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Personal Finance > Investing
Picking the right REITs
April 30, 1998: 1:18 p.m. ET

PaineWebber analyst still enthusiastic about REIT sector's stock prospects
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NEW YORK (CNNfn) - While the stock market has surged to record highs since the beginning of the year, real estate investment trust companies (REITs) are lagging behind. The sector, as a whole, has seen prices decline roughly 5 percent, due to an ominous regulatory stance in Washington and other issues.
     Still, Jonathan Litt, senior real estate analyst at PaineWebber, told CNNfn's Before Hours the majority of REITs enjoy solid fundamentals, making them not only a smart buy, but a once-in-a-lifetime bargain.
     Following is a transcript of his comments.

     TONY GUIDA, CNNfn ANCHOR, BEFORE HOURS: Let's face it. (REITs) are down 5 percent since the beginning of the year. The market's up around 12 percent. What has changed in your thinking to make this a recommended buy now?
     JONATHAN LITT, PAINEWEBBER: Well, I think there have been a couple of things in the news which have driven the stocks down.
     First and foremost is President Clinton's budget proposals, which included some legislation to constrain the growth of some of the paired-share REITs. I think many portfolio managers and investors have just said, "This is too complicated. We're not going to own the group. We're going to sell our current positions."
     And that's what we've seen happening. We've seen money draining out of the group as this Clinton proposal circulated in the press.
     The reality is the proposals (only) affect four REITs and we don't think they're going to materially impact the growth rates of those four. It doesn't affect the whole (REIT) universe, and I think there has been a misconception that it does affect the whole universe.
     We think it's creating a buying opportunity in these stocks similar, to a lesser degree, to when Clinton went after health care reform and health care stocks back in 1992. I think we're going to see that this is creating a once-in-a-lifetime buying opportunity of stocks at some of the cheapest valuations we've seen in the past.
    
     GUIDA: Where do you see these stocks going for the rest of this year?
     LITT: I think that the catalyst to drive the stocks up from here is going to be all this news and press ... giving way to very strong earnings growth.
     We've seen about half the REITs report earnings in the first quarter already, and earnings growth is up 16 percent. That compares to the S&P earnings growth, which has really been flat so far for the first quarter. For the full year, Street estimates are looking for earnings growth of 20 percent for the REIT industry, which compares to PaineWebber's view of a 6 percent growth rate for S&P 500.
     So, you're really looking at a group which has great growth fundamentals and a high dividend yield at about 6 percent. Relative to the broader market, these stocks are cheap. I think the last valuation measure we would look at is that the REITs are trading at a 53 percent multiple discount to the S&P 500. That's the lowest it's been in the past four years.
     GUIDA: I know you have a group of six to recommend, but before we get to those names, you treat REITs as sort of a defensive play. I'm wondering, given the news that's out this morning -- a very strong economy in the first quarter, but no inflation -- does that help or hurt this theory of yours?
     LITT: I think the REITs are both a good offense and a good defense. I think the good offense is strong growth rates, strong underlying fundamentals. I think they are also a good defense if the market does weaken because you have a low correlation to the S&P 500. So, the REITs really march to their own drummer, and if you're looking to diversify your portfolio the REITs are an excellent place to go.
     GUIDA: All right. Let's just briefly mention your recommendations.
     LITT: Sure. This morning, we've kept our "buy" rated stocks, which are top ratings, to about 10 percent of our universe. To drive the point home this morning, what we've done for the first time in four years, is upgrade that 10 percent weighting to a 20 percent weighting, and we've upgraded six stocks as a result.
     The names which we're recommending today are Bradley Real Estate (BTR), Camden Property Trust (CPT), East Group Properties (EGP), Gables Residential (GBP), General Growth Properties (GGP), and Liberty Property Trust (LRY). Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.