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Shopping Centers Today -> September 2002
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TEMPORARY TUMBLE?
Retail REIT stocks, historically stable, raise a few pulses
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For a long time REITs have been seen as paragons of stability, in contrast to the volatility of other kinds of stocks. Thus it was all the more unsettling when REIT stocks tumbled in the first three weeks of July.
More surprising, and perhaps disturbing, is that the technology-heavy Nasdaq composite index outperformed both REITs and the Standard & Poor’s 500 index, despite the almost daily revelations of misdeeds among such tech companies as Adelphia Communications Corp. and WorldCom. Traditionally, this is when high-yielding, safer securities such as REITs thrive, Merrill Lynch & Co. REIT analyst Steve Sakwa noted in a July report.
Analysts came up with several explanations for the faltering of REITs. Investors began selling off REIT stocks at the end of June; most notable among them were profit-taking diversified investment fund managers, explained Greg Whyte, managing director of REIT research at Morgan Stanley Dean Witter. The investment bank tracks REITs through its Morgan Stanley REIT index (RMS).
Investors’ intentions to take money out of REIT stocks were camouflaged by heavy buying during the last week of June. The dedicated REIT investors, not wanting to see large cash balances standing idle, wanted to invest before the end of the quarter, said Whyte. That rally sent the index up 2.8 percent from the middle of June, but also set the stage for a three-week free fall.
By the end of June, REITs had gotten to be very expensive, giving diversified investors an incentive for profit-taking. So the selling started, and by July 25, the RMS had dropped to 401.59, down 2.7 percent from the beginning of the year. Even small investors took their money out of the sector. Also about that time REIT mutual funds were reporting their first fund outflows in nine months, according to a Morgan Stanley report.
Second-quarter earnings aggravated the situation. A good number of REITs barely met earnings expectations or were lowering their estimates, while companies on the general market were starting to meet their earnings goals, said Whyte.
Among retail REITs, the story was pretty much the same, though they began a rebound sooner than the other asset classes. The Salomon Smith Barney Retail REIT index suffered sell-offs that mirrored the RMS until July 19. The last week of July, however, all the major retail REITs staged gains in total returns. According to the Salomon index, regional mall returns increased by 1.3 percent, while strip centers and factory outlets delivered returns of 1.54 percent and 5.43 percent, respectively.
For their part, retail REITs met or exceeded second-quarter earnings expectations, as Morgan Stanley analysts predicted they would. Taubman Centers, Bloomfield Hills, Mich., reported an 11.8 percent increase in funds from operations (FFO), a shade better than analysts’ consensus estimates. Kimco Realty Corp., New Hyde Park, N.Y., reported a 2.7 percent increase in FFO from a year ago, also beating consensus estimates.
At press time, retail REITs had managed to remain one of the best-performing asset classes for the year, despite the downturn. From the beginning of the year through the RMS peak on June 28, only seven of the 27 retail REITs, or 26 percent, had underperformed the index. Since June 28, that number has dropped to five, or 19 percent.
So despite the July plunge, analysts insist that REIT stocks still represent a good value, and are inherently less volatile than other stocks.
“One always has to remember where the index has been,” said Whyte. “And the index is back at an all-time high.”
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