Biggest REIT scandals

 REIT Biggest Scandals of the ’70s

Go-go real estate investment trusts stumbled through financial scandals in the mid-1970s but have begun to maneuver again. This time, however, they face competition from a brand new investment twist named Limited Partnership Income Syndicates.

Authorized by Congress in 1960 for small investors to benefit from real estate holdings previously available and then institutions, the 150 registered “REITs” of 1972 paid a report $600 million in dividends.

REITs pay no federal tax upon income or gains. With a growth record of nearly 30 % annually, money advisers of the go-go era touted them like a hot investment.

Along with respected managers, though, the glamorous business attracted inexperienced entrepreneurs. Capital was plowed recklessly into loans, rather than real estate. When the real estate market slumped in 1973, seriously leveraged REITs crashed, according to Larry Laws of Rockville’s CRI Inc. Two-thirds proceeded to go into bankruptcy or reorganization. The 69 left in 1976 mustered the meager $124 million in dividends that year. REITs were wreathed within ignominy.

But most bad managers and flighty money have already been exorcised, say industry observers. And during the latter half 10 years, REITs have posted steady gains. This year, the industry expects to pay for dividends of nearly $300 million, according to the National Association of Investment Trusts (NAREIT).

Chevy Chase-based Federal Realty Investment Believe in, for example, posted a 176 percent profit gain in the 3rd quarter just reported. With funds concentrated in shopping centers, Government earned $1. 6 million in the third quarter compared along with $569, 000 in the same period last year. In the very first nine months, income increased 114 percent to $4. 2 million from $2 million in the earlier year.

Improved results are due to higher income in believe in properties and interest income on short-term investments, explained Steven T. Guttman, president of Federal. “That means there is nothing extraordinary concerning the success, ” added Sheldon Noble, finance chief. “We’ll be making such gains regularly. ”

The industry now counts about 120 REITs representing an overall total of $7. 5 billion in assets, according to NAREIT. Along with companies like Federal recording dramatic gains, it may be time for that investor seeking fast-paced targets to reexamine REITs, suggested Stanley Burns, an analyst with Real Estate Research Corp.

“They are definitely creating a comeback, ” said the executive of the Chicago-based consulting organization. “They seem to have their act together. ”

In the very first half of 1983, the 74 publicly traded REITs appreciated 13 % in price, and yielded nearly 18 percent in dividends.

Along with renewed investor confidence, new issues, expected to represent an additional $1 billion in REITs assets inside the year, have been sold to the market. Consolidated Capital Earnings successfully floated $115 million in stock, BankAmerica Realty sold $50 million in convertible debentures and Common Growth sold $32 million in preferred stock all for investment trusts so far in 1983.

“People always knew that the automobile was not ill, just some of the people driving this, ” commented Anthony Reynolds, a principal in Washington’s Real Home Analysts Inc.

Successful financing issues are “further evidence that REITs have entered a brand new era, recording strong new interest on the part of traders, ” said David Donosky, outgoing president of NAREIT.

REITs do have numerous clear advantages, contends newly elected President Kent Colwell, who can also be head of Transamerica Corp. ‘s REIT subsidiary of San Francisco.

Due to the tax immunity, REITs are able to pass along nearly dual the earning of real estate-based stocks. In a study covering a 10-year span from the market by San Francisco-based Questor Associates, average real estate provided returns between 7 and 10 % to 40-percent-tax-bracket investors. For the tax-exempt REITs, returns ranged through 14 to 22 percent.

As a means of investing in property, reputable REITs offer the advantage of professional management. Companies for example Transamerica and BankAmerica obviously cannot afford to mar their images with inexperienced or risk-hungry managers within their REIT subsidiaries, said Miller of Real Estate Research Corp.

Diversity provides another layer of protection. And the REIT is possibly the tidiest method of investing in real estate.

REITs are fluid. They are traded like stocks. Fifteen are listed on the brand new York Stock Exchange and 19 on the American Stock Trade, and 40 are traded over the counter.

Solid advantages tend to be attracting new money, but all is not completely right along with REITs.

Although the industry has assiduously attempted to purge itself there may be a few demons, Miller said. “Some of the portfolios continue to be risky, ” he explained. “You have to be concerned about a few of the underlying assets. ”

Miller investigated two dozen REITs in the mid-1970s which were in trouble with creditors. “Some of these companies had used business school graduates, put them on commissions and they place deals together, ignoring the market and loan-to-value ratios. They do some funny things, ” he said. ” The comedy might not be over, Miller indicated: “Some of the smaller ones still appear to be a bit risky. ”

REIT analyst dean Kenneth Campbell cautions investors to stay with proven companies.

Interest has added a new dimension of danger to REIT portfolio managers, Campbell said. Financing real estate prior to was a question of searching. Now it is a query of timing.

Debris from some of the bigger crashes is still being collected. Two years ago, 40 or 50 former trusts were trying to buy operating businesses, Campbell recalled. He explained that the idea was to make use of past losses to shield the new companies’ profits from taxation’s. TMC Industries, formerly TMC Mortgage, is one case.

This kind of plan is hardly a confidence booster for the average buyer.

Currently, some of the same bankrupt REITs involved in that plan are now being liquidated, including FMI, formerly First Mortgage Investors.

Diversified Mortgage Traders Inc. has been transformed into a basic trust, and was absorbed earlier this month by Carlsberg Corp. of California.

In common, the number of problem-prone mortgage REITs has diminished. In 1970, mortgage REITs represented 77 percent of assets invested. Currently, the more stable equity REITs dominate, with 60 percent of assets, according to NAREIT.

For REIT managers, probably the greatest threat doesn’t come from its own rascals or real estate recessions, however from competition, namely limited partnership syndications.

Led by giants for example Chicago’s JMB Inc. and California’s Fox & Carskadon, syndicates boast property that dwarf REITs collective $7 billion.

To be fair, most syndicates are marketed towards the well-heeled investors seeking a tax shelter. Their attraction is a chance to pass along depreciation to individual investors. Rockville’s CRI, for instance, leverages its investments with federal and state financing. For each and every subscriber dollar, there is triple that in assets, and, as a result, triple the depreciation protection offered each year.

Now there is really a new type of all-cash, low-level leverage syndicate that is “taking dead aim on a single market as REITs, ” said CRI’s Laws.

“We offer a few of the same advantages as the equity REIT, ” said Jud Malkin as well as Stuart Nathan, principals in Chicago’s JMB Realty Corp. Like the REIT, JMB’s income-generating, limited-partnership syndicate pays no tax. Investor money finances malls and office building, as do REITs. In addition, as along with all syndicates, there is the added attraction of depreciation.

“In 1 sense, “it is a question of form over substance, inch the principals said. “Both investments can offer the same material. ”

But with income supplemented by depreciation advantages, will syndicates hide REITs? In terms of scale, they already have. JMB’s earnings partnership alone counts $3 billion in assets, half the total of REITs combined.