REIT Valuations Maybe Extended

In an article from Bloomberg, a number of investment managers note the stretched valuation of REITs. Buyer beware.

"Sam Zell is probably the shrewdest operator in this field that there is,'' said David Dreman, who oversees $21 billion at Dreman Value Management LLC in Jersey City, New Jersey. ``If he's selling, I don't think I want to be a buyer."

Institutional investors with $11.9 trillion in assets have been net sellers of REITs since November, according to the brokerage arm of Boston-based State Street Corp. Shareholders sold as dividend yields on the trusts tumbled below those of government debt.

The average yield of U.S. REITs tracked by the National Association of Real Estate Investment Trusts, or NAREIT, fell to 3.78 percent at the end of January. That was 1.03 percentage point less than the 10-year Treasury note, the biggest discount since 1985, according to data compiled by Bloomberg.

Dividend yields on REITs have plummeted as share prices boomed. The NAREIT index of 179 U.S. property trusts has posted a total return of 348 percent this decade, for an average annual return of 23 percent in the past seven years. The S&P 500 has averaged a 1.1 percent return, including dividends, in that time.

U.S. REITs tracked by the Leuthold Group last month traded at an average of 18.8 times adjusted funds from operations. That's the highest since at least 1997 and almost 50 percent more than the average for the past decade, according to the Minneapolis-based research and investment firm, which counts two- thirds of the 100 largest U.S. money managers as clients.

Source:
MFS, Deutsche Bank Dump REIT Shares Amid Record Blackstone LBO
By: Michael Tsang and Daniel Hauck
Bloomberg
February 12, 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5sgh4AX1qNY&refer=home