For Subscribers

Get the complete article now!

Two analysts and top management from eleven sector firms examine the Real Estate/Property Services sector in this special 51-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info401.htm.

TWST: I see that you have no strong buys in the group, quite a few buys, and a large number of accumulates. What can we infer from this about your overall view of the REITs at this time and what investors should be doing with the stocks?

Mr. Sakwa: Just to clarify, Merrill doesn’t at this time, have a strong buy recommendation, so our top rating is a buy. Our next rating down is accumulate, our third rating is a neutral, and then a sell. So you would never see any strong buys at this point. We have been taking a lot of buys off the table. I was just compiling a list and looking at the number of rating changes that we’ve actually made since the fall of 2000. We’ve only upgraded three stocks while we’ve downgraded 19 stocks. Some of those have gone from buys to accumulate, some from accumulate to buys, and we actually have a couple of sell recommendations.

TWST: Were those downgrades because of company-specific issues or deteriorating sector fundamentals? Or were they due to valuations?

Mr. Sakwa: A combination. Some had just gotten to our target price and we could no longer justify the current rating, so perhaps we took it down a notch. Some were due to proprietary research that we had done either on a particular market where we thought things were perhaps getting weaker and perhaps before the company reported or maybe during the quarter, we indicated our concerns about a specific market and the companies that would be impacted. And the valuations were such that we thought that not all the bad news was necessarily priced in. On the upgrades, conversely, we had done some proprietary work on a company like Taubman (NYSE:TCO) and we thought that the risk associated with their development pipeline wasn’t as great as people thought. The stock looked attractive to us, so the risk/reward seemed a little bit out of line and we upgraded the stock. But I think clearly the overwhelming direction has been downward ratings since the fall, which is consistent with the more cautious stance that we adopted on the group starting in the fall of 2000. We put out a piece in November called “Slightly Less Bullish,” and at that time we said that while there were a number of factors that persuaded us to remain positive, we were less positive on the group going into 2001. I think a lot of those things are playing out and back in November our return expectations for 2001 were in the 10% to 12% range. The group currently is up around 9% now. So we think there’s still a little bit of upside left for the year and maybe we’ll slightly exceed the 12% threshold. But we’re certainly going to be well below where we were last year, which was close to a 27% return.

TWST: I saw one in Chicago that included a Restoration Hardware, a Crate & Barrel, and a Whole Foods Market, among other stores.

Mr. Sakwa: Yes. But these just aren’t going to work everywhere, so I think there will probably be some places in suburban Chicago and Washington, DC, and parts of Boston and New York and Los Angeles and the suburbs of Houston. But I don’t know that there will be that many in any particular market. It’s clearly been a big trend that we’ve been hearing about over the last couple of months. But we’ll see how many actually get built.

TWST: Are malls still being built?

Mr. Sakwa: They’re still being built but there are only a few being built each year. As I said, Taubman is a company that we recently upgraded. Basically, starting today and going through early November they will be opening three new malls.

This special issue includes:

1) Property Services - In an in-depth (3,600 words) Analyst Interview, Jay Leupp, Managing Director and Senior Real Estate Equity Analyst at Robertson Stephens, examines the outlook for the sector and shares specific stock recommendations.

2) Outlook for REITs - In an in-depth (3,800 words) Analyst Interview, Steve Sakwa, Senior Analyst in the Global Securities Research and Economic Group at Merrill Lynch, examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of eleven sector firms examine the outlook for their firm and the sector.