REITs: He's "Dr. Doom"

Lehman's David Shulman gives few issues a buy rating these days

Stock analysts have a reputation for sticking to their buy ratings no matter what. Not David Shulman. The Street's top-rated analyst of real estate investment trusts -- the pools of real estate that trade like stocks -- is so sour on the sector that the brokers at Lehman Brothers, Shulman's firm, dubbed him "Dr. Doom." Of the 33 REITs that Shulman tracks, he rates just four "overweight" -- Lehman's term for a "buy."

Shulman's unfavorable view stands out at a time when many investors see REITs as one of the few safe havens in the market. Following gains of 27% in 2000 and 13.5% in '01, REITs last year returned 3.6%, with their generous average 7% dividend yield offsetting a modest decline in share prices. By contrast, the Standard & Poor's 500-stock index, including reinvested dividends, fell 22% last year. That outperformance continued in the first quarter, with REITs managing a nearly 1% total return vs. the S&P 500's 6% decline.

Still, Shulman thinks REITs are about to lag stocks. "A lot of investors are chasing performance, but this is the time to be cautious," he warns. Shulman's reasoning: If the economy slows further, the problems plaguing commercial real estate, such as rising vacancies, will only worsen. A better economy won't help right away either, says Shulman. That's because improvements in real estate tend to trail the broader economy. All told, Shulman sees REITs delivering a 3% total return this year, with dividends continuing to offset small losses in share prices. By contrast, some on Wall Street see a 2003 hike in the S&P of 7% to 10%.

Shulman sees rising property taxes, continued soft demand for office and apartment space, and the tough economic climate causing some REITs to trim their dividends in coming months. One bright spot, he believes, is regional mall operators such as General Growth Properties, Rouse, and Simon Property Group -- because retailers will still pay top dollar for prime locations. Shulman also likes REITs that own warehouses, and his top pick is CenterPoint Properties Trust. Such REITs will be among the first to benefit when the economy perks up. Shulman's favorites have already scored big gains in recent months -- up 5% to 10% since January -- and he warns they may be pricey (table).

Shulman is more bearish on REITs than his peers at other big firms. But this 60-year-old Wall Street veteran's contrarian calls have often been on the money. Shulman, who created the real estate research department at Salomon Brothers in 1986 and later served as chief equity strategist, boldly turned bullish on REITs in April, 2000. Back then, real estate stocks were down the tubes, and investors were intoxicated with tech. Soon after, REITs began to shine. That made Shulman look prescient and helped him to earn the top honors in Institutional Investor's latest annual ranking of Wall Street analysts.

Shulman thinks the next really good year for real estate will be 2005. At that point, he expects the benefits of an improving economy to trickle down to the real estate market. Until then, you might want to heed his advice and pick your REITs carefully -- if at all.

By Susan Scherreik

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