Thursday, January 20, 2005

Global Funds: U.S. real estate funds still hold rewards


By Judith Rehak International Herald Tribune

Thursday, January 20, 2005
Are U.S. real estate funds finally winding down after five years of outperformance? After closing 2004 at the pinnacle of U.S. equity funds with an average 31.71 percent return, they have tumbled 5.22 percent since Jan. 1, according to Morningstar, the Chicago-based fund researcher.
.
The problem is rising U.S. interest rates, which are making government bonds more competitive with dividends paid by real estate funds, a major attraction for yield-hungry investors.
.
Do not assume that it is time to bail out, though. "The future may not be as bright, but we're not in a bubble mode," said Dan McNeela, an analyst with Morningstar. "Real estate is still a good diversifier."
.
But an annual return of 10 percent to 12 percent is more likely, according to the managers of two real estate portfolios with strong long-term performances but different strategies.
.
Michael Winer, who runs the Third Avenue Real Estate Value fund, emphasizes operating companies over real estate investment trusts, or REITs, which pay out most of their income.
.
As a result, the fund's yields are lower, but it is less vulnerable to rising rates. His portfolio is down 1.6 percent this year.
.
"I tend not to look at interest rates and macroeconomics," Winer said. "We look at individual companies from the bottom up, then fundamentals, and if they're safe and cheap, then we buy them."
.
A favorite theme is companies involved in urban redevelopment projects, like Forest City Enterprises, a developer in New York's once-blighted Times Square area. "Adding or creating value is one of the best ways to invest in real estate," Winer said.
.
On a smaller scale, he recently purchased a large stake in the initial public offering of Thomas Properties, a Los Angeles-based company that redevelops existing office and retail properties that are suffering from large vacancies.
.
The Third Avenue fund's assets have ballooned to almost $2 billion from $800 million a year ago, sending Winer abroad for new ideas. After a recent trip to Britain, he bought shares in Unite Group, which develops student housing around the country's universities.
.
"There is a severe housing shortage, so it's very lucrative," he said. More British companies are on his buy list. "There's quite a bit to choose from there, a lot more entrepreneurial opportunities," he said.
.
Closer to home, he has also found good value in Killan Properties, a Canadian company that acquires apartment properties in Nova Scotia, particularly Halifax.
.
"This region has been ignored by most property companies, but a lot of people live there," he said. "We got in early because no one had heard of them."
.
While the Third Avenue fund favors operating companies, the Security Capital U.S. Real Estate fund is more focused on a concentrated portfolio of 25 income-producing REITs. But with REITs looking expensive, Ken Statz, a co-manager of the fund, is concentrating on niche plays and those where rent-growth estimates justify price targets set by his analyst team.
.
"It's not like 2004, when you could just buy a REIT," Statz said. "In 2005, it will be, show me the growth and you'll get your return."
.
One of his top performers has been AvalonBay, an apartment REIT, where Statz said he believed growth potential had been underestimated. He said he liked the fact that it operated on the East and West coasts of the United States, where occupancy levels are high.
.
Avalon has more inventory coming on stream in the next two years, and it recently raised its earnings forecast. Even after a rise of almost 50 percent in the share price over the past year, "you're not paying too much," he said. "It was ridiculously cheap."
.
Statz also likes Simon Property Group, the largest U.S. mall developer, which is riding a wave of consolidation in the industry. "They've got a great balance sheet, a high-quality portfolio," he said. "There is nothing startling in the short term, but we like the durability of their growth story. It's a powerful core holding."
.
Another real estate sector that Statz favors is the hotel industry, as travel picks up in a stronger U.S. economy. "It has been an amazing turnaround story," he said, noting that industry earnings were already reaching estimates that had been set for 2007. He owns shares in Fairmont Hotels, which is not widely followed and owns quality properties. "It's a great long-term story to hold, and it has been surprising on the upside," he said.
.
To investors who are still leery of the sector, Statz offered this advice: "Don't be out of real estate. Just buckle down for some volatility."
.



