<Picture: Y delayed 20 mins - disclaimer Friday March 5, 1:56 pm Eastern Time
ANALYSIS-REITs still lose out to hot growth stocks
By Suchita Nayar
NEW YORK, March 5 (Reuters) - The worst storm to hit U.S. real estate investment trusts in more than two decades appears to have blown over. But investors who abandoned ship are refusing to come back, leaving REIT stocks adrift.
Given how Internet and other high-flying technology stocks can double in one day alone, investors have ignored the 10-20 percent annual total return that trusts historically promise, analysts say. The National Association of Real Estate Investment Trusts (NAREIT) equity index fell 19 percent last year, its worst drop since 1972.
``(REITs) are a dull story in a very sexy market,'' said Jeffrey Donnelly of Everen Securities.
``The only catalyst pulling this sector back will be one of relative valuations,'' he added. ``People will get tired of buying companies at 80 times earnings and might take some money off the table and put it in companies with more conservative and consistent valuations.''
REITs, which own a portfolio of properties and are required to pay out 95 percent of their cash flow in the form of dividends, hold the promise of consistent income for shareholders. They have delivered at least a 5-10 percent growth in funds from operations, a key measure of their operating earnings.
``Investors don't want to play defensive when they can get 20-30 percent returns -- sometimes ever larger -- in a day from frenetic stock activity in sectors like the Internet,'' said Jay Leupp at BancBoston Robertson Stephens. ``That's more than what REITs are expected to appreciate in an entire year.''
But some think the tide for the beleaguered sector -- once considered a safe haven -- could turn later this year as people realize its inherent value. Most REITs are trading at a discount to the value of their physical assets.
Since the beginning of the year to Thursday's close, the Morgan Stanley Dean Witter benchmark real estate index (^RMS - news) has fallen by about 5 percent, compared with the Dow Jones Industrial average (^DJI - news) and the technology-laden Nasdaq market (^IXIC - news), which have gone up some 3 percent.
Most REITs have hit rock bottom, such as shopping mall owner Simon Property Group Inc. (NYSE:SPG - news), which set a new 52-week low of $24.25 on Thursday.
Few others, meanwhile, have managed to stay afloat.
Mortimer Zuckerman's Boston Properties Inc. (NYSE:BXP - news) shares ended 6 cents higher at $32.81 on Thursday, near a year high of $36, while Sam Zell's Apartment Investment and Management Co. (NYSE:AIV - news) closed 50 cents lower at $38, near its year high of $41.63.
Some analysts argue that the group has become highly oversold amid the possibility of a strong recovery in the second half of the year. Fears of a looming economic recession -- which rocked the sector last year -- appear to have dissipated, while demand for space remains strong in most markets. The credit crunch that curbed REIT expansion plans in 1998 also appears to have abated.
But investors continue to pull capital out of the sector, causing mutual funds that own REIT stocks to sell their shares, dealing another blow to the companies, said Christopher Haley of First Union Capital.
Tero Tiilikainen of SNL Securities said the REIT story in 1999 is going to be ``an operations story,'' with trusts focusing on internal growth and placing a premium on solid management teams and liquidity.