REIT Sector Review by Jacqueline Doherty
Highlighted companies: Equity Residential (EQR), BRE Properties Inc. (BRE), Avalonbay Communities Inc. (AVB), Mack-Cali Realty Corp. (CLI)
Summary: The Trader takes a bearish stance on the already falling REIT sector. Equity Residential (EQR) warned that a weak Florida condo market is hurting its business double-fold: (1) It reduces its one-time gains from turning rentals into condos. (2) The weak market is causing owners to rent instead of sell, putting downward pressure on rents; a similar scenario could be coming soon in California, Phoenix, and Washington, D.C. EQR shares are down 5% since late October, BRE Properties Inc. (BRE) is down 8%, and Avalonbay Communities Inc. (AVB) is down 6%. Commercial REITs such as Mack-Cali Realty Corp. (CLI) [-9%] have fared no better. Douglas Kass of Seabreeze Parnters sees more coming, saying that current prices imply a 6-7% increase in rents, when 2-3% is more likely. And with commercial REITs still at a steep 19x forward earnings, and apartment REITs at 22x -- both almost double their historical averages -- and yields at just 4%, there's still plenty of downside potential.
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