But even with the dramatic daily hundred-point index swings, things aren't that much different from about a year ago. REIT stocks took a similar dive in the first part of 1997, but later rebounded to post significant gains.

What will happen this time around? Are we in a permanent state of affairs, or will REITs pull themselves back up? Ben Johnson, publisher of National Real Estate Investor (sister publication to SCW), went directly to the most recognized source of information about REIT-land, the National Association of Real Estate Investment Trusts (NAREIT) and its head, Steven Wechsler. Here is the result of his recent one-on-one interview.

Johnson: Why have REITs under-performed, in general, the market so far this year?

Wechsler: It is probably not fair to judge until the end of the year, then you have to look at what you are comparing it to because if you look at the Russell 2000 versus the S&P 500 versus the all-REIT Index, then you see different things happening. But fundamentally, REITs during the '90s have shown several years of strong total return as well as price-only return. It is not surprising that after 1996 and 1997, where we had total returns of 36% and then 23% roughly, that you would get a little retrenchment. Essentially, we have seen some revaluation, repricing in the REIT market as a whole. That's to be expected in a liquid real estate market. During the first seven months of the year that is what we have seen. Through the end of July, the NAREIT index of all REITs is down 11.37%, and essentially the REIT marketplace has given up some of the gains of the last few years.

Johnson: With this blip in the market there are two different sides of the fence, the sellers and the holders. Isn't there a real dichotomy in the marketplace today?

Wechsler: In the broader marketplace there is, absolutely. One of the key characteristics to keep in mind, as we speak today, is that when you look at the REIT marketplace overall, most of these companies are making money; they have attractive, well-leased portfolios, and if anything, their profit, their FFO, is growing over a year ago. So, the fundamentals are very positive.

Johnson: Despite the up and down vagaries of the stock market on a daily basis ...

Wechsler: The stock market will value individual companies as well as sectors in different ways, at different times. That's what we are seeing today in the REIT market.

Johnson: There is a little bit of talk today that as some stocks are hammered, they instantly become takeover targets, but there are probably also a few REITs that may be looking to de-REIT. A lot of firms are looking at their structure. Do you think we are likely to see some of that jockeying as well as consolidation?

Wechsler: It is all part of the overall picture, and no doubt whether it is this year or future years, there will be some companies that are public that decide, for one reason or another, to become private again. But that's no different than you see in the public marketplace at large. On occasion, companies are taken back private, but the mainstream will continue to be public companies. The trend line will continue in the public direction rather than the private direction, for all the reasons that REITs have been successful in recent years. Reasons such as liquidity, access to the public capital markets, the accountability that goes with operating a public company, the transparency, the information flow, ultimately will be more attractive to providers of capital than not.

Johnson: What types of information do you supply to the marketplace?

Wechsler: NAREIT plays a number of fundamentally important roles, but they are all centered in communications of some type. We are engaged in significant undertakings in research and industry affairs to learn more about the REIT and public real estate industry at large. And we disseminate that information not only to our members but also to the investing public and policymakers. This year we are inaugurating a real-time NAREIT index that will have the pricing of the marketplace overall, by various sectors, and through other categories on a real-time basis. That will be a valuable service to the industry and the investing public.

Second, we conduct a number of surveys on different aspects of the REIT marketplace and we will make that information available as well. We are also engaged in ongoing communication efforts to make the various constituencies that are tied to the REIT marketplace more aware of the identity of REITs and public real estate, whether that's providing information to policymakers in Washington or the states, whether that's providing information to those in the institutional investor community that have been focused to date - or may well be in the future - on REITs.

Johnson: What are your primary goals then, in addition to the information and the things that you are launching? I assume those things you mentioned pretty much are on the website if they are real-time.

Wechsler: We will be unveiling that (in the near future) on our website. A very important goal is to tell the REIT story. That's more simply put than what I just said to you, but to tell the REIT story and to tell it to those constituencies that matter the most to this marketplace - policymakers, investors, opinion-makers, the range of people and institutions central to public real estate.

Johnson: And why do you want to do that?

Wechsler: REITs have become a larger part of the overall real estate marketplace during the 1990s. As a result, it is very important that those who are tied to the REIT world in some fashion, or have responsibility attached to it, understand what is happening, why it is happening, why REITs exist, what REITs are all about and what the whole movement toward public ownership means.

Johnson: How closely do you work with the rating agencies?

Wechsler: The rating agencies are an important constituency for the REIT marketplace. More and more REITs have rated debt securities. With that goes a commitment to the public who is buying those securities and, therefore, we take relationships with the rating agencies seriously. We meet with them from time to time, brief and inform them on what is taking place in the REIT marketplace. They will regularly consult NAREIT staff, including our research department, for information and data. So, I think we have a good working relationship.

Johnson: Obviously, we have just come through the legislative challenges associated with the paired-share structure. Is there any further legislation in the next 12 months or so that you feel would impact the REIT structure or the REITs in general?

Wechsler: As of today, a variation of the paired-share REIT legislation that President Clinton proposed in his fiscal year 1999 budget has been adopted by Congress and signed by President Clinton. The other proposals that were contained in the President's budget have not been addressed, and given the timetable in Congress this year it does not seem likely they will be addressed this year. We certainly are hopeful that those provisions, which we view with substantial disfavor, will not be adopted by Congress and that includes the change for the worse in the rules affecting the use of so-called qualified service subsidiaries by REITs as well as the ability of C-corporations to convert to REIT or mutual fund status.

