Pairing Up on REITs

Home Properties (HME - commentary - Cramer's Take) could be a nice diversifier to Essex and Avalon. With an average rent per unit of $1,142, the firm targets moderate-income residents. Its 37,000-plus apartments are primarily in the suburbs of major metropolitan markets, such as Washington, DC; New York City; Philadelphia; Boston; Chicago; and Baltimore, which all have high barriers to entry and high housing prices relative to incomes.

For a higher yield, look into BRE Properties (BRE - commentary - Cramer's Take), which is probably most similar to Essex, though judging from its slower dividend growth rate, it does not seem as well run.

The Shorts

Saul Centers (BFS - commentary - Cramer's Take) operates neighborhood shopping centers primarily in the Maryland and Virginia areas. The company has recently cut its dividend by 17%.

Weingarten Real Estate (WRI - commentary - Cramer's Take) has a portfolio of neighborhood shopping centers located all across the country. Markets include New Mexico, Texas, Arizona, North Carolina, Illinois, Florida, Colorado, Georgia, Louisiana, Missouri, Oregon, Utah, California, Washington and more. In addition, the company has a portfolio of industrial space. Moody's recently downgraded its debt.

Ninety-five of Equity One's (EQY - commentary - Cramer's Take) 170 properties are located in Florida. A 56% weighting at ground zero of the housing crisis does not strike me as terrific positioning. Georgia, Louisiana and North Carolina comprise another 32% of the portfolio.

A fairly common theme among these neighborhood-type shopping centers is that their anchor tenants are oftentimes defensive in nature -- grocers and large drug stores. That might be, and this is anecdotal, but I've been noticing around Long Island that even these sorts of businesses aren't immune to the downturn. More important, Equity One has Publix supermarkets in a whopping 55 locations.

Most regional mall operators have been decimated so badly that most of them are trading under $10, which is a level that I prefer staying away from on the short side. Simon Property Group (SPG - commentary - Cramer's Take) has been cut in half, but as the giant of the group still sports a $12 billion market cap.

As a group, the residential REITs are kicking off slightly lower dividends by about 40 basis points. However, they will be better positioned relative to the retail REITs as the bad news continues to unfold in the consumer sector.

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At the time of publication, Masino was long ESS, AVB and BRE and short WRI and SPG, but positions can change at any time.

Rich Masino is president of Private Investor Research and editor of The Substantial Investor. He is a private investor who manages a family long/short investment portfolio that holds numerous positions across a variety of asset classes.

Before starting Private Investor Research, Mr. Masino co-founded a telecommunications company that grew to 500,000 customers. He sold all of his interests in the company in 1998.

He holds an MBA in finance from St. John's University.