Quick Take: Investors in the Alpine U.S. Real Estate Equity Fund/Y (EUEYX) had reason to smile last year, when it returned 82%, versus 37% for its real estate fund peers.

Still, portfolio manager Samuel Lieber agrees that in the short run, his $147-million fund can be more volatile than others that invest in real estate, since he’s willing to concentrate his holdings in certain segments of the industry. Lieber’s shareholders can also get a bumpy ride because, compared to similar funds, this portfolio does not emphasize dividend income, which can cushion falling share prices.

Over the long run, though, Lieber points out that the fund’s performance has smoothed over the rough patches in the road. For the five years ended in February, Alpine U.S. Realty returned 22%, on average, versus 16.6% the average real estate fund.

The Full Interview:

What’s a railroad doing in a real estate mutual fund?

The explanation is simple. The company in question, Florida East Coast Indus (FLA), acquires, develops and manages commercial properties through one subsidiary, and operates rail lines through another.

The holding may seem atypical for an investment vehicle like the Alpine U.S. Real Estate Equity Fund, but then the fund is not typical of similar offerings, says Samuel Lieber, who runs the portfolio.

Lieber explains that he hunts for stocks among a larger group of companies than his counterparts, and unlike them, he is more focused on capital appreciation than income generation. As a result, the fund may not pay as much in dividends as its peers.

Funds like Lieber’s generally bulk up on real estate investment trusts, or REITs, which are publicly traded companies that invest in real estate holdings and have to pay out the majority of their annual income through dividends.

Income, though, is a secondary consideration for Lieber. So, while he will own REITs, and sometimes gives them the most space in his portfolio, he also buys home builders, hotel chains, and companies like Florida East Coast that have significant real estate operations in addition to other businesses.

Home builders currently account for about 62% of the fund’s assets, and lodging companies make up another 14%, says Lieber, who expects these sectors to gain if the economy continues to rebound. Roughly 20% of the portfolio’s holdings are in REITs.

As a stock picker, Lieber looks for cheap shares of companies generating strong returns on equity and invested capital. Healthy margins, sound balance sheets and relatively low debt are on his check list, too, he says, as is “double-digit growth potential.”

In making a case for investing in companies that put up houses, Lieber says that as a group, they’re churning out return on equity of more than 20%, “which is superior to any REIT,” while their shares are trading for only about 8.5 times projected 2004 earnings.

Margins have been expanding for most builders over the last few years, Lieber says, and although he doesn’t expect that to continue, he sees them stabilizing.

In addition, robust demand for new housing has enabled builders to pass higher prices for materials along to buyers, Lieber says. “It’s one of the few areas in the overall economy where there’s pricing power,” he says.

One of Lieber’s favorite home builders, and the fund’s No. 1 stock, is Lennar Corp`A` (LEN). The company’s annual sales have risen about 24% and its profits have increased roughly 40% over the last three years, according to Lieber, who added that both figures topped Lennar’s peers. The company’s nearly 30% return on equity, and 19.5% return on invested capital last year, were also better than its competitors’, he says.

Lieber also likes Toll Brothers (TOL), which he says targets wealthy clientele, offering houses that cost $550,000 on average. Tax law changes under the Bush administration, and the stock market rally that started last year and continued until recently, have spurred demand for housing among these buyers, Lieber says.

Two other home builders were among the fund’s top performers over the last 12 months. Shares of Hovnanian Enterpr Cl`A` (HOV) rose 153% during that span, and Meritage Corp (MTH) gained about 140%, he said.

Florida East Coast’s stock rose 57% during the period, Lieber says. Over time, the fund manager expects vacancy rates in the company’s properties to decrease, which should increase its profits. Although the company’s return on equity is low right now, “we think there’s a lot of room for improvement there,” he said.

The company’s railroad subsidiary owns approximately 1,200 acres of property, sales of which are recorded by the real estate unit. Florida East Coast also generates revenue by leasing space adjacent to its rail lines.

Among lodging companies, Lieber finds La Quinta Corp(Unit) (LQI) attractive. The company’s stock, unlike shares of many of its competitors, is trading at a discount to La Quinta’s underlying assets, he believes. Also, the company has about $500 million in cash and credit lines that it can use to make acquisitions, Lieber says. Because LaQuinta is a medium-sized company, anything it buys has the potential to “meaningfully drive earnings,” he adds.

The fund’s investments in the hotel sector also include Gaylord Entertainment (GET), which started life in the entertainment business and later branched out. Gaylord’s hotels feature centers for conferences and conventions, so it stands to be a beneficiary of a stronger economy, which could boost business travel, Lieber says.

– Richard Diennor