Article| estate investment trusts

Record: 1 Real Estate: Making the REIT Picks. Business Week Online; 7/1/2008, p6-6, 1p Interview *INTERVIEWS *REAL estate business *FINANCE *JOB creation *REFINANCING *REAL estate investment trusts *INTEREST rates Investing Real Estate Stock Recommendations NAICS/Industry Codes522292 Real Estate Credit 525910 Open-End Investment Funds 525930 Real Estate Investment Trusts LEE, David — Interviews An interview with David Lee, manager of T. Rowe Price Real Estate Fund, is presented. Lee tells that T. Rowe is outperforming in the market and correlates closely with job creation. He informs that real estate companies can refinance their debts despite the liquidity crisis. He also mentions the benefits of real estate investment trusts from the Federal Reserves interest rate hike. 994 0007-7135 32988646 Business Source Premier

Section: Top News INVESTING Q&A

Real Estate: Making the REIT Picks

David Lee of T. Rowe Price Real Estate Fund tells how hes outperforming rivals — and the stock market — and what property groups he likes now

After a great run, real estate investments have suffered over the past year, with the average real estate mutual fund down 18%, according to Morningstar. David Lee has managed the $2.5 billion T. Rowe Price Real Estate Fund (TRREX) since it opened in October 1997, so he has seen tough times before. In the two years after the fund started, shares of real estate investment trusts [REITs] lost almost 20%, even as the Standard & Poors 500-stock index raced ahead 50%. Even my family was calling up saying they were going to disown me,” Lee jokes.

But starting in 2000, real estate shares went on an incredible seven-year run, ignoring the Internet crash and more than doubling, on average. Lees fund has gained almost 13% a year over the past 10 years, beating the S&P 500 by more than 8 percentage points annually and performing better than three-quarters of all real estate funds. Boston-based BusinessWeek correspondent Aaron Pressman spoke with Lee at Morningstars (MORN) annual conference in Chicago on June 27.

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Real estate was the best place to be for a while, but that run seems to have ended. Whats hurting real estate investment trusts?

After those seven years, a correction wasnt surprising. I wont say it was expected, but it wasnt unexpected. So far this year, were just about flat, while the overall market is down 8% or more, so were outperforming again. I suppose you could call it a Pyrrhic victory.

Its as simple as the economy. Youve five months of job losses now, and this group correlates closely with job creation. Office buildings require job creation, obviously, and shopping malls need the retailers to grow. So the demand side is down temporarily. Were not at panic button-type levels. Long term, were very bullish on the U.S. economy. Thats been a very good bet.

Were very optimistic about supply. There hasnt been a lot of new commercial real estate construction this year. Commercial construction starts have fallen off a cliff. So that bodes well for an eventual recovery, although I cant predict exactly when it will start.

Has the credit crunch hurt the sector much? Arent real estate companies frequently in need of fresh loans?

The real question is whether these real estate companies will be able to refinance their debts, and the answer is theyve been able to so far. The public companies are prudently capitalized. Look at Simon Property Group (SPG). They just did a debt offering, and it was oversubscribed. They got a very good rate.

Potentially, more difficult times may be ahead for more leveraged companies — some of the private companies. I think banks are going to demand more equity before making those loans.

In general, public REITs arent heavily leveraged, certainly compared with their private counterparts. The public markets have done a good job of policing that. Anybody who tried got put in the penalty box; it was so expensive for them to raise equity that it didnt make sense. A lot of the companies in our fund have balance sheets to take advantage of potential weakness in the market if there are forced sales.

The consumer is also having a tough time, and I keep reading about retail chains closing stores. Wont that hurt the retail-oriented REITs?

We really like the mall companies. Theres good scarcity value in regional malls and not a lot of construction going on in the mall business. Short of going bankrupt, were not convinced that all these retailers can close their way to profitability. Theyre going to continue to pay rents to have stores in the highly profitable malls.

I thought mall operators charged each store a percentage of sales for rent, so dont the operators suffer if consumer spending drops?

Regional mall companies have moved away from percentage [of sales] rents to contractual rents. They can handle these short-term lulls because of the contractual rents.

The Federal Reserve seems to be signaling that an interest rate hike is on the horizon. Do REITs get hit if the Fed starts hiking rates?

If the Fed is raising rates because of inflationary fears, real estate has historically been used as an inflation hedge. So that could be good for REITs. If the rate hike is because the economy is strong, REITs all own physical assets with physical demand, so thats

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also good.

Among the various subsectors of REITs, which are you looking at for the best values?

Weve never been in mortgage REITs. We do own residential apartment communities, some of which are starting to benefit from the housing situation: Its harder to purchase homes, so theres a greater propensity to rent. Industrial REITs, with warehouses, are pretty economically sensitive right now.

Your fund doesnt own any of the so-called specialty REITs, such as trusts that own nursing homes or computer data centers. Why is that?

Were heavily concentrated in what Id call the major food groups. We havent been in health-care REITs, and right now would be the wrong time to do that. We dont own any of the technology center REITs, either. Were not into the specialized REITs that are tied to a particular use and a particular industry. Id much rather go with prime locations. Some of the specialized trusts could be good stocks, but its just not the way we invest in real estate. I focus on location, location, location.

Does the fund look outside the U.S. much?

A lot of companies are doing that for us. Were seeing international expansion by AMB (AMB), ProLogis (PLD), Kimco Realty (KIM) and Simon, for example. Thats how were getting international exposure. And this might be the best asset class for international expansion.

http://www.businessweek.com/investor/content/jun2008/pi20080630 _608298.htm

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