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Are U.S. real estate funds finally winding down after five years of outperformance? After closing 2004 at the pinnacle of U.S. equity funds with an average 31.71 percent return, they have tumbled 5.22 percent since Jan. 1, according to Morningstar, the Chicago-based fund researcher.
.
The problem is rising U.S. interest rates, which are making government bonds more competitive with dividends paid by real estate funds, a major attraction for yield-hungry investors.
.
Do not assume that it is time to bail out, though. "The future may not be as bright, but we're not in a bubble mode," said Dan McNeela, an analyst with Morningstar. "Real estate is still a good diversifier."
.
But an annual return of 10 percent to 12 percent is more likely, according to the managers of two real estate portfolios with strong long-term performances but different strategies.
.
Michael Winer, who runs the Third Avenue Real Estate Value fund, emphasizes operating companies over real estate investment trusts, or REITs, which pay out most of their income.
.
As a result, the fund's yields are lower, but it is less vulnerable to rising rates. His portfolio is down 1.6 percent this year.
.
"I tend not to look at interest rates and macroeconomics," Winer said. "We look at individual companies from the bottom up, then fundamentals, and if they're safe and cheap, then we buy them."
.
A favorite theme is companies involved in urban redevelopment projects, like Forest City Enterprises, a developer in New York's once-blighted Times Square area. "Adding or creating value is one of the best ways to invest in real estate," Winer said.
.
On a smaller scale, he recently purchased a large stake in the initial public offering of Thomas Properties, a Los Angeles-based company that redevelops existing office and retail properties that are suffering from large vacancies.
.
The Third Avenue fund's assets have ballooned to almost $2 billion from $800 million a year ago, sending Winer abroad for new ideas. After a recent trip to Britain, he bought shares in Unite Group, which develops student housing around the country's universities.
.
"There is a severe housing shortage, so it's very lucrative," he said. More British companies are on his buy list. "There's quite a bit to choose from there, a lot more entrepreneurial opportunities," he said.
.
Closer to home, he has also found good value in Killan Properties, a Canadian company that acquires apartment properties in Nova Scotia, particularly Halifax.
.
"This region has been ignored by most property companies, but a lot of people live there," he said. "We got in early because no one had heard of them."
.
While the Third Avenue fund favors operating companies, the Security Capital U.S. Real Estate fund is more focused on a concentrated portfolio of 25 income-producing REITs. But with REITs looking expensive, Ken Statz, a co-manager of the fund, is concentrating on niche plays and those where rent-growth estimates justify price targets set by his analyst team.
.
"It's not like 2004, when you could just buy a REIT," Statz said. "In 2005, it will be, show me the growth and you'll get your return."
.
One of his top performers has been AvalonBay, an apartment REIT, where Statz said he believed growth potential had been underestimated. He said he liked the fact that it operated on the East and West coasts of the United States, where occupancy levels are high.
.
Avalon has more inventory coming on stream in the next two years, and it recently raised its earnings forecast. Even after a rise of almost 50 percent in the share price over the past year, "you're not paying too much," he said. "It was ridiculously cheap."
.
Statz also likes Simon Property Group, the largest U.S. mall developer, which is riding a wave of consolidation in the industry. "They've got a great balance sheet, a high-quality portfolio," he said. "There is nothing startling in the short term, but we like the durability of their growth story. It's a powerful core holding."
.
Another real estate sector that Statz favors is the hotel industry, as travel picks up in a stronger U.S. economy. "It has been an amazing turnaround story," he said, noting that industry earnings were already reaching estimates that had been set for 2007. He owns shares in Fairmont Hotels, which is not widely followed and owns quality properties. "It's a great long-term story to hold, and it has been surprising on the upside," he said.
.
To investors who are still leery of the sector, Statz offered this advice: "Don't be out of real estate. Just buckle down for some volatility."
.
Are U.S. real estate funds finally winding down after five years of outperformance? After closing 2004 at the pinnacle of U.S. equity funds with an average 31.71 percent return, they have tumbled 5.22 percent since Jan. 1, according to Morningstar, the Chicago-based fund researcher.
.
The problem is rising U.S. interest rates, which are making government bonds more competitive with dividends paid by real estate funds, a major attraction for yield-hungry investors.
.
Do not assume that it is time to bail out, though. "The future may not be as bright, but we're not in a bubble mode," said Dan McNeela, an analyst with Morningstar. "Real estate is still a good diversifier."
.
But an annual return of 10 percent to 12 percent is more likely, according to the managers of two real estate portfolios with strong long-term performances but different strategies.
.
Michael Winer, who runs the Third Avenue Real Estate Value fund, emphasizes operating companies over real estate investment trusts, or REITs, which pay out most of their income.
.
As a result, the fund's yields are lower, but it is less vulnerable to rising rates. His portfolio is down 1.6 percent this year.
.
"I tend not to look at interest rates and macroeconomics," Winer said. "We look at individual companies from the bottom up, then fundamentals, and if they're safe and cheap, then we buy them."
.
A favorite theme is companies involved in urban redevelopment projects, like Forest City Enterprises, a developer in New York's once-blighted Times Square area. "Adding or creating value is one of the best ways to invest in real estate," Winer said.
.
On a smaller scale, he recently purchased a large stake in the initial public offering of Thomas Properties, a Los Angeles-based company that redevelops existing office and retail properties that are suffering from large vacancies.
.
The Third Avenue fund's assets have ballooned to almost $2 billion from $800 million a year ago, sending Winer abroad for new ideas. After a recent trip to Britain, he bought shares in Unite Group, which develops student housing around the country's universities.
.
"There is a severe housing shortage, so it's very lucrative," he said. More British companies are on his buy list. "There's quite a bit to choose from there, a lot more entrepreneurial opportunities," he said.
