Apartment, Health REITs to Rebound First

SAN MATEO, Calif. ( TheStreet) -- Jay Leupp, manager of the Grubb & Ellis AGA US Realty Fund ( GBEUX), expects real estate investment trusts that invest in apartments, health care and self-storage sites to gain.

The $2 million fund has more than doubled during the past year, better than 87% of its Morningstar ( MORN) rivals. It has gained 14% this year, beating 96% of peers.

Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.

How did you know it was a good time to buy at this time last year, when most investors were selling real estate stocks?

Leupp: It certainly was an uncertain time. What we did during that tumultuous time period was focus on real estate fundamentals, which is what we do best. We focused on the best management teams and we focused on the best values. When you put those all together and stay with your thesis, it should work and it worked for us.

What is your outlook for commercial real estate?

Leupp: We see commercial real estate in the early stages of a three- to five-year recovery. The sector recoveries will be at different paces though. We see apartments, health care real estate and some of the specialty areas, like self-storage, recovering very soon, over the next 12 to 24 months. Some of the other areas, like lodging and office, will take longer periods of time to recover. In between those two, we see the industrial space and the retail space recovering in 18 to 36 months.

What is your top pick in the commercial real estate space?

Leupp: We like some of the REIT preferreds and our top pick is a REIT preferred in the lodging space, Ashford Hospitality Trust ( AHT). We like the series D preferred. We view this as a way to collect a 10%-plus dividend yield and take advantage of a recovery in lodging fundamentals over the next 36 months. Essentially, you are getting paid to wait.

What would you say is your top under the radar pick?

Leupp: We like one of the mall REIT preferreds, Glimcher Realty Trust ( GRT). In this case, we like the series G preferred issue. This preferred also pays about a 10% dividend yield on a mall portfolio that is based primarily in the Northeast. We see a gradual recovery taking place in retail fundamentals over the next two to three years and we are already seeing a pickup in same-store sales.

This is a company that's already been through this situation before and weathered the storm. You have a proven management team, quality assets and a region whose growth will likely mirror that of the overall nation.

What part of commercial real estate would you avoid?

Leupp: The suburban office space market will continue to struggle for a while. I think it is going to be four to five years before suburban office space fundamentals recover. That's a much different area than high-quality, business-district office assets. That's an area in the secondary and tertiary markets. It's going to be a long time before landlords have pricing power in the suburban office market and can demand even modest rental increases as leases expire and new tenants show up for space. The recovery there is going to be slow and sluggish.

-- Reported by Gregg Greenberg in New York.
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.

If you liked this article you might like