By Courtney Darby
In this issue we profile the T. Rowe Price Real Estate Fund, a dedicated real estate fund that utilizes a long—term, total return strategy. Fund manager David Lee assembles a diverse portfolio in the commercial real estate sector that is varied by property type and geography. More than 95 percent of the fund's assets are invested in REITs, Lee says.
As a fund manager, Lee aims to create a portfolio that produces the best returns for his clients. However, Lee stresses that the T. Rowe Price Real Estate Fund emphasizes long—term results over the short term. The fund's one—year return in 2003 of 34.84 percent ranked it 48th among 76 real estate funds tracked by Lipper. However, its five—year—50 return of 15.05 percent placed the fund 13th (see complete 2003 Lipper rankings).
"I think our long-term perspective is different from most other funds, which is indicated by our historically well-below average turnover ratio," Lee says. "We're talking about single—digit turnover in the last two calendar years, which means we are very comfortable with our holdings and their prospects for the long term. Over half of the fund's current holdings have been held since the fund's inception."
Lee strives to be conscious of risks that are taken with a particular investment and tries to determine whether the fund is being rewarded sufficiently to take on those risks.
"Some other funds only focus on a company's income or growth," Lee says. "We are focused on total return and will gravitate toward whichever sector or opportunity provides the greatest total return potential."
When it comes to selecting specific REITs to bolster the fund, Lee sticks with traditional metrics, in addition to relying heavily on the quality of a company's management.
"I think it is important to note that we are big believers and users of the traditional metrics (with comparisons such as price to funds from operations (FFO), price to net asset value (NAV), dividend payout, potential for dividend growth, and earnings growth, among others). However, we pay more attention to the quality of management of our companies and the vision that we believe management has for creating value with our investments," Lee says. "Sometimes traditional metrics are too shortsighted and don't take into account the future potential of NAV growth, as well as the value that can be formed by the creativity and talent of the management team."
Kimco Realty Corporation (NYSE: KIM), Duke Realty Corporation (NYSE: DRE) and
CBL & Associates Properties, Inc. (NYSE: CBL) are just a few of the companies highlighted for their talented management teams that Lee has held since the fund's inception.
"We seek management teams that are adept, intelligent, honest and entrepreneurial about their businesses. We want companies that share our view for long—term value creation," Lee says. "These managers are essentially stewards and partners of our capital, which is why management quality is so important to us."
Lee, who has managed the fund since its launch six years ago, says promising recent economic indicators should positively impact real estate going forward.
"We are hopeful of an improving economy and with that, an improvement in real estate fundamentals over the next 12 months," Lee says. In particular, Lee is bullish on apartment and industrial REITs.
"We think that apartments have an opportunity to have a good recovery because you tend to get job growth in a recovering economy and increased demand for apartments," Lee says. "Because apartments have a relatively shorter lease duration among real estate, there is an opportunity to see that translated into the bottom line economics of the sector. Industrial can also do well as we see an increase in the movement of goods."
Finding the right formula for investment decisions using qualitative and quantitative factors is an integral part of Lee's role as fund manager, and his most rewarding part of the job.
"I think this business requires insight in trying to determine which securities are not efficiently valued [and in turn it] challenges one's insights," Lee says. "You are very successful if you are right a majority of the time, but that also means you are wrong occasionally. Therefore, there is always the potential for improvement, and I think it's striving for the constant improvement that makes the job both stimulating and challenging."
Before finding his niche as fund manager, Lee received his B.S. in computer engineering from the University of Illinois at Urbana—Champaign. After graduating, he went to work for IBM as an engineer. Lee always had an interest in business and wanted to be out on the front lines, so he transferred from engineering to a marketing representative at IBM.
"From there my interest in business continued to grow, and I decided to go back to school to pursue my M.B.A.," Lee says. "From my engineering background, I always had a passion for numbers and therefore a passion for finance and investing."
Lee earned his M.B.A. in 1993 from Stanford University and joined T. Rowe Price. Initially, Lee was an equity analyst covering transportation, real estate and major chemicals. When the T. Rowe Price Real Estate Fund launched Oct. 31, 1997, Lee's role as an analyst eased his transition to managing the fund.
"As the fund began, I saw opportunity for compelling returns and a very beneficial product in REITs," Lee says. "As an investor, real estate's opportunity for rewarding returns is intriguing; I really like the cash flow aspects of real estate."
