Online Extra: "Where You Get Paid Generously to Wait"

T. Rowe Price's David Lee on how patience and an almost boring attention to fundamentals pay off in real estate investing

David Lee has managed the $380 million T. Rowe Price Real Estate Fund (TRREX ) since its inception in October, 1997. The A-rated fund, which gained an annualized 15.2% for the five-year period ending June 30, has been one of the most consistent performers in the real estate sector. BusinessWeek Personal Business Editor Lauren Young talked to Lee about real estate investing, lodging, and what he favors currently. Following are edited excerpts of their conversation:

Q: What's your favorite kind of real estate stock?


I'm a boring guy. I like companies with a straightforward, yet value-added, business plan that are run by an adept management team with great industry vision and an entrepreneurial spirit. All things considered equal, I'd like them to have a strong asset base to work with, with properties that are hopefully in higher-barrier markets. I also want them to have a balance sheet that will help them execute. That's the super motherhood-and-apple-pie answer.

Q: Are you still shying away from hotel stocks?


Last year we were underweight lodging stocks. Relative to other real estate sectors at the time, lodging had priced in an economic recovery, but lodging companies had not delivered tangible results. We saw gross domestic product numbers reported that were reasonably healthy on a growth basis, but that didn't seem to be showing up in company fundamentals.

Now, fundamentals appear to be improving in the economy in terms of job creation. They're also translating into real tangible improvements at the property level in lodging, with a nice rebound in revenue per available-room statistics. We've moved back in.

Q: Can real estate investment trusts continue to pay such hefty dividends?


Companies, by and large, have continued to make distributions. Coverage became tighter in the downturn, but because companies had positioned themselves well, they were in a good position even as fundamentals weakened. We hope that the recovery in fundamentals will strengthen the coverage of those distributions, which historically have been the majority of return to real estate investors. We think of real estate as a sector where you get paid generously to wait.

Q: What kinds of real estate investments do you like right now?


I don't like to talk about specific companies, but we like the commercial mainstream real estate sectors, including apartments, offices, and retail in the form of malls and shopping centers. We also like lodging. These sectors compose the majority of the portfolio.

The good news is that supply has been in relatively good shape. There's a lack of overbuilding, and the larger issue of late has been anemic demand as a function of the weaker economy. There's a silver lining in that historically, the long-term trend for demand has been very good.

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