David Lee of T. Rowe Price Real Estate Fund

S&P: Can you describe two of your recent stock purchases?

LEE: In the first half of 2002, we bought initial positions in United Dominion Realty Trust (UDR) and Essex Property Trust (ESS). Both are apartment operators.

United Dominion is a well-established nationwide apartment REIT which hired a new chief executive, Thomas Toomey, in February of last year. Toomey has an excellent track record and was formerly at Apartment Investment and Management Co. (AIV). Before buying United Dominion, however, we wanted to see that the company could deliver some strong quarterly performances under his stewardship, which it did. We think Mr. Toomey will be able to increase the operational efficiencies from United Dominion's portfolio of assets.

Essex Property is a company we have long admired, but we didn't purchase the stock until its price came under some pressure earlier this year as the real estate market on the West Coast weakened. Essex has a heavy presence in California and the Pacific Northwest.

S&P: Tell me about ProLogis Trust. They've done very well this year — the stock is up about 25% year to date.

LEE: ProLogis Trust is a REIT that operates a global network of industrial distribution facilities. They are a highly proficient developer of industrial properties, and they are also earning management fees through some of their institutional partnerships. ProLogis is unique in that it has significant business operations overseas. They are already well-established in Europe and they've recently launched a division in Japan. It's quite unusual for an American real estate company to have operations overseas.

S&P: Your top holding as of June 30, Equity Office Properties, has been sluggish this year.

LEE: The company hasn't done well because the office sub-sector as a whole has had it tough this year with declining fundamentals. But we like the company's management team and portfolio of assets. In addition, last year Equity Office acquired Spieker Properties, a deal that made it the largest merger in REIT history. But Spieker has a large exposure to the San Francisco-San Jose market, which has been under some pressure, thus hurting the performance of Equity Office's stock.

Incidentally, our exposure to Equity Office is actually an underweight position relative to our benchmark, the Wilshire Real Estate Securities Index.

S&P: Do you favor one region of the U.S. over another?

LEE: We like real estate companies that operate in areas that provide high barriers to entry. This condition tends to exist on either coast. As a result, we have heavy exposure to companies operating in places like New York, Boston, California and Florida.

S&P: What do you sell?

LEE:. We will sell a holding when there is a change in our original investment thesis, when our confidence level management's strategy declines, or when we can find a more attractive substitute for the portfolio. We have a moderate turnover, however, generally below 50% annually.

S&P: Can you cite two stocks you recently sold off?

LEE: We sold off JP Realty — but that occurred only because the company was acquired at a premium by General Growth Properties in an all-cash takeover. We made a substantial profit on JP Realty.

A more convention sale was Alexandria Real Estate (ARE), a company that supplies space and facilities to life sciences businesses. Although the stock has performed well this year, up about 25% in the first half of 2002, we became increasingly concerned about the prospects of its tenant base, given the problems in the life sciences industry. We felt that Alexandria's stock price had not taken this into account, so we eliminated it. However, we still like their management team very much.

S&P: What is your outlook for the real estate sector?

LEE: One subject we are concerned about is the potential lack of demand in property space. While supply levels are falling, we need to see a steady increase in demand for the REIT sector to flourish — and higher demand is predicated on a stronger US economy.