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July 01, 2002 at 04:00 AM
With their high yields and low correlation to equity indexes, real estate investment trusts have maintained a certain conservative attractiveness in today’s depressed stock market. So what happens when a REIT fund invests in companies that are not traditional real estate plays? Just ask Robert Gadsden and Sam Lieber, lead portfolio manager and founder, respectively, of the Alpine Realty Income & Growth Fund.
Alpine’s investment strategy has won the fund five-star ratings from both Standard & Poor’s and Morningstar. Gadsden and Lieber’s strategy is based on picking companies that are expected to grow over time and whose dividends are covered by operating cash flow. They don’t invest in the technology or automobile sectors, but do include companies that derive at least 50% of their earnings from or hold at least 50% of their assets in, real estate. “We will invest in a company that is essentially a real estate company,” Lieber says, “even though that may not be its primary business.”
For example, a few years ago Alpine invested in Alexander’s, a department store chain based in midtown Manhattan. “It’s a REIT fund now, but it didn’t used to be,” says Lieber. “As a retailer it was struggling and subsequently went bankrupt, but as a real estate company it performed very well.”
With Gadsden overseeing things on a day-to-day basis, and co-manager Lieber monitoring Alpine’s other funds, both men contribute to the investment decisions regarding Alpine Realty Income & Growth. “We look at everything a company has to offer,” explains Gadsden. “Its management team, its balance sheet–we even look at its regional market before we make a decision to include it [in our fund] or not.”
Gadsden and Lieber have seen the worst of real estate times evolve into the coalescing REIT market of today. Those experiences taught them that sector-specific investments don’t work, and that there is no substitute for fundamental research. “We do not predetermine specific sector allocations,” says Lieber. “We are more organic than that.”
We recently spoke with Gadsden and Lieber in their New York office about consumer spending, outlet malls, how adding a non-diversified fund to your client’s portfolio can be a good thing, and the cadence REITs have followed over the last 30 years.
How does consumer spending in your areas of interest affect this fund? Gadsden: Our investments are broken down by property, but they are out of alignment with our benchmark [the Morgan Stanley REIT Index] weightings. We try to determine which property types we think are going to perform the best before investing in them. Currently, we are heavy in lodging, retail, and the broad category of office and industrial properties, which includes warehouses. We also have a fair amount of investments in mortgage finance companies and health care. How consumer spending affects those investments has, I think, surprised most economists. Consumers have been the strongest part of the economy over the last 12 months, especially in housing. Because the consumer is taking advantage of a low-interest environment to refinance and buy new homes, apartment companies have not been doing as well. So our investments in apartments are smaller than in mortgage and homebuilding companies.
Lieber: This consumer-to-market relationship indicates a positive direction for the economy in general. Lower interest rates are allowing people to refinance and purchase homes rather than rent them, which then adds to their equity. But the boom in home purchases has hurt the apartment properties, and that is why we have been very selective in that aspect. But having said that, we are selective on a number of levels. In 1998, many homebuilding companies almost went under, were unable to pay dividends, and many went bankrupt. But some of these companies became very attractively priced earlier last year. So we examined their balance sheets to find the companies’ big picture potential, took advantage of the lowering interest rates and the growing business climate, and purchased those stocks. That made some people nervous, but because of our experience in homebuilding, our perspective is a little broader. And now things have worked out nicely.
Do you maintain the same number of stocks every year? Gadsden: It changes. We have taken a different approach than a number of other REIT funds. We tend to be more diversified, meaning we probably have less concentration in any individual stock. I think we have 60 or so at this point in time, but typically we have about 45 names.
Lieber: This fund is designed for people with less risk tolerance. What we do is add a few more names, spreading the exposure. But we tend to concentrate on specific industries based on performance. We tend to be more prudent, and part of that strategy is not to have too much exposure to any one industry. This is not an aggressive fund from that perspective at all. Usually we try not to go too far to overdiversify.
