There is an old saying that the higher you fly the farther you fall. That can certainly be said of the once high-flying REIT industry, which came off record-breaking performances in 1996, 1997 and 1998. But will those be the glory days of the REITs, or merely the precursor of bigger and better events to come?

Recently, the Intertec Marketing Research Department conducted a detailed study of the REIT industry. Specifically, the study was designed to examine how REITs perceive the current state of their industry and their expectations for the future.

A list of 233 REITs was used to conduct the telephone survey. Only one contact from each company was allowed to respond. Interviews were conducted between April 5 and May 3, 1999.

A total of 85 telephone interviews were conducted, which represents a 36% response rate to our survey.

Who we queried To best understand where our respondents were coming from, we asked for some simple demographic information upfront. We found this about our respondents' businesses:

* They have a median of 96 properties in their portfolios.

* They have a median portfolio size of 13.5 million sq. ft. (their average portfolio size was actually 21.7 million sq. ft. and 183 properties).

* The largest segment of REIT respondents (49%) have been operating for five years or less and have retail properties in their portfolio. However, more than 22% of respondents have been in operation for 16 years or more.

* Nearly half of all respondents (48%) specialize in only one property type.

* 62% of respondents said their portfolios include retail, while 48% said they have office properties, 35% said multifamily and 26% said industrial.

* Respondents were evenly divided between local/regional companies and national/international companies.

In a related article, please turn to page 84 for an informative interview with NAREIT head honcho Steven Wechsler.

A bright future? Let's start off with an overall outlook issue. Despite the more recent hard times for the REIT industry and its fall from grace, more than one-third of our respondents (36%) believe a general REIT industry recovery will occur in the next 12 months. In addition, more than three-fourths of respondents who believe REITs are trading at a discount believe this trend will only continue for the short term.

Still, there was a significant body of respondents (43%) who believe the recovery will occur in the next 12 months or more. Perhaps these star-gazers are just as concerned about interest rates and other economic indicators as their analyst brethren.

Leverage levels On average, our respondents had leverage levels of 42%. Nearly two-thirds (62%) operate under a percent-of-debt ratio of less than 50%. One-fourth of respondents have a 50% or more debt level.

Growth stock vs. income stock The most pressing question of our time concerning the REIT industry is this: Are REITs really growth stocks or dividend/income stocks?

Interestingly, our REIT respondents were asked what they feel investors think of them, and also how the REITs think of themselves.

Their answers were surprisingly similar. According to our REIT respondents, they overwhelmingly view themselves as income stocks (82%), while 93% say that investors consider REITs as income stocks. One-third consider themselves to be value stocks and only one-fifth view their stock in the growth category.

Trading values Another of the time-honored traditions by public companies is to knock the perception that their stock is undervalued by investors in the marketplace. This is the primary reason for investor roadshows, after all. Since commercial property assets are the primary underlying value of any REIT, how they are valued directly impacts the REIT's stock price.

Our survey confirmed the widely held belief that REIT stocks are undervalued today. A healthy 85% of our respondents strongly agree that their stock was undervalued, and 98% agree that REITs in general are trading at discounts to the underlying value of their real estate holdings.

Valuing management's role It is perhaps no secret that today's REIT-stock analysts look most closely at the company's management team as a gauge for a REIT's health and long-term growth prospects. So we asked our respondents what they felt about the importance-of-management issue.

Actually, we asked, "What factors do you believe are important to the value of a REIT?" Not surprisingly, 54% of respondents pointed to the strength of the management team as the key factor affecting the value of any REIT. This response was not-so-closely followed by the location of properties (27%), health of the economy (22%), geographic scope of the REIT (20%) and the type of property (20%).

Geographic diversity or not? Conventional wisdom on The Street has always been that REITs should have geographic diversity to maintain steady income streams in up and down markets and to cushion against economic downturns. But today the two schools of thought are blurring the notion of which is actually a better long-term strategy.

When asked what the advantages are of having a local/regional focus, most respondents mentioned better understanding/knowledge of the market, followed by fewer markets/easier to know/can focus within region. By the same token, having a national/international focus is an advantage in terms of risk diversification and allows better property diversity while offering customers multiple locations.

When asked about the major disadvantages of having a local/regional focus, most respondents mentioned that these properties are more susceptible to regional market trends and economic swings. The major disadvantages to having a national/international focus are wider geographic area to cover and having to maintain an expertise in all markets, plus increased management costs.

