Once upon a time, Wall Street investors rushed to their mailboxes each month to greedily rip open their account statements. And in the late 1990s, they were pleased to see their wealth increase steadily.

Then came the panic of 2000, when few winning investors were to be found. Those who had placed their money in real estate stocks, however, were seen smiling as their investments grew while others sunk like rocks.

While Wall Street seems to have turned a corner, and real estate's fortunes look slightly less promising in 2001, real estate investment trusts (REITs) and other real estate equities continue to outpace many market indices.

REITs can generally be divided into three categories:

• "Equity" REITs are funds that own major properties such as shopping centers, commercial buildings, and large apartment complexes.

• "Mortgage" REITs are funds that make mortgage for large commercial properties.

• "Hybrid" REITs both own property and also make mortgage loans.

So far this year, the REIT indexes tracked by the National Association of Real Estate Investment Trusts (NAREIT) has seen in increase in stock price of 6.6 percent. This is right in line with the 6.5 percent increase so far this year in the Dow Jones Industrial Average.

What's more, real estate stocks have blown past the flagging Nasdaq, which has risen only 0.6 percent in 2001 after a brutal beating in late 2000.

In an interesting aberration, the Russell 2000 Index has so far this year made an impressive 11.6 percent upswing. This doubles the rate of growth among REIT issues, which typically track somewhat parallel to the Russell 2000.

In the first quarter, funds from operations (FFO) for equity REITs rose 7.5 percent on average, according to NAREIT. And year-over-year FFO for the fourth quarter of 2000 averaged 8.3 percent.

"First quarter earnings for REITs and publicly traded real estate companies significantly outperformed companies in the S&P 500, where profits are declining," said Michael Grupe, NAREIT senior vice president and director of research.

During the first quarter, average operating earnings per share dropped 6.5 percent for the S&P 500, according to First Call/Thompson Financial.

Among equity REITs, the strongest performance was turned in by office, mixed industrial/office and specialty sectors, Grupe said. The largest 20 percent of REITs posted average earnings per share growth of 13.1 percent.

Despite strong gains in 2000 and beyond, publicly traded real estate companies argue that they are not trading at fair multiples on Wall Street.

Despite such concerns, both mortgage and hybrid REITs continue their dizzying growth. So far this year, shares in mortgage REITs are up nearly 45 percent, while hybrids have seen their share prices rise almost 34 percent.

Will the good news continue? No one knows, but for the moment at least REIT investors are generally pleased.

For more articles by Lesley Hensell, please press here.

Published: May 25, 2001

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Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net