Q:  What is the history of the company and the fund? A : Our real estate portfolios originated at the private investment firm Dalton, Greiner, Hartman, Maher & Company. That firm managed more than $1.5 billion and invested in small and mid-cap value equities and has been around for over 20 years. Since the emergence of securitization of private real estate into the public market in the nineties, real estate had substantially increased in weighting in broadly tracked indexes. As a partner at the firm I managed real estate exposure in the portfolios. I had done a lot of private and public real estate work over a long period of time and we developed an investment process and an orientation towards investing in public real estate on a value basis. We also structured concentrated portfolios in special value situations in public real estate for separately managed accounts and that served as the foundation for the Value Opportunity Fund in late 1999 when the real estate was out of favor and tech stocks were preferred. In 2000 we decided to form REMS as an independent firm and spin out the real estate portfolios from Dalton Greiner. John Webster who manages our Atlanta office and the investment group also joined the firm. In 2002 we converted the value-opportunity portfolio to a mutual fund. That mutual fund, at the time, was one of the few funds that could leverage and also hold short positions. We have in excess of $700 million in total assets under management today under several funds and accounts. We also continue to manage real estate exposure for Dalton, Greiner, Hartman, Maher & Company. Q:  How is investing in real estate different? A : In the broadest sense real estate is divided into commercial and residential. Nearly 60 percent of the population has single-family home investments. Those tend to act differently to the stock market. Commercial real estate is an income-producing business that requires management intensity and covers the spectrum: from hotels and apartments, to office, industrial and retail properties and there are specialty formats, such as self-storage, cell phone towers, data centers and health care facilities. That business in the private market is management intensive. They typically trade around what is known as capitalization rate or cap rate, which is a multiple of the cash flow produced by the business. Those cap rates relate to where the interest rate market is and the perceived economics of the businesses in terms of cash flows, occupancy, rents, tenancy rates and location. That is several trillion dollars worth of assets today in the United States, and more in Canada, which is where we focus. About 10 to 15 percent of commercial real estate is trading in a publicly listed securities structure. The share prices provide daily liquidity and your real estate is marked-to-market everyday, which it is not in the private market. You only know what it is worth in the private market when you can find a buyer who pays for it. What you get is pricing in the public markets that can have a high degree of variance with what the private market value of the real estate might be inside those public structures. You also have to understand that the real estate sits on a platform. It can be in a Real Estate Investment Trust structure, or it can be in a real estate operating company structure. That platform consists of an organization and management and their ability to keep it rented, and in good shape and acquire and develop new assets. So the real estate platform is important and the quality of the management of people, and their track record in acquiring and managing assets is the key. In addition, you need to look at outside external influences related to the economy and interest rates. The business that we are in and have done for a long period of time is through an investment process locate pricing in the public market that does not reflect what we underwrite as the value of the assets held by that public structure. Then also evaluate the platform and its ability to increase the value of those assets over time, and determine whether or not we would like to be partners with the people. We buy real estate that happens to trade in a public wrapper and we try to hold that real estate for a long period of time, try to extract income from it in the form of dividends, and take those dividends and re-invest it back into real estate. We do not focus on what REIT based indexes are doing but do care about the health and the stability of the financial markets to provide capital to the companies we are investing in. We are a long term investor and are prepared to hold these companies for several years with the objective to generate a return that, including dividend income, would be in the low double-digit range. Historically we have done about a 12 percent annualized rate of return and as low as 8 percent is acceptable. We doubt we could ever do more than 15 percent over any extended period of time. Any expectations beyond that are probably not realistic. Q:  What is your investment process? A : The three main objectives are: you want to buy the best quality assets you can at a fair price and what you think the platform and the people can do with those assets. In other words, we are going to allocate capital to owning the real estate, either below what we believe it would trade at in the private market, or around what we think it would trade at in the private market to create our basis for investment. From there we have to evaluate; is this real estate sitting on a platform that has the capability to enhance its value over time? On top of that, is management and their ability to manage that real estate in a manner that we are comfortable with. We want to feel very comfortable with the people we are partnering with because we tend to be partners with them for a long time. Our investment process is set up through using a number of characteristics that relate to value of the real estate; such as cap rate and price-to-cash-flow and price-to-replacement cost. Those are value characteristics you can look at. You then have certain credit metrics that you are looking at in a company, and its ability to have long-term sustainability of its balance sheet. Those metrics are all set up and we divide the universe of companies in a set of quartiles. There are probably about four hundred investable opportunities today on the equity side, and probably 75 or so on the preferred part of the capital structure. To invest, those are screened and we create four quartiles, of which the first quartile is the most attractively screened and the fourth is the least attractive. We concentrate our underwriting on first two quartiles, looking for specific public structures that appear to be mispriced by the equity market and when we find those, our team in Atlanta and I hit the trail. We have done this for so long that we normally know a lot of these assets. You have got four hundred companies, probably three hundred of them we know fairly well, and another hundred we have varying knowledge of. But you still hit the trail, look at the assets, evaluate the platform; meet with the people, talk with others in the markets; and do, what we would call, an underwriting process. If everything is checking out then it becomes a target to invest capital in. John Webster came out of the real estate banking environment, as well as private real estate, and has a good feel for underwriting real estate assets. Then you have to back that into a portfolio structure so that, for example, if it happens to be an apartment portfolio and you already own a full-boat of apartments, then this has to be more attractive than something you own in order to move into the portfolio. If you own very little multi-family assets, for example, then you have room to acquire an additional piece of that. It does not matter to us if in the stock market multi-family is doing well or not doing well. The economics of the underlying business are important to us, in that it must be potentially increasing in its occupancy and rents so that the value will increase. But the