Real Estate Prospects for 2010

By Sham Gad | January 04, 2010 AAA

Thanks to government aid, notably the Homeowners Tax Credit passed by Congress in 2009 and extended into 2010, the real estate industry was saved from falling into an abyss. Without Uncle Sam underwriting mortgages via Fannie Mae and Freddie Mac, real estate would have collapsed beyond what many might imagine. Nonetheless, the industry as a whole does not necessarily define all the players, so here are three names to consider for 2010.

IN PICTURES: Digging Out Of Debt In 8 Steps

One Homebuilder
When it comes to picking real estate, I don't deviate from my value-oriented ways. I stick to quality names that have demonstrated prudence through both good and bad industry times. When housing prices are going up, every housing executive can look like a genius. But unless you can perfectly time markets, high fliers in bull markets can easily become big losers when reality kicks in. What you want - in any industry - are businesses that are thinking about risk when the times are booming. That's why I like NVR (NYSE:NVR), a homebuilder with superior management and a conservative approach to real estate. Today and during the real estate bubble, NVR has always maintained a pristine balance sheet, with over $1 billion in net cash against a $4.1 billion market capitalization. (For a look into understanding the balance sheet, check out our article on Reading The Balance Sheet.)

Shares in NVR are up over 40% heading into the end of 2009. That compares with over 110% so far for smaller and heavily indebted Hovnanian (NYSE:HOV). Clearly, Hovnanian favors the short-term trader. But now consider the two-year return when real estate stocks went into free fall. NVR was up over 25% while Hovnanian shares were down over 46% by mid-December 2009. Quality always wins out.

Two Land Owners
Aside from NVR, the only other real estate names that are of interest to me are Tejon Ranch (NYSE:TRC) and St. Joe (NYSE:JOE). The ultimate attraction in these two names can be found, again, on the balance sheet; both companies are nearly debt-free, a characteristic not found in any other comparable companies. In addition, both Joe and Tejon possess catalysts that will likely unlock land value over time. For Joe, next year is the opening of the Panama Airport in Florida, built on land donated by Joe. Joe owns the surrounding land, which means any hotels, gas stations and restaurants will be buying Joe land. In California, Tejon has just reached a milestone agreement in which it will donate a chunk of land for permanent environmental conservation. In return, Tejon gets to develop other land without the common roadblocks put up by environmental organizations.

The Common Theme
Notice the common theme in the three: little to no debt. Despite the thawing in credit markets in 2009, unhealthy debt levels are not desirable for real estate enterprises. If investor money begins to make a play on real estate, these three names could benefit in 2010 and beyond.

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