The New REIT Choices

In these days of stagnant stock prices and moribund real estate markets, many people might be surprised to learn that real estate investment trusts, those stock-like investments that own real estate, have been one of the best performers in 2010. But at least one group has noticed the trend: real estate executives, who are flooding the stock market with a slew of new REITs.

Almost 20 publicly traded REITs could debut in 2010 (seven had already debuted by the end of August), according to real estate–research firm Dealogic, a big increase from the nine REIT initial public offerings in 2009. The REITs own everything from hotels in Massachusetts to glass office towers in Texas. Investors so far have been receptive to existing REITs this year; as a group, they’re up 12 percent, with residential REITs up almost 25 percent (the broader stock market is down 2 percent). Even with the still floundering market for most IPOs, REIT executives are betting that by going public now they can raise cash to pay down their own debt or to gobble up properties at distressed prices, says Michael Dubis, a financial planner who also teaches a course on REITs at the University of Wisconsin.

Of course, investing in any sort of real estate these days requires some faith that prices for offices and houses won’t start tanking again. Even in the flurry of new IPOs, some REITs have had to cut their offering prices to attract skeptical investors, says Nick Einhorn, a research analyst at the IPO-research firm Renaissance Capital. But some pros still see potential in REITs. The average REIT dividend payout is 4.5 percent, considerably higher than that of government bonds or money-market funds.

Some analysts say a few of the new commercial REITs show promise. One of the more highly regarded newcomers is Piedmont Office Realty Trust (PDM). The Johns Creek, Ga.–based firm owns 73 buildings, including Chicago’s Aon Center, the nation’s fifth-tallest building. Piedmont went public in February at $14.50 a share, and even though its shares have risen 27 percent, it still sports a high 6.9 percent dividend yield. The share price of smaller Hudson Pacific Properties (HPP) is down 4 percent since it debuted in June, but some analysts like it because of its unique properties: a collection of eight California office buildings and movie-production spots. The firm raised more than $200 million from its IPO and recently acquired another office building.