pricing that we can acquire those assets is a critical piece of the puzzle. Q:  Can you give us two examples of companies you invested and why did you select them? A : Without naming the specific company, there is a holding we have had that is in the manufactured housing sector of the economy, we have owned for a long period of time. That business ran into difficulties of supply and competition from the single-family housing market between 2004 and 2007 period. The pricing of these assets in the public market was under-valued as to their potential and the platform they sat on; and management’s strategy during that period impressed us. In addition we were able to extract an unusual amount of dividend cash flow out of that asset, about a seven percent yield. So we felt very comfortable getting that income and investing it back into these assets and waiting for a change in the environment. That change in the environment took place in 2010 and that business is now very profitable, occupancy is rising significantly and rents are rising at accelerated rates. In addition the enterprise is able to attract capital at attractive rates to acquire more assets, which are coming on the market from private holders who do not have the capital to manage them or increase their value properly. It has produced a very attractive long-term return for us. Looking back you could have not held the asset for X-period of time, but for us, if it was good real estate; being well repositioned; we were interested in putting more capital into it, not leaving the space. I can give you another example of a retail shopping center portfolio in the public market that we have owned for a long period of time, again eight to 10 years. It is a smaller company that was always penalized for its size in the marketplace but had good portfolio properties—probably carried more leverage going into the correction than was advisable—but still a balance sheet that was manageable. Over that period of time it continued to reposition those assets, enhance their value. In the last couple of years they have really done a great job on the balance sheet. We received five percent plus in income over that period of time, reinvested it back into the enterprise. I think last year it was one of the best performing public enterprises in the shopping center sector. Recently the company has acquired some additional assets, raised additional capital and became larger in market capitalization. That has attracted even more buyers to the public structure. Its value continues to perform quite well, and it remains undervalued relative to the potential for these assets and the enterprise. Q:  What is your portfolio construction process? A : First, we absolutely have a philosophy of not having too much concentration so that no holding could take the portfolio down. If it goes negative because the stock market is bad we cannot do anything about that; but it should never be negative because the assets we have invested in, and the areas we have invested in and the credit of the tenants, all goes bad at the same time. We have to have diversification protection. We do very specific analysis of the portfolio to understand what our tenancy is, and how much exposure we have. We try not to have any tenancy we can measure producing income into the portfolio that would represent more than one percent exposure. We diversify broadly across the United States and North America. We try not to let concentrations get into any specific areas. We might overweight certain regions where we think they are more attractive. The portfolio has been constructed for many years so it is not like you have new portfolio construction going on all the time. You are gradually moving assets around and some are being eliminated from the portfolio and some are enhanced. We generally own between 25 and 30 positions in the portfolio. We do not allow a property type to exceed 30 percent exposure to the portfolio. We do that by property, it is not by company. We have exposures in lots of enterprises that have diversified portfolios. We have exposures in land and different types of commercial buildings. We have exposures in mortgage REIT structures, where we bought what we think are real estate debt portfolios that are attractively priced. We have exposure in the hotel market. We have exposure in multi-family and office, industrial and retail. In a specific property type I think the highest exposure we have would be in the mid 20s today. We have not had any leverage in the portfolio since 2010; but we do have a modest short position in the portfolio today and we generally short the REIT index. We will use some leverage to increase our investment exposure in real estate, because it is very attractively priced and we believe you are starting a recovery process. We do not know how that recovery may evolve but historically, once it starts, you want to own as much as you can. Once it reaches what we would consider more fair value, the leverage comes off. Remembering that commercial real estate values have hundreds of years of history of the ranges in which they trade. Buildings in New York have been there for over 100 years. They have traded in ranges of pricing to cash flow that are sometimes 10 percent, sometimes four percent. The buildings are still there and they are still 90 percent occupied, and they are not going to fall down tomorrow, unless there is an earthquake. If those buildings are there then at different times someone will sell it at the high range of those capitalization rates, or the most undervalued ranges. That is the range they trade at over hundreds of years and then you will revert back to the mean in a recovery period. That is the one thing about our business that is very different. Clients have a great deal of difficulty in understanding that because they tend to want to run for the hills if things do not look so good, and buy more when things look too good. We have buildings and rents, which are contractually obligated, that go out for years. The underlying assets we are working with tend to have a narrower range of pricing and tend to last a very long time. Our objective is to acquire those when the market is going in the opposite direction, and selling them when the market is overpricing them. Mean reversion is a very powerful force in our industry but it is very hard to make yourself believe that when things are going in the opposite direction of the mean. Q:  What are your views on risk and how do you manage it? A : We have really two risks. We have the pricing risks in the public market, which we cannot control. It can be quite volatile, certainly more volatile than the underlying value of the assets. That risk we cannot control. The only thing we can do about it is that when pricing keeps rising to higher levels, is to reduce the exposure of the portfolio and hedge it and that also means we are probably going to give up some performance. The second part of that are the risks you have in the investments you have made. The first and most important thing is if they over-leverage the assets; so that if you get into a financial crisis and economic downturn, they are unable to sustain the enterprise, the platform, and hold the assets, and you lose them. What we do not want to do is end up with investments in good assets that are over-leveraged and cannot get through a crisis. If we can hedge the portfolio when pricing is exuberant, realizing we are going to give up some return, and have capital to invest when pricing is irrationally pessimistic and be willing to commit that capital, then we are going to manage through the public market pricing volatility. The other part is that we have to watch companies, the assets we have invested in and how they are exposed those to the economic and the credit environment; because somewhere out there, there is always going to be a change in that. We have to have those enterprises be able to keep these assets, and work them during the difficult times, so that when the recovery comes we are in a position to realize that reversion to mean, and not lose the assets.