Defensive REITs Thrive
Amid Broad Weakness
With some segments of the real-estate industry weakening over the past year, Alpine Realty Income & Growth Fund has posted some positive results by emphasizing selectivity and defensiveness.
Most of the $57 million Alpine portfolio is concentrated in real-estate investment trusts, but as a defensive move, the fund has invested about 15% of its assets in REIT preferred stocks, as opposed to REIT common stocks. Those preferred stocks have posted nice yields and have safer dividends than common stock, said Samuel A. Lieber, president of Alpine Funds since their inception in early 1998.
In addition, starting about two years ago, Alpine Realty reduced its exposure to weakening property types, such as apartments. And the fund has become more selective by focusing on companies with certain niche and size advantages.
Alpine Realty has posted a year-to-date return of 13.9% through Tuesday, compared with a 2.31% gain for the Lipper Real Estate Fund Index and a 20.12% decline for the Standard & Poor's 500-stock index, including dividends, according to Lipper Inc. For the past three years, the Alpine fund has gained an average of 21.09% annually, compared with a 14.06% annual increase for the Lipper index and a 12.86% annual decline for the S&P 500.
One of Alpine's stock favorites currently is Pasadena, Calif.-based Alexandria Real Estate Equities Inc., which specializes in building laboratory office space for biotechnology and pharmaceutical companies. While the office market nationwide is showing vacancy rates of 15% or more, Alexandria's portfolio vacancy rate at the end of the third quarter was 4.8%, said Robert W. Gadsden, portfolio manager for the fund since September 1999.
The low vacancy rate is due to continued demand for research and development space from companies such as pharmaceutical giant Merck & Co., said Mr. Gadsden. He expects Alexandria's funds from operations, which is net income plus depreciation and other adjustments, to rise 9% to 10% in 2003 from 2002.
The stock rise resulting from that, plus a dividend yield around 4.9%, should produce a total return in 2003 of more than 15%, Mr. Gadsden said. The stock is currently trading around $41, Alpine bought much of its position in the fall of 2000 at about $31 or $32.
Another Alpine pick is New York-based iStar Financial Inc., which provides financing solutions for commercial real estate. It recently has reduced its risk by moving away from "mezzanine" loans, which are subordinate to first mortgages, and toward first mortgages and "credit leases," in which it buys assets from a customer who wants to sell the assets and lease them back.
Among the company's pluses are its range of loan products, which gives it a one-stop-shop advantage, and its dominance in the sector, which gives it more attractive financing than others can obtain, said Messrs. Gadsden and Lieber. And it spreads its risk through a diversification of property types.
And with an 8% expected increase in stock price and yield of 9%, Messrs. Gadsden and Lieber expect a 17% total return from iStar in 2003. Alpine started investing in iStar at the end of 1999 when the stock was in the high 16s. It is currently trading around $27.50, and Mr. Gadsden said he would be "disappointed if we didn't see the stock at 30 next year."
A third pick is Chelsea Property Group Inc., in Roseland, N.J., a dominant owner of large, high-end outlet malls. Its outlet malls tend to average sales of $400 a square foot per year, compared with $260 to $270 for average malls, Messrs. Gadsden and Lieber said. A few years ago, Chelsea saw its stock hurt as investors feared Internet competition and associated it with other, troubled outlet malls. Chelsea's good locations helped it avoid those troubles. Plus, others' troubles enabled it to acquire malls inexpensively and turn them around.
Chelsea's return on equity of 15.1% compares with an 8.7% average for REITs, and it has good prospects for new development, according to Messrs. Gadsden and Lieber. Two malls have done "phenomenally well" in Japan, with $700 a square foot in annual sales, Mr. Lieber said, and three more are in the works there.
Alpine started buying Chelsea in early 1999 and added to its position in 2000, when it was trading in the range of $12.75 to $13.50, Mr. Gadsden said. It currently is trading around $34.50.
REITs in general have outperformed the market partly because investors have found their dividend yields, now averaging about 7%, relatively attractive over the past 18 months or so, according to the executives. But investors may not find REITs as attractive in the future. "Next year's going to be a very tough year," says Mr. Lieber.
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