Q:  What is the history of the company and the fund? A : We started the real estate group at Neuberger Berman in the beginning of 2002, launched the mutual fund in 2002 and currently manage $800 million in the fund and $1.7 billion in the real estate strategy overall. Brian Jones and I co-manage all assets in the firm’s real estate securities portfolios. We manage a portfolio of real estate securities, primarily Real Estate Investment Trusts (REITs) and some Real Estate Operating Companies (REOCs) that give investors a broad exposure to commercial real estate in the U.S. across various property types and geographies. It is a long-only investment strategy. Q:  Why should investors consider investing in commercial real estate? A : We think commercial real estate is an attractive asset for investors for a number of reasons. Commercial real estate is a hard asset. The underlying investments generate recurring rental income, and that income can be an important component of the potential total returns that investors in commercial real estate and/or REITs are able to generate. Over time, REITs have been able to generate competitive returns relative to other asset classes. Importantly, there is a modest correlation between REITs and other investment options, whether they are other classes of equity securities, or fixed income securities. We think that within a diversified portfolio, REITs can add to total returns over time, and also add to diversification through their modest correlations to other asset classes. The third, REITs are required to pay out at least 90 percent taxable net income in the form of common dividends, which is a significant component of total return. We think REITs present opportunities because of their characteristics in terms of their liquidity profile for investors. It is easier to buy a position in a portfolio of commercial real estate through a REIT structure than it is to accumulate a diversified portfolio through direct ownership of commercial real estate in the private market for most investors or portfolio managers. Additionally, we think the REIT structure is an attractive way to access commercial real estate because of the diversification potential. When you invest in a REIT fund, the underlying investment is spread across hundreds, if not a few thousand, individual commercial real estate assets. Q:  What is your investment process? A : In terms of our investable universe, we focus on REITs and Real Estate Operating Companies. We are combining real estate analysis with security analysis. While these are publicly traded equities, at the core of their businesses is the ownership and operation of commercial real estate in the U.S. We do fundamental analysis on each of the companies in our investable universe. We look at the attributes that a typical equity investor will look at. We are looking at cash flows and balance sheets and meet frequently with company management teams to discuss strategy, property and asset management and capital allocation. From a real estate perspective, we visit markets and tour properties to see the location of assets, proximity to demand drivers and transportation hubs, the surrounding amenity base, and competing supply both existing and under construction. We want to know who the tenants are, the terms of the leases, and how each individual property is financed. It is really a combination of equity analysis and real estate analysis. We put together a portfolio that is going to give you the diversification by property-type and by geography and take meaningful positions in companies that we think can outperform the market. In our investable universe, there are approximately 140 REITs plus approximately 25 REOCs whose primary business is in real estate. We also limit ownership in companies with minimum market capitalization of $300 million. Q:  What are two examples of companies that meet your investment criteria? A : Boston Properties, which has been a core holding within our fund since inception, is an owner of high-quality office buildings, primarily in four markets: Washington D.C., New York City, Boston, and San Francisco. When we look at the office market nationally, we generally focus on central business district markets as opposed to suburban markets, markets with barriers to entry, and markets that have multiple demand drivers. From a market perspective, an investment in Boston Properties gives you exposure to what we believe are some of the best markets in the country. We are also looking at the quality and location of the assets owned and managed by the company. When we analyzed Boston Properties, in each of the markets that they operate in, their assets are located in good, strong locations in terms of demand drivers; in terms of amenity base, and the ability for the property to generate above average rental rates. If you were to look at the portfolio in any of their primary markets, those assets tend to be some of the highest-quality properties in the market, generating the highest rents, relative to that local area. Another aspect that we think is very important to the process is an experienced management team. We meet frequently with the senior management of Boston Properties. We think that these companies are more than just a portfolio of buildings. They incorporate a strategy in terms of allocating capital, when to buy and sell assets, and when to start development. We think that the management has been a good allocator of capital across their markets and has done a good job in terms of starting new development and timing acquisitions and dispositions. Boston