We also have been supportive of REIT legislation aimed at eliminating abusive transactions associated with the REITs.

Johnson: Last year you were talking about consolidation, continued growth through acquisition and institutional investor interest. Do all of those things pretty much hold for at least the rest of '98, or as far out as you are willing to project?

Wechsler: Obviously, as we move toward the end of 1998 and into 1999, there will be a higher premium put on internal growth and development relative to acquisition that is already developed this year, but acquisition will continue to be an important activity for REITs. As for consolidation, we have only seen it in a couple of significant examples to date, but it is a story to be written.

Whether it is something that we see develop toward the end of 1998 or 1999, I don't know, but down the road there will be consolidation. I continue to believe that as the acquisition story, as the internal growth and development story, as the consolidation story unfolds, the over-arching story will be the movement of privately held real estate into the public hands through REITs predominantly.

Johnson: Another trend is on the international scene. Do you think foreign investment into American REITs will continue, and how important are international activities by American REITs?

Wechsler: We will continue to see investments by foreigners in the U.S. REITs for all the reasons we will continue to see investments by domestic investors. Foreign investors will be very attracted to the REIT marketplace in the United States. Many have traditionally invested in real estate directly, and the REITs offer a more attractive alternative, in part due to liquidity as well as the centralized management, professional management with a comparable stake in the property. As far as REITs investing abroad, many explore that potential. Some have begun to do it modestly, and we are in the very early stages of what may develop there.

Johnson: What is your guess? How big a piece of the business is that going to be in total for REITs? Is there any way of knowing in a couple of years - could that be 50% of their FFO growth?

Wechsler: That is very hard to predict for a number of reasons: One much depends on business opportunities abroad, what develops in economies in Europe, Asia and elsewhere. Second, some will depend on the compatibility of foreign laws with U.S. REIT laws. One of the things that has been very clear to us in NAREIT over the past year is that there is very, very significant interest in looking at whether it makes sense within foreign countries to have laws comparable to the U.S. REIT law. So whether it is in Western Europe, Japan or Latin America, many countries, both on the public and private side are looking at the potential for a REIT regime similar to what the U.S. has in place.

Johnson: Actually that would give U.S. REITs a perfect entry into those markets since they already understand the structure and could just create more companies.

Wechsler: Yes, it would make entry easier and probably more attractive.

Johnson: Do you get involved in regular conference calls with analysts to talk about the REIT industry?

Wechsler: NAREIT conducts on a monthly or bimonthly basis conference calls with the analysts and institutional investor community. On those calls, senior NAREIT staff summarizes developments in the marketplace, including the political marketplace as well as the investment marketplace. Representative CEOs from REITs provide briefings on sectoral performance and outlook and we then have a number of questions and answers from the analyst investors on the phone, and this is done on a regular basis. We also hold lunches and meetings in a variety of cities during the course of the year to answer questions and present information to the institutional investor community. The reason for that really is that NAREIT serves as the industry investor relations (conduit).

Johnson: You are sort of creating your own hub of networking opportunities and information gathering, too?

Wechsler: That is an important part of it.

Johnson: Get out your crystal ball and look forward to some REIT trends for 1999 and then into the new millennium. Any thoughts on what some interesting trends might be, given your insight into the industry?

Wechsler: It is very hard to predict whether things go up or down from here. I believe that as time goes by, the broader marketplace will attach significant values to the predictable and reliable cashflows from operating real estate companies with real estate leased for a significant period of time. And I believe that the combination offered by REITs of the real estate investment characteristics so often sought by investors to balance their portfolios, combined with the operating performance of public REITs, will lead to continued support for this industry.

Johnson: Give us a big, bold prediction, if you would please. Do you think that there are going to be more or fewer REITs by the time Jan. 1, 2000 rolls around?

Wechsler: Over the last few years everyone said we would see consolidation and fewer REITs, and we ended up with more REITs.

Johnson: That is basically because th IPO market was still hot, I would think.

Wechsler: Correct. I think we have today 213 REITs as we speak. I don't doubt that we will have sort of plus or minus 200 then as well. If the consolidation story picks up, obviously that number will decline.

Johnson: Everybody's made light of the downturn recently, but has anybody drawn comparisons between this year and last year, because there was a first quarter blip in FFO earnings last year? And, if I'm remembering right, there was also a summer dip in the market last year. Are we drawing some par allels here?

Wechsler: Here is one parallel that's worth looking at. REITs have, in recent years at least, performed better in the second six months of the year than in the first six months. In 1995, the first six months was just under 8% and the second six months just under 10% - NAREIT's total return index. In 1996 it was just over 7% in the first six months, almost 27% in the second six months. In 1997 it was about 6% in the first six months and double that, just over 12%, in the second six months. This year the total return index was down a little over 5% through the first six months, and we'll see where the next six months bring us.

Johnson: So there is some consistency to this?

Wechsler: We will see whether it continues or not. It will be interesting to see that with - at least as we speak - the decline of the broader market in the last several weeks, whether the Dow or the S&P ... whether some money begins to move back into the REIT sector as a result or whether the REIT sector essentially just mirrors the broader market.

Johnson: Was there anything you wanted to touch on that I didn't ask - something you wanted to get off your chest, Steve?

Wechsler: I would just go back to one other point when you asked about our goals and what NAREIT is all about. Another theme of our CEO Conference this year was "Preserving and Perfecting REITs" and that is an important part of our mission. Both the preservation and a move toward perfecting are very much part of our agenda and are clearly tied to our broader communications strategy.