They Know Real Estate

The hands-on managers behind First American

John Wenker and Jay Rosenberg are real estate junkies. Heading to the airport after a conference in Palm Beach in March, they took a detour to a two-acre vacant lot owned by Kite Realty Group (KRG ), a holding in the $740 million First American Real Estate Securities Fund (FREAX ), which they jointly manage. The land won't be developed for more than a year. Most real estate fund managers wouldn't have bothered to peer at a weed-filled site.

But Wenker and Rosenberg like to look into each company's pipeline of projects using skills they picked up earlier in their careers. Wenker, 54, got his start in the 1970s working for the city of St. Paul, Minn., first assessing property and later overseeing new developments. Rosenberg, 34, built industrial buildings in the Midwest before becoming a fund manager. "We have hands-on experience, and we like to get out and take a look," says Wenker.

Their diligence has helped First American produce annualized gains of nearly 20% in the 2001-2005 period, about one percentage point better than the average real estate mutual fund, according to Standard & Poor's (MHP ). Unlike many of their competitors, the managers also look beyond real estate investment trusts (REITs) to operating companies, such as Hilton Hotels (HLT ), that have substantial property on their balance sheets. Such outfits don't necessarily pay dividends as high as REITs, but they often trade at a substantial discount to the trusts and provide a cushion when the market turns against the sector. That has helped First American outperform in weak REIT markets, like the one last summer. "We're looking at a lot of companies a lot of our peers have never even heard of," says Rosenberg.

Another overlooked segment, small-cap REITs that aren't followed by Wall Street analysts, have also proven profitable. The duo put almost 2% of the fund into tiny First Potomac Realty Trust (FPO ), with a market capitalization just under $600 million, which gained 17% last year. First Potomac's savvy management buys underutilized office and industrial properties in the Washington (D.C.) area.

After a tremendous five-year run in the REIT sector, average dividend yields are below that of the 10-year U.S. Treasury bond, a danger signal in prior rallies. But considerable mergers-and-acquisitions activity has helped the sector post strong performance, says Rosenberg. Rising interest rates will eventually deter those buyers. "We're due for a little payback," says Rosenberg. With its quirky style, though, the fund should outperform its peers even in a downturn.

By Aaron Pressman

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