Portfolio Manager Perspectives

Jeff Benjamin

John Wenker: Commercial real estate a flop, but REITs are hot

Dec 6, 2009 @ 12:01 am

By Jeff Benjamin

If commercial real estate is in such bad shape, why are real estate investment trusts thriving? The answer, according to REIT fund manager John Wenker, boils down to liquidity. “REITs have rallied this year off the theme of access to capital,” said Mr. Wenker, who manages $2.5 billion in the real estate department of First American Funds Inc. “The fundamental environment for commercial real estate is still fairly weak, but public companies with access to capital should do well, and REITS have rallied off that theme.” One offering Mr. Wenker manages is the $655 million First American Real Estate Fund (FARCX), which invests in publicly traded REITs. “Since the beginning of March, more than 60 [REITs] have raised $20 billion worth of public equity, and a couple dozen more companies have raised $7 billion worth of unsecured debt,” he said.

Mr. Wenker said that many of the problems facing commercial real estate, including large-scale vacancies that have led to defaults, have been concentrated on the privately owned side of the business, where leverage was more prevalent during the boom cycle a few years ago.

“Most public REITs are forced to maintain lower leverage levels,” he said.

Mr. Wenker said the key is to focus on areas of “inelastic demand,” such as health care, storage facilities and office buildings that have long-term leases with credit-quality tenants.

One example of the extreme other end of the commercial-real-estate sector, he said, is hotels, which can reset prices on a daily basis, depending on demand.

In an improving economic environment, such pricing flexibility can be an advantage, but it can hurt the bottom line in downturns.

First American Real Estate typically holds about 60 REITs. Mr. Wenker currently likes Federal Realty Investment Trust (FRT) for its exposure to a high-quality demographic through select shopping centers.

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