President and Co-Portfolio Manager of the Stratton Monthly Dividend REIT Shares Fund
Beers, James Profile
Stratton Management Company
Host: Please welcome Jim Beers, president and co-portfolio manager of the Stratton Monthly Dividend REIT Shares Fund [STMDX] for Stratton Management Company. For more information, call 800-634-5726 or visit www.strattonmgt.com/mutualmain.html.
Jim Beers: Good evening. My name is Jim Beers, co-portfolio manager of the Stratton Management Monthly Dividend REIT Shares [STMDX]. We are a 100 percent no-load mutual fund that concentrates in Real Estate Investment Trusts (REITs). Our primary investment objective is current income and we utilize REITs to generate that income. Minimum investment is $2,000. There is no minimum for retirement accounts.
The Chat
Question: Can you explain what a REIT is?
A REIT is a company that owns income-producing real estate. REITs can own a variety of property types such as apartment complexes, office complexes, hotels, health care facilities, shopping centers and shopping malls.
Question: Can you tell us why REITs usually pay a higher dividend than most companies?
REITs typically pay a higher dividend because they are required by law to pay out 90 percent of their income to shareholders of the REIT. In exchange for doing that, they pay no corporate income tax.
Question: What do you think of Mack-Cali Realty Corporation [CLI] at these levels?
Mack-Cali is an office REIT with a large portfolio in northern New Jersey, predominately in suburban office parks. However, they do have a slew of assets in Jersey City, which is directly across from lower Manhattan. Because of the terrible disaster on September 11, many investors bid up the price of this stock with the theory that those properties would see a rise in office demand due to offices being relocated, businesses being moved, etc. We do not currently own the stock. In fact, we sold shares of Mack-Cali when it rose in the days following resumed trading after September 11. My concern with Mack-Cali is the sustainability of earnings given the large amount of sub-lease space in other areas of the portfolio.
Question: How are REITs performing in this economy?
Year to date, through September 30, REITs, as measured by the Morgan Stanley REIT Index [RMS], were up 7.5 percent. Given that the Standard & Poor's (S&P) 500 [$INX] Index over that same time frame was down -20.5 percent, REITs are doing fairly well. However, the terrorist attacks have accelerated a decline in the overall economy, and we are cautious on those sectors of the market that are more economically sensitive. With interest rates at very low levels, REITs do offer an attractive income oriented vehicle.
Question: Do you have an opinion on Simon Property Group, Inc. [SPG], the nation's largest shopping mall owner?
We own Simon Property currently. We think it is a well-run, well-managed company. Despite its heavy exposure to the retail consumer and despite concerns over a slowing economy, we believe this company has above average quality assets and that it is large enough to withstand an extended downturn in the economy. We would view Simon Property as a core holding in any REIT portfolio.
Question: Can you explain your research process?
We utilize brokerage research, in-house fundamental analysis, company visits, property tours, etc. In addition, we utilize economic and other type of outside research. Our primary initial screen would be dividend yield to narrow the universe of potential buy candidates, and then fundamental analysis is applied.
Question: Do you like Liberty Property Trust [LRY]?
Liberty Property Trust is one of our favorite holdings, headquartered here outside of Philadelphia. We like the management, we like their property type, and we like the markets that they are in currently, despite slowdowns in office vacancy rates.
Question: We are witnessing a number of media statements about REITs needing to reduce to dividends in order to survive. Do you believe this is a significant problem?
The problem you speak of is particularly evident in the lodging stocks. Following the terrorist attacks of September 11, all travel related industries basically stopped. With air travel being shunned by most consumers, the concern for hotel companies is that their revenue numbers will not be achieved. We believe that the possibility of dividend cuts or the suspension of dividends in these companies is very real. However, we hope that a change in consumer behavior may help lessen the blow to hotel revenues. And the change I am speaking of might be business travelers using car and rail transportation to travel to more regional destinations. Vacation plans may get altered to include stays at domestic resorts, and increased travel by automobile may help increase revenue for highway hotel properties. Finally, with limited service and extended stay, hotels may see an increase in traffic as money conscious customers trade down to hotels with lower room rates.
Question: Any thoughts on Sam Zell's Equity Office Properties Trust [EOP] and Equity Residential Properties Trust [EQR]?
We currently do not own either of those two REITs primarily because their yield does not enter our universe. But, we think Sam Zell is great and we think he's done a great deal for the REIT industry. We think having those companies included in the S&P 500 [$INX] is a major step towards raising investor awareness of REIT stocks. I think that Equity Office Properties Trust is having a difficult time this year due to its large office portfolio concentrated in major metropolitan areas where oversupply is beginning to become very evident. But long term, we like both companies and feel they are solid well run REITs
Question: How much does the real estate market affect your fund?
It depends on what you mean by the real estate market. If we're talking about REIT stocks traded on the New York Stock Exchange (NYSE), we are 92 percent invested in those companies. So, we will be affected by changes in those stock prices. If you're talking about the fundamental of the real estate industry, there certainly is a direct tie, but at times the stocks don't necessarily reflect the underlying fundamental of the real estate market.
Question: How does the real estate produce income for the company owning it?
