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REITs follow stock market lower; analyst downgrade

NEW YORK (AP) -- An analyst downgrade deepened the stock-market pain for several companies that own apartment buildings Wednesday.

Their shares fell in a widespread market rout, even as a string of recent reports have pointed to a stronger housing market.

Buck Horne, an analyst at Raymond James & Associates, lowered his recommendations on a batch of multi-family real estate investment trusts on Wednesday. Multi-family REITs mainly own apartment buildings.

Horne cited a number of reasons for the shift. At the top of the list is the belief that the Federal Reserve will keep interest rates low and that other central banks from around the world will buy bonds to push down long-term interest rates.

In that case, investors will likely favor investments that pay higher yields — such as REITs that deal in commercial real estate mortgages — rather than multi-family REITs.

And if financial markets turn more turbulent in the coming months, Horne wrote, shares of many will likely track the overall stock market rather than beat the broader market's return.

Horne cut Essex Property Trust Inc. and Mid-America Apartment Communities Inc. to "Outperform" from "Strong Buy." He dropped Equity Residential, Apartment Investment & Management Co. and Associated Estates Realty Co. to "Market perform" from "Outperform."

REITs have performed well recently, with the Dow Jones Equity All REIT index gaining 11 percent in 2013. One concern with multi-family REITs, however, is that people who are paying rent now may try to buy houses with mortgage rates near record lows and home values rising. That would bring down rents and REIT income.

But the apartment sector is still strong, Horne said. The U.S. Commerce Department reported on Tuesday that home construction topped 1 million in March, the first time that's happened since June 2008. The overall pace of new housing construction rose 7 percent in March from February, and apartment building led the surge with a 31 percent gain, the fastest pace since January 2006.

Here's a look at how those real estate investment trusts fared in late Wednesday trading:

— Essex Property Trust fell $3.14 to $153.74, down 2 percent.

— Mid-America Apartment Communities fell $1.13 to $68.26, down 2 percent.

— Equity Residential fell 95 cents to $57.60, down 2 percent.

— Associated Estates Realty fell 60 cents to $17.70, down 3 percent.

— Apartment Investment & Management fell 57 cents to $30.83, down 2 percent.

The Standard & Poor's 500 index was down 1.5 percent.