Broadening their appeal The two core REIT constituencies - investors and analysts - are often at odds over what rates of return (ROR) to expect from any REIT stocks. But the REITs themselves overwhelmingly feel that they must increase their rates of return to gain the additional investors they expect to need for future growth.

Nearly nine in 10 respondents (86%) believe that in the future, REITs will become more attractive to non-dedicated REIT investors. But in order to do so, the rate of return for REITs obviously must increase. In fact, respondents report an average ROR of 4%, while the average ROR they believe investors expect is more like 13%. That's a significant gap, eh?

Just to explore the types of returns our REIT respondents have achieved over the past 12 months, we asked for some percentages. A full 31% of them said they achieved RORs of 1% to 10% in the past 12 months; 11% saw RORs of 11% to 15%; and another 11% saw RORs of 16% or higher.

Grow, grow, grow Here at NREI, we've said it before: REITs in general have limited options for growing their enterprises, and hence their value and stock price.

So what are our respondents' growth strategies? Overall, most REIT respondents (69%) plan to grow through development, while 65% will grow through acquisitions.

Our national/international REIT respondents are more likely to grow through acquisitions than their local/regional brethren (76% vs. 53%, respectively). REITs that specialize in one property type are more likely to have development plans than those that have multiple property types (76% vs. 64%, respectively).

Not surprisingly, only 25% expect to grow through secondary offerings of stock, which is a radical departure from past years and reflects the changed capital-markets environment of the late-1990s.

M&A trend ahead? REIT-industry consolidation is one significant trend that has been predicted for quite some time. Most often cited is either a merging of equals or the big fish eating smaller fry.

Our survey seems to bear this out. The majority of our respondents (79%) expect small cap REITs to merge in greater numbers in the future, while the majority also believe that large cap REITs will acquire small cap REITs.

Which are more likely to merge, local/regionals or national/internationals? According to our survey, local/regional REITs are more likely than national/internationals to predict that small cap REITs will be able to keep up with large cap REITs (53% vs. 38%, respectively).

Almost half of our respondents (49%) believe that the gap between small cap REITs and large cap REITs is likely to accelerate, indicating a more clear-cut definition between big and little in the industry of the future.

Getting a retail bent? Go to most finance conferences these days and at the top of the stay-away-from-that-property-type list is retail. Surprisingly, retail properties are the most frequently mentioned property type that our survey respondents plan to acquire, develop and sell in 1999.

The retail category was followed by office properties, multifamily and industrial.

Region-by-region analysis For those REITs which plan to acquire properties in 1999, which property type will they favor and exactly where will they favor it?

Our respondents remained bullish on retail, citing it as the No. 1 property type they will acquire this year. They expect to buy more retail in the Northeast than any other region.

For the office sector, REITs expect to acquire properties in the Northeast and Southeast. Multifamily buyers will be active in the Southeast and Midwest, while the largest percentage of industrial buys also will be made in the Southeast and Midwest.

On the development side, the largest percentage of retail property developments are planned for the Midwest, while the largest percentage of multifamily, industrial and hotel property development are planned for the Southeast.

Bull vs. bear market Which market is best for REITs, bull or bear? It seems like a simple question because stocks always go up during a bull run, but REITs are sometimes positioned as an alternative investment - a quasi shelter stock - in more bearish markets.

Our respondents with multiple property types are more likely to believe REITs fare better in bull markets (39%) than in bear markets (27%). The opposite is true for REITs with one property type; 39% believe REITs fare best in bear markets and only 20% believe they fare best in bull markets.

If you believe that a rising tide lifts all ships, then you agree with many of our respondents. But when asked if they agree or disagree that the value of their real estate holdings is directly affected by the performance of the stock market, 48% said they either somewhat disagree or strongly disagree with that statement. A total of 41% said they somewhat agree and only 4% said they strongly agree.

The largest percentage of local/regional REITs strongly disagree with that statement, while 60% of national/international REITs somewhat agree or strongly agree.

Biggest challenges to come According to our respondents, the three leading challenges facing their businesses in the years ahead are:

* Raising capital;

* Educating investors about the value of stock ownership; and

* Enhancing stock prices

Following closely on the heels of these "big three" challenge items are: Maintaining growth; making profitable acquisitions and being able to acquire properties at reasonable prices; broadening their investor base and attracting investors; and establishing an identity with the investment community.