'' said Carolyn Baril, fund manager and equity research analyst for Cincinnati's Star Bank.
Ms. Baril manages about $57.5 million in REITs through Star's Stellar Fund and the Star Select REIT-Plus Fund.
Star has been in the REIT market for about 10 years. Ms. Baril has witnessed REIT industry growth, and she said she sees more growth ahead.
As a REIT fund manager, which operates like a mutual fund and holds stock in several REITs, Ms. Baril doesn't recommend investing in individual REITs.
''We do all of the digging for them,'' she said.
Evaluating REITs is harder because they don't have the long track record of traditional blue-chip equities. The portfolios of REITs also can change quickly, with the buying and selling of properties.
''For the small investor, I don't think it's a good idea to pick their own REITs. To get into the portfolio is too much work,'' said Norm Miller, director of University of Cincinnati's real estate program.
If a small investor wants to invest in a REIT, rather than a REIT fund, the most important criteria are management and market and geographical diversification.
When examining the management, look for leverage, Mr. Miller said. A conservative debt structure of no more than 40 percent to 50 percent of total assets.
''You should never invest in a REIT that is 90 percent leveraged off,'' he said, because you don't want them to be paying out all of their funds for operations.
Diversification -- this applies to individual REITs and REIT funds -- can shield the investment from the swings in the market. Look for REITs with a broad base of geographic and sector (hotel, office, industrial) investments.
''With any investment, the key thing is to be patient. Don't measure REIT investments on what happened last week -- that's crazy. If you go into REITs, it's for the long run,'' Mr. Miller said.
Publicly traded REITs are subject to market fluctuations and industry cycles just like any other equity investment, but downturns in the REIT market are easier to see coming because of the nature of the vehicle and the real estate market, Mr. Miller said.
''You're not going to see a 20 percent change in a year in a REIT,'' he said. Rents that make up the bulk of REIT revenues fluctuate little on an annual basis, and the mandatory 95 percent earnings payout required by law ensures that the yield will remain steady.
An overbuilt market is the sleeping dragon in the REIT industry.
Loose construction lending practices of the 1980s awoke that dragon and left many urban downtowns overbuilt epicenters of empty buildings. Lowered rents ultimately reduced REIT returns, dropping to a low of 3.03 percent in 1994, but the market has rebounded with a fury, hitting 35.71 percent in 1996, according to SNL Securities.
REIT returns dipped to 20.49 percent in 1997, a drop that Mr. Miller considers an acceptable adjustment to overvalued prices in 1996.
Tighter lending rules should keep overbuilding in check somewhat, but the real check for REITs is dividend payout. If the yield drops, shareholders become unhappy -- thus, it is in the best interest of the REIT to guard against overbuilding and acquisitions in saturated markets.
For now, overbuilding is a distant worry. The REIT market, riding the general economic boom, for the past two years has boasted higher than 20 percent returns, according to SNL.
New REIT funds are starting nationwide, like Cincinnati's Johnson Realty Fund, which Johnson Investment Council started with $2 million in assets Jan. 2. The mutual fund of REITs is up to $2.9 million this month.
Fred Brink, equity analyst Johnson Investment Council, is a co-portfolio managers for the REIT fund.
''We felt that REITs were a way to get real estate into people's portfolios, especially people who didn't have a huge amount of capital to go in and buy real estate,'' Mr. Brink said.
Now, even the small investor can be a part of the Johnson's portfolio diversification formula: stocks, bonds, cash and real estate.
With REIT investing, the small investor, can crest the hill on Interstate 75, look upon the Cincinnati skyline, point and say, ''That's my building -- well, part of it is, anyway.''
