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REIT Shares Drop on Analyst's Downgrade

NEW YORK-Smith Barney downgrades 12 REITs in a report that says they are overvalued, sparking a sell-off late last week that continued on Monday, pulling down share prices even further.

By Brian K. Miller | Updated on September 13, 2004

NEW YORK-Smith Barney downgraded a dozen companies in the REIT sector late last week, hanging the “sell” sign on nine of them. The report by analyst Jonathan Litt, which forecasts a near-term drop-off in share prices, sparked a sell-off that pulled REIT share prices down between 1% and 4% on Thursday. After trading Monday, all involved had fallen further.

“[REIT] Fundamentals continue to improve but valuations are ahead of themselves,” says Litt in the report, explaining that REITs are up about 16% year-to-date, and with dividends they are on track to deliver 17.4% total return in 2004. “We believe the group is…due for a pause in total returns as earnings catch up with extended valuations.”

The report details two possible scenarios. The first, a “Goldilocks” economy for REITs–where the economy muddles along with modest job, inflation and GDP growth–may provide upside to the group. The second, an “End of the REIT Bull Market” economy, is where investors will be attracted to other sectors of the stock market that promise big total returns as a result of the strong economy.

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