I've been asked repeatedly why Real Estate Investment Trusts (REITs), which are stock companies that own and manage real estate for investors, have been so weak today. A couple of observations:
1) Mort Zuckerman, CEO of Boston Properties, spoke at a Boston Properties Investor Conference this morning, and according to traders gave a somewhat downbeat assessment of the U.S. economy, saying the economy has "made us very, very cautious";
2) the main REIT index, the MSCI REIT Index, was up 4.3 percent yesterday, about twice the outperformance of the S&P 500;
3) there may be a modest unwind of the "buy high-dividend stocks" play going on, since utilities (the other big-dividend play besides REITs) are also weak today;
4) when credit spreads are widening, REIT stock valuations usually go down;
5) there's chatter from analysts that financing and valuations for commercial real estate deals have diminished in recent weeks. This may be affecting how companies are talking about their business models;
5) ISI was out with a negative call on REITs today: "Given the continued problems plaguing the European financial system and the spillover impact it is having on US bank stocks, we are becoming increasingly concerned about the valuation metrics that investors will apply to REIT stocks going forward. We believe that our price targets were based on somewhat optimistic valuation levels and would prefer to use more conservative multiples and slightly lower premiums to NAV until the financial uncertainty is resolved...Based on our new valuation metrics, our price targets fell by 5.2% on average with the declines ranging from a low of 2% to a high of 10%."
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