Summary of Morningstars interview with David Lee of T.Rowe Price Real Estate Fund (TRREX), Michael Winer of Third Avenue Real Estate Fund (TAREX), and Kenneth Statz of JP Morgan U.S. Real Estate Fund (SUSIX):

Kenneth Statz likes multifamily properties, believes talented management teams can add the most value in mall or retail REITs, and has mall operator Simon Property Group (SPG) at the top of his list.

David Lee of T. Rowe Price favors blue chip REITs in most major property types (multifamily, industrial, office, and retail).

Michael Winer of Third Avenue has the most value-oriented approach, emphasizing a REIT’s balance sheet as much as its cash flows.  Winer likes land companies such as St. Joe. Corp (JOE), which owns more than 700,000 acres of land in the Florida panhandle, and real estate companies in Asia such as Hang Lung Properties.

Morningstar’s Take on Real Estate

Clearly, the days of 20%-plus annual returns are over in real estate; and, it believes it has inflation-combating characteristics over the long term. As long as there isn’t dramatic overbuilding, landlords can mostly raise rents to cover higher expenses, and land itself tends to appreciate with inflation. Finally, although the tight debt markets are constraining growth, they are also likely inhibiting overbuilding–and overbuilding is what invariably leads to the most severe downturns in the real estate cycle.

They don’t agree that multifamily is rosy, becauase the  overbuilding in single-family homes and condominiums is serving to create competition for apartments.

Morningstar’s Top Picks:

1. Duke Realty (DRE)

Solid business developing office and industrial parks in the Midwest, is trading below Morningstar analyst Jeremy Glaser’s Consider Buying price. The firm has solid tenants such as Amazon.com and Monsanto that are seeking additional space.  Duke’s full-service development capabilities make it an attractive real estate outfit for growing firms. Finally, Duke is financially sound with a fixed charge coverage ratio above 2 times and dividend coverage at 70% of funds available for distribution.

2. Mack Cali

a. Has an attractive suburban New York City office footprint. Its occupancy is in the low-90% range, but its rent growth has been slowing a bit lately.  However, the firm’s balance sheet is in good shape, with debt at 40% of gross assets and its fixed charge coverage ratio at more than 3 times. Dividend coverage is less impressive, as the firm paid out around $1 million more than its adjusted funds from operations in the first quarter, but we think the firm can easily borrow small amounts until business improves.

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http://www.trackthepros.com/categories.php?category_id=118

Track fund manager’s picks at:

http://www.trackthepros.com/categories.php?category_id=93