Street Wise: Standing by a diversified approach to Reits

Leo Wells is committed to real estate.

As the president and CEO of Wells Real Estate Funds in Atlanta, he argues that just about every investor should have some assets in real estate.

These days, with the broad equity markets settling comfortably into bear country, such an allocation might seem like a no-brainer.

But a glimpse at the performance of the Wells S&P REIT Index Fund (WSPAX) proves that even real estate investment trusts don’t necessarily post positive returns in this market.

The fund – the only one that tracks the Standard & Poor’s 500 REIT index – is off 1.6% over the past six months, placing it in the bottom third of real estate funds tracked by Morningstar Inc. Over the same period, the S&P 500 stock index has lost 23.6%, and the Nasdaq Composite Index is off 31.4%.

Over the past three months, the fund is down almost 8%, while the S&P 500 stock index has lost about 23%, and the Nasdaq Composite has fallen about 27%.

Because Mr. Wells thinks Reits should amount to basic steady-as-she-goes dividend-paying machines, he also has a separate non-traded public Reit fund.

The shares of that Reit fund are sold to investors at $10 each, with a $1,000 minimum. The price doesn’t vary, because Mr. Wells makes the only market for the shares.

Launched four years ago, the Wells non-traded Reit fund is debt-free, diversified, fully leased and trades at $10 per share “today, tomorrow and the next day,” he says.

The downside, in addition to the kinds of risks that always come with real estate investing, is limited liquidity. The upside is a string of dividends that have climbed steadily from 6% in September 1998 to 7.75% as of the end of June.

The $1.3 billion fund, which includes 52 properties in 19 states, recently filed with the National Association of Securities Dealers to take in another $3.3 billion from investors over the next two years.

The fund is scheduled either to liquidate or to go public by 2008. The other option is a proxy vote asking shareholders to extend the life of the fund.

Up to now, Mr. Wells has played it close to the vest. He purchases only pre-leased properties, and he doesn’t buy anything if he can’t pay cash.

This makes the investors the bankers during the operating phase. When the portfolio eventually is liquidated, if all goes according to plan, the investors get back their original investment plus 90% of the profits.

By operating free of leverage, Mr. Wells says, the fund could drop to less than 20% occupancy and still cover expenses.

Mr. Wells doesn’t apologize for his conservative style in an already conservative asset class.

“All Reits aren’t created equal,” he says. “We diversify by geography, industry and tenant, with no more than 10% to 20% exposure each.”

Making a mint

Coinstar Inc. (CSTR), a Bellevue, Wash.-based operator of coin-counting machines that are found in grocery stores, is about to extend its streak of beating earnings expectations to four quarters.

The company’s stock, which trades at about $25.25 per share, is up nearly 8% over the past six months, despite falling from a peak of nearly $35 in April.

Bill Wolfenden, manager of the RS Small Company Growth Fund (RSSGX) in San Francisco, lists Coinstar among his biggest holdings (InvestmentNews, Feb. 25).

He calls the company a “special situation that’s not really correlated to the economy.”

With 9,000 coin-counting machines placed with 24 of the nation’s 25-largest supermarket chains, the company still is in its infancy in terms of customer awareness, Mr. Wolfenden says.

Mr. Wolfenden, who has owned the stock for about two years, recently added about $450 million worth of shares to the portfolios he manages at RS Investments.

Coinstar, which is scheduled to announce second-quarter earnings Aug. 1, is expected to earn 76 cents per share in 2002 for a price-earnings ratio of 32.

Questions, observations, stock tips? E-mail Jeff Benjamin at jbenjamin @crain.com