Q:  What is your investment philosophy? How do you focus the real estate market? A: We have a longer-term perspective and that's partially because we're part of a full service real estate advisory company that invests both in direct property and in securities. The fund is sub-advised by Cornerstone Real Estate Advisors, a sister organization to Oppenheimer- Funds. Both companies are part of the MassMutual Family of financial service companies. Why this is important is because Cornerstone’s expertise is central to our investment process. The company invests in direct property and in real estate securities. By ‘direct property’ I mean physically buying or developing individual assets, buildings, or groups of buildings, so we have the direct property perspective on what is happening in the marketplace. For example, we have over $2 billion dollars in hotels that we manage on the direct side of business that stretch from Hawaii to Boston. Basically, we have business class and resort hotels located in all the major regions of the country from the west to the east coast. This type of organization allows us to tap into very current trends in the real estate markets, and is an integral part of our overall research process on the security side. The research group is a critical component of our overall analytical process. We've created a proprietary database for the property markets in all the regions of the country. Through this database, we can drill down to the zip code level and get a very accurate read on the markets both historically and forward looking into the next two or five-year period. All the members of the team are well acquainted with the detailed property market research and are in a position to work closely with the research group that maintains the databases. The results of this intensive research are quantified for all the major metro areas in the U.S. markets. We then overlay the property portfolios of the companies in our investment universe over the supply and demand projections we develop in our research data bases. This allows us to create a virtual portfolio analytical system and assess the prospect for each company in our universe. A key differentiator for us is the type of people that we bring into the equation. All the members of the real estate securities group have extensive direct real estate experience. Instead of having people who have been equity analysts their entire careers, we have a multitude of different disciplines within the group. For example, we have a former commercial architect who brings a unique outlook not only on the type of properties, but also on the quality, the construction, and on how well the properties are going to work in the marketplace. We also have an analyst who has spent a number of years in the appraisal industry and understands the process of valuing initial properties in a very in-depth manner. These people have tremendous depth of knowledge about the industry beyond just the public companies. Q:  Could you describe your investment universe? A: The universe consists of the NAREIT Equity REIT Index, which essentially includes all the equity REITs within the U.S. marketplace. We also cover Real Estate Operating Companies, which are publiclytraded companies that own and operate commercial real estate but have chosen not to elect the REIT status. Q:  Do you also look at homebuilders or you avoid them? A: We don’t participate in the homebuilding business as part of an investment strategy but we do track the business very closely. In fact, one of our analysts used to cover the home building industry for an analytical firm. We watch it closely because the supply and demand for housing can't be looked at only from the perspective of one type of housing. We have to know what’s going on with apartments, condominiums, and single family homes to see what the most affordable product is in various regions of the country, and where the greatest demand for a particular type of housing is going to be. For example, there has been a tremendous run up in the price of condominiums which will obviously impact people’s decisions whether to rent an apartment or buy a condominium or a single-family home. Q:  What is your view on companies like CB Richard Ellis, for example? Would they be included in your universe? A: They’re not part of our investment universe. Firms like CB Richard Ellis have extensive commercial brokerage operations which service the industry, but they don’t own and operate real estate. We’re a pure play on real estate investments; a minimum of 75% of net operating income of the companies we own comes from the ownership and operation of either commercial or residential real estate. By ‘residential real estate’ I mean apartment communities, not for sale housing. Q:  Would you highlight your portfolio management process? A: Our research process leans heavily on the proprietary research database, which allows us to screen the market in a fairly effective way given the fact that there are over 300 metropolitan fiscal areas in the U.S. It is a screening tool that allows us to identify the opportunities in the marketplace from a top-down approach. We also receive a lot of input from the field organizations and properties across the country managed by our direct organization. To understand the property markets or the companies themselves, we do entity analysis, which is similar to traditional equity analysis in trying to get an opinion about the overall prospects of a company. We spend a lot of time with the management of the company to determine their track record, their capabilities, and their integrity in the corporate world. We analyze their business strategy to make sure that it is consistent with our view of what the market conditions are, where the best opportunities are, and what the management capabilities are. We regularly review our portfolios with the members of the senior management and all of them have been in the real estate industry for a minimum of 15 years, some of them for as long as 35 years. This review allows us to have an informed opinion about the management within the companies that we’re investing in. Quite often the members of our senior management team had past dealings with the management of some of the publicly traded companies, and they can give us a history of their experience and their view on the integrity of these people. Q:  How many securities form your fund on average and what is the turnover? A: We typically have around 40 securities with varying weights from 1% to maybe 6% or 7%, depending on the size of the company and on our belief in their strategy. The turnover depends on what the market conditions are. If we believe that the fundamentals of a sector are changing rapidly, we'll rotate out of that sector. That's one of the basic premises of Cornerstone, not only in the securities business, but also in the direct businesses. We believe that there is a property-specific market cycle for each property type; we try to anticipate those cycles and to rotate into the property types we think have the best opportunities. So depending on the market cycle and where we’re in that particular cycle, our turnover can be anywhere from 50% to 80% or 90% in a given year. Q:  What type of trends form the basis for your investments? A: Right now we have a huge amount of hotel holdings on the direct side of our business. One of the trends that we’ve been tracking closely since 9/11 is what's happening with the hotel industry recovery, including bookings, room rates, and additional forms of revenue. We regularly spend time with our hotel group and call the general managers of the hotels that we own to get their initial thoughts on market trends. We identified the increase in occupancy early on, because of our knowledge of the individual markets and because of our discussions with the hotel managers. The trend that we really got excited about wasn’t necessarily the increase in occupancy, because a lot of the hotels had downsized the amount of staff when their business fell off. When the business did pick up and the occupancies picked up, they had to add staff. Even though the revenues were increasing, their expenses were also increasing. Now that the hotels have basically reached full occupancy, they can push average daily room rates without adding the staff and the respective expenses so a lot of that increase in the rate is falling to the bottomline and is dramatically increasing their net operating income. We have also been watching the trend in the coastal housing markets. The affordability of housing in both the west and east coasts has become fairly low due to the combination of the run up in housing prices and the increase in mortgage rates. As a result, the demand for apartments has increased dramatically as many people are shut out of the forsale housing market. Combined with the job-growth that we're experiencing, we believe that the demand for apartments, particularly in these higher-cost areas of the coastal U.S. is going to be very attractive. Q:  What kind of diversification strategy do you pursue? A: We have a representation in all the core sectors, which are apartments, industrial, office, and retail. We’ll always have a significant representation in all the core sectors. However, in the niche sectors, like selfstorage or manufactured home communities sectors, we may have minimal representation as we believe that the fundamentals for those sectors going forward are not positive. Q:  What is your approach towards risk control? A: We hold weekly risk assessment meetings where we utilize portfolio attribution and risk assessment software package to highlight positions and trends in the portfolio. These meetings allow us to identify the relative risks of various positions so that we can better anticipate portfolio adjustments that need to be made. In addition, we closely monitor the capital market environment to look at the company risk and to better understand how their cost of capital and the availability of capital are affected. Then we analyze the trends in their business and their balance sheets to determine whether or not they can adequately fund their business strategy. We have frequent meetings with our direct side of the business that identify trends in the major property markets and that allows us to make adjustments to the portfolio. .