Chances are if you had gone to almost any REIT portfolio manager at the start of 2005 and told them their portfolio would post a total return close to 19 percent they would have been ecstatic. So even though Art Havener finished second in the 2005 Real Estate Portfolio Stock Challenge, his portfolio strategy is worth noting. Unlike Block whose five-stock portfolio remained relatively static for the year, Havener made several timely alterations to his portfolio.

At the end of the year, Havener’s portfolio included the now privately held Capital Automotive REIT, Kilroy Realty Corporation (NYSE: KRC), EastGroup Properties, Inc. (NYSE: EGP), Alexandria Real Estate Equities, Inc. (NYSE: ARE), and Ventas, Inc. (NYSE: VTR). At various times during 2005, he held a number of other stocks including Extra Space Storage Inc. (NYSE: EXR), recently acquired CenterPoint Properties Trust (NYSE: CNT), LaSalle Hotel Properties (NYSE: LHO) and Eagle Hospitality Properties Corporation (NYSE: EHP).

The changes reflect Havener’s strategy of identifying companies with core earnings growth potential—companies that do not derive per share growth in funds from operations (FFO) with proceeds from property sales. Havener’s strategy also factors in dividend growth.

“I wanted to pick companies with core earnings growth that would translate into above average dividend growth,” he says.

What about sectors? According to Havener, he avoids sector calls. “At one time, you could play sectors because all sectors moved in tandem,” he says. “That’s not true anymore.”

During 2005, for example, REIT share prices for 55 percent of the NAREIT Equity Index rose, while 45 percent saw share price declines. Individual stocks from the different sectors turned up as both gainers and losers.

An analysis of total returns shows that 48 of 149 REITs listed in the NAREIT Equity Index posted negative returns last year. In other words, an unschooled investor had a one in four chance of picking a loser.

“We believe that the REIT market is a stock picker’s market,” Havener says.

Forecasting 2006

For 2006, Havener sees more opportunities for schooled “stock pickers.”

Havener says he will consider stocks within the residential, mall, hotel, and self-storage sectors.

“We’re over-weighted in these areas because the fundamentals are positioned to produce above average core earnings,” Havener says. Participating in the Stock Challenge again in 2006, Havener’s initial portfolio includes residential REIT Home Properties, Inc. (NYSE: HME) and hotel REIT Eagle Hospitality.

What about industrial? “We are over-weighted in industrial, but keep in mind that consolidation has produced a small universe of companies in that market,” Havener cautions. Havener has one industrial company, EastGroup, in his initial 2006 Stock Challenge portfolio.

The office sector is the only one under-weighted by Havener for 2006. Even so, he remains enthusiastic about office REITs with niche strategies or holdings that are concentrated geographically in growing regions.

“There are some dynamite companies in the office sector,” Havener says, pointing to Alexandria, Kilroy and SL Green. Havener has also selected Alexandria in his initial 2006 Stock Challenge portfolio.

Overall, Havener exudes optimism about REITs generally, noting that 2005 was the sixth-consecutive year in which REIT stocks outperformed most major indexes. No one expected that at the beginning of 2005, he adds.

“The reasons include consolidation in the REIT markets, investor sentiment, and demographic trends,” Havener says. “If you evaluate all the merger and acquisition activity in the REIT market, you will see that our equity market cap is diminishing in size. So there is a scarcity of shares available. Investors also have return expectations that REITs can match. Finally, baby boomers are beginning to retire and to look for more conservative investments that produce decent returns.”