The fly in the ointment remains the economy. "Although demand is strong, job growth will be required for REITs to improve in almost any type of property," Cohen says.
His ten largest holdings, which make up 50% of the portfolio, include big names such as Vornado Realty Trust, Boston Properties, Prologis, Simon Property Group, AvalonBay Communities and Rouse.
Other real estate stock fund managers are turning to Real Estate Operating Companies (REOC) for long-term growth instead of current income. REOCs are not required to distribute 95% of their income, as are REITs. They can pump the retained earnings back into new developments.
"There are pockets of opportunities in REITs," says Michael Winer, manager of the Third Avenue Real Estate Value Fund. "The key is to be very specific and invest in well-capitalized companies whose dividends are well covered and secure. These are companies that have tremendous staying power from strong balance sheets."
Winer focuses on long-term capital appreciation rather than income. He's buying REOCs when he thinks the price represents a significant discount to its true value. The fund owns just 30 stocks, 60% of which are real estate operating companies as opposed to REITs. And 70% of the fund's top ten holdings are real estate operating companies.
"Real estate operating companies are a vehicle for growth," he says. "Real estate is a capital intensive business. Companies that retain cash flow have a significant advantage over REITs, which pay out all their cash to shareholders."
Winer says that as cash comes into the fund, he is primarily accumulating more shares in the following companies due to their long-term growth opportunities:
St. Joe Co. Winer sees the company unlocking hidden value in millions of acres of land in northwest Florida, which is being developed for residential resorts, single-family homes, as well as condominium and mall, office and industrial space. The company will create residential properties and resorts on valuable costal land, with $500,000 condominiums along the beach. It also owns valuable land adjacent to the proposed Palm City International Airport.
Forest City Enterprises. A commercial real estate operating company that develops projects in urban areas. It is developing an infill area in New York City and is redeveloping the old Denver airport. Its company has properties in 24 states and is well-diversified in office, retail, residential and hotel properties.
Tejon Ranch Co. This company owns 270,000 acres of land 60 miles north of Los Angeles in Kerin County, California. Much of the land is adjacent to Interstate 5, the busiest freeway in the nation. It is considered the next and perhaps last great frontier in land development in California.