Currently, there is evidence to suggest that a new era in property investment has emerged. Well managed and capitalized real estate investment trusts, more popularly known as REITs, are able to access the capital markets for funding malls, office buildings, hospitals, apartment building and mortgage financing. Long-term income is generated for investors and retirements are secured through the investment in REITs.
However, the history of real estate investment trusts is obscured by legal entanglements, trust busting, name changing and bankruptcies. With a goal of unveiling the industry and its murky history, we’ll be posting stock price performance of REITs in some of the most volatile periods.
The history of REITs can be broken into several distinct periods:
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1886 to 1935
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1960 to 1980
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1980 to present
We’ll highlight anecdotal data from various companies from each respective period with added insight about how and why some of these companies, as reflections of the REIT industry, didn’t do as well as expected. The goal of these articles is to give potential investors the needed perspective for proper risk assessment.
The first REIT we’ll cover is United States Realty & Improvement (USR&I) in the period from 1921 to 1939. According to a Barron’s article dated April 8, 1929, USR&I:
“Is one of the principal holders of New York City real estate….”
“Real estate owned by United States Realty is held mostly through subsidiary companies. Among the New York properties are Trinity Building, United States Realty Building, Hotel Plaza, Savoy-Plaza Hotel, and a new office building now being erected at Madison Avenue and 57th Street.”
“…United States Realty has purchased building sites in New York, Boston, Hartford and other cities for the erection of buildings.”
At the time, USR&I was among the largest REITs in the country. As seen in the chart below, USR&I jumped from as low as $41 to as high as $184, a +384% increase in a 3-year period.
There appears to be little need to explain why USR&I failed as everyone would ascribe it to the “Great” Depression. However, when looking at the chart above, readers need to recognize that the decline in USR&I began not at the peak of 1929 but at the peak of 1925. The decline from the high in 1925 resulted in loss of –99% by the time of the 1939 low. In 1925, the perspective on USR&I in the Barron’s was as follows:
“The earning power, present and prospective, also justifies an increase in dividends. Company [USR&I] is in the strongest financial position in its history; underlying mortgages are steadily being reduced, income from rentals are at satisfactory rate and Plaza Hotel earnings are consistently good (“U.S. Realty & Improvement”. Barron’s. February 2, 1925. page 11.).”
In spite of the very favorable position of USR&I, the REIT suffered exceptionally in the period from 1925 to 1933 as the onset of the “Great” Depression hit every stock in the country. Ultimately, USR&I went through a lengthy reorganization process that began with the Supreme Court ruling that trusts (impacting REITs) were to pay taxes as corporations. Then, in the period from 1940 to 1946, USR&I was forced to merger with Sheraton Hotels, later renamed Sheraton Corporation of America.
United States Realty & Improvement reflected the experience of all other publicly traded REITs. Contemporary REITs like Lawyers Mortgage, Alliance Realty and Lefcourt Realty Corp. also went through the same experience as USR&I. Keep in mind that USR&I was among the most liquid of REITs at the time, suggesting that most other REITs suffered a fate worse than a forced merger.
see also: REITs from 1971 to 1974