BOSTON (Dow Jones) -- A slower economy and continuing worries over the housing and credit markets will likely pressure real-estate investment trust stocks the next several months and the shares could lose ground, Lehman Brothers analyst David Harris said Tuesday.
"Assuming no recession (65% probability) or only a mild recession, we think that by midyear the sector might be seen as being more attractive," Harris wrote in a note.
"This might be based on some confidence about an end to the downturn in housing and an overall economic improvement in 2009," he said. "REIT earnings quality and dividend yield should appeal to some investors."
He sees REIT stocks as a group rising between 5% and 7% in 2008.
REITs' streak of outperforming the stock market for seven straight years looks set to end in 2007. An exchange-traded fund tracking the sector, Dow Jones Wilshire REIT ETF (RWR), was off more than 17% year to date through Monday's close, trailing the S&P 500 Index (SPX) by over 23 percentage points, according to Morningstar.
Investors have taken profits after the multiyear rally and there are concerns that the credit turmoil could raise REITs' funding costs. Still, the commercial real-estate market has mostly sidestepped the carnage in residential housing, at least so far.
REITs, which are required to pay out most of their earnings to shareholders in the form of dividends, give investors exposure to the commercial real-estate market.
"We have a positive view of retail, a neutral/positive view of offices, a neutral/negative view of industrial and a negative view of apartments," wrote Lehman's Harris in his report.
The analyst did, however, upgrade apartment landlord Equity Residential (NYSE:EQR) (EQR) to overweight from equal weight.
"The company's strong balance sheet, safe dividend, minimal development relative to its size and share-buyback program are supportive features," according to Harris. Equity Residential (NYSE:EQR) recently boosting its quarterly dividend and share-buyback program is the "right thing" for shareholders, the analyst said.
Conversely, Lehman downgraded shares of developer Cousins Properties Inc. (NYSE:CUZ) ( CUZ) to equal weight, while suburban office company Mack-Cali Realty Corp. (NYSE:CLI) (CLI) fell to underweight.
The Mack-Cali downgrade was "principally predicated upon the company's lackluster earnings-growth prospects and relatively less-attractive portfolio concentration compared to its peers," Harris wrote. "Softening office-tenant space demand from financial-services tenants in [and] around New York could be a headwind," he said, while also raising concerns over the company's dividend.
Regarding Cousins Properties (NYSE:CUZ) , the company's land business "will remain significantly challenged throughout 2008," Harris expects.
"The substantial development pipeline could also be a source of additional risks should the economy continue to weaken. While we continue to believe this is a winning long-term business model, we estimate that the rewards are not likely to appear until 2009."
The analyst pointed out that his top REIT picks with outperform ratings are retail companies Developers Diversified Realty (NYSE:DDR) (DDR), Macerich Co. (NYSE:MAC) (MAC) and Simon Property Group Inc. (NYSE:SPG) (SPG)
In offices, he likes Boston Properties Inc. (NYSE:BXP) (BXP), Douglas Emmett Inc. (NYSE:DEI) (DEI) and Vornado Realty Trust (NYSE:VNO) (VNO). Apartment REITs Essex Properties Trust Inc. ( ESS) and Equity Residential (NYSE:EQR) draw top marks, as do Extra Space Storage Inc. (NYSE:EXR) (EXR) in self-storage and data-center company DuPont Fabros Technology Inc. (NYSE:DFT) (DFT)
"We generally favor companies with greater defensive characteristics," Harris said.
(END) Dow Jones Newswires 12-18-07 1732 Copyright (c) 2007 Dow Jones & Company, Inc.
