Q:  What core beliefs guide your investment philosophy? A : We believe in building our investment portfolio one security at a time. We do not start with a preconceived notion to follow an index or structure the portfolio to match a benchmark or meet certain size or style requirements. We are looking to acquire good businesses that are trading at fair prices or at a discount to fair market value. We have a set of core disciplines that we stick to regardless of the market environment. Q:  What different strategies do you pursue? A : Every stock we buy is going to fit one of the three strategies and the companies that we invest in; strong, sustainable competitive advantage, that trades at a discount to fair value, cyclical industries that lead in industry rebound when its conditions improve and underappreciated, underutilized assets where value is not yet reflected in the stock’s price. The three equity selection strategies that we follow focus on: our “strategic profile” strategy, how we evaluate investments in growth sectors. Next, we have a strategy for cyclical sectors, which focuses on industry return on capital, what we call a “hurdle rate” strategy. Finally, we also use a deep value approach we call our “bankable deal” strategy. In the strategic profile strategy, we look at companies in growing industries that have a sustainable, competitive advantage and what that growing business can be worth over time. We look to buy these stocks at what we think is a discount to the present value. Our hurdle rate strategy is how we invest in cyclical businesses. This is a very contrarian approach, designed to look for companies that are financially strong enough to emerge from their current industry downturn with additional market share and better profitability. The key is to identify those companies with the ability to benefit from market down-cycles. The third strategy, the bankable deal, is an asset play strategy. In the bankable deal there is an in-depth look at the assets and cash flow of a company to reveal value that is not yet realized in the company’s price. Focusing on underappreciated, often underutilized assets on which the market is placing little to no value, we look for possible catalysts to highlight or unlock this value. Q:  How real estate investing is different or similar from other asset classes? A : One of the things about real estate investing is the stream of cash flow that it can generate that is predictable. Additionally, with portfolios of properties that have pricing power, there is potential for cash flow growth. When looking at real estate, we determine what that stream of cash flow is expected to be in the future, and then discount it back to find a present value for it. We try to ascertain why this asset generates a good stream of cash flow, and why we think it is going to grow. There are many questions that we ask in analyzing a “profile” company. For example, can new construction come in and can someone start competing with it on lease rates? Real estate is a cyclical business and we evaluate opportunities, keeping in mind what these companies can earn in the normal market environment. At the time of this fund’s inception in 2009, the United States was deep in a residential cycle. Our assessment at that point was that the home ownership rate had been too high. People were going to lose their houses, and unable to afford to buy, because financing was going to get tight, which would initiate a movement toward apartment rentals. When we opened the fund, we had a large weighting in apartment REITs, in companies that own apartments across the nation. Our belief was that the vacancy rate had gotten high when home financing was easy. But now this was going to swing the other way. Apartment vacancy was going to fall and that would start pushing rents higher. We had witnessed this trend in 2010 and this continues today, though at a slower rate. We pulled down that weighting in the apartment sector over time and that was one of the stronger performing sectors in the 2011 market, and has since moved a little bit more sideways. But that cycle of investing in the apartments (where we thought people would move to getting in early when construction was down), was how we would maximize a cyclical part of real estate. This has been one of the more pronounced cycles of late. Q:  What is your investment process? A : We have a broader definition of real estate and we are not restricted by the geographic location or legal structure of the company. We look for companies globally, and evaluate companies that are not only set up as Real Estate Investment Trusts but also operating as regular corporations. While we are primarily invested in REITs, we also look at real estate companies operating as C Corps, as well as suppliers and other beneficiaries of real estate. We also invest on a global basis. As a part of the investment process, we look at home builders, apartment managers, industrial properties and lodging facilities operators. We also consider specialized REITs operating data centers, health care facilities, and student housing on campuses. We use both valuation screens and qualitative screens. We are not stock screeners that match certain metrics even though we are valuation-sensitive. We have proprietary company models that compare performance to the history and other