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If you've studied Forbes' annual ranking of real estate investment trusts, you already know there are fewer top-rated stocks to choose from this year. So what gives?

Some great companies are fighting a soft U.S. economy. Vornado Realty Trust owns 14 million square feet of office space in New York. Boston Properties owns 8 million square feet there. Both companies are heavily concentrated in Manhattan, where the vacancy rate has risen to 12% from 3% in the salad days of 2000.

That has hurt growth in both REITs' adjusted funds from operations, or AFFO, which is earnings plus depreciation, minus maintenance-level capital expenditures. Vornado's AFFO-growth rate has fallen to 1% from last year's 3.7%; Boston Properties' to 1.9% from last year's 10.3%.

It's not all bad news. A third of the vacancy, says Bruce Mosler, president of U.S. brokerage Cushman & Wakefield, is being sublet on the cheap by companies that overreached during the boom. But Mosler predicts things will firm up this year: "Renters are looking at sublease space and seeing that it has value. Our prediction is it will clear out by the second or third quarter."

For a very well-managed REIT like mall owner General Growth Properties, the problem wasn't weakness but strength. Shopping malls performed well last year, and investors flocked to General Growth's shares, which climbed 33%. Thus, a stake in this Chicago-based company costs 11 times AFFO, up from the 8.7-times multiple last year. Last year's A+ for value has become a B.

General Growth's A+/B rating still makes it one of the four highest-rated REITs on our list. Boston Properties merited the same score. But two smaller companies scored higher.

One is Chateau Communities, a Greenwood Village, Colo.-based REIT that owns 207 trailer parks in 37 states. Vacancies and a projected slip in earnings this year have sent Chateau's investors rushing for the exits. But the company is modestly leveraged, with debt amounting to just 52% of the market value of its properties by Green Street Advisors' accounting, and it sports a 10.7% dividend yield.

True, the $2.20 dividend is too thinly covered by Chateau's projected $2.20-a-share AFFO in 2003. But Green Street projects cash flow will firm up to $2.32 in 2004. A for performance, A+ for value.

Our other top-rated REIT, Mills, owns 12 outsized shopping malls around the U.S. A talented developer, Mills has been handed the lead role in redeveloping downtown Chicago's Block 37, possibly the most valuable block of real estate in the entire Midwest. (Also, the most maddeningly difficult to develop--Chicago developer and former Forbes 400 Richest Americans member Neil Bluhm tried for years and failed.) On Feb. 12, Mills was awarded a $1.3 billion project to redevelop the Continental Arena site in northern New Jersey.

Mills shares trade at 10 times AFFO, a lower multiple than other mall stocks, and offer a 7.9% yield. A for performance and also for value.

It's worth noting here that although we use Green Street data to derive our grades, our ratings are different from theirs. For example, they agree Chateau is a buy but are cool to Mills' stock.

Finally, pity Host Marriott, a well-run REIT that owns 122 fancy hotels around the U.S. worth $9.3 billion. Room vacancies are a big weakness. Host Marriott was forced to cut its dividend for now and receives twin Fs. The company ought to score better with us once it resumes paying dividends. For now, its shares may be more attractive to investors seeking shares trading at a discount to liquidation value. Green Street is warm to Host's $8 shares, which are trading well under its $10.25 net asset value.

Copyright © 2003 Forbes.com