New York University
. After working as a real estate analyst for
from 1993 to 1996, Litt recently rejoined
Salomon Smith Barney
as their senior real estate analyst. In the interim, he followed real estate and lodging at
. Prior to 1993, he worked on the buy side for
, a money management firm specializing in REITs.
Industry Outlook and Style
Jonathan Litt's outlook for real estate investment trusts is bright, both in the near and the long term. Although the group is up 20% this year, the analyst notes that REIT stocks remain roughly 20% below the peak prices they reached in 1997.
He believes there is still lots of room for these stocks to appreciate. REITs consistently grew earnings throughout the sector's bear market of 1998-1999, asserts Litt. The Salomon analyst expects earnings to continue to grow in the 8%-10% range over the next three to five years. Factoring in their dividend yields, which average 7%, REITs will soon consistently generate total returns in the midteens, he contends.
Viewing supply and demand conditions as the keys to evaluating the real estate market, Litt was concerned about overbuilding in the first half of 1998. Since then, however, he sees evidence that construction is moderating or declining, while demand remains strong. But he believes the U.S. economy will cool down and with it, the demand for new buildings. "The fact that we're seeing construction slow in advance of the decline in demand is positive for the sector," he says. "Historically, we've been accelerating building as we go into a recession."
In January 1999, Salomon Smith Barney established a list of companies that the firm believes to be the top plays in the group. Companies that make the firm's so-called blue-chip list must meet several criteria, Litt explains. First, they must operate in markets with high barrier to entry -- areas where it's hard to build, thus making an oversupply of buildings unlikely. In addition, companies must have a large capitalization, be conservatively leveraged and have consistent earnings growth and highly regarded management teams.
From a field of 65 companies, nine make Salomon's REITs blue-chip list. Of those, the firm's top pick is
Equity Office Properties
, a Sam Zell-led company, notes Litt.
"We also like
, which is in New York, Boston, Washington, D.C. and San Francisco -- those markets are on fire right now," observes Litt. Another favorite name:
, which operates apartments in the robust markets of the Northeast, Northwest and the Midwest. (Salomon has investment banking relationships with all three companies.)
Office companies dominate the list because that sector has the best fundamentals, says Litt. And within that subsector, central business district office is the "most attractive," he asserts.
Is there a subsector he'd avoid? "We're not loving suburban office in the South because we expect to see overbuilding in those markets," says the Salomon analyst.
Favorite stock for next 12 months:
Equity Office Properties
"Equity Office Properties is the largest owner of office buildings in the U.S.; total capitalization is about $20 billion. It trades at about an 18% discount to its peers, which are Boston Properties,
Vornado Realty Trust
. We believe that Equity Office Properties will have similar growth prospects as those companies, hence we have it as our top pick right now."
Rate Their Stock Picks:
Which stock do you like best?
Litt and Whyte: Equity Office Properties
Raiman: Equity Residential