Q: In reviewing a profile of the fund, I noticed the minimum requirement to open an IRA is only $100. Has that changed? A: That has not changed. We offer what I like to think is the opportunity for small investors to get involved in the real estate asset class. We designed it deliberately with small minimums. Q: The problem with small minimums is you face some high expense ratios. A: A little bit, although we have a cap on it. There is an expanse cap of 1.9%. It's been in place since the beginning. We don't want the expense ratio to be any higher than that. Q: This is a very small fund in terms of assets under management. Is it due to the small minimum investment requirement? A: I think that's part of it. I also think that we're a pretty new fund, having only been around for just four years, so we don't have a long history, although I would say our management firm has been doing real estate securities since 1989. We've got one of the longer track records in the sector of this kind of securities. It wasn't until Forward asked us to sub advise this fund that we were in the public fund arena. Q: As I understand it, the real estate market is broken down into subcategories such as residential, community, office, retail and industrial. A: You've hit the big categories. There is self-storage. There are a few that we call specialty REITs. Plum Creek Timber, for example. There are mortgage REITs, but we don't use them in our portfolios. What we're trying to do is give clients a diversified portfolio of real estate. Mortgages aren't really real estate. They're more like debt. We focus on equity REITs. Q: How do you diversify the holdings for shareholders? A: We stay invested in the same weighting as the NAREIT equity index. It's the National Association of Real Estate Investment Trusts. We're benchmarking to that. We maintain the same sector weightings as that index. We try to add value by selecting companies within each sector that are in the best supply and demand markets for their property type. Where do you live? Q: I live in Wilmington, NC. A: I can tell that the Raleigh-Durham market is better than the San Francisco market when it comes to office space right now. The demand in San Francisco is pretty quiet. Vacancy rates are pretty high. What we prefer to do is tilt our portfolio toward owning markets where the supply and demand is better and try to stay out of markets where it is not as good. The caveat is there are a larger number of real estate operators that are in multiple markets around the country. Sometimes you have to take some exposure in what we could consider less desirable markets in order to get exposure in some more desirable markets because you have to buy the REIT as a whole. It happens, but at the end of the day, we try to tilt it toward the best supply and demand profile. Q: Do you literally research each publicly traded real estate investment trust with a fine toothcomb? A: At the property level. We keep a database of all the properties owned by publicly traded equity REITs. If we like offices in Raleigh-Durham, I can run you a list of every REIT that owns offices there, how much they own and what percentage of their portfolio, what the general lease terms are, and how much space is expiring in the next two or three years. I can look at all that data and decide if I think that is a good opportunity. Q: That is quite an extensive database. Is it proprietary? A: As far I know we're the only REIT manager that keeps a database like that of property level holdings. I can't say that with 100% certainty, but I haven’t heard of anybody else that does that. We built it ourselves in-house. Q: How many programmers did you hire? A: We hired a programmer and then we used a lot of student labor. We mostly use Marquette graduate business students to do it for us. They're abundant, reliable and pretty good at it. Q: I guess you tapped a source for future equity fund mangers. A: Everybody likes to get a little experience in the business. Quite honestly, we have hired a couple of them after their internships. We've had good luck with them. They're pretty good kids. Q: Do you travel much as part of your research into properties? A: As portfolio manager, quite honestly, I spend most of my time on the road looking at real estate and evaluating local market conditions as well as meeting with the management of these companies. In real estate, I tell people there is almost as much art as there is science. A good real estate management team can add a lot of value to your properties. Conversely, a bad management team will take good properties and hurt the value of them. I spend a lot of time getting to know management teams and what their business plan is and what their strategy for execution is with the understanding that I want to obviously find good management teams and stay away from what I would consider bad management teams. I know that is subjective. Q: How is this subjectivity used in distinguishing the difference between management teams? A: There is sort of a two-pronged approach. First of all we can look at the operating history of the company in terms of its financial performance. If you think about it, a real estate investment trust at many levels is just like a portfolio manager for a mutual fund – a portfolio of buildings. Q: That manager is managing a portfolio of properties. He wants to bring in the cash flow. A: Right - creating value for the shareholders by managing the balance sheet and creating cash flow and doing good deals at the right time and avoiding bad deals. You can essentially compare the performance of the management team to their peers in that group and get an indication for how good they are. But, I'll tell you something interesting. They tend to cluster pretty closely together at a good level. Then you can tell that there are few that clearly are trailing behind. Then you can see that probably some folks are really far behind. Q: Are the ones far behind the ranker speculators in the marketplace? A: More and more I tend to see them as what we call the old school real estate guys. If they've got money, they'll build it or buy it without a lot of focus on what the long-term financial return is. And, those