With Returns Like These, Everyone is a Winner
[March/April 2007]

In a horse race, it would have been a photo finish between the first and second runners-up in the 2006 Portfolio Stock Challenge.

Peter Slatin made his selections based on solid management teams with a track record of success.

First runner-up by a nose was Peter Slatin, editor of The Slatin Report, a digital newsletter serving the commercial real estate industry. Slatin ended the year with a 35.9 percent return on his portfolio which included American Campus Communities (NYSE: ACC), Extra Space Storage (NYSE: EXR), Host Hotels & Resorts (NYSE: HST), Mid-America Apartment Communities, Inc. (NYSE: MAA) and SL Green Realty Corporation (NYSE: SLG).

Close on his heels was second runner-up Anatole Pevnev, former analyst and now the founder of REITcafe.com, with a 35.6 percent return. Pevnev’s portfolio consisted of Corporate Office Properties Trust (NYSE: OFC), FelCor Lodging Trust Incorporated (NYSE: FCH), Kimco Realty Corporation (NYSE: KIM), Post Properties, Inc. (NYSE: PPS) and ProLogis (NYSE: PLD).

Slatin, who has been covering real estate and the REIT industry for two decades, says that he made his selections based on “a solid management team and a track record of success.”

His first pick was SL Green, a consistent performer in the office sector with its solid and desirable midtown Manhattan portfolio. “I respect CEO Mark Holliday for his talent in creating revenue through retail programs, lending and acquisitions,” Slatin says.

Anatole Pevnev of REITcafe.com made his selections based on the market leader in each sector.

With SL Green as his anchor stock, Slatin says he “went for a lot of growth.” He felt confident about the market position of each of his picks and looked for companies with strong upside potential, although not necessarily the biggest stars in each sector. “Once I made my picks, I stuck with them, despite the temptation to make changes,” he says.

Pevnev applied a different strategy, going for the market leader in each sector, with the exception of apartment REIT Post Properties. “That was my bullish call,” he says. “I felt the indicators pointed to the multifamily sector coming back. Atlanta is one of those markets that can recover quickly, and I expected that would be reflected in Post’s performance in 2006.”

Coming off one of the best years of returns in REIT history, these two experts are enthusiastic for REIT prospects in 2007. “Everyone was surprised by the strength of last year. We expected something around a 10 percent return, not 35 percent,” Slatin says. “I believe there will be continued strong growth in 2007, between 10 percent and 20 percent.”

Although Slatin anticipates a slowdown in mergers and acquisitions in the wake of the Equity Office deal, he believes that office and multifamily REITs will lead the pack, particularly in high barriers-to-entry coastal markets. “Overseas growth in the industrial sector will continue, along with consolidation in some key markets,” he says.

Capital, particularly private capital, was the wild card in 2006 and may play that role in 2007 as well, the two experts agree. “There’s $1 to $2 trillion in capital out there worldwide,” Pevnev says, “and the demographics of the investing community are pushing money into income-producing opportunities like real estate. The globalization of real estate makes it easy for investors anywhere in the world to invest in REITs.”

But there is a caveat to the flood of capital flowing into REITs, Slatin adds. “Investors must watch the underwriting standards,” he says. “Caution is called for.”

According to these two winners, 2007 promises to be an interesting year for REIT investors and analysts alike.