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Two years ago, Investment Advisor took a broad look at the REIT and real estate investment market. In that story”(Is It Safe?” March 2001), a planner in Cleveland complained that the problem with real estate was that it was a really tough sell to clients, compared to all those wonderful returns that the overall stock market was providing. My, how times have changed. Yet for Leo Wells, president of the Wells Real Estate Funds, times haven’t changed that much: he was a firm believer in real estate investing then, and he remains a real estate evangelist today. Editor Jamie Green caught up with Wells in late February to discuss the rosy state of real estate investing, the Wells’ approach, and whether the market is overheated and fixing for a cyclical fall.

How will 2003 shape up for real estate? I think you’ll see another great year. The media–the printed press and television–have been really slow to pick up on [real estate as an investment option], but now they are, and when investors see that, you’ll have more people willing to invest in real estate. If they don’t see [real estate] on TV or in print, [they figure] there must be something wrong with it. Since they don’t see or hear about a diversified portfolio [in the media], real estate has been a slow mover. Yes, it’s a harder sell, but so what? Isn’t that what you get a commission for? It’s not like taking orders in a drive-in window at McDonald’s; you’re supposed to sell.

I’ve always thought a salesman was a person who caused people to do something that was good for them that they wouldn’t have done on their own. As you can tell, I believe in good salesmen.

As you know, historically, what the media has said is that stocks, bonds, and cash make up a diversified portfolio, in spite of the fact that stocks and bonds together don’t quite make up what real estate does in total investment in the United States. But people forget that. I’ve always thought it was an oxymoron to say you had a diversified portfolio if you didn’t include real estate.

I heard some planner say on TV that if you own a house, that’s enough [of a real estate investment]. But a house isn’t an investment, an investment is something you can buy and sell and live off the proceeds of the sale.

So our approach always has been to argue that you ought to have 20% real estate in a good overall balanced portfolio. And the only drawback for most people is that it’s not liquid; you can’t go out and give someone 14 bricks and three doors and two windows. But if 80% of your portfolio is in investments that are liquid, that 20% shouldn’t make any difference.

You mentioned that the general media is beginning to discover real estate, but is it still a hard sell with advisors? Or has real estate gotten more acceptance? I think it has [gotten more acceptance], but I’m not so sure if most planners aren’t reactionary anyway. If someone walks in the planner’s door and says they want X, Y, and Z, most planners try to find X, Y, and Z. But the really good ones say “If you want X, Y, and Z, go down the street. If you want someone to determine what’s best for your profile, stay here.” And those planners have, to some degree, taken on real estate in the right fashion, and they’ve been doing that for a number of years. They understand assets that aren’t correlated.

So what’s happening right now is in some ways a reaction to wanting to eat on a regular basis and pay your bills, because how hard is it to go out and sell a mutual fund these days? If you get hungry enough you will sell real estate, because people will buy it. And most people love real estate.

Real estate defines a tangible asset. Is it that the older you are, the more valuable a tangible asset is? Yes, I think so. As we get older and we’ve made dumb investments, we’ve learned that the ones that are not tangible, well, it’s really hard to go get those back, and it’s easier to cheat somebody on an intangible asset. Whereas if you’ve got an office building leased to AT&T and it’s 250 million square feet and 60 stories high, you can see that; no one hauls it off in the middle of the night. It’s not like all this Enron stock, where even people who were working there lost everything, right in front of their eyes.

If you’d invested, for instance, in the Enron building instead of Enron stock, even as an employee you’d be better off. That building is still there. Yes, they sold the building for about 60 to 70 cents on the dollar, but 60 to 70 cents is better than zero.

I think the appeal, particularly in the way we do real estate, on an all-cash basis, [is that investors] put their money with us and they get a 7% dividend. That dividend is basically locked in for the next 10 years because we’ve got a Fortune 500 company guaranteeing that rent. That’s the appeal–it’s not emotional, it’s just dollars.

All an investment manager has to do is show somebody “Here’s the dividend, and here’s why it’s that way, and here’s why it’s going to stay that way.” Even under the new [dividend] tax proposal, you don’t pay any tax on a corporate level. But under the Real Estate Investment Trust Act, the REIT pays no tax. So you’ve got a lot more money to pass on to the investor. The beauty of REITs and real estate is that it’s got a great dividend.

Under the REIT act, REITs are forced to pay a high dividend, because first they don’t pay any corporate taxes, and secondly, they have to pay out at least 90% of their net operating income.

Our break-even occupancy rate is 18% to 19%. At 50% occupancy, we pay a 3% dividend, and if you know who our tenants are–on average, S&P A-grade tenants–if we get 50% occupancy, the stock market is under 500. A 3% dividend in that environment, the government will be putting money with us, it will be so bad.

What about liquidity? Do you understand that everything has a liquidity problem? Liquidity is available, it’s only a question of the price. Is real estate liquid? Yes, but at a price. Are stocks liquid? Yes, but what’s the price?

If you bought IBM stock and you knew you couldn’t sell it for 10 years, then it would be worth a heck of a lot more at the end of those 10 years, and you wouldn’t see the volatility. The price you pay for liquidity in stocks is high volatility.

But what about the expectations of the investor, how long a time horizon should REIT or real estate investors have? We tell people when they go in, you ought to go in for 10 or 15 years. We have liquidity features but we don’t promote them. We tell people: If you can’t live with a 7% dividend for 10 or 15 years, then you ought not to go in.

If you can’t live with that, we have a mutual fund of REITs, and that’s where you ought to go. We have the only mutual fund that tracks the S&P REIT index. You’ll have volatility, of course, but that’s the price. We raised $1.4 billion in our nontraded REITs last year, more than all traded REITs combined. This year we’re looking to raise $2.5 billion.

We were also the largest purchasers of real estate last year in the United States, (spending about $1.5 billion) and we’re on track to buy $2.5 billion in real estate this year.