FUND WATCH


Opportunities in Real Estate Companies

The manager of Ivy Real Estate Securities discusses his favorite industrial, hotel, storage and shopping-mall stocks.



Housing starts are declining, residential property prices are softening, interest rates are rising and the average real estate investment trust now yields nearly one percentage point less than the ten-year Treasury. Is this a time to buy or sell REITs and other publicly traded real estate stocks? Joe Betlej, who manages Ivy Real Estate Securities (symbol IRSAX), is finding good income and growth opportunities in real estate companies.

The first thing to consider, says Betlej, is that residential property moves in a different cycle from office, industrial and hotel space. The commercial side of the real estate industry tends to perform better in the late part of an economic cycle. As employers add workers and feel strength in the economy, they require more office and factory space; rising business travel drives up hotel room rates; growing imports and exports drive demand for more warehouses and logistics centers.

Therefore, while housing appears to be cooling today, earnings are accelerating for commercial, industrial and hotel companies. Fearful of rising inflation? The hard assets of real estate are a classic inflation hedge. While it's true that REITs today yield less than Treasuries, don't forget that, unlike fixed-interest securities, real estate firms can raise dividends paid out to shareholders each year. (Betlej says REIT dividends grow 3% to 5% annually, on average.) Finally, with an even lower correlation to Standard Poor's 500-stock index than bonds, REITs offer excellent portfolio diversification.

Betlej particularly likes the industrial, hotel, storage and shopping-mall businesses. Here are his top stock picks in each category.

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In the industrial space, Betlej is hot on ProLogis (PLD), a leader in building and managing modern logistics facilities. The 3.1% yield is modest for a REIT, but this is a growth company. The specialty of the Denver-based REIT is putting up new distribution facilities in transport hubs, such as Los Angeles and New Jersey, where sea, air and train networks intersect.

If you've traveled recently, you've probably noted the steady rise in hotel room rates. Most of this windfall drops to the bottom line of the hotel companies. Betlej favors Starwood (HOT), better known by its Westin, W, Sheraton and St. Regis brands. He expects 9% to 10% annual growth in Starwood's revenue per available room (a favorite industry measurement) for the next few years, which will translate into profit growth of 15% to 20% a year. Starwood, incidentally, is not a REIT.

One habit at which Americans excel is accumulating junk in their houses. That's why Betlej is so keen on Public Storage (PSA), the leader in the growing self-storage industry. A low-cost operator, Public Storage has been acquiring smaller companies to expand its footprint. This REIT's modest yield is less than 3%, but Betlej expects earnings to increase by 12% to 15% annually over the next couple of years.

Economists seem to write the obituary of the American consumer every year. But the consumer just won't drop -- and that's a good thing for General Growth Properties (GGP), a leading owner, operator and developer of regional shopping malls. Betlej likes the way this REIT, which yields 3.5%, is redeveloping malls to include residential, office and hotel space. These mixed-use developments augment weekday and daytime traffic in the malls' retail space.

The A shares of Ivy Real Estate Securities levy a maximum front-end sales charge of 5.75% and charge annual expenses of 1.67%. The initial minimum investment is $500. For more information, call 800-777-6472.

--Andrew Tanzer




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