Real Estate: Making the REIT Picks

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I thought mall operators charged each store a percentage of sales for rent, so don't the operators suffer if consumer spending drops?

Regional mall companies have moved away from percentage [of sales] rents to contractual rents. They can handle these short-term lulls because of the contractual rents.

The Federal Reserve seems to be signaling that an interest rate hike is on the horizon. Do REITs get hit if the Fed starts hiking rates?

If the Fed is raising rates because of inflationary fears, real estate has historically been used as an inflation hedge. So that could be good for REITs. If the rate hike is because the economy is strong, REITs all own physical assets with physical demand, so that's also good.

Among the various subsectors of REITs, which are you looking at for the best values?

We've never been in mortgage REITs. We do own residential apartment communities, some of which are starting to benefit from the housing situation: It's harder to purchase homes, so there's a greater propensity to rent. Industrial REITs, with warehouses, are pretty economically sensitive right now.

Your fund doesn't own any of the so-called specialty REITs, such as trusts that own nursing homes or computer data centers. Why is that?

We're heavily concentrated in what I'd call the major food groups. We haven't been in health-care REITs, and right now would be the wrong time to do that. We don't own any of the technology center REITs, either. We're not into the specialized REITs that are tied to a particular use and a particular industry. I'd much rather go with prime locations. Some of the specialized trusts could be good stocks, but it's just not the way we invest in real estate. I focus on location, location, location.

Does the fund look outside the U.S. much?

A lot of companies are doing that for us. We're seeing international expansion by AMB (AMB), ProLogis (PLD), Kimco Realty (KIM) and Simon, for example. That's how we're getting international exposure. And this might be the best asset class for international expansion.