US Bancorp
Downgrades REITs

NEW YORK -- US Bancorp Piper Jaffray analyst Andrew Rosivach downgraded a number of real estate investment trusts and is now recommending investors "market weight" rather than "overweight" this sector over concerns that yields won't be as attractive in the next 12 months.

In a note, Rosivach said spreads have tightened between REIT earnings yields and 10-year investment grade corporate bond yields. Since his sector note on Oct. 10, spreads have contracted to 196 basis points from 309. The six-year average spread is 304 points, he noted.

He blames the contraction on a 101 basis point increase in corporate bond yields.

As a result, Rosivach is now predicting REITs will generate total returns of only 1% to 5% over the next 12 months. "This is a significant drop from our 12% forward 12-month estimate as of the beginning of the year and 9% estimate only two months ago," he said.

As a result, he lowered his investment recommendation to market weight.

He also downgraded a number of REITs. He cut AvalonBay Communities Inc. to outperform from strong buy. He lowered BRE Properties Inc., Heritage Property Investment Trust, Macerich Co. and Price Legacy Corp. to market perform from outperform. And he chopped Gables Residential Trust and Essex Property Trust Inc. to underperform from market perform.

His top picks, which he believe can still offer material earnings growth, are AvalonBay, Regency Centers and Pennsylvania REIT.

Rosivach does not hold shares in any of the companies named. However, his firm has had an investment banking relationship with most of them.

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