In wake of REIT retreat, some wonder if they paid too much.

REIT stock prices are down and they are not raising capital on Wall Street as they were only a few months ago, according to a new investors' study. Many REIT debt ratios have crept up and are nearing unacceptable levels, the report says, further reducing their standing with Wall Street. Now, with such chinks in their armor showing, the market is asking if their aggressive buying habits were evidence of overpaying for properties.

"Opinion is divided on this matter," says Peter F. Korpacz, MAI, publisher of the Korpacz Real Estate Investor Survey. "There are several distinct points of view."

Many market participants believe that REITs were not overpaying. Prices were high, but because these were the result of competition in the marketplace, they were market prices. "This was certainly the case with individual properties," says Korpacz. There were multiple bidders for each property, and buyers were paying for the real property only.

"Sales of portfolios in late 1997 and the first half of 1998 were different, however, because of the accretive nature of the purchase, which resulted in an increase in FFO sufficient to increase the stock price," contends Korpacz. Those who think that REITs were overpaying for portfolios say they were paying for real estate plus the additional value they could get in the stock market as a result of the purchase.

"Until a few months ago, REITs were so eager to acquire portfolios to increase their market capitalization, they were willing to pay a premium," says Korpacz.

While there were fewer bidders for portfolios, the fervor for portfolios was greater than for individual properties. "What made portfolio transactions different was that portfolios had characteristics of a major real estate operating company," explains Korpacz. They included numerous real property assets; national tenant relationships; and operating efficiencies in leasing, management, administration and operations. "As a result, portfolio transactions commanded premiums, and prices were higher than they would have been for the real property alone."

"Our view is that, given supply and demand at work, prices on individual properties are market value," says Korpacz. "Prices on portfolios may or may not be market value, depending on real estate and stock market conditions. In the end, portfolio pricing vis a vis market value can only be judged on a case-by-case basis."

Despite the fact that REITs are not so active now, the competitive environment still exists, and prices for individual properties and portfolios continue to rise, albeit not so dramatically. "However, the trend of portfolio deals that carry premiums seems to have waned," Korpacz concludes.

The Korpacz Real Estate Investor Survey - is published quarterly by The Korpacz Company, Inc. The Frederick, MD firm's Korpacz Real Estate Source Directory is a cumulative Internet database containing articles and descriptions of thousands of real estate data products, software, books, Web sites, education programs, and local government publications. For information on products, call [phone] or visit www.korpacz.com.