REIT stocks extended their winning streak into the first quarter of 2002, according to LaSalle Investment Management’s U.S. Real Estate Securities Market Review and Outlook.
With the Wilshire Real Estate Securities Index up 9.1 percent and the NAREIT Equity Index up 8.3 percent, REITs significantly outperformed the broader stock markets during the first quarter of the year. In comparison, the S&P 500 Index rose only 0.3 percent, while the NASDAQ Index suffered a 5.3 percent decline.
“We believe that REITs remain well-positioned to continue their strong performance,†said William K. Morrill, Jr., Managing Director and Chief Executive Officer of LaSalle Investment Management Securities. “Valuation levels for REITs remain attractive relative to capital market alternatives by several measures: REITs are still trading at low earnings multiples relative to the broad stock market; REIT dividend yields are at an above-average trading spread to Treasury yields; and REIT share prices are close to the underlying value of their real estate.â€
“Over the next year, we expect real estate companies to provide investors with a total return of 10 percent to 13 percent, assuming no change in price-earnings ratios,†he continued. “As we move into 2002 and the shape of the economic recovery becomes more clear, we think market leadership within the real estate sector will move more strongly to those companies with higher growth prospects and the wherewithal to achieve their financial and operational goals. We believe this is a good time to initiate or add to a portfolio of real estate securities.â€
According to the report, the United States’ economy appeared to have begun to recover during the quarter, more quickly than most analysts expected. Real estate owners have been less impacted in this recession than in prior economic downturns, thanks to more limited levels of new supply and stronger balance sheets. Only hotels, with their night-to-night leases, have seen significant declines in operating income.
REIT Funds From Operations (FFO) earnings for 2001 increased about 5 percent, versus a decline in the earnings of the S&P 500. Since the supply of new development was curtailed in anticipation of a more severe recession than now appears likely, LaSalle believes that 2002 should be a year of continued growth in the earnings of public real estate companies, with consensus estimates placing FFO growth at around 4 percent.
“We believe real estate stocks offer investors an attractive combination of high current income and moderate appreciation, along with relatively low market volatility,†said Morrill. “As a greater percentage of the population enters or nears retirement, higher current income will become more important. With stocks and cash instruments such as money markets and CDs offering very low yields, REITs look particularly attractive to that market segment.â€
LaSalle Investment Management, Inc.)
