Q:  What is the mission of the fund and how is the fund different from other real estate focused funds? A : We believe that investing in real estate makes good sense because being a landlord is financially rewarding. Commercial real estate offers an opportunity to invest in an asset class that is not directly correlated to general stock and bond markets over the long term. We are focused on long term investing and over the long term, dividends play an important role in generating total returns for investors. And real estate, by virtue of long-term contractual leases, is a wonderful way to generate that predictable income. We started the fund in 1994 and we take a broad view of investing in real estate. We are not only open to investing in real estate securities but also in companies that manage real estate or hold significant real estate as a part of their business. We are a family run business and we have a long history of investing over three generations of Davises. Chandler’s family has been in the real estate business for several decades and he brings real estate expertise and true understanding of the sector to our shareholders. Q:  What is your investment philosophy? A : We have a time tested global investing approach through which we try to find businesses with defendable franchises, a wide moat so to speak, run by management teams whose interests are strongly aligned with shareholders. We like to buy these businesses when they are trading at a discount to their long term value. That investment philosophy has a particular application to the real estate fund in that we are looking for businesses that can weather and managers who can manage the entire real estate investment cycle. The conventional notion of a real estate company is that you own a building and you simply put tenants in it, collect the rent, and spend a little money to keep the building competitive. That is a fine way of doing things and a good beginning, but we think you need to do much more than that. It is important to be a very good acquirer of assets. It is equally important to be a very good developer or redeveloper of assets. You also need to sell assets when the time is appropriate and reinvest those proceeds in acquisitions or development. Additionally, an ideal investment adds value by managing both sides of the balance sheet. A business that navigates well the entire real estate cycle and deftly manages its balance sheet can grow its yield over time. That is far more valuable than a high current yield that does not grow. Q:  How do you divide the real estate market and how do you look for the opportunities? A : While we focus on traditional real estate, such as multi-family, retail, industrial, and office properties, we also look at other sectors. Lately, student housing and data center properties have become a large part of our portfolio. We have also been known to take an even broader, somewhat unconventional view of real estate. At times we invest in companies whose real estate is being undervalued because the company’s corporate structure or primary business is suppressing value . For example, we were buyers of Burlington Northern and Florida East Coast Industries, before they were taken private. These railroad companies hold valuable rights-of-way, which we consider real estate. That value was not realized until the companies were taken private. Our shareholders benefitted from the significant premium paid. Another approach that has been with us since we started managing real estate focuses on evaluating what we refer to in house as complexity. We are big fans of complexity and that is not always in favor with investors. There are businesses out there that, because of their management teams’ ability to manage complexity, can take a difficult piece of property and solve any number of issues related to contamination, environmental impact or regulatory hurdles in order to create value. Investors generally shy away from complications but if you analyze and monitor the situation carefully you can yield outsized returns. One final element of our process is the time we invest visiting properties and meeting with management teams. We spend a tremendous amount of time doing this in order to gain insight into how properties are managed and maintained and to assess how they are positioned in their market. Most often we meet with middle management or property managers to get feedback from those closest to the assets. Q:  Could you give one example? A : One of our largest holdings in the fund is called Forest City Enterprises. Forest City is a real estate company with an excellent track record of building large complex developments typically where there is a public-private partnership. Forest City will ally itself with a municipality to build a mixed-use development with residential, office and commercial components. Sometimes the company uses land that requires some degree of remediation or improvement. It is a complex process that can take ten plus years to get from conception to ground breaking. The value created has been tremendous and the rewards are also exciting. Forest City has developed a franchise that municipalities and other public entities across the US find attractive. In fact, Forest City has been so successful at these larger projects that often they are not the low cost provider. Even so, some public entities are willing to pay a bit more to have a strong partner like Forest City that they know will complete the project as promised. In addition, Forest City has plenty of stabilized assets generating cash that supplements the company’s development efforts. They are the best at what they do and this is what we look for. That is not to say that they are immune to economic uncertainty. Development, however measured, is often viewed as a risky endeavor, but we are willing to balance that risk with other holdings in the portfolio that might be less risky. Q:  How do you build your portfolio? What safeguards do you have in managing the cyclicality of the business? A : We concentrate on owner earnings, which is how much money equity holders can take out of a business after investing enough capital to keep the business competitive. That concept is closely aligned with the way we value real estate, whose worth we often describe as being only as valuable as the cash flow it can produce. We utilize proprietary financial models to determine how much cash a company can produce for equity holders over the next ten years. That forward cash flow is then discounted back at our assumed cost of capital. In building our financial models we flex variables that significantly impact valuation. Those variables can include core growth, timing and cost of acquisition, development costs and refinancing risk. Ultimately it’s the nature of the business that dictates which variables are most important for modeling purposes. We take a barbell approach when constructing the investment portfolio. At our core, we are value investors. Things that are underpriced in the market always attract us, but we are also prepared to take risk when it is warranted. Often we will pair a reasonably priced safe investment with a deeply discounted investment that has more risk. For example, several years ago we paired Simon Property Group with Developers Diversified, which is now called DDR Inc. At the time Developers Diversified was having difficulty deleveraging their balance sheet and coming to terms with a couple of high profile tenant bankruptcies, chief among them being Circuit City and Linens-N-Things. At the time we believed that improving capital markets and stronger retail sales would change market sentiment surrounding the company. We decided to invest in Developers Diversified, but paired that trade with the safest retail investment in our universe, Simon Property Group. Importantly, our investment was asymmetric. We took a much larger position in Simon than we did in Developers. Q:  How many holdings do you have? A : The number of holdings is between 30 and 40, but typically the number of actual companies in the fund is less than that. That is due to the pairing strategy we mentioned earlier. Q:  What do you consider as risks and how do you manage them? A : Every company has different sets of risks. The first rule of making money on Wall Street is not losing it. Risk matters a lot to us and over the last three or four years we have been more cognizant of potential risk than ever. The recent financial crisis was an eye opening experience. We learned that we need to accept that far more is unknown than is known. That is why our financial models now factor in all possible outcomes, not just single static assumptions about what we think is most likely. Of course, not all risks can be delineated in mathematical terms. There are a lot of clues to be found by pursuing mundane research techniques such as reading financial disclosures and other SEC filings. We spend hours each day reading and searching for those clues in the vast number of available filings Q:  What is portfolio turnover rate and what is your benchmark? A : Our benchmark is the Wilshire Real Estate Securities Index. Our portfolio turnover has changed over the last few years because volatility within the real estate universe has gone up dramatically. While historically we used to get 10 to 12 percent returns in an entire year, more recently we have sometimes been able to achieve that in the span of a month or two. This means that we sometimes reach our sell or buy triggers more quickly than in the past and turnover has gone up as a result. Our favorite holding period is indefinitely. We have always been great believers in the idea that you don’t get rich going from 1 to 2 to 4, but you get really rich going from 4 to 8 to 16 to 32. It is those last two or three doubles that really make you the money.