Anyone who plunked down $20 for a newly issued share of Rockefeller Center Properties Inc. in 1985 has seen the value of his investment drop by about 65 percent during a period in which the stock market as a whole has more than doubled. This happened despite a fat dividend yield of more than 8 percent. Considering the current boom in real-estate investment trust (REIT) stocks, you ought to remember this sad story the next time a huckster hypes real estate as a can’t-miss investment.
Rockefeller Center Properties is a REIT-pronounced “reet”-a company that gives stockholders a real-estate investment without their having to worry about collecting the rent, shoveling snow off the sidewalks or finding new tenants. In these low-yielding days, REITs seem to be simply magical. Because they have to pay at least 95 percent of their income as dividends, REITs carry yields of 4 percent and up.
Largely because of the yields they offer, REITs are red-hot. For the first three months of the year, owning REIT stocks was almost as good as having your own printing press. The average REIT stock gave its holder dividends and stock-price increases that work out to a return of 19.1 percent, reckons the National Association of Real Estate Investment Trusts, a trade group. Meanwhile, the stock market as a whole, as measured by Standard & Poor’s 500 stock index, produced only a 4.3 percent return. That’s why investors plunked down more than $1.7 billion to buy newly issued REIT securities during the first quarter. If sales continue at that pace, they will hit almost $7 billion this year, which would top last year’s $6.6 billion, the previous record. Pretty heady stuff.
But looking at the chart (below) should give you pause about buying just any old REIT stock. As you can see, we’re in the third boom in REIT history, the previous two being the 1968-72 and 1985-86 booms. Those booms were followed by massive busts, in which most REITs lost big pieces of their value, and investors lost a big piece of their money.
The trade group’s chief number-cruncher, Christopher Lucas, points out with absolutely no prompting that only one 1985-86 REIT-Weingarten Realty Investors-has done well for its investors. Some other members of what the industry calls “the class of 1985-86” overpaid for properties, used too much borrowed money or were run by people who were just not very good at managing real estate. The 1968-72 class was even worse. Many of those were REITs that made mortgage loans on which borrowers defaulted, or which owned properties that were hocked to the eyeballs and couldn’t make their mortgage payments.
Jon Fosheim, a principal of Green Street Advisors, a Newport Beach, Calif., firm that helps institutional investors select REIT stocks, says that the excesses of recent cycles haven’t yet shown up. One of the problems with REIT investing, Fosheim says, is that “real estate is a whole bunch of local markets, and each local market is different.” The safest way to own REIT shares, he says, is by buying REIT mutual funds and letting the portfolio manager sweat.
The original holders of Rockefeller Center Properties stock might wish that they’d bought REIT mutual funds-or just about anything other than their shares. These holders have some consolation, however. The shares have value, provided the center’s buildings don’t continue falling in value. And as dreadfully as the shares have performed, they still produce an annual dividend. That makes the holders much better off than Japan’s Mitsubishi Estate Co., Ltd. In a deal widely lamented in the United States as a symbol of the West’s decline, Mitsubishi bought 80 percent ofthe center’s parent firm, Rockefeller Group, Inc., from the Rockefeller family for $1.4 billion. But with the center now worth less than its mortgage, Mitsubishi currently has a huge paper loss on its investment. And Mitsubishi has to pay millions each year to fund the center’s capital improvements.
Mitsubishi and Rockefeller Center Properties stockholders may yet make out, because the mortgage still has seven years to go and the center may increase sharply in value by then. “We don’t assume we’ll stay in the sewer forever,” says Edward Fontaine, CEO of Rockefeller Center Properties. But for now, the only ones who have made out are the Rockefellers, who declined to comment. The family has taken $1.9 billion out of the center from mortgage proceeds and the sale to Mitsubishi. Which is yet another example of how billionaires get to stay billionaires.
