Analysts See Simon Property
As Next Inclusion in S & P Index

Now that the REIT industry's two biggest companies, Equity Office Properties Trust and Equity Residential Properties Trust, have been added to the Standard & Poor's 500-stock index, analysts and investors have been busy speculating over which real-estate investment trust might be selected next.

All bets are on Simon Property Group Inc., given that the Indianapolis-based mall owner is the REIT industry's third-largest company, with a stock-market capitalization of about $4.8 billion, according to the National Association of Real Estate Investment Trusts.

"We fully expect Simon to be included in the near future," says Mike Kirby, a principal at Green Street Advisors Inc. in Newport Beach, Calif. "It clearly meets all of the S&P's tests," which include guidelines on market capitalization and liquidity.

Simon officials declined to comment.

David Blitzer, chairman of the S&P's index committee, says the market cap of REITs in the S&P 500 should gradually reflect the proportionate market cap of REITs in the overall market. "If REITs represent 3% of stocks in the market, for example, then they ought to move to represent 3% of the index," he says. "If one works through the numbers, that suggests that REITs will be added over the next couple of months."

The S&P's index committee announced last week that Chicago-based Equity Residential, the nation's largest publicly traded apartment landlord based on stock-market capitalization, would replace National Services Industries Inc. in the S&P 500 index as of this past Monday.

The decision came a little more than one month after Equity Office, the nation's largest publicly traded office landlord, also based in Chicago, was included in the index. The index committee also admitted a total of five REITs into the S&P's MidCap 400 index and its SmallCap 600 index.

"This continues the shift from real estate as an irrelevant sector that can be ignored by investors to a relevant sector that investors need to have an opinion on," says Lee Schalop, an analyst at Banc of America Securities in New York, who helped lead the effort to get S&P to reconsider allowing REITs into its index.

REITs' inclusion into the S&P stock indexes in early October gave the industry a stamp of legitimacy it needed to be taken more seriously by a wider investor audience. But the industry's shining moment was virtually eclipsed by world events and a number of earnings warnings issued by REITs, most citing the already-weak economy made worse by the Sept. 11 terrorist attacks.

According to the Morgan Stanley REIT Index as of Monday, Equity Office's total return -- stock price plus dividends paid to shareholders -- has fallen 4.9% since Oct. 3, when S&P made its announcement after the market closed. Total return has fallen 3.4% since Oct. 9, when its stock was added to the index. Equity Office's total return was influenced, in part, by the fact that the company issued an earnings warning the morning after the S&P announcement.

Equity Residential's total return has risen 2.3% since Nov. 28, the day after S&P's announcement and fell 0.9% on Monday amid an overall down market, when its stock was added to the index. Douglas Crocker II, Equity Residential's president and chief executive officer, speculated that one reason the REIT might have had a better immediate reception from investors was because the announcement came further away from Sept. 11 than Equity Office's.

Simon's total return has risen 9.6% since the Equity Office inclusion announcement, and has risen 1.3% since the Equity Residential announcement.

Overall, it's been hard to tell whether the S&P's decisions have made much of an impact on REITs' performance. But Steven A. Wechsler, president and chief executive officer of Nareit, advises patience. "It's an impact that will be felt over time," he says.

REITs of the Week
Equity Residential was the best performer in the latest week after becoming the second REIT, after Equity Office, to be included in the S&P 500 index. The stock saw 32 million shares traded Nov. 30, compared with average daily volume of 930,000 shares, due to demand from index funds.
Best 12/3/2001 Price Weighted Return* Current Dividend Yield Equity Residential $28.69 0.16% 6.00% ProLogis Trust 22.04 0.09 6.3 Simon Property 29.12 0.09 7.2 BRE Properties 31 0.03 6 Worst 12/3/2001 Price Weighted Return* Current Dividend Yield Equity Office $29.31 -0.12% 6.80% Host Marriott 8.14 -0.06 12.8 Public Storage 33.75 -0.06 5.3 Apartment Inv. & Mgmt. 44.15 -0.04 7.1
*weekly market capitalization weighted return Sources: Morgan Stanley; Tradeline.com

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