It sounds like a broken record. Every six-to-12 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 2006 earnings season churns along and companies are reporting their annual results, investors have been greeting each announcement with a new wave of buying. As a whole, REIT stocks are up 11.1 percent year-to-date. The S&P 500, meanwhile, has been 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 coverage have risen 19.8 percent year-to-date while shopping center REIT stocks have gone up 12.4 percent.

The march upward has occurred despite results that have been a bit varied so far. (see chart below). Tanger Factory Outlets has led the way. Its 2006 FFO per diluted share jumped 29.48 percent over 2005. 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 Equity One (down 11.38 percent). The REIT had some high severance expenses associated with its change of leadership. Meanwhile, 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 has jumped 5.6 percent in response.)

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.

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 along side Blackstone Group eventually besting Vornado Property Group in the battle to buy Equity Office Properties.

These skyrocketing stock prices have some analysts worried. Deutsche Bank analyst Lou Taylor downgraded 15 REITs last week, 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.

-- David Bodamer & Riccardo A. Davis
Company Type 2006 FFO/
Dil.Share
2005 FFO/
Dil.Share
% Chg.
Tanger Factory Outlets Outlets $2.24 $1.73 29.48%
Taubman Centers Malls $2.56 $2.17 17.97%
Kimco Realty Shop. Ctr. $2.21 $2.00 10.50%
CBL & Associates Malls $3.39 $3.08 10.06%
Acadia Realty Shop. Ctr. $1.19 $1.09 9.17%
Simon Property Group Malls $5.39 $4.96 8.67%
Regency Centers Shop. Ctr. $3.88 3.64 6.59%
Federal Realty Shop. Ctr. $3.26 $3.06 6.54%
Developers Diversified Shop. Ctr. $3.41 $3.23 5.57%
Kite Realty Shop. Ctr. $1.16 $1.13 2.65%
General Growth Properties Malls $3.06 $3.05 0.33%
Macerich Co. Malls $4.35 $4.35 0.00%
Equity One Shop. Ctr. $1.48 $1.67 -11.38%