From Dow Jones Newswires
October 01, 2002

NEW YORK -- Many investors, burned by the dot-com blowup and jaded by the accounting scandals and earnings misses in the broader stock market, have turned to the real-estate world for the safety and comfort of its dividend yield.

But for Michael Winer, portfolio manager of the Third Avenue Real Estate Value Fund, such a strategy is shortsighted. For him, it's all about long-term growth potential, not dividend yield.

"If you're in it for a three-to-five year investment horizon," then real-estate investment trusts and real-estate operating companies are a good choice, he said. "But if you have a one-year investment horizon, watch out."

Indeed, some of the REIT names with the loftiest dividend yields can also be the more volatile stocks.

REITs have become fashionable as investors chase after dividend yield, he said.

REITs "were even mentioned on 'The Sopranos' [TV show] last week. So you know everybody knows about them," quipped Mr. Winer.

However, Mr. Winer deliberately ignores dividend yield when cherry-picking his real-estate stocks. In fact, he actually favors real-estate operating companies over REITs.

Differing from REITs, which avoid paying taxes as long as they distribute 90% of their income to shareholders through dividend payments, real-estate operating companies can retain their cash flow and reinvest it in the business. As a result, operating companies, unlike REITs, can finance acquisitions and development projects using existing cash flow to grow the business. Whereas, REITs must rely heavily on the equity markets to raise cash for acquisitions.

REITs may offer attractive dividends, but real-estate operating companies offer potentially greater growth, said Mr. Winer.

Mr. Winer's New York-based fund, which began operation in September 1998 and now has about $340 million in assets under management, posted returns of 31% in 2000, 18.2% in 2001 and was up about 2.6% in 2002 as of Sept. 19, he said. By contrast, the Standard & Poor's 500 was down 24%, Nasdaq was off 36%, and the Russell 2000 had fallen 23% over the same period of the current year.

REIT total returns, as measured by the National Association of Real Estate Investment Trusts, are up 6%.

Mr. Winer's top three picks are all real-estate operating companies: Brookfield Properties Corp., Catellus Development Corp. and Forest City Enterprises Inc. The three are among the fund's top five holdings as of Aug. 31, according to Morningstar.

Brookfield, a Toronto company that develops and acquires Class A office properties in major cities in North America, jumped onto investors' screens world-wide when many of its properties were damaged in the World Trade Center tragedy.

Indeed, the company owns Towers One, Two and Four of the World Financial Center as well as One Liberty Plaza, which were all directly adjacent to the Twin Towers. The company also owns properties in midtown Manhattan. About 53% of Brookfield's operating income currently comes from its Manhattan properties.

Its stock has taken a hit since Sept. 11 as nervous investors fretted over whether downtown Manhattan, or even New York City in general, would rebound. Many watched anxiously as tenants bolted downtown New York and talked about relocating all or some of their operations elsewhere. In the 52 weeks ended Sept. 20, shares have been as high as $21.10 on June 25 and as low as $15.57 on Oct. 26. Shares currently trade around $19.

The situation was exacerbated by the recession, which has caused financial services firms to cut staff and real-estate space, causing a boatload of sublease space to hit the New York office market.

Mr. Winer isn't concerned. He said Brookfield is largely insulated from the turmoil since it holds long-term leases with high credit-quality tenants that guarantee its rent revenue during this turbulent period. Indeed, few leases expire until at least 2005.

More recently, Brookfield raised eyebrows when it boosted its downtown New York holdings even further by announcing plans to buy a 51% stake in Tower Three of the WFC -- an empty 2.1-million-square-foot tower that is still undergoing repairs. Lehman Brothers Holdings Inc., which used to lease space in the tower, has already indicated it won't be returning. Brookfield said the acquisition "underscores our strong commitment to lower Manhattan."

Mr. Winer had nothing but praise for Brookfield.

"Being able to buy even a vacant building in the World Financial Center for $128 a foot is a steal," he said. By contrast, a property in midtown Manhattan at 399 Park Avenue recently sold for more than $600 a foot, he noted.

Mr. Winer is a big believer in the long-term viability of downtown Manhattan. City, state and federal government officials are motivated and determined to rebuild, he said. "In the long-term, lower Manhattan will be an even better place to live and work than prior to Sept. 11," he said.

The portfolio manager said he's snapped up additional shares in Brookfield since the stock began falling. Brookfield's shares recently traded at $19.21, but Mr. Winer believes its net asset value is closer to $24.

Mr. Winer is bullish on Catellus and Forest City, primarily for their development expertise. Generally, returns tend to be higher for companies that develop properties than those who simply acquire them.

Some investors have shied away from companies that develop in this weak economic environment. With so much uncertainty over when the economy will recover, developers run the risk of not having tenants to lease the space once a project is complete, they say.

However, Mr. Winer noted that both Catellus and Forest City insist on pre-leasing a large portion of their developments before a shovel goes into the ground.

Although Catellus has a significant development pipeline in California, where real estate has taken a hit by the dot-com blowup, Mr. Winer isn't concerned. He noted that many of the company's projects are industrial properties, which have been less impacted than office assets. Mr. Winer is also impressed with the company's strong balance sheet.

Forest City has been a developer for more than 60 years, said Mr. Winer. Its portfolio includes residential, office, retail and even hotel properties in densely-populated markets, such as New York, Boston, Denver and Washington. The company's shares recently traded at $33, but Mr. Winer pegs the NAV at closer to $43.

Mr. Winer is avoiding hotel REITs and companies. He says these companies are directly affected by the ebbs and flows of the economy. "Their tenants leave every night," making it difficult to predict cash flows, he said.

"Office building have leases that average 10 years and I can tell within 10% what their 2005 cash flow will be," he said. "But hotels, I can't tell you what the cash will be in September."

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