Highwoods rating lowered

Analysts see rate hikes sticking or tightening, say REITs may not be sure things

Rising interest rates and a general shift away from real estate investment caused analysts to downgrade the Raleigh real estate investment trust Highwoods Properties and 20 other REITs Monday, causing some shares to fall.

"Recent interest rate increases may stick or tighten further, negatively affecting ... private market real estate values," Stifel, Nicolaus & Co. analysts wrote to investors.

Stifel now thinks the companies will perform 10 percent above or below the general stock market -- a sign that REITs might have lost their sure-thing status.

Public companies that generate income through rental properties such as offices, warehouses, shopping centers, apartments and hotels in the U.S. outperformed the broader stock market for the seventh straight year in 2006.

The Morgan Stanley REIT Index gained 30 percent in 2006. The S&P 500, a benchmark of the stock market, returned 13.6 percent.

Analysts have doubted a repeat in 2007. So far, they've been right: The REIT index has dropped 3.5 percent this year, while the S&P has gained 6.4 percent.

The downgrade was also prompted in part by more mutual funds pulling money out of real estate.

"About $2 billion flowed out of real estate mutual funds in the past few weeks, a trend that may continue," Stifel wrote.

Shares of Highwoods dropped $1.18 to $39.03. Highwoods' shares have lost 4.2 percent this year.

Stifel has been the most bullish analyst covering Highwoods, the biggest suburban office landlord in the Southeast. Four other analysts have the equivalent of a "hold" rating on the company. One recommends "sell."

"We continue to like Highwoods," Stifel analyst John Guinee wrote in a separate note, lauding the company's development pipeline and strategy to shift development to more dense locations.

And Highwoods didn't take it as a slap. "I don't think they're negative on Highwoods," said Tabitha Zane, Highwoods' vice president of investor relations. "I think they're more cautious on REITs in general."

Five other office REITs were downgraded Monday, including Boston Properties, the biggest U.S. office REIT by income. It fell $2.49, or 2.2 percent, to $108.77.

"Except in a few key markets, office fundamentals are flat, with significant new construction adding risk in some markets," Stifel wrote.