peers. For us, the company or the investment case has to fit our strategies, but the valuation also has to meet our criteria. It is not just about what you buy, it’s also what you pay for it. Q:  Would you walk us through the research process? A : We divide the entire research staff into teams that target different sectors of the market; a consumer, life sciences, or technology team, or real estate team or business services team. Each team has their coverage on a global basis so my team would cover real estate not only here but also abroad. We are flexible in terms of the ability to move more resources into one area where we see additional opportunities. In general, we like to have people build some expertise in different areas of the market so that we can be flexible. We receive the benefit of communicating with these other groups so that we’re getting expert opinions in numerous areas. In addition, we use qualitative screens and try to determine where we believe the stories are setting up to be more attractive. For instance, we have owned timber REITs, so if we want to own timber we may use the knowledge of our capital goods team just to understand where building products or markets are, or better understand where building products pricing is. It is beneficial to access experts across teams who have knowledge of specific segments of the market. We are very valuation-sensitive. We do all of our own modeling where we evaluate how the REITs are priced and try to understand where we think there may be more opportunities. We have exposure in hospitality or lodging sectors, here and abroad. Our view is that we are going through a multi-year recovery in lodging where we have not had a lot of construction, particularly in the higher end of the market. We are observing better revenue growth in terms of revenue per available room, RevPAR, and above average net operating income growth. And yet, many companies are trading at valuations that we believe are attractive. One of the companies we own is Accor SA, the French hotel operator. They are transitioning to a more “asset-light” business model, where they are selling off some properties, and we believe are unlocking value. We also own other hotels benefitting from the improvement in the industry, like Host Marriott Corp and Pebblebrook Hotel Trust. Pebblebrook started a few years ago as a REIT and raised a pool of money to buy hotels during the downturn. The management team had a good track record of acquiring properties and building a portfolio of hotels. We also have the Biomed Realty Trust Inc as one of our larger holdings. The company owns research labs in several locations across the company. And one other area that we have had a reasonable size investment in is the data storage REITs. There are numerous trends driving an explosion in data, including the move towards cloud computing, the growth in mobile devices, social networking and health care information technology. This growth has supported the need for professionally managed data centers. To benefit from this, we have exposure to CoreSite Realty Corp., Digital Realty and DuPont Fabros. While these are U.S.-based companies and do most of their business here, Digital Realty is rapidly growing its global footprint. We think that the underlying growth for this sector will continue to be strong, while pricing will be moderate. We expect data centers will continue to generate above average rate of return. Q:  How do you build your portfolio? What is the role of diversification? A : As I mentioned earlier we select and analyze individual companies and we also build our portfolio in the same way. We invest in quality businesses, but also adhere to a strict pricing discipline. To us, the quality of earnings and cash flow stream is just as important as the price we pay for the future value. The margin on safety is also just as important to us. We are prepared to wait, but we need enough cushion in the price to compensate the business or market uncertainties. We are also open to investing in smaller companies as long as we think there is enough upside to the valuation and there is liquidity to buy or sell the stock in the marketplace. Q:  What do you consider risk? How do you control or manage it? A : One element of risk is if that the stock doesn’t meet expectations we laid out at the time of purchase. This is if the investment thesis is broken, the company veers off its strategy, or makes an acquisition that we do not think is in the best interest of shareholders. These are the risks we inherit when we buy a stock. If a stock is not tracking your expectations, you need to reevaluate and determine if it is worth staying with. We monitor all these risks and we control them within the margin of safety or the price we pay at the time of purchase. Q:  What drives your sell discipline? A : Our sell price is determined at the time of purchase. We follow our strict models and when the stock trades at a price above our estimate of the fair value we will review the position. Another point that is important to us: we continue to monitor our stocks to make sure they are tracking as expected. For us, there are two ways to sell a stock. First, if it hits our estimate of fair value. Second, if it starts deviating from our expectations and we determine it no longer matches up with the reason we bought it.