After two years of double-digit losses, REIT stocks made a comeback in 2000 as investors fled flagging high-tech stocks for safer investments.

According to the National Association of Real Estate Investment Trusts, the sector returned 25.9%, their best performance since 1996. The association’s public equity 100 led the group with a 28.66% return, followed by equity REITs with 26.4%, and mortgage REITs with 15.96% — bouncing back from close to 50% declines from early 1998 to the fall of 1999.

David G. Shulman, who took over as Lehman Brothers’ head REIT analyst last January with bullish predictions, said three factors contributed to the sector’s resurgence in 2000.

First, real estate investment trust stocks were extraordinarily cheap a year ago, he said, and investors who held them did not want to sell with prices so low relative to underlying asset value. Second, earnings momentum for the trusts improved during the year; and third, the disturbance in the tech market drove many investors to value stocks.

“Investors fled out of technology into a whole array of safe havens, so value stocks in general did well,” he said. “Savings and loans worked, banks worked, utilities worked; there’s a whole array of stocks in the value universe that did well, and REITs are just one part of the big drama.”

Keith Pomroy, senior real estate analyst at SNL Securities, said that as the dot-com bubble deflated, investors realized they want to see income now rather than far in the future. REITs, he said, are one of the few categories of income stocks, many of which flourished in 2000.

Indeed, the SNL’s equity REIT index returned 25.9% last year, after a loss of 5.4% in 1999. Likewise thrifts such as Washington Mutual Inc. and Golden West Bancorp were up over 100% on the year.

But more important, Mr. Pomroy said, 2000 helped spur a gradual acceptance by the public of the REIT industry as an investment.

He said that for investors before 1990, real estate had been something for specialists and people in the know. Now, however, REITs are increasingly mainstream, he said.

“As time goes on and the industry avoids disaster and real estate continues to be a safe and sane alternative investment, REITs will become a part of investors’ portfolios,” he said. “It’s a great way to protect your capital and see it grow.”

That has not always been the reality. In the wake of the Russian debt crisis in 1998, REIT stocks got hammered. Despite last year’s performance, three-year returns for the National Association of Real Estate Investment Trusts’ total REIT index is actually down 1.5%, and mortgage REITs a dismal 18.16%. Investors harbored concerns that real estate development was overextended, leaving itself vulnerable to economic downturns.

And even before the 1998 liquidity crisis, the residential mortgage REITs were hurt by prepayments, as falling interest rates prompted a historic mortgage refinance boom.

Lesia Bates, vice president and senior analyst in Moody’s Investment Services real estate group, upgraded her rating on the sector in October but remains wary.

She moved from “negative” to “stable but cautious,” noting that real estate is cyclical and not without risk. Moreover, she said REITs will not be immune to the slowing economy. She acknowledged that the stocks had a banner year in 2000, but said it is not likely to be repeated.

“We’ve seen explosive growth that everyone has known is not sustainable, and REITs are not insulated from that,” she said. “So whenever you are moving into an environment where there are more cautionary pressures in the economy — such as weaker corporate earnings, waning consumer confidence — people are fearful of what lies ahead.”

Mr. Shulman, however, argues that unlike 1990, when excess in the real estate market greatly contributed to the recession, real estate will not be a factor if the economy has a severe downturn this year.

“If there is an economic recession, REITs will be a sideshow, unlike in 1990 where we were the main event,” he said. “A recession is not coming from real estate, it’s coming from excess capacity in other parts of the economy.”

And despite her cautions, Ms. Bates agreed that 2000 represents a watershed in that investors now recognize that REITs can be a safe investment.

“Given what has happened in the overall stock market, investors really started to view them as a good income play with some growth potential,” she said. “You’ve got good returns, good yields, a little higher risk than some more traditional corporates, but it’s a good haven for investment over the long term.”

Mr. Shulman said that though REIT stocks are obviously not as cheap as they were a year ago when he came to Lehman Brothers, he said he believes that they have not yet hit a ceiling.

“They are still trading below what we believe to be the private net-asset value,” he said. “So we think there is continued room for these stocks to go higher. That’s what we’ve been telling clients.”

Ms. Bates said that REITs have also inspired confidence across the board from lenders and investors by managed through the liquidity crisis in a very disciplined way.

“They not only scaled back some of their aggressive growth strategies, but really re-emphasized their focus on internal management to help boost revenues and in turn profitability,” she said.

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