After posting eight consecutive quarters of negative returns, REITs have become attractive again to some pension funds.
In December and January there was a flurry of buying, according to industry experts. "A number of investors began to recognize that the best companies are extraordinarily cheap. If they want to commit to real estate, they can buy it cheaper on Wall Street than on Main Street," said Fred Carr, a principal at the Boston-based research firm Penobscot Group Inc.
In addition, the sector enjoyed what some industry pundits called a "Buffett bounce." In December, a wallet owned by billionaire investor Warren Buffett was auctioned off at a fund-raiser. The wallet, which went for $210,000, contained a stock tip.
The well-publicized tip was to buy First Industrial Realty Trust Inc., Chicago. The news caused the entire real estate investment trust sector to rise briefly, while First Industrial shot up to close at $27.50 Dec. 20, from $25.75 at the previous trading session. Trading volume jumped to 865,700 shares, compared to a normal day when fewer than 100,000 shares change hands.
Guy Jaquier, senior investment officer at the $171.5 billion California Public Employees' Retirement System, Sacramento, who oversees the system's $8 billion real estate portfolio, was one of those who took advantage of the low REIT prices and scooped up $60 million worth in early December. "I saw it as a value play," he said in an interview. "When you can buy quality real estate for 80 cents on the dollar, you should do it. On the other hand, even though REITs have compelling values, their performance has been so bad, it takes a real contrarian to buy them at this time."
The retirement fund owned $550 million in REITs as of Dec. 31.
Retail interest
CalPERS is particularly interested in the retail sector, said Mr. Jaquier, although the system had focused more on apartment REITs in June because of a concern retail investments might not do well during the holiday sales season. "But bricks and mortar retailers did do well in December, and I think their prospects are good. E-commerce will certainly have a role, but shopping malls will continue to be important, too." CalPERS invests in office, industrial, retail and apartment REITs, Mr. Jaquier said. It does not invest in hotel, prison or storage REITs.
At General Motors Investment Management Corp., New York, which invests for the $91 billion General Motors Corp. pension trusts, the appealing prices have spurred increased buying.
Tom Dobrowski, managing director real estate and alternative investments, said he has been adding selectively to the nearly $1 billion REIT portfolio in the past several months.
"We're in the market all the time," Mr. Dobrowski said. He's most bullish on the apartment and office sectors.
The Public Employees Retirement System of Ohio, Columbus, also has taken advantage of low REIT prices. "We see this as a great opportunity," said Mary Beth Shanahan, who runs the $55 billion system's $5.5 billion real estate investments. "Everything is beaten up, so all sectors have an upside," she said. The system doesn't comment on current activity, but sources said Ohio bought $400 million worth of REITs in December. As of Dec. 31, Ohio owned in excess of $1 billion in REITs, said Ms. Shanahan. According to Pensions & Investments data, the Ohio system owned $1.4 billion in REITs as of Sept. 30.
A good time to move
William K. Morrill, chief executive officer at LaSalle Investment Management (Securities), Chicago, said that in the last half of 1999 LaSalle picked up $250 million to $300 million in new REIT business. It added $100 million from mid-December to mid-January. The firm manages $3 billion in REITs.
"As investors cashed in on their technology profits, they began to look at sectors that did poorly but that had good fundamentals. So it was a good time to move into REITs," he said.
The $57 billion State Teachers Retirement System of Ohio, Columbus, plans to continue buying REITs until it reaches its target allocation of 10% of the $5.4 billion real estate portfolio, said Herbert Dyer, executive director. It currently holds $385 million in REITs, according to Mr. Dyer.
"Some people have been worried about the decline (in prices), but we're comfortable with our portfolio. We use them to balance the real estate we can't own directly because it's too small or too difficult to manage. So we get that exposure through REITs," he said.
Not everyone is so upbeat about REITs, however. Walter Koziol, director of investments for the $14 billion Illinois Municipal Retirement Fund, Oakbrook, said the pension fund has not viewed the downturn in REIT prices as an opportunity.
"The sector hasn't recovered and we don't expect it to in the near term. So we're not doing anything about our REITs. We're just standing pat," he said.
Illinois Municipal owns about $94 million in a portfolio managed by Clarion/CRA Securities, Wayne, Pa., plus another $126 million in private REIT investments.
Penobscot's Mr. Carr observed that despite the bounce resulting from Mr. Buffett's interest, he hasn't been the kind of long-term influence the industry needs. "After the announcement of his buys, for two days people jump in and buy, but then they get bored and sell and the sector drops again," he said.
Long-term view
Frank Blaschka, principal at The Townsend Group, Cleveland, noted that investors need to take a long-term view. "This year REITs should produce a dividend of 7% to 8% plus earnings growth of 6% to 7%, which could add up to returns in the midteens, which is pretty compelling. But if they're out of favor or if the stock market goes down, REITs will go down with it."
Many of the pension funds holding large REIT allocations have been sitting on the sidelines for the past year, neither adding to nor subtracting from their holdings. They include the $28.1 billion Public Employees Retirement Association of Colorado, Denver, which owned $338 million in REITs as of Sept. 30, according to P&I data; and the $51 billion State of Michigan Department of Treasury Bureau of Investments, Lansing, with a $350 million portfolio of REITs as of Dec. 31, according to Deputy Director Roy Pentilla.
"Anyone who bought REITs a year ago would be down, and would probably want to see some kind of momentum before buying again. Some of those funds with a large exposure to REITs took meaningful hits. It would be difficult for them to buy and try to average down," said one pension fund REIT manager, who asked not to be identified.
But some pension funds without any exposure to REITs have begun dipping their toes in the water for the first time. Ted Bigman, principal at Morgan Stanley Dean Witter, New York, said his firm raised more than $500 million in REITs in 1999, mostly from new allocations.
The RREEF Funds, Chicago, also has been chalking up new REIT money, particularly since Jan. 1, said Kim Redding, principal. "Since the first of the year, we took in $75 million in REIT money. One client added $25 million to an allocation, while two other funds each invested $25 million with us. One of the funds invested $100 million in the REIT market for the first time."
