Falling dollar should lift real-estate trusts

By Harry Domash

The falling U.S. dollar presents an opportunity for you to make money. Here's how.

Say you're an oil magnate and you've got $10 million to $100 million in petrol dollars that that you need to put to work. Investors in that category often look for real estate such as office buildings, shopping centers and hospitals.

Thanks to the strength of the economy, many such investors look to the United States for investing opportunities. Now, with the weak dollar, U.S. real estate looks like a bargain to outsiders, increasing demand and driving prices up.

Now say you're you, and you don't have millions of petrol dollars to spend. You can, however, go along for the ride by buying shares in a real-estate investment trust (REIT).

REITs are a special type of corporation that invests only in real estate. REITs don't pay federal corporate income taxes as long as they pay out at least 90% of their taxable income to shareholders. Consequently, REITs typically pay dividends equating to higher yields than regular corporations.

On the downside, because they don't pay corporate income taxes, REIT dividends are mostly taxable at ordinary income rates, rather than the 15% maximum tax rate that applies to dividends from regular corporations. So, if possible, put your REIT holdings in tax-sheltered accounts such as IRAs.

REITs, by the way, come in two flavors; equity REITs, which own properties, and finance REITs, which invest in loans backed by real estate. Since we're looking to profit from rising property values, we'll focus on equity REITs.

Dividends and much more

REIT dividends provide a steady income stream and help cushion downdrafts during market downturns. However, in recent years, share-price gains have contributed much more to shareholder profits than dividends.

For example, in 2006, the NAREIT (National Association of Real Estate Investment Trusts) equity index gained around 30%, not counting dividends. Dividend yields added an additional 4% or so to that return.

The strong REIT share price gains reflect increasing real-estate property values and expectations that the REITs will be taken out by private-equity groups eager to gain control of prime commercial properties. For example, office property owner Equity Office Properties Trust was acquired earlier this year by Blackstone Real Estate Partners for $48.50 per share, roughly 30% above the trading price before takeover rumors surfaced last summer.

There are more than 100 publicly traded REITs out there. Here's a screen for spotting the best prospects. It looks for solid, low-risk REITs that savvy investors such as mutual fund managers and market analysts have taken a liking to.

The right REITs

Equity REITs usually specialize in a particular type of real estate such as shopping centers or office buildings. MSN's Deluxe Screener is one of the few that enables screening by property type:

• Diversified
• Office
• Health-care facilities
• Industrial
• Residential
• Retail

The diversified category includes finance REITs and equity REITs that own more than one property type.

Select the REIT property type of interest by selecting Industry Name (Field Name), and then pick the property type within Real Estate section (Value).

Screening parameter: Industry Name = REIT (property type)

Avoid the big risk

Market capitalization (recent share price multiplied by number of shares outstanding) is how much you'd have to spend to buy all of a company's shares. Market caps for most REITs run from $1 billion to $10 billion. I set my minimum allowable market cap at $500 million. REITs with market caps below that figure are risky business and best avoided. Don't cut that figure and consider increasing the minimum to $1 billion if you want to reduce your risk.

Screening parameter: Market Capitalization >= 500,000,000

In a similar vein, most REITs change hands at prices well above $20 per share. Any REIT below $10 is probably trading there because market players see problems ahead. I set my minimum allowable share price at $10. Consider increasing the minimum to $15 or $20 if you want to reduce risk.

• Video: The case for REITs

Screening parameter: Last Price >= 10

Piggyback on the pros

Institutional investors such as mutual funds and pension plans generally favor REITs and often hold big positions. Lack of institutional ownership means that these savvy investors see something that they don't like.

Institutional ownership is measured in terms of percentage of outstanding shares held by these big players. For in-favor REITs, institutional ownership usually runs from 80% to 95%. Figures much below that range signals a lack of enthusiasm. I set my minimum allowable institutional ownership at 50%. Don't lower that number and consider increasing it to 60% if you want to reduce risk.

Screening parameter: % Institutional Ownership >= 50%

REIT analysts spend their days assessing the outlooks, and publishing buy/sell ratings for REITs that they follow. Firms such as Zacks Investment Research compile the individual analyst ratings into "strong buy," "buy," "hold," "sell" and "strong sell" consensus ratings.

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