Properties meets our criteria of investing in companies with experienced management teams and strong balance sheets. When you have low leverage and access to multiple sources of capital, when the market is slowing, that is going to protect your portfolio. In times when the economy is growing, having a strong balance sheet allows you to make investments, whether it is acquisitions or new development. So we think over a full real estate cycle, having a strong balance sheet is very important. When we analyze companies such as Boston Properties, we use various valuation metrics. We analyze each company based on cash flow multiples relative to growth rates. We also calculate the net asset value of the company’s underlying real estate based on private market capitalization rates. When we think about all of the attributes of Boston Properties, it really meets all of our requirements in terms of favoring high-quality assets in good locations, in markets that have high barriers to entry, with an experienced management team, and a conservative capital structure. Q:  One more example from a different real estate segment? A : Public Storage is the largest owner of self-storage facilities in the United States. One of the most attractive investment attributes we find in Public Storage is the way the REIT manages its balance sheet. They use primarily preferred securities to finance their operations and this use of a modest-level preferred financing has enabled Public Storage to have one of the strongest balance sheets in the industry. The nice thing about the preferred securities is that the securities have no fixed maturity date. Public Storage’s financing situation is highly stable. Their attractive balance sheet has allowed them to execute meaningful acquisitions when the opportunities presented themselves. We currently favor that name because of their low leverage and flexible capital structure. Additionally, we have seen some trends emerging in the self-storage business that favor the larger operators of storage portfolios. In particular, the growth of the internet as a customer acquisition tool has advantaged the larger players. Public Storage has storage facilities in all of the major US markets, leading the company to be well positioned whenever a consumer is searching on Google, or through other search engines, to find self-storage facilities. What we have found, particularly over the last four or five years, is that the larger operators of self-storage facilities have been able to take market share from the local and regional operators. This has enabled Public Storage to maintain an occupancy level in their self-storage facilities that is well above the average occupancy of self-storage facilities throughout the United States. Moreover, we really are impressed with the management team at Public Storage in terms of how they allocate capital to acquisitions, or redevelop their existing assets. We think that over time, Public Storage will be able to uncover ways to grow their portfolio of storage assets and should be able to continue to exceed the self-storage industry in general, in terms of occupancy levels and cash flow growth. Q:  Can you give us an overview of various segments in the real estate marketplace? A : In terms of how we look at our space, it is a combination of top down and bottom up analysis. We have talked about our fundamental analysis at the company level, but our top down analysis helps guide our sector allocations and where we want to be, over and under weight, by property types, as well as geographic regions of the country. For each of the various property types we invest in, there are helpful metrics we analyze to measure demand for commercial real estate. In the office and apartment sectors, we look at economic and job growth, especially as it impacts local markets where a particular company could have exposure. For regional malls and shopping centers, we track tenant retail sales and consumer confidence to help determine our overweight or underweight in the retail space. In the industrial warehouse sector, we analyze global trade patterns, container volume through seaports, and truck and rail traffic in the U.S. This helps us determine whether or not demand for industrial warehouse and distribution properties is improving or weakening. Additionally, we actively manage the portfolio in terms of geographic areas as well. We are looking for the demand drivers in a particular region. An example could be looking at the technology sector and its impact on demand in Northern California; financial services and media driving office demand in New York City; or a strong energy sector driving demand in Texas. When we see periods where job growth is accelerating, that could point to being overweight in the southeast region of the country, where job growth typically exceeds the national average. Q:  What is your buy and sell disciplines? A : Our buy and sell discipline is closely tied to our REIT valuation model. We have a proprietary spreadsheet based valuation model that helps our group identify relative value opportunities within the REIT universe. The valuation model that we utilize really crystalizes all of the company specific research that we do for the universe of REITs that we analyze. The valuation model includes three primary inputs. This includes our cash flow estimates, or fund flow estimates, for each of the REITs in the investable universe for the current and next year. It also includes our net asset value estimates for each REIT in the universe. This is where we estimate the private market value of all of the