Dealing With Long-Term Issues

Wake up and smell the Geritol. A new book on choos

On page 71 this month, you'll find an overview of the alternative investment market and our premiere, exclusive directory of the firms that offer them. The numbers indicate that among alternative products, hedge funds are among the hottest things around today. But long before hedge funds came along some five decades ago, property was the alternative investment of choice. It still is for many folks. A great portfolio balancer, real estate has little correlation with stocks. It can also generate both current income and long-term capital gains, albeit with some unique risks (just remember that mantra: location, location, location).

But if you are trying to persuade a client to invest in real estate, what route do you take? Buy an office or apartment building? Well, maybe the client doesn't want to be a landlord. What about publicly traded real estate investment trusts (REITs)? Their diversified portfolios are usually great for income, but over the long haul, REIT prices may be more subject to the overall whims of the equity market than you would prefer.

Then there are private REITs. True, they are far less liquid than their publicly traded cousins; investors may suffer discounts of 10% or more off net asset value if they want to exit before a REIT is due to wind down. But some private REIT sponsors have done an admirable job for investors. I'd like to tell you about one of the more unusual ones, Bill Carey. A courtly Baltimore native whose antiques-filled offices overlook Manhattan's Rockefeller Plaza, Carey is the alchemist of the REIT biz.

Bill and his team specialize in sale-leaseback deals, which basically aim to turn underdeployed assets on corporate balance sheets into gold. Carey looks for companies that need cash and own real estate, but may not have the credit rating to borrow cheaply. Using equity raised from investors plus some debt, Carey buys these corporations' properties and then leases them back for long periods to the original owners, who remain responsible for paying all taxes, insurance, upkeep, and other operating costs. That provides Carey with immediate cash flow and gives him a shot at earning a profit on the sale of the property down the road. In some cases, he has even received equity in tenants as well, allowing for an extra gain when the shares are sold. If you have shopped in a PETsMART store or gone to a Rave Reviews cinema lately, it's likely you've visited a Carey property without even knowing it.

As the U.S. economy emerges from recession, Carey boasts an admirable occupancy rate of better than 99% in its $3.2 billion portfolio of properties. Even in the doldrums of 1990 and '91, Carey's properties remained more than 98% rented. This has meant tidy returns. Carey's new Corporate Property Associates 15 REIT has raised $100 million so far, with new cash coming in at a rate of $2 million a day. CPA:14, which closed to investors in November, now has about $1.2 billion in assets and an estimated life span of 9 to 12 years. It is currently yielding 7.5%. "People get paid dividends--very generous ones--which tend to grow regularly," says Carey. "We've got one of the best records in the business."

It is these dividends that have won over both commissioned and fee-based advisors to Carey's products. "They kick out a rent check every quarter," says Ralph J. Schroeder, of Schroeder & Associates, a financial advisory branch of American Express in Woodlands, Texas. Schroeder likes his clients to keep 10% to 15% of their assets in real estate as "an investment hedge." He adds that "back in the bull market days, we would call this portfolio insurance. Now, it looks pretty good."

Of course, anyone considering any investment, alternative or traditional, needs to do plenty of due diligence. But after 38 years in the net leasing business, Bill Carey has certainly carved out a niche worth a look.

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