.
Closer to home, he has also found good value in Killan Properties, a Canadian company that acquires apartment properties in Nova Scotia, particularly Halifax.
.
"This region has been ignored by most property companies, but a lot of people live there," he said. "We got in early because no one had heard of them."
.
While the Third Avenue fund favors operating companies, the Security Capital U.S. Real Estate fund is more focused on a concentrated portfolio of 25 income-producing REITs. But with REITs looking expensive, Ken Statz, a co-manager of the fund, is concentrating on niche plays and those where rent-growth estimates justify price targets set by his analyst team.
.
"It's not like 2004, when you could just buy a REIT," Statz said. "In 2005, it will be, show me the growth and you'll get your return."
.
One of his top performers has been AvalonBay, an apartment REIT, where Statz said he believed growth potential had been underestimated. He said he liked the fact that it operated on the East and West coasts of the United States, where occupancy levels are high.
.
Avalon has more inventory coming on stream in the next two years, and it recently raised its earnings forecast. Even after a rise of almost 50 percent in the share price over the past year, "you're not paying too much," he said. "It was ridiculously cheap."
.
Statz also likes Simon Property Group, the largest U.S. mall developer, which is riding a wave of consolidation in the industry. "They've got a great balance sheet, a high-quality portfolio," he said. "There is nothing startling in the short term, but we like the durability of their growth story. It's a powerful core holding."
.
Another real estate sector that Statz favors is the hotel industry, as travel picks up in a stronger U.S. economy. "It has been an amazing turnaround story," he said, noting that industry earnings were already reaching estimates that had been set for 2007. He owns shares in Fairmont Hotels, which is not widely followed and owns quality properties. "It's a great long-term story to hold, and it has been surprising on the upside," he said.
.
To investors who are still leery of the sector, Statz offered this advice: "Don't be out of real estate. Just buckle down for some volatility."
.
Are U.S. real estate funds finally winding down after five years of outperformance? After closing 2004 at the pinnacle of U.S. equity funds with an average 31.71 percent return, they have tumbled 5.22 percent since Jan. 1, according to Morningstar, the Chicago-based fund researcher.
.
The problem is rising U.S. interest rates, which are making government bonds more competitive with dividends paid by real estate funds, a major attraction for yield-hungry investors.
.
Do not assume that it is time to bail out, though. "The future may not be as bright, but we're not in a bubble mode," said Dan McNeela, an analyst with Morningstar. "Real estate is still a good diversifier."
.
But an annual return of 10 percent to 12 percent is more likely, according to the managers of two real estate portfolios with strong long-term performances but different strategies.
.
Michael Winer, who runs the Third Avenue Real Estate Value fund, emphasizes operating companies over real estate investment trusts, or REITs, which pay out most of their income.
.
As a result, the fund's yields are lower, but it is less vulnerable to rising rates. His portfolio is down 1.6 percent this year.
.
"I tend not to look at interest rates and macroeconomics," Winer said. "We look at individual companies from the bottom up, then fundamentals, and if they're safe and cheap, then we buy them."
.
A favorite theme is companies involved in urban redevelopment projects, like Forest City Enterprises, a developer in New York's once-blighted Times Square area. "Adding or creating value is one of the best ways to invest in real estate," Winer said.
.
On a smaller scale, he recently purchased a large stake in the initial public offering of Thomas Properties, a Los Angeles-based company that redevelops existing office and retail properties that are suffering from large vacancies.
.
The Third Avenue fund's assets have ballooned to almost $2 billion from $800 million a year ago, sending Winer abroad for new ideas. After a recent trip to Britain, he bought shares in Unite Group, which develops student housing around the country's universities.
.
"There is a severe housing shortage, so it's very lucrative," he said. More British companies are on his buy list. "There's quite a bit to choose from there, a lot more entrepreneurial opportunities," he said.
.
Closer to home, he has also found good value in Killan Properties, a Canadian company that acquires apartment properties in Nova Scotia, particularly Halifax.
.
"This region has been ignored by most property companies, but a lot of people live there," he said. "We got in early because no one had heard of them."
.
While the Third Avenue fund favors operating companies, the Security Capital U.S. Real Estate fund is more focused on a concentrated portfolio of 25 income-producing REITs. But with REITs looking expensive, Ken Statz, a co-manager of the fund, is concentrating on niche plays and those where rent-growth estimates justify price targets set by his analyst team.
.
"It's not like 2004, when you could just buy a REIT," Statz said. "In 2005, it will be, show me the growth and you'll get your return."
.
One of his top performers has been AvalonBay, an apartment REIT, where Statz said he believed growth potential had been underestimated. He said he liked the fact that it operated on the East and West coasts of the United States, where occupancy levels are high.
.
Avalon has more inventory coming on stream in the next two years, and it recently raised its earnings forecast. Even after a rise of almost 50 percent in the share price over the past year, "you're not paying too much," he said. "It was ridiculously cheap."

Statz also likes Simon Property Group, the largest U.S. mall developer, which is riding a wave of consolidation in the industry. "They've got a great balance sheet, a high-quality portfolio," he said. "There is nothing startling in the short term, but we like the durability of their growth story. It's a powerful core holding."
.
Another real estate sector that Statz favors is the hotel industry, as travel picks up in a stronger U.S. economy. "It has been an amazing turnaround story," he said, noting that industry earnings were already reaching estimates that had been set for 2007. He owns shares in Fairmont Hotels, which is not widely followed and owns quality properties. "It's a great long-term story to hold, and it has been surprising on the upside," he said.
.
To investors who are still leery of the sector, Statz offered this advice: "Don't be out of real estate. Just buckle down for some volatility."
.

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