real estate assets that each REIT owns. Then obviously subtract out any debt or liability that are also on the balance sheets. This is where we bring into play our commercial real estate analysis in terms of understanding the value of different types of assets in different regions and markets of the United States, to understand and appropriately estimate the net asset value of each REIT. The final input from our group into our valuation model is long term growth rates for each REIT in the universe. Here we are looking at a few different factors, including the historical cash flow growth trends of REITs real estate portfolio, as well as the management team’s history of adding value through their capital allocation decisions. We are looking to understand the growth trajectory of the REIT’s real estate assets, but also looking to decipher which management teams are adding value to the underlying real estate that they own and which teams, through either poor capital allocation decisions, or using too much financial leverage in their capital structure, have destroyed value within their portfolio for shareholders over time. The long-term growth rate within our model is probably the most subjective input, but it helps us identify REITs that are likely to grow their asset bases and grow their cash flows at above average rates on a go forward basis. The model also includes the dividend yield of each REIT in the investable universe. The valuation model applies weights to each of these factors and then will rank the universe from most attractive to least attractive, at any given point in time. When we are either considering adding a security to the portfolio, or analyzing a security that is already in the portfolio, we are looking to our REIT valuation model to point out REITs that are either undervalued versus the universe of potential investments, or overvalued. When we think about our sell discipline, typically we want the names in the portfolio to be at least in the top half of our valuation model in terms of their relative attractiveness. When a REIT falls into the bottom third of the rankings of our model, that is a clear indication to us that we may want to consider reducing the security in the portfolio, or potentially eliminating it altogether, because its relative attractiveness in terms of its potential to generate total returns in the future is less attractive. Q:  What is your portfolio construction process? A : We benchmark against the FTSE NAREIT All Equity REITs Index. Typically we hold between 35 and 45 securities in the portfolio. We think that is the right number to give you diversification by property type and by geography, but is also concentrated enough to take meaningful positions in each company that we invest in. We utilize our top-down analysis to help guide sector allocation. We always have exposure to the primary property types of office, apartments, retail, and industrial. Depending on demand, we will maintain 50% to 150% weightings relative to the benchmark. We may also have exposure to smaller property types such as lodging, self-storage, health care, or timber. For smaller property types, our weightings can vary from zero to two hundred percent versus the market. We then build the portfolio from the bottom-up, using our fundamental company analysis. We analyze the location and quality of the underlying real estate, the experience of the management, the sustainability and growth potential of the cash flows, and the strength of the balance sheet. Q:  How do you define risks and how do you manage them? A : We think of risk management as an important aspect of our investment process. One of the key things to think about when we are analyzing risk is that we are investing in a fixed sector. When we contemplate risk within the portfolio, we are largely thinking about the risk of our portfolio underperforming its benchmark. On a monthly basis, we analyze performance attribution reports for the funds and that highlights to us how both our sector over and under weights are influencing the performance of our portfolio, as well as how our individual stock weighting are contributing to outperformance or underperformance of our portfolio versus the benchmark. We are constantly monitoring our exposures in terms of sector over-weights and underweights, and I think Steve highlighted the explicit sector limits that we impose on the portfolio. More importantly, we are analyzing the sector weightings and the security weightings to understand what portions of our portfolio are delivering outperformance and underperformance versus our benchmark. We would generally describe our strategy as benchmark aware. So we are not trying to stay too close to the benchmark in terms of our sector over-weights or underweights, but we want to make sure that our sector and security weightings are influencing the portfolio in the ways we are targeting to generate attractive relative returns. Much of the risk management we do is at the security level. We think one of the primary concerns that we are watching for is new supply coming into a market. We always are looking at the level of demand and supply in local markets. We tend to favor markets that have higher barriers to entry where there are more restrictions in terms of new supply coming into the market. We also closely monitor the capital structure of the companies that we invest in. We think that too much leverage is one of the biggest risks when investing in real estate so we tend to focus on companies, or find more attractive companies, that we believe have more conservative balance sheets.