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Analysts: Go Commercial When It Comes to REITs

Tuesday, 10 Apr 2007 | 4:52 PM ET

Investors should not confuse the housing slowdown and subprime mortgage woes with the performance of equity real estate investment trust companies (REITs), two analysts told CNBC’s Melissa Francis on “Closing Bell.”

“The mortgage REITs can be pretty dicey, but the commercial REITs that own the properties directly are really facing a very different set of dynamics than what you’re seeing on the homebuilding and single family side of the market,” said Louis Taylor, senior REIT analyst at Deutsche Bank, who recommends ProLogis, American Financial Realty and Public Storage .

The Case for REITs
REITs focusing on commercial properties offer an opportunity for investors to make money in real estate, with Stephanie Krewson, BB&T Capital Markets equity research; Louis Taylor, Deutsche Bank Securities sr. REIT analyst and CNBC's Melissa Francis

The subprime impact will be limited to about 10 markets in Florida, Phoenix, Las Vegas and interior California, where unsold new homes will come back to the market as rentals, Taylor explained. “There might be some short-term depression on the rental market in those cities,” but the commercial side is in good shape, he added.

Equity REITs are appealing because they are a great source of income, serve as a hedge against inflation, add diversification and have strong valuation, said BB&T Capital Markets analyst Stephanie Krewson.

“We expect the REIT industry to produce a 20% total return in 2007. We’re very bullish,” she said. “We expect REITs to deliver 7% to 8% earnings growth in 2007 versus 6% from the S&P 500. And REITs offer about a 4% current yield versus less than 2% on the S&P 500.

And this is a good time to jump in, analysts say.

“Right now, they’re only trading on average at a 2% to 3% premium to the underlying value of their real estate, so you’re getting balance sheet flexibility and liquidity almost for free,” Krewson said.

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  • With almost 30 years experience in business television, Bill Griffeth is co-anchor of the 3 p.m. ET hour of CNBC's "Closing Bell."

  • Kelly Evans

    Kelly Evans is an on-air correspondent, reporting across CNBC's business day programming. She is co-anchor of CNBC's "Squawk on the Street."