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Stock prices may rebound

While the stock performance of real estate investment trusts (REITs) has badly lagged behind the overall stock market over the last year, an upturn in the performance of the stocks -- and in particular those of the retail REITs -- is considered a distinct possibility.

"The earnings for the regional mall companies are expected to be up about 10% this year, while on a valuation or multiple basis their stocks are where they were four years ago," said Andrew Jones, retail REIT analyst at Morgan Stanley Dean Witter, New York.

"When you think of how much the overall stock market has gone up over the last four years, (on a compound basis, the Standard & Poor's 500 index is up 125% over the last four years, while the mall REIT stocks are up 69%) the mall REITs should certainly perform better this year," he added.

Mr. Jones expects mall REITs to have a total return this year of 13% to 15%, noting that they should not underperform the stock market as much as they have so far in 1998.

The retail REITs should "easily" provide at least a 12% to 13% total return for 1998, pointed out Gary Boston, retail REIT analyst at Paine Webber.

"In an uncertain environment investors should come back to the stocks that are more stable," he said.

This should bode well for the retail REITs. With their higher dividend, REITs should attract investors who want stable income from their stocks.

"With the Standard & Poor's 500 Index rising to new highs, interest in REITs should pick up, because on a risk-reward basis the REITs are better valued," said Jordan Heller, REIT analyst with CIBC Oppenheimer, New York.

Craig Schmidt, retail REIT analyst at Merrill Lynch, New York, agreed that on a valuation basis REITs appear to be good buys.

"The spread between the price/earnings multiple of the S&P 500 and the adjusted funds from operations multiple of the REIT stocks is at an all-time high," he said.

The multiple for the S&P 500 is 1.95, while it is 1.73 for REITs.

A company's price/earnings multiple is its stock price divided by its most recent yearly earnings per share. Adjusted funds from operations (FFO) is the REIT equivalent--in terms of performance measurement--of earnings per share. The difference in the two multiples shows that regular company stocks are trading at a much higher multiple of earnings per share than REIT stocks are of their adjusted FFO.

For the first three months of 1998, the total return of REIT stocks is a negative 4.6%, while the S&P 500 has had a positive 10.6% return.

"We can't see why REITs should underperform the S&P 500 by that much," said Mr. Schmidt. The REITs are due for a rebound, he said.

The surprisingly strong earnings performance in the fourth quarter by the regional mall REITs should also give a boost to their stocks. Investors like to see corporate earnings that exceed analysts' predictions.

"The regional mall REITs had one of the strongest positive surprises ever, with 83% of the REITs either coming in at or exceeding expectations," said James Sullivan, REIT analyst at Prudential Securities, New York.