operators also tend not to have a pure focus on real estate. There may be other real estate activities they're engaged in. I have not seen a lot of situations where that has added a lot of value for shareholders. We tend to stay away from those folks and focus on the more professional management teams. Their full time, exclusive activities as a management team are to manage the properties of the REIT they represent. Q: Aside from adding value for the shareholders above and beyond the benchmark sector weightings, how do you achieve that? A: It's the geographic tilt. Then it becomes purely security selection, holding the better operators versus the lesser operators in the same sector. That is the pure alpha proposition here. When you do the attribution analysis it's geography; it's management, and then the residual after that is very small. Q: Which geographic regions are currently more attractive? A: We divide the country into eight geographic regions. Then we focus on the metro areas within each of those geographic regions. We show our geographic breakdown in our quarterly report. I think you would find that helpful because we show the geography and the weighting changes since the last quarter. What I think you'll see is we're overweight in selected markets on the east coast, in particular Baltimore, New York, Washington, D.C., Boston, Philadelphia and some of the suburbs, northern New Jersey. Our portfolio in broad terms is overweight in those markets. Q: How does it break down from that point? A: That report should be on the Website at www.forwardfunds.com. What you will see is a breakdown by property category in those areas. In general, I can say we're overweight across apartments, retail, industrial and office on the east coast. We're underweight those sectors, for the most part, on the west coast. Q: Your strategy would certainly change according to market conditions. A: That's true. Right now, if you think about it, there are two ways you can approach the REITs that you buy after you like the geography. You can buy those that offer a higher yield but offer less growth potential or you can lean toward those that offer a little lower yield but have a higher growth potential based on how they manage the companies. Right now, we're leaning toward those that have higher dividend yields and a little bit less growth. We just don't see even in relatively good markets a tremendous amount of growth opportunity until the economy recovers. Our work doesn't see any meaningful economic recovery until early next year at the earliest. Q: Current economic forecasts point to a slow job market despite a gradual recovery in the overall economy. A: Let me tell you from the real estate macroeconomic perspective, you need two things in place to drive demand for real estate broadly. You need household formation and job growth. Although household formation has picked up a little bit, you're competing against very low interest rates when people make a buy versus rent decision. A lot more people can afford to buy, so the natural tendency is if people can afford to buy they will. That is one thing that is working against you in terms of economic recovery. Of course, job formation drives the demand for office and industrial space. That again would tell you that you're probably less inclined to look for growth and more inclined to look for current yield in those areas. That is what we have been doing in the portfolio. The net result is with GDP growth in round numbers of less than 2%, it's really hard to stimulate broad demand for real estate. You get little areas here and there where markets are tight. But to stimulate a macro level nationwide demand you have to have GDP growth over 2%. And it has to come along with household formation and job growth. What we're planning on doing is trying to collect relatively high dividend yields right now relative to the 10-year bond and put that money into clients' pockets. Q: What is the outlook for the REIT market? A: A lot of bad news has already been priced in to the real estate securities market. But, from an operating point of view, most operators are doing okay. There isn't tremendous earnings growth, no tremendous opportunities to make acquisitions, but on the other hand, most of their tenants are still paying rent. They're in a financially good situation. They continue to pay dividends. Things show stability, if not modest improvement in a lot of markets. That in summary is where we are. Q: With a client wanting to allocate capital to a real estate fund, I would advise to defer the dividends and look at the capital gains as icing on the cake. What is your view? A: I think it is a fair comment. When you look back at it, historically, a half to two-thirds of your total return comes from the dividend yield, depending on the time period. Generally speaking, you get more of your return from your dividend than from the capital appreciation. That said, I think you characterized it right. If you're buying them, you're buying them for the yield and if you get capital appreciation, that's a bonus. Q: I would also advise to tax defer it all. A: Yes. To the extent you can. The 401k, your IRA, your profit-sharing plan, those are the places where this probably has the best fit, because you shelter all those dividends. Q: How do you operate your private client portfolios? A: We run basically the same portfolio in separate institutional private accounts. That's really a bigger business than the mutual fund for us, because we manage around $150 million in what you would call institutional accounts. That is the lion's share of our business. Q: How is the mutual fund with Forward doing since its inception in 1999? A: We'd like to see the fund be as big as that and I think it will be. It's been growing steadily. We started with just a few hundred thousand dollars. They've been working hard at raising money ever since then. Q: In four year's time, my data show $15 million in assets under management. A: Oh, no. We've got $26 million as of this morning. Q: That is exponential growth over four years. A: Well, yes. I think we're on a nice growth trajectory if we can just keep rolling along for another four years. We'd be doing just fine.