The Forbes/Slatin Real Estate Report, edited by industry expert Peter Slatin, is a professional-level newsletter geared to the more sophisticated real estate investor.
Along with his own insights and advice on investment opportunities in the sector, one feature of the service is its monthly interviews with REIT-sector equity analysts. Below, I share some highlights from Slatin's interview with Jordan Sadler of KeyBanc Capital, who discusses some of his current favorite ideas among REITs.
FORBES/SLATIN: KeyBanc is focused on the U.S. What are you seeing here?
SADLER: My view, initiated last October, was a cautious outlook overall. The recent M&A squeezed shares. We continue to feel that way. REITs are trading at a level where it's hard to justify incremental investment across the space, although you can be tactical with names that are more attractive.
FORBES/SLATIN: In your universe of tactical moves, what stands out?
SADLER: Our top pick was Digital Realty Trust (NYSE: DLR), and it continues to be. It has fundamental drivers that are significantly differentiated from most of their REIT brethren. That, in theory, should be able to generate excess profit until competition gets hip, which seems to be slowly happening. For their type of building, there is limited supply, and a ton of demand, from financial services, Internet and enterprise companies and channel users.
FORBES/SLATIN: Investors in this type of building, telco hotels, etc., had some real trouble before.
SADLER: There was a ton of stuff built, and DLR bought at a highly discounted rate. Demand has shifted and grown from the dot-com era. Today's needs are driven by such things as Sarbanes-Oxley and the need for backup facilities. We think DLR will have free cash-flow growth of 20% to 30% per year over the next three years.
FORBES/SLATIN: What other office companies do you like?
SADLER: In a more traditional office vein, we favor Mack-Cali (NYSE: CLI). This is one that the market loves to hate, but over time they have proven to deliberately create value. This is not a management story. It's an operator story, as well as a market recovery story. They offer compelling value next to their NAV (net asset value).
"They trade at an NAV of $189 per square foot, but 20% of their assets are in the Jersey City market, including 3.5 million square feet of development rights on the waterfront that is very likely to benefit from the tightness and high rents of the Manhattan market. That's not a here-now story, though. It's 2010 or 2011.
FORBES/SLATIN: Are there any other niche office companies that you think offer good value?
SADLER: We've been fans of American Campus Communities (NYSE: ACC). We think in apartments we are seeing slowing momentum, although it's not that growth isn't good. ACC is the class act operator in the student housing game.
"ACC is the one that hasn't blown up, and I don't think they will. That's because they are more disciplined in their approach. This property type is set to reap the benefit of population growth and increased penetration in terms of kids going to college; it just increases the demand prospect.
FORBES/SLATIN: Given the overall concerns you have about growth, is there any sector that you feel can outperform?
SADLER: We are bullish on the health care space. We view it as defensive during REIT pullbacks and weaker times, such as in1998-99. They're attractive on a relative valuation basis, more so than historically, and they have both great demographics and fundamentals.
"There has been limited construction and more demand, as baby boomers are putting their parents into these facilities. The fundamentals look cheap. The smarter operators like Ventas (NYSE: VTR) are figuring out how to get at that growth. We also like Cogdell-Spencer (NYSE: CSA), a small medical-office building developer that will benefit from their ability to develop assets in a low cap-rate environment."
For more stock picks from the leading financial newsletter advisors, visit Steven Halpern's free daily website, TheStockAdvisors.com.
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