Hefty dividend yields and steady profit growth have lured more investors to real estate investment trusts this year, and some analysts are growing concerned the stocks have climbed too far.
Prudential Securities Inc.'s James Sullivan on Tuesday cut ratings on Kilroy Realty Corp., SL Green Realty Corp. and Equity Office Properties Trust, citing rising office vacancy rates in some markets.
He joined other analysts who have downgraded REIT stocks in recent months and warned that the stocks are expensive after their sharp gains of the last two years.
The analysts' arguments seem compelling to Wendell Perkins of Johnson Asset Management in Racine, Wis., who Tuesday sold shares of Camden Property Trust and Weingarten Realty Investors.
"This morning we started cutting our exposure to the whole sector," Perkins said. When he added the stocks to the $80-million JohnsonFamily Small Cap Value Fund a few years ago, "They were very cheap," Perkins said. "They're just not any longer."
A Bloomberg index of 148 REIT shares has surged 35% since year-end 1999, including a gain of 9% so far this year. Those returns don't include dividends paid.
By contrast, the blue-chip Standard & Poor's 500 index has fallen 23% since year-end 1999.
Kilroy shares (ticker symbol: KRC) fell 73 cents to $28.26 on Tuesday, while SL Green (SLG) lost 83 cents to $24.77 and Equity Office (EOP) slid 47 cents to $30.61.
Prudential's Sullivan lowered Kilroy, SL Green and Equity Office to "hold" from "buy."
Kilroy's share price still is up 8% this year, SL Green is up 13% and Equity Office is up 2%.
REITs own buildings and essentially pass the rents through to shareholders in the form of dividends. REITs may specialize in commercial, residential or industrial properties, or own a mix of all three sectors.
"When you're in an uncertain stock market like we've been in for the last couple of years, the REITs are safe havens," said JohnsonFamily's Perkins. Multiyear leases give many REITs relatively stable, predictable earnings, and the dividends can make the stocks attractive even when they aren't gaining. Annualized yields on many REITs are above 6%.
Sullivan said REITs will be less attractive if other parts of the stock market take off as the economy recovers. Even so, he said, "the relative attractiveness of their yields is going to continue to be a positive factor."
Merrill Lynch & Co. analyst Steve Sakwa said in a research note this week that REITs are, on average, offering a 6.2% dividend yield, down from 7% at the start of the year.
He also said that they are trading at almost an 8% premium to their net asset value, a method commonly used to assess whether they are cheap or expensive.