While many real-estate fund managers pride themselves on their bottom-up approach to picking stocks, Russell Platt is an unapologetic top-down investor.

Ask him about his favorite public real estate companies and Platt, 44, the chief investment officer and co-founder of Dividend Capital Investments, will start talking about the subsectors in which those stocks are located.

"Only 10% of the commercial real estate in the country is owned by real-estate investment trusts, so in understanding REITs you really need to understand the broader market they are in first," he says.

These days Platt, who manages close to $500 million in real-estate assets for mostly institutional investors, is bullish on high-end hotel REITs for their share-price growth potential and mall REITs for their ability to strike a balance between growth and income.

Among his favorites: LaSalle Properties, which owns high-priced hotels across the country, and Acadia Realty Trust, a shopping-center landlord in the Northeast and Midwest.

But Platt, 44, who once ran Morgan Stanley Asset Management's real-estate division, doesn't live by REIT stocks alone.

He has boosted the yield in his year-old Dividend Capital Realty Income Fund by owning a large stake in preferred shares of real-estate-related companies, including commercial mortgage lenders as well as property-owning REITs.

These preferred securities, which behave more like bonds than common stocks, often have yields of 8% to 10%. In a pricey public real estate market such as today's, REIT stocks that pay such rich yields are usually stretching their resources and probably are best avoided, he says.

Thanks to his penchant for preferreds, however, Platt's mutual fund has a yield of 5.2%, more than two percentage points greater than the sector average. And the fund has gained 22% this year, three percentage points short of the average real estate fund. But with this fund's heavy weighting in income-oriented investments, it's easy to understand why total returns might lag at times.

Barron's Online: If someone tells you that he or she is looking for a real-estate stock that will give him or her market-beating returns in the next year or two, where would you direct them?

Platt: For the aggressive investor who is less concerned with yield, I would absolutely focus on hotels. Hotels saw occupancy nationwide after 9/11 drop by 10% to 15% to a point where most major publicly-traded hotel property companies either eliminated their dividend or went bankrupt.

What we are seeing now is occupancy rates are firming and they are up 4% to 5% nationwide year over year. Room rates are also rising at high-single-digit levels.

You want to focus on the areas that are most geared to recovery, such as New York, Washington and San Francisco. And high-end hotels such as Hilton and Four Seasons are doing much better on a relative basis than the budget hotels today.

Q: Is there a stock that embodies this trend and is still worth buying at current prices?

A: We like LaSalle Hotel Properties (LHO) a lot. It's got a portfolio of a little bit over $1 billion of high-end hotels (including hotels operated by the Marriott, Radisson, and Westin chains) throughout the United States. The stock is trading around just shy of 15 times 2005 estimated funds from operations, or FFO, which is the earnings equivalent from REITs. And its FFO is expected to grow by around 19% in the next year.

The yield on that stock is only 3.1%. So, you are going to get most of your return from capital appreciation. Again, this is not for widows and orphans, but we think it's a good play on a sector that has got sort of the best fundamentals in the business. We've added more of the stock to our position in the last few months.

Q: What's another real-estate stock that is a more conservative play than La Salle?



A: First off, I think you want to look for this kind of stock in the retail sector. Retail REITs really didn't even suffer in the past recession, because consumers buoyed by tax rebates and mortgage refinancing proceeds continue to spend at very high levels. And if the store tenants are healthy, the landlords are going to be healthy.

What we like to see are folks who have opportunities to add value to properties. One example is Acadia Realty Trust (AKR.) It is a very small company (less than $1 billion in assets), but these folks are very shrewd in really making their scarce equity dollars work.

They are good at taking older, tired shopping center in suburban communities with high population density, refurbishing them, and bringing in new merchants.

Q: Are these mostly strip malls?

A: Yes. But the folks who shop at them have a lot of income. So, if the REIT brings in some new restaurant concepts, or a new theater, it can add some value to what otherwise looks like a pretty tired piece of real estate. They also do some refurbishing of the properties before they bring the new tenants in.

This [stock] is trading at 13x [estimated] 2005 earnings, a big discount to the sector average. And we think its growth between 2004 and 2005 will be on the order of about 10.5%. And this company pays a decent dividend of 4.2 %.

Q: Unlike a lot of real-estate fund managers, you hold a lot of preferred shares of REITs and other real estate-related companies. What's your thinking behind the preferreds?

A: If you are looking for high-dividend income from the common stock of REITs, you will have to buy a company that might be paying all of its funds from operations as a dividend.

The office sector right now, for example, is littered with REITs that are actually paying in excess of 100% of their earnings as a dividend. It's painful for them to cut the dividend, so a lot of them are hanging in with the hope that the market will turn around. But a lot of them will have to cut their dividends.

My recommendation for someone that wants income out of REITs: get it in a pure income vehicle like preferred shares. Don't be suckered into a high dividend yield in the common, because you are going to see no growth and you may have your dividend at risk.

Q: Give me an example of a preferred that you like right now.

A: Accredited Home Lenders is paying a 9.45% yield right now. The company is a single-family subprime mortgage lender.




This is a company that has got $1 billion of equity subordinate to our preferred position. We would have to have $1 billion of equity wiped out before we would see a loss to our principal. We wouldn't own the common stock of this company, because of the volatility of owning a subprime lender, but the preferred status gives us added protection.

Source: mortgagesaver.org

© Copyright 2004 by Buyincomeproperties..com