Signs Abound That the Joy Ride Of REITs May Be Ending

By Jerry Knight
Monday, November 7, 2005

If you want to understand how nervous real estate investors are these days, take a look at Mills Corp., the company that owns Potomac Mills, Arundel Mills and dozens of other mega-malls.

Mills' stock price plunged 15 percent last Tuesday, its biggest daily loss ever, after the Arlington-based company delayed release of its second-quarter financial report for a week and warned that third-quarter results "will be substantially below expectations."

Four Wall Street firms promptly cut their rating on Mills stock, with three slashing it to "neutral" and one to "sell." In Baltimore, Legg Mason real estate analyst David Fick suspended his rating on Mills, writing that it was impossible to make a recommendation because the company is "stonewalling" on its finances.

"The management did itself and shareholders a huge disservice" in its handling of the situation, Fick wrote. "The company probably did more damage with the way it presented the issue than the reality."

Tuesday's announcement knocked $300 million off the stock market value of Mills, a real estate investment trust. Its share price has fallen 30 percent so far this year and closed Friday at $44.62.

The company plans to issue its third-quarter report Wednesday. A spokesman said only that the delay in issuing the report is not a symptom of ongoing accounting problems like those that have plagued so many companies recently.

Mills is the latest REIT to feel the heat that higher interest rates are putting on the stocks of real estate and home-building companies, which in recent years have been some of the best-performing investments available.

Not anymore. REIT shares have dropped 11 percent since they peaked in early August, as measured by the NAREIT composite price return index. NAREIT is the National Association of REITs.

The index is down about 2.3 percent this year, reflecting the slump in stock prices. Because REITS pay out most of their profits in dividends, investors in the index stocks have still posted a 2.4 percent total return so far this year.

But with falling stock prices offsetting much of the quarterly dividends, REITs have done no better than the overall market this year, one of many signs that the real estate sector's six-year run is running out of steam.

The stocks of six of about a dozen REITs that are based in the District, Maryland and Virginia are down for the year. In addition to Mills, the losers are Washington REIT, which owns several types of properties in the area; Saul Centers Inc., a shopping-center specialist; Highland Hospitality Corp. and Host Marriott Corp., both of which own hotels; and CarrAmerica Realty Corp., a major office developer.

Nationally, third-quarter financial reports forecast a slowdown. Six out of seven REITs that recently changed their projections for 2006 revised them downward, Citicorp noted. Of 13 REITs that gave new guidance on fourth-quarter performance, eight pushed their profit projections down while five raised them.

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