The annual National Association of Real Estate Investment Trusts convention, held at the Sheraton Boston Hotel last week, focused on building dividends and portfolio diversification. A panel on building value, pictured above, included moderator and NAREIT Chairman Hamid R. Moghadam; Rahul Bhattacharjee, director of research for Cohen & Steers Capital Management; Theodore R. Bigman, managing director for Morgan Stanley Investment Management; Steve Buller, portfolio manager for Fidelity Investments & Research; and David M. Fick, managing director of Legg Mason Wood Walker.

About 1,150 executives, investors, lawyers and vendors piled into the Sheraton Boston Hotel last week for the National Association of Real Estate Investment Trusts’ annual convention. The three-day event focused on building dividends and the importance of portfolio diversification with a series of panels hosted by some of the industry’s biggest companies, including Equity Office Properties Trust, Goodwin Procter, Fidelity and Merrill Lynch & Co.

Optimism about a healing economy permeated several of the week’s discussions, with projections boosted by a 30 percent gain on the NAREIT composite index as of Nov. 10 this year. But while REIT investment dollars have recently poured in, some experts are dubious as to whether the money flow will continue.

“We’ve been running around for years espousing about real estate [as an investment option]; we’re happy that the world caught on,” said Theodore R. Bigman, managing director of Morgan Stanley Investment Management and an event panelist. “I have concerns that this will be as good as it gets. We’ve certainly seen some fantastic fund flows in 2003 from every source imaginable … There’s some risk that we can’t be as strong as we’ve been but we’ve certainly enjoyed the ride.”

However, some say that there are additional opportunities for growth. As more and more countries clear the path for foreign investment and as REITs continue to outperform the Standard & Poor’s 500, an increasing number of investors are asking how they, too, can cash in on REITs.

“What we hear [from prospective new investors] is: ‘I’m underweight on my index’ … They’re saying: ‘I don’t understand REITs but I have to invest in it, help me get up to speed so I don’t underperform,'” said David M. Fick, managing director of Legg Mason Wood Walker and a panelist at the NAREIT event. “There’s a huge amount of capacity for fund-flow to come from institutional investors. Our system appears to have a lot of untapped capital, also with foreign investors expressing interest.”

Congress authorized the creation of REITs in 1960 in an effort to help smaller investors capture a piece of large-scale real estate sales. The classification made it possible for these smaller investors to earn a share of the profits with the added comfort of a diversified portfolio of properties. But in the beginning, REITs could only own real estate. Revamped tax code laws, most of which have changed only in the past decade, really paved the way for REIT growth by allowing them to function as full-fledged companies. Today, qualified REITs can not only own but also manage their properties, in addition to several other powers, including providing concierges.

The U.S. Securities and Exchange Commission lists about 180 REITs in existence with total assets of more than $300 billion. More than two-thirds are traded on the New York Stock Exchange, the American Stock Exchange and NASDAQ. To qualify as a REIT, a company must meet Internal Revenue standards, including obtaining a minimum of 100 shareholders, holding at least 75 percent of its total assets in real estate and deriving at least 75 percent of its gross income from property rents or mortgage interest.

REITs earnings grow with increasing rents and a growing economy. New acquisitions and developments also create growth when the returns exceed the financing costs.

Typical REIT buyers include pension and endowment funds, foundations, insurance companies, bank trusts and mutual funds. REIT shares can also be purchased on the open market or through mutual funds.

REIT on Target

In 1990, the total market capitalization of REITs topped $8.7 billion. Today, that number has jumped to $200 billion.

“Real estate is considered to be a relatively safe haven in the context of a broader equity market whose bubble has burst,” said Gil Menna, a partner at the Boston law office of Goodwin Procter. “People consider real estate to be more stable.”

The number of REITs peaked in the mid- to late-1990s at 224. Today there are about 180. Industry watchers expect that the number of REITs will continue to dwindle with consolidation. But despite the industry’s rapid growth over the past decade, REITs own only 15 percent of the country’s commercial real estate properties.

“More and more people are understanding that REITs outperform other benchmarks, and have been for the past 10, 20 years and they have done so with less volatility,” said Steve Wechsler, president and chief executive officer of NAREIT, the national trade group for the industry. NAREIT, based in Washington, D.C., represents more than 2,000 members.

REIT performance over the past four years attracted the attention of many investors. In 2000, the NAREIT Composite jumped up almost 26 percent over the previous year, in 2001 it increased by 15.5 percent and in 2002 it rose by 5 percent.

“We’re hoping it’s a trend that will continue,” said Jay Hyde, vice president of communications for NAREIT. “There’s always the danger that people will chase performance and if they see it lag, they’ll pull their money out, but we hope that there’s no full-scale departure.”

With the economy beginning to show signs of recovery, NAREIT executives expect that the longer-term picture for REITs remains bright. Wechsler expects that REITs will strengthen and continue to grow.

One area NAREIT hopes to grow and expand its influence is with 401(k) plans. According to the association, only 11.8 percent of 401(k)s offer clients a REIT investment option.

“It should be near 100 percent,” Wechsler said. “There’s tremendous room to grow and understand the value of investing in REITs.”

NAREIT executives are meeting with plan providers in a lobbying effort to make the change.

NAREIT will also focus on corporate governance in the coming year. The association will stress the importance of looking to outside directors and setting accounting standards.