) and Host Marriott (HMT
), the largest hotel REIT. Our biggest position is Starwood Hotels & Resorts (HOT
), which is not a REIT but a hotel operating company. All three have high-quality real estate portfolios, excellent management, and strong balance sheets. Starwood, in particular, has terrific brands and great overseas exposure.Q: And offices?A: Clearly, we like Equity Office Properties (EOP
), which is the largest office REIT and the largest REIT altogether. We also like Vornado Realty (VNO
), the largest office owner in New York City. We've recently developed an affinity for Southern California offices, which are holding up well despite the California energy crisis. Arden Realty (ARI
) is the biggest player in that region.Q: Are there any sectors you're avoiding?A: We avoid specialty areas such as mini-warehouses, movie theaters, and bowling alleys. These are property types that can get overbuilt pretty quickly.Q: At the start of 2000, REIT stocks traded at big discounts to their underlying property values. Where are they now? A: They were trading at about a 20% to 25% discount, on average. They're now trading at about 10%. Historically, their market values have equaled their property values. So they're still attractive from a valuation standpoint.Q: How safe are REIT dividends now?A: I just did a little study on that. In 1993, REITs were paying out 86 cents of every dollar in cash flow as dividends. Today, they're paying out 61 cents of every dollar. That means cash flows would have to decline industrywide by 39% before dividends would be affected. That has never happened, even in the 1990-91 real estate depression.Q: Do you expect dividends to rise soon?A: You should see a definite acceleration. Boston Properties (BXP
), another favorite of ours, just raised its dividend by almost 10%. You'll see a lot more of that.