Experts predict resurgence of L.A. realty securities: REIT offerings to become hot again in 1994, they say.

The red-hot market for shares in real estate investment trusts fizzled during the last two months of 1993, sparking Mayday-style headlines.

Local investment bankers, lawyers, accountants and real estate groups involved in the structuring, sales and issuance of REIT securities insisted the market is just taking a breather and will make a comeback in 1994, despite even the major earthquake that hit the Los Angeles area on Jan. 17. But they did not agree on what the predicted resurgence would look like.

REITs are companies that own and manage real estate portfolios to earn profits for shareholders. Because shares of REITs are usually traded publicly, they offer investors better liquidity and diversification than these investors would otherwise have had owning real estate. REITs also offer a higher potential payback in an environment of low interest rates.

For issuers, REITs offer another avenue to obtain much-needed capital.

"The REIT market, both from an investor and issuer standpoint, will be healthy in 1994," predicted David Knowles, who directs Merrill Lynch & Co.'s real estate investment banking efforts for the Western U.S. out of his Westwood office. Knowles added that the earthquake was unlikely to have a long-term negative impact on Southern California-based REITs or on the ability of local REITs to make initial public offerings. "An earthquake is going to have some effect, but the most important thing is the overall economy."

Several real estate sources agreed with Knowles' comments that a disaster is unlikely to have an impact on the success of a REIT.

L.A.'s perception problem could hardly be worsened by the recent ground shaker. Successions of riots, fires and floods have yet to stop the flow of investment capital into the region. As Knowles put it: "People know that California has earthquakes."

The success of a REIT is dependent upon growth, said Paul Prescott, a partner with accounting firm Arthur Andersen & Co. Disasters, while they present a short-term problem, have not proved to be detrimental in the long run.

"If someone were trying to come out with a REIT this week that was a portfolio of Southern California property with a heavy concentration in the San Fernando Valley, they might have a problem," said Jim de Bree, national director of REIT advisory services for accounting firm Deloitte & Touche. Overall, said de Bree, the local REIT market should not be effected negatively by the quake. Knowles claimed that his firm was the lead underwriter or co-manager for about 48 percent of the nation's REIT equity offerings in 1993.

Knowles, who has personally structured REIT offerings for issuers and has sold REIT products to investors, said he is optimistic about L.A. County REITs in the year ahead. "Depressed markets, like Los Angeles, may be areas of opportunity," he reasoned, noting that some of the best-performing REITs to date involved formerly depressed properties in Texas and Colorado.

Richard Klein, a partner at the Century City office of accounting firm Kenneth Leventhal & Co., was even more bullish. He said he expects 1994 to be a "banner year" for REITs, with activity picking up, like clockwork, sometime in February. Right now, he said, he knows of "several billion dollars (worth of deals) under consideration" -- all involving Southern California properties.

"There has been a fundamental change in the way real estate will be financed in the future," said Klein, "and REITs are well- positioned to be a major part of this financing."

He chalked up the market's recent nose-dive to unrealistic expectations, noting that in mid-October 1993 about $10.2 billion worth of REIT equity filings alone, both initial and secondary, were slated to go public.

To put that into perspective, prior to 1993, he said, 1992 had been the all-time record year for total U.S. REIT transactions, with $6.5 billion of such deals closing. By comparison, during the first 10 months of 1993, Klein said, $10.7 billion in REIT deals had closed nationwide.

The year-end flood of REIT hopefuls appeared just as securities trading volume was winding down for the holiday season and interest rates were inching up.

REITs are more interest-rate sensitive than other equity issues. That is because, explained Klein, REITs must distribute 95 percent of their annual taxable income -- a much higher percentage than most stocks pay out.

"The high cash dividends have historically made REITs trade more like bonds, where market value is inversely adjusted to movement in interest rates," he said.

"It was a challenge to get a deal done," said Julian Caprow, chief financial officer for Beverly Hills-based G&L Realty Corp., one of two L.A. County-based issuers (and about a dozen issuers nationwide) to complete a REIT transaction in the last two months of the year.

G&L Realty ended up adjusting its initial REIT yield to almost 9 percent per annum, pricing its 3.68 million shares at $18.25 a share on Dec. 10. Originally, the per-share price was expected to go out at somewhere between $18.75 and $20.25, said Caprow, for an annual yield of 8.10 to 8.75 percent.

The adjustment brought "very good retail and institutional interest," said Caprow, for the REIT's portfolio of medical office buildings.

L.A.'s other late-year REIT issuer, Manhattan Beach-based Alexander Haagen Properties Inc., sold a $194 million initial public offering of equity REITs in U.S., European and Asian securities markets on Dec. 17.

At $18 per share, investors locked into a yield of about 8 percent for the first year vs. the 6.85 to 7.58 percent yield estimated in the company's Oct. 8 perspectus, which envisioned the stock going out at $19 to $21 a share.

"At the time we were trying to go public," recalled Fred Bruning, the REIT's senior vice president for leasing development and acquisitions, "there were 11 other companies in our development category (shopping center developers) that were trying to go public at the same time. Only two of us made it."

According to Bruning, Indianapolis-based Simon Property Group was the other issuer that successfully launched its REIT in late 1993, and Simon's was the largest REIT in the nation's history, at $840 million.

The Macerich Co., a Santa Monica-based shopping mall developer that had hoped to launch a $262 million to $288 million REIT last year, will be back "when the market's right," according to Macerich Chief Accounting Officer Tom Ahearn. Alexander Haagen's Bruning said he believes the year-end glut in REITs sent a message to the development industry that it's not so easy to become a REIT. He predicted that many companies may find it more difficult next year.

"For companies such as Alexander Haagen," Bruning said, "1994 and beyond will be a time of unparalleled opportunity because we have access to capital now, whereas many of our competitors don't."

The best advice for investors is "buyer beware," said Andy Kane, a partner with accounting firm Arthur Andersen & Co. and director of the firm's real estate services group for the Western U.S.

Kane, who works out of Arthur Andersen's downtown L.A. office, acknowledge that a lot of the REIT wannabees are "very good as far as their underlying properties." But Kane warned that these investments are very price sensitive to prevailing interest rates. "I don't think that the initial yields will come down," he predicted. "They may still have to go up."