BarCap Downgrades REIT Industry On Earnings Growth Concerns
Barclays Capital (BarCap) downgraded its investment rating of the real estate investment trust (REIT) sector to 2-neutral from a 1-positive rating, amid concerns that earnings growth won’t come until 2011 and that REITs may appear less attractive than other investment alternatives. But the REIT universe is diverse and while BarCap downgraded the industry as a whole and four individual REITs, it did upgrade its ratings on three REITs in research released Wednesday. Sector-by-sector, BarCap upgraded multifamily from negative to neutral, while maintaining neutral views on office, regional malls and shopping centers and maintaining a positive view on industrial. BarCap said while the threat of insolvency by most REITs has subsided, earnings will decline to a trough in 2010 before inflect positively in 2011. “If insolvency is off the table, then relative valuation and, by extension, earnings, matter; the question is whether there will be sufficient growth to justify current valuations,” analysts wrote. “Our estimates imply a 7.3% decline in [cash available for distribution] CAD in 2010, following a 21.3% expected decline in 2009. Meanwhile, consensus expectations are for S&P 500 earnings to be up 27.3% in 2010.” But BarCap projects REITs will come out of the current downturn with a greater absolute market share, citing a trend of a growing distinction between real estate broadly and publicly traded real estate, “and further between those REITs with access to capital and growth potential and those that are more challenged,” the research said, resulting in an uptick in the number of companies seeking to go public. The analysts did project, however, that the REITs in its coverage universe will offer a 12-month total return potential of roughly 7.2%. “In our view, then, it will be extremely important in 2010 to differentiate among REITs on the basis of management team, portfolio quality and geography, financial flexibility, embedded growth, and opportunity set,” the analysts wrote. “We continue to believe that investing in REITs will be more of a stock-picking than a sector-picking game.” Write to Austin Kilgore.