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Zacks Industry Outlook Highlights: Public Storage, Taubman Centers, Avalonbay Communities, Host Hotels & Resorts and Prologis

PSA TCO AVB HST PLD

 ZacksTrade Now

For Immediate Release

Chicago, IL – December 22, 2011 – Today, Zacks Equity Research discusses the REIT Industry Review & Stock Picks, including Public Storage (PSA - Analyst Report), Taubman Centers Inc. (TCO - Analyst Report), Avalonbay Communities, Inc. (AVB - Analyst Report), Host Hotels & Resorts, Inc. (HST - Analyst Report) and Prologis Inc. (PLD - Analyst Report).

A synopsis of today’s Industry Outlook is presented below. The full article can be read at  http://www.zacks.com/stock/news/66713/REIT+Industry+Review+%26amp%3B+Stock+Picks+-+Dec.+2011

OPPORTUNITIES

We are bullish on Public Storage (PSA - Analyst Report), the largest owner and operator of storage facilities in the U.S. The company has significantly increased the scale and scope of its operations through the acquisition of Shurgard Storage Centers that had a considerable presence in the European markets. Although Public Storage currently owns a 49% stake in Shurgard, the size and scope of its operations have enabled it to achieve economies of scale, thereby generating high operating margins and managerial efficiencies.

The "Public Storage" brand is the most recognized and established name in the self-storage industry, with a presence in all the major markets across 38 states in the U.S. In addition, the storage facilities of the company have a high visibility and are usually located in densely populated areas that improve the local awareness of the brand. This offers a significant upside potential for the company.

Another stock worth mentioning is Taubman Centers Inc. (TCO - Analyst Report), which owns, develops and operates regional and super-regional shopping centers throughout the U.S. and Asia. Retail shopping centers spanning over 400,000 square feet of gross leaseable area (GLA) are generally referred to as "regional" shopping centers, while those centers having in excess of 800,000 square feet of GLA are generally referred to as "super-regional" shopping centers.

Taubman focuses on dominant retail malls that command the highest average sales productivity in the U.S., measured in terms of mall tenants’ average sales per square foot. On a trailing 12-month basis, mall tenant sales were $615 per square foot during third quarter 2011. In addition, a large number of these shopping centers are strategically located in the most affluent regions of the country, which include Los Angeles, San Francisco, Denver, Detroit, Phoenix, Miami, Dallas, Tampa, Orlando and Washington DC. This, in turn, enables the retailers to target high-end upscale customers and maximize their profitability.

We also remain bullish on Avalonbay Communities, Inc. (AVB - Analyst Report), one of the best-positioned apartment REITs, primarily focused on developing multi-family apartment communities for higher-income clients in high barrier-to-entry regions of the U.S. Avalonbay has Class A assets located in premium markets, such as Washington DC, New York City and San Francisco, where the spread between renting and owning is still high despite home price declines.

As ‘echo boomers’ (the children of baby boomer generation) opt to move out on their own and more renters decide to part ways with families and roommates, the single-family homeownership rate across the U.S. has persistently declined and the demand for multifamily rental apartments has seen a surge. With new supply remaining muted until late 2013 or 2014, we expect the performance of the multifamily sector as a whole and Avalonbay in particular to remain comparatively stable in the coming quarters, as renting has emerged as the only viable option for customers who could not procure mortgage loans or are unwilling to buy a house at present.

In addition, Avalonbay has a reasonably strong balance sheet with moderate near-term debt maturities and adequate liquidity. Consequently, the company can capitalize on potential acquisition opportunities due to distressed selling from owners and developers who cannot refinance their properties that augur well for its top-line growth.

WEAKNESSES

A significant chunk of REITs are raising capital through property level debt and equity offerings. Although both debt and equity financings provide much-needed cash infusions, these could potentially burden already leveraged balance sheets and dilute earnings. Property level debt is also harder to obtain and more expensive, as commercial real estate prices remain under pressure.

We are bearish on Host Hotels & Resorts, Inc. (HST - Analyst Report), the largest lodging REIT and one of the largest owners of luxury and upper-upscale hotels. The majority of Host Hotels’ properties are concentrated in the luxury and upper-upscale segments, which was the weakest performing segments during the economic downturn. While the outlook for these markets has improved, the pace of improvement remains quite uneven and unsteady.

The hotel industry is also cyclical in nature, and is heavily dependent on the overall health of the U.S. economy. Unfavorable macroeconomic conditions in the past has compelled customers to cut back on discretionary spending and prefer lower priced brands over premium ones. Consequently, demand for Host Hotels had reduced comparatively and if the trend reoccurs in future, the bottom line of the company is likely to be affected, reducing its operating margins.

We also remain skeptical about Prologis Inc. (PLD - Analyst Report), the erstwhile AMB Property Corp. that acquires, develops, operates and manages industrial real estate space in North America, Asia and Europe. Although the quarterly results were in line with the company’s expectations and signified a gradual improvement in market fundamentals, macroeconomic issues have contributed to a slower pace of recovery.

The credit crunch has also widened the bid-ask spread between buyers and sellers of commercial real estate, causing deal volumes to fall from pre-recession levels. In addition, market vacancy increases will mitigate Prologis’ ability to push through rental rate increases. This has significantly affected the long-term growth of the company.

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