Three REITs for an Uncertain Environment: Portfolio Fix

Alexandria Real Estate Equities Inc. (ARE) is an example of a health-care REIT that Martin likes. "Alexandria is our favorite in that sector," says Martin. "Alexandria has key life-science clusters in, for example, South San Francisco, La Jolla, and Cambridge.

"Internationally they have a first-mover advantage in India, and they really align themselves with not only the local universities such as Stanford and San Francisco. But they're also full integrated with the health-care systems, the venture capital, other biotech firms," he explains. "They are the go-to landlord, developer, and owner of those assets."

Martin also favors multi-family REITs. Although share prices have increased significantly over the past several years and valuations are "a bit stretched from a fundamental standpoint," the sector still makes sense, he believes: "We're seeing a significant amount of (housing) demand for a number of reasons.

"Number one, it's a very cost-efficient housing alternative, especially in an environment in which there's a lot of uncertainly around home ownership where evaluation is settling out and there's a lot of supply. It's been very, very difficult to get a mortgage, so mortgage financing is very difficult," Martin explains.

"That leads to a tremendous amount of uncertainty. On top of that you have a levered balance sheet from the average consumer," he notes. "All of that is creating significant demand, and I would call it outsized demand for multifamily at a time when we don't have a significant oversupply of multifamilies. It has driven valuations so we're seeing very good rent growth in the 5% to 10% annual basis for the multi-family REITs."

The REIT's management team is another key factor in a slow-growth environment. Martin says. In particular, he wants to see what he calls a "full-service real estate skill set," which he defines as the ability to acquire, develop, redevelop and manage property.

These businesses, he says, "are able to grow or have flexibility through a cycle, whether that's an economic cycle, slow growth or high growth or whether that's an inflation cycle or whether that's just a real estate or financial cycle."

Another factor to consider if interest rates rise: the REIT's finances. "We want to focus on those companies with strong balance sheets where leverage isn't too high, where interest coverage ratios are in good shape, where debt maturity levels on an annual basis are at a manageable level," he says.