Stocks Can't Fall? Check Out REITs' Retreat

This post by Doug Kass appeared at 8:08 a.m. on May 21 on TheStreet.com's Street Insight.

We learn from history that we learn nothing from history.
-- George Bernard Shaw

Back in early February, the real estate investment trust sector was the cat's meow -- it could do no wrong. Despite my pooh-poohing the sector's seemingly ridiculous popularity (and valuations) on Street Insight and even in a Barron's editorial, the group marched ever higher. Premiums to net asset value were at all-time record highs, dividend yields were at all-time lows (seemingly disconnected from the level of interest rates), multiples to funds from operations hit historically high levels -- and the entire sector was seen as takeover fodder.

In late 2006, Sam Zell made history by selling his prized Equity Office Properties to The Blackstone Group. Investors saw this transaction as confirmation of value. By contrast, I viewed the sale by the "smartest man in the room" as a cautionary sign.

The proximate cause for the REIT leadership: rising liquidity (in the form of mutual fund inflows and mergers). And, oh yes, the momentum fed upon itself as the traditional non-REIT investors had new company in the group in the form of aggressive fund managers who grazed on the price action like piranhas waiting for their prey.

Back in early February, the real estate ETF -- iShares Dow Jones U.S. Real Estate (IYR Quote) -- traded at $93 per share; today it is at $80 per share and doesn't seem to have an uptick, despite the market's overall strength.