By Courtney Darby
Most dedicated real estate mutual funds contain a high allocation to REITs, however Third Avenue Real Estate Value Fund's portfolio manager Michael Winer takes a different avenue. While Winer does allocate 25 percent of the portfolio to REITs, roughly 40 percent is allocated to real estate operating companies (REOCs). Winer is bullish on REOCs as a source of long-term capital appreciation for the value-oriented fund. Winer adds that REOCs, like many listed REITs, provide excellent returns and above average growth in net asset value.
"The operating company format provides better flexibility to retain cash flow, reinvest and not be so dependent on capital markets," Winer says. "However, REOCs don't receive certain tax benefits that REITs do, [which is one reason why REITs are also an integral part of the portfolio]."
In addition to the REIT and REOC allocations, the remaining 35 percent of the portfolio is comprised of management companies and sometimes distressed, high-yield debt situations, as well as a fluctuating amount of cash.
"We tend to focus on companies we think will continue to provide long-term growth and increase shareholder value," Winer says.
Some of the REITs that fit Winer's criteria are Vornado Realty Trust (NYSE: VNO), ProLogis (NYSE: PLD), PS Business Parks (NYSE: PSB) and Catellus Development Corporation (NYSE: CDX). Currently, Catellus (which Winer also owned while it was a REOC) is his largest REIT holding with a 6 percent allocation in the portfolio.
"These management teams tend to be opportunistic, create shareholder value and have a long track record of either beating their competitors or producing solid returns and being conservatively financed," Winer says.
REOCs that display similar qualities are The St. Joe Company (NYSE: JOE), Forest City Enterprises (NYSE: FCEA), Brookfield Properties (NYSE: BPO) and LNR Property Corp. (NYSE: LNR), according to Winer. (Editor's note: At press time LNR had agreed to be acquired by Riley Property Holdings LLC.)
Winer also says that he doesn't focus on specific sectors when assembling the portfolio, but rather individual companies.
"If we like what they do, I don't really care what kind of properties they have," Winer says. "As it turns out, we end up having a very diversified portfolio not only by property type, but by
geographic region as well. All of this is a by-product of our fundamental bottom-up research."
While having a diverse portfolio is a priority to Winer, his most important responsibility is creating absolute returns with minimal risk.
"We don't focus on benchmarks, but look to provide decent absolute returns. There are times when we may lag the market, but for the most part I think we've provided above average, top-tier returns over the last five years with a lot less volatility," Winer says. "It's nice to be able to provide decent returns for shareholders without having to focus on what's going to happen this month or next month. We take a long-term approach to investing, and I think our shareholders appreciate that."
Winer, who's logged 25 years in real estate, has a good handle on the long-term benefits of investing in listed real estate. His background as a real estate developer and accountant, as well as a four-year tenure at Third Avenue Funds proved useful when the real estate value fund was launched in 1998.
"I hatched the idea to start a dedicated real estate fund because the Third Avenue Value Fund always had a significant component invested in real estate companies. They are always a great play for a value shop," Winer says. "I thought we could create a product that was just focused on real estate and real estate companies with the investment objective being long-term capital appreciation."
