Real Opportunities - Page 2 of 3

Real Opportunities

do you recommend among the industrial REITs?
We like First Potomac Realty Trust (FPO), a small regional firm based in the Washington, D.C., area that is one of the best managed in the group. First Potomac operates flex buildings that can be converted for various uses–as a bulk warehouse or office space. The adaptability makes its income stream more stable. They also enjoy a high tenant retention rate–90% of their leaseholders opt to renew. What’s more, the rents on re-signed leases have increased an average of 10%, compared with rents on expiring leases. That tells us several things, including that renters don’t have many options in the company’s prime locations in the Mid-Atlantic region. Although the company is small, it’s the largest owner of industrial and flex property in Washington, D.C. First Potomac’s dividend yield of 6% looks stable as well.

If healthcare is an attractive part of the REIT landscape, what do you like there?
Ventas Inc. (VTR) is one of the largest owners of senior housing and long-term care assets in the country. Ventas owns 500 properties in 42 states, including nursing homes, independent and assisted living facilities, and hospitals. Management has done a very good job squeezing returns from assets. Over the past year, Ventas boasts a return of 15%, which is higher than the REIT universe’s 10% average. Because Ventas is nationwide, it isn’t vulnerable to a downturn in any one region. On top of that, there is an important plus: A growing portion of the company’s rental stream comes from a private care or private pay patient base rather than Medicare or Medicaid. Ventas currently offers a dividend yield of 4.4%.

Do you recommend avoiding office buildings altogether?
We’re neutral on office building companies. We actually think landlords that control suburban office space can benefit from the wave of tenants and back-office operations that are priced out of markets like Manhattan. Mack-Cali Realty Corp. (CLI) is our favorite suburban office REIT, and again management is key. They have reined in leverage–their debt-to-asset ratio is 38%, while the same figure for privately owned commercial real estate can run as high as 75% to 80%. Most of Mack-Cali’s debt load is fixed and should cause no trouble if short-term interest rates happen to spike upward in the future. Mack-Cali was prudent even while many REITs felt compelled to keep astride the frenzied buying that was taking place in prime markets. Many participants pay too high a price down the road when they have very little flexibility to increase rents under long-term leases and can’t keep up returns. Mack-Cali has been in business more than 50 years and has a base of 2,000 tenants, with no one tenant accounting for more than 3% of its rental stream. We see that as another sign of the company’s stability. Mack-Cali carries a dividend yield of 6.1%.

With all that said, what types of REITs would you avoid?
The apartment group is the least attractive. We think apartments remain overvalued even after the REIT group’s decline this