Real Estate Stock Rally Reaches Its Peak, Some Say

From Bloomberg News

Is the REIT rally overbuilt?

A rally in the shares of real estate companies, which pushed the Morgan Stanley REIT index 19% higher in the last year, might have run its course, some analysts and investors are saying.

The index, a benchmark for the real estate investment trust industry, is just shy of 400 and is unlikely to go much higher, they said, because share prices are near or above the value of the apartments, offices, shopping malls and other property owned by the trusts.

"REITs are not cheap," said Patrice Derrington, who manages more than $200 million in real estate securities for Victory SBSF Capital Management. "They are approaching fair market value."

Goldman, Sachs & Co. on Wednesday downgraded six real estate investment trusts, including Simon Property Group (ticker symbol: SPG), which fell 28 cents to $28.87, and Equity Residential Properties Trust (EQR), off 88 cents to $56.11. The brokerage firm cited high share prices and declining demand from tenants.

The Morgan Stanley index, which started at 200 in 1994, is up 9% for the year, compared with a decline of 8.3% for the Standard & Poor's 500 index. The REIT index measures total return, which includes price appreciation and dividend payments.

It fell 0.78 point Wednesday to 398.97 after hitting a record high Tuesday.

Even with a slowing economy cutting into rent and occupancy rates, the average REIT trades at a 4.3% discount to its net asset value, according to Morgan Stanley, compared with a discount of 11.2% in March.

REITs are companies that own all types of properties, from Chicago's Mercantile Exchange to Minnesota's Mall of America. Some of the country's largest real estate companies are REITs, including Equity Office Properties Trust (EOP), the biggest office owner, Equity Residential, the biggest apartment owner, and Simon Property, the biggest mall owner.

Because they pay out most of their net income, REITs carry dividend yields that average 7%, about double the Dow Jones utilities average. With interest rates falling, REITs have attracted investors looking for income, portfolio managers said.

Morgan Stanley estimates REIT profits will rise an average of 7.4% this year and 8.2% in 2002.

Goldman Sachs analyst David Kostin downgraded Simon; Equity Residential; Mack-Cali Realty Corp. (CLI), down 9 cents to $28.41; Entertainment Properties Trust (EPR), off 67 cents to $17.97; and Weingarten Realty Investors (WRI), down $1.04 to $43.56, to "market perform" from "market outperform." He downgraded Reckson Associates Realty Corp. (RA), off 5 cents to $22.90, to "market perform" from "recommended list."

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