10 Top Buy-Rated Real Estate Stocks for 2011

(Top buy-rated real estate stocks for 2011 report updated with analyst upgrades to AvalonBay Communities.)

NEW YORK (TheStreet) -- Stocks in the real estate investment trust sector outperformed the S&P 500 in 2010 and are expected to deliver 9% to 11% in total returns in 2011, according to analysts at Keefe, Bruyette & Woods.

"REITs are back on offense and all eyes are on growth," said KBW's Sheila McGrath, "growth prospects for core portfolios, growth from acquisitions and growth in dividends."

>> 14 REITs Increasing Dividends Annually

Morningstar (MORN) noted that REITs have been catching on with a number of exchange-traded fund investors who consider them as potential hedges against inflation. The investment research firm pointed to inflows of $312 million to the iShares Dow Jones U.S. Real Estate (IYR), and $371 million of net inflows to the Vanguard REIT Index (VNQ) in the third quarter as evidence of the growing interest in REITs.

REITs have a distinct advantage over broader market investing, Greg Genovese, president and CEO of Pacific Valley Realty Capital, told TheStreet recently. He said the group's rise is due in part to the equities' ability to generally offer better yields and cash flow than dividend-paying stocks. There is simply more demand for REITs nowadays as well, he said, and that demand continues to increase.

McGrath said equity REITs stand to benefit in 2011 from "superior access to attractively priced capital" as fundamentals stabilize following the "sharp decline" the sector faced amid the Great Recession. She expects multifamily and hotel sector REITs to rebound with the strongest internal growth over the next two years, and advised REIT investors in 2011 "to focus on REITs and sectors that can deliver both core portfolio and external growth."

>> REIT Earnings: Behind the Numbers

Funds from operations -- or FFO, a performance figure used by REITs to define cash flow from operations, removing the profit-reducing effect of depreciation -- should grow between 7% and 9% annually on average over the next few years. KBW's calls assume real GDP growth of 2.6% in 2010, decreasing 1.3% in 2011, with unemployment remaining above 9% throughout 2011 and the Fed Funds rates unchanged through the year at 0% to 0.25%.

Genovese added that the REIT sector as a whole has not yet fully recovered from its highs before the recession, offering greater upside potential for investors in the space because "the blood has already been spilled and the liquidity crisis is no longer what it was."

With all this in mind, here then is a roundup of KBW's top buy-rated REIT picks for 2011.

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