Can You Trust the REITs? Part 2

Our REIT Roundtable predicts more underperformance ahead. Plus, a few exceptions to the dour forecast.
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Editor's Note: This is Part 2 of Christopher Edmonds' column on the latest meeting of the REIT Roundtable; Part 1 ran yesterday.

Members of the


REIT Roundtable

believe that a combination of tax-loss selling, continued outflows from REIT-dedicated mutual funds and the unwinding of

unit investment trusts will put pressure on the prices of REITs, or real estate investment trusts, between now and the end of the year. "They are sources of supply," says Roundtable member Ritson Ferguson of

CRA Real Estate Securities

. "That's enough to keep a lid on prices."

"There is no spark in the short term for REITs," says Craig Silvers, head of REIT research at

Sutro & Company

and a member of the Roundtable. "There is no reason to own these stocks before January."

However, the panel is mixed on the outlook into the new year. "We know we'll get an 8% dividend," Ferguson says. He predicts REITs should appreciate about 8% for a 16% total return through June.

At the low end of the spectrum is Roundtable member Carl Tash of

Cliffwood Partners

, who says the total return between now and next June will be in the low single digits. "We may be up only 2% or 3% between now and June," he says. "We are just in the wrong part of the economic cycle for real estate stocks to move."

In addition to broad market predictions, we also asked our panelists for their best REIT stock idea between now and June 2000, the next scheduled gathering of the group. We also asked them to predict how well the major REIT sectors would perform.

Both CRA's Ferguson and Jim Grissett of the Atlanta-based real estate management firm the

Parthenon Group


Liberty Property Trust


, an office/industrial REIT. "They do the basics well with no negative surprises," says Ferguson. Both Ferguson and Grissett are long the stock. Grissett also likes

Meristar Hospitality


, a downtrodden hotel REIT he holds in his portfolio, for investors with a long-term horizon.

Roundtable member Marc Halle of

Prudential Real Estate Securities


Post Properties


, a developer of upscale multifamily properties. "They're hitting singles," says Halle, who also favors apartments over other sectors. "The multifamily sector is pretty transparent when it comes to earnings. Investors seem to understand and trust the numbers." Prudential rates Post hold. (The firm has done no investment banking for the REIT.)

Rich Paoli of

Warburg Dillon Read


First Industrial Realty Trust

(FR) - Get Report

. "The company is decreasing leverage, selling assets and will likely announce a stock buyback next year," he says. "All could be near-term catalysts for the stock." Paoli rates First Industrial buy. (Warburg has not performed any investment banking with the company.)

Sutro's Silvers favors another multifamily REIT,

Essex Property Trust

(ESS) - Get Report

, with a focus in the Western part of the U.S. "They are in good markets with growing demand and stable supply," he says. "They just beat third-quarter estimates and earnings visibility in the teens going forward looks good." Silvers rates Essex Property buy. (Sutro has performed investment banking for the company.)

Cliffwood's Tash also likes Essex and another apartment REIT,

Charles E. Smith Residential


. "The multiple is high, but they should be able to beat estimates into next year," Tash says. "You talk to apartment owners, and they all say they are asking and getting rent increases that are much larger than they expected." Cliffwood Partners is long the shares of both Essex and Charles E. Smith.

All Roundtable members were negative on the short-term prospects for the hotel sector. Silvers summed it up best: "If the sector is this weak in a strong economy, wait until a downturn. They may look cheap now, but just wait."

The overall mood of the Roundtable may have been best summed up by Parthenon's Grissett. "If you invest between now and June, don't buy these things," he says. "If you're investing for the next three-plus years, it's more risky to be short than long."

Coming soon: I will look at REIT-stock-buyback programs and answers to your questions for the Roundtable.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

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