It sounds like a broken record. Every six-to-twelve months REIT stocks seem to hit a new high and outperform broader indices and observers and analysts ask the question: “Are REITs overvalued?”

That's exactly where the industry sits today.

As the 2006 earnings season churned along in January and February and companies reported their annual results, investors have been greeting each announcement with a new wave of buying. As a whole, REIT stocks were up 11.1 percent for the year as of late February. The S&P 500, meanwhile, was up 2.7 percent during the same time period.

On the retail side, the results have been even better.

The weighted average of shares of regional mall REITs covered by Merrill Lynch's rose 19.8 percent during the same stretch while shopping center REIT stocks were up 12.4 percent.

The march upward occurred despite results that have been somewhat varied so far. (See chart on p. 10.)

Greensboro, N.C.-based Tanger Factory Outlets has led the way. Its 2006 FFO per diluted share jumped 29.48 percent over 2005. Bloomfield Hills, Mich.-based Taubman Centers also finished up a strong year with FFO per diluted share up 17.97 percent.

At the other end of the spectrum is Columbus, Ohio-based Glimcher Realty Trust, which has had some problems in its repositioning strategy. (See story on p. 20.)

Miami, Fla.-based Equity One was also down 11.38 percent. The REIT had some high severance expenses associated with its change in leadership last year. Meanwhile, Chicago-based General Growth Properties finished off a lackluster year by posting FFO growth of just 0.33 percent. But even here, investors have found reasons to invest. General Growth provided a glimmer of hope, upgrading its 2007 guidance. (As a result, its stock jumped 5.6 percent.)

And many analysts remain optimistic about retail REITs in large part because fundamentals remain strong.

“We are generally optimistic and bullish on the sector. We still think they're going to perform well in the long term,” says Chris Lucas, senior research analyst at Robert W. Baird.

Worth too much?

But this recent wave of appreciation has left regional malls with a price to net asset value ratio of 115 percent — their highest point since December 2003 according to Merrill Lynch estimates. Shopping centers are even higher — trading at a 124 percent premium, the highest since December 1997.

Meanwhile, the forward adjusted FFO (AFFO) multiples — roughly the equivalent of earnings per share — are also at historic highs. Regional malls are trading at 25.3 times AFFO and shopping center REITs are at 23.3 times. REITs as a whole are at 27.2 times. The historic averages for regional malls and shopping centers are 12.2 times and for REITS as a whole are 13.1 times.

The regional mall sector specifically has been buoyed by Simon Property Corp. reaching a deal to acquire Mills Corp., which sent both firms' stock higher. In the REIT universe as a whole valuations increased throughout the battle between Blackstone Group and Vornado Property Group (eventually won by Blackstone) to buy office property giant Equity Office Properties.

These skyrocketing stock prices have some analysts worried. Deutsche Bank analyst Lou Taylor downgraded 15 REITs in late February, all based on valuation concerns.

Meanwhile, Bank of America Securities analyst Ross Nussbaum downgraded Macerich Co. for the same reason. “We believe the stock now fully reflects an expected ramp-up in FFO per share growth in 2008-2010 to 10 to 12 percent driven by development, as well as strong mall fundamentals,” Nussbaum wrote in a research note.