Q:  Real Estate has been a dramatic asset class over the past decade. Do you think we are through with that kind of extreme volatility? A : Investing in real estate securities really took hold in the early part of the last decade after the crash in tech stocks. REITs derive a significant portion of their intrinsic value on the value of their income stream or dividends so the sector was recognized as a durable income-producing asset class. As the decade progressed, more and more debt became available at cheaper and cheaper rates, it became quite a speculative business and the bid for REIT companies really peaked in early February 2007. The housing market started to grind and the mortgage market suffered from lending excesses in the five years to 2007 and market conditions worsened between 2007 and 2009 with, as we all experienced, the collapse of the single-family housing sector. Following the collapse of Lehman Brothers and Bear Stearns was a dramatic decline of as much as 70% in home prices which led to a virtual stop in new construction in several segments of the real estate market. Tight lending conditions exacerbated the situation. However, with the help of the Federal Reserve, asset prices have been on the rise in the last three years and banks have slowly begun to increase lending and employment has stabilized. The stable economy and steady support from the Fed has provided a positive backdrop for the recovery in real estate prices and in stocks of companies active in the sector. Q:  What are the different sectors of the REIT market? A : REIT securities have grown to include many sectors that were once not considered investible. At present, retail dominates the group with 25% of the market capitalization of the REIT market, multi-family apartment sector has about 20%, office buildings are about 15% and warehouse and industrial companies are 7% and lodging is about 6%. The healthcare REITs have grown to be quite a significant component and they are probably 15% to 16% of the market capitalization of the REIT market. The lodging group’s performance tends to be the most cyclical in operating performance as their revenue contracts quickly if the consumer spending contracts which makes lodging often the quickest to react to swings in the economy. Right now, the apartment group has had a terrific run and companies have been able to maintain strong occupancies in the last several years and put through sizable rental increases for tenants. Supply had been fairly benign but in the last eighteen months new supply has begun to trickle with permitting and construction activity increasing in various markets. The office side is really about corporate hiring, expense and confidence. We are still bullish on the prospects for office landlords in New York City in the West Coast. At the moment, New York is a stagnant market in terms of either growing occupancies or landlord’s ability to increase rents because the financial services sector is still in transition and there is reluctance for larger office tenants to be making commitments with the uncertainty in the economy and in Washington. Q:  What is your investment strategy? A : We invest primarily in domestic REIT stocks and fixed-income securities which allows us to maintain a focus on yield and investing across all different levels of market capitalization. We try to identify the underlying macroeconomic drivers that should improve the demand for property in local markets. Our objective within this fund is to create an above average and high risk-adjusted-total-return with income always going to be a primary objective. We are benchmark aware and seek to add value by uncovering opportunities with in-depth research on individual companies, fundamental analysis driven by a value bias and a willingness to look at all market caps. Q:  What analytical steps involve your research process? A : Valuation is important to us but the whole process starts from a top-down economic appraisal in which we identify factors that may drive various sectors of the real estate market. What that means is forming a view of the overall economy and how that could affect the real estate market and then identifying the various property types, geographic markets and industries that may be driven to better performance. Once I have that framework I look at the sectors to find are there companies that fit our criteria and pass our test of valuation and management quality. I also have a healthy dialog about industries and job growth with analysts in our company and outside experts and rely on data about prospects for employment growth, consumers and business capital spending and confidence. My high conviction ideas tend to be a mix of good valuations for companies that are not seemingly cheap but have superior earnings growth potential. Q:  Can you give a couple of examples to better illustrate your research process? A : One of our larger and more successful investments in the last couple of years has been CBL & Associates Properties, Inc., a retail properties developer. CBL is a regional mall developer and the company has a collection of properties with above-average sales productivity per square foot and strong franchises in their local markets. The retail mall developer is not well understood by the market and has, at times, traded at a sharp discount to other companies in the sector. On the metrics that we looked at, we found CBL to have a good business franchise and, as an enterprise, the stock was trading at a big discount to private market values and to its peers. For a period the stock lagged because during the weak economic period of 2008 and 2009 the large debt on its balance sheet was perceived as a constraint for future growth. We spoke to the management and saw that there was going to be an opportunity for them to make meaningful improvements in their balance sheet and lower their cost of capital and retire debt and in fact right now they are moving to a strategy where I believe in a year or so they will be an investment-grade bond issuer. Kilroy Realty Corporation is a self-administered REIT. Traditionally, it was an operator of office assets in Southern California and in Seattle as well as a developer in those markets. Kilroy’s vacancies increased quite a bit at the time of the housing market collapse in 2007 and 2008. We believe that job growth will return to those areas and there will be a slow expansion in business confidence and that will drive the demand for office-space real estate in those markets. They also made the strategic decision to add in new markets, including San Francisco and Seattle. That decision has begun to pay off for them as San Francisco has been one of the strongest recovering markets in the last two or three years. Q:  How do you build your portfolio? A : Our portfolio seeks to deliver a high-income return and superior total return performance. We are looking for a mix of high-conviction ideas which are coming out of the top-down approach and other deeper value opportunities. When it comes to valuations we are flexible as long as the earnings growth and business fundamentals support our convictions. We tend to run a diverse portfolio of approximately 60 REIT names and invest consciously across all market capitalizations. We are typically a fully invested fund so we hold little cash. We tend not to invest with big overweight positions in the most volatile property types like mortgage finance entities or lodging space. We temper how much of an overall allocation we have in these groups based on the historic underlying volatility of the property type. Our benchmark is the Morgan Stanley REIT Index. We are cognizant of the following things when building a portfolio – deliver a good risk-adjusted return and a yield that is in the top 20% of the group. . Q:  How do you manage risk? A : Our portfolio construction is designed to include a diversified list of REITs across most property types, market caps and geographies, based on valuations. We are not closet indexers but we are cognizant of what is in the index and always consciously decide how much and where we will stray from a market neutral portfolio. We evaluate our positions continuously and are quicker to sell if we decide that the economic scenario, company direction, execution or local market conditions are not what we estimated or had come to believe. We believe our diversification strategy, sell discipline and healthy skepticism of volatile property types has the potential to mitigate the downside risk.