Fund Managers Pick Their Favorite REITs

NEW YORK (TheStreet) -- For all of investors' concerns about the sagging real-estate market, property funds' returns have dwarfed those of the broader stock market.

The iShares Cohen & Steers Realty Majors Index Fund ( ICF), an exchange traded fund that holds the biggest U.S. real estate investment trusts (REITs), from AvalonBay Communities ( AVB) to Vornado ( VNO), has soared 50% in the past year, compared with 11% for the Dow Jones Industrial Average. This year, the iShares ETF is up 31%, three times that of the Dow.

"The REIT market's outperformance has been driven by a combination of improving debt capital markets, the signs of fundamental recovery and the search for yield by investors," says Bob Gadsden, manager of the Alpine Realty Income & Growth Fund ( AIGYX). "Next year should incorporate the continuation of the early-stage earnings turnaround and dividend increases across the sector."

TheStreet searched for investors' favorite REITs with the help of Gadsden and Peter Sorrentino, manager of the Huntington Real Strategies Fund ( HRSAX).

Alexandria Real Estate Equities ( ARE)

Alexandria is the preeminent REIT focused on owning, managing and developing properties for the life-sciences industry. The company's assets are clustered in the top research markets of San Francisco, San Diego, Maryland, Seattle and Cambridge, Mass.

"Alexandria produces consistently positive growth in net operating income from life science industry space demand that remains resilient," says Gadsden.

According to Sorrentino, Alexandria is an overlooked REIT because its structure and ownership don't fit into a typical REIT category.

"REITs like Alexandria often combine large development tracts of real estate that has been approved by permitting bodies," he says. "This is often an undervalued asset as more regions enact legislation aimed at limiting future development."

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Vornado Realty Trust ( VNO)

Vornado Realty Trust ( VNO)

Vornado owns, manages and leases office, retail and merchandise-mart assets. The company's stock has recovered along with key commercial locations such as New York and Washington D.C., nearly tripling in value since the market bottomed in March 2009.

In its most recent quarterly report, Vornado said rental income rose substantially as the company benefited from revived office leasing in the Northeast. Moreover, the company, co-founded and chaired by Steven Roth, announced last month that it acquired a 9.9% stake in JCPenney ( JCP) as part of a strategy to take greater interest in retailers in a play for their real estate.

"Exceptional balance-sheet capacity, strong management and an opportunistic investment style position Vornado well in the present market," says Gadsden.

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Douglas Emmett ( DEI)

Just as Vornado is a powerhouse in major East Coast cities, Douglas Emmett dominates the West Coast, including Greater Los Angeles and Hawaii. Total leasing activity during the third quarter totaled 680,794 square feet spread among 190 leases. There were 70 new leases totaling 203,959 square feet.

In October, the company added substantially to its holdings when its closed-end fund acquired Wilshire Bundy Plaza, a class "A" office building with more than 310,000 square feet for a contract price of $111 million, or about $358 per square foot.

As of Sept. 30, Douglas Emmett's office portfolio was 89.9% leased and 88.7% occupied, while its multifamily-home portfolio was 99.3% leased.

"Douglas Emmett has market-dominant positions in the office submarkets of West Los Angeles and Honolulu, which should provide superior pricing power and operating income growth as those submarkets recover from cyclically low occupancies," says Gadsden.

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Plum Creek Timber ( PCL)

Along with newly converted Weyerhaeuser ( WY) and Rayonier ( RYN), Plum Creek represents a simple and effective way to add timber, which has historically been an outstanding currency and inflation hedge, to a portfolio. Plum Creek sells its timber for use in a wide range of products including plywood and fiberboard for use in housing construction.

Because the housing market remains challenging, Chief Executive Officer Rick Holley says the company is "holding our most valuable lands for future opportunities while capturing good value in lower-value markets where prices remain the most attractive." While the company may be holding back its best land as it waits for a better price, it's currently paying out a healthy 4.6% dividend yield.

"It's also worth noting that timber offers the added bonus of being a key export commodity to emerging economies, which is very important nowadays," says Sorrentino.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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