Through the rent that the landlord receives from the tenant. For example, an apartment building owned by the REIT, each person that lives in the apartment building pays a monthly rent to the operating company or the management company that runs the apartment building. He, in turn, forwards the rent to the landlord. And, in this case, the REIT. Another example would be in a shopping mall, stores like The Gap and Old Navy pay rent to the owner of the mall for the space that they occupy in that mall on a monthly basis.
Question: Based upon the recent decline in lodging stocks, are there any values that you believe are enticing?
Currently, we are being very cautious with lodging stocks at these levels. But we are holding our current positions awaiting third quarter earnings conference calls and visibility on fourth quarter hotel dividend payments. We believe long term this is a good entry point in hotel stocks. However, there may be consolidation in the industry in the future. One particular company we like is Hospitality Properties Trust [HPT]. But again, I would be cautious concerning the dividend going forward.
Question: What do you think of Royalty Trusts compared to REITs?
We are a mutual fund organized under the Investment Company Act of 1940. Currently, our charter only allows for holding common stocks and equities convertible into common stock listed on the major exchanges. I really am not familiar enough with Royalty Trusts.
Question: You speak of the REIT returning a good income, is the profile for an investor one whose goal is "spendable" income or reinvested growth opportunity?
I speak predominately of dividend income thrown off by the REIT. In the current environment, investors are being paid to wait for growth in dividends and also growth in capital appreciation. REITs can be good for retirement type accounts because the income is reinvested like in a fund (like ours) and taxes on that income are deferred until later years when an investor begins to take distribution from that retirement account.
Question: I remember 10-15 years ago the REIT got a lot of bad press. Has that cycle run its course? I believe that many people were under the impression that tangible property gave them more security?
In the mid-1990s, real estate and the publicly traded REITs became very popular. In 1994 and 1995 we saw a large number of Initial Public Offerings (IPOs) of real estate companies. The idea was to get privately held real estate into the public hands in a much more liquid tradeable fashion. Holding tangible properties can be very difficult for the individual investor, and buying and selling particular properties is a time consuming, exhaustive process. REITs were created to allow management with expertise in operating, developing and acquiring real estate assets to maximize profit potential and shareholder wealth. In addition, investors can diversify across a number of property types when holding a portfolio of real estate securities rather than owning one piece of a partnership or building.
Question: What are your thoughts on iStar Financial Inc. [SFI]?
I don't know much about iStar Financial. We owned it briefly because we acquired it through a merger of a holding we previously held. I believe they are more of a financing/mortgage REIT that acquired tangible assets and properties with the hope of obtaining equity REIT status. The stock rose at a particular point and we decided to take profits on those shares.
Question: Can you give us some historical data on your funds' performance under your stewardship?
You can call 1-800-578-8261 Monday through Friday and we would be happy to fax our performance sheets to you. Or you could try our Web site, www.strattonmgt.com and go to the Mutual Fund tab.
Question: If the funds are invested through a Roth IRA, does that exempt them from the tax issue?
As far as our fund is concerned, any dividend or capital gains distribution in an IRA account would get reinvested on x date and no taxes are due in any given year as long as the funds stay in the IRA account. Once an investor reaches age 59 1/2, he can, following an Internal Revenue Service (IRS) rule, take distributions from his IRA. I do not know whether the Roth IRA shields you from taxes on distribution, but I assume that dividends in any given year that are reinvested are tax deferred.
Question: Being that you have info on the real estate market, what do you think of mortgage-backed assets?
I'm really not qualified to comment on mortgage-backed securities and the asset class. We concentrate primarily on equity securities.
Question: Do you like Brandywine Realty Trust [BDN] at these levels?
Yes, we do. Brandywine is also predominately in the Philadelphia suburban markets. In fact, Brandywine owns the building we just signed a five-year lease with. There has been some concern over softening in the suburban office market. However, we like Brandywine and we think that their management is very qualified to handle a prolonged period and that discipline development will provide them with decent inventory when the economy begins to recover.
Question: How risky are REITs?
Given the current market turmoil and the current national and international turmoil, it is very difficult for me to put REITs on a riskiness scale. As this terrorism effect continues to unfold on the U.S. consumer, it is very difficult to discern how devastating the recent world events will be on the U.S. economy. The REIT dividends do make these stocks attractive to income-oriented investors. However, their fundamental businesses are tied to the overall economy. Because of the dividend yields, they tend to hold up better in a declining environment than other stocks. But as the market begins to recover and investors look to growth oriented companies, they will lag the overall market. As I mentioned before, current dividends are not guaranteed, and there's always the possibility of a dividend suspension in these uncertain economic times. We are comfortable with them, however, for the investment objectives of our mutual fund.
Question: Do you like Innkeepers USA Trust [KPA]?
We like Innkeepers USA Trust. They are, however, in the lodging sector and we are concerned about their revenue numbers over the next few quarters. In their favor, we note that they are a leader in the extended stay and limited service sectors of the lodging industry. And so, they may benefit from a reduction in "fly to" destinations and an increase in "drive to" destinations. We feel that Innkeepers' management is very much on the ball and that the company's balance sheet is currently well positioned. But we are anxiously awaiting the company's third quarter earnings call on October 30.
Question: Does the geographic location of a company's major operations have any impact on your decision to invest?
Overall, we look at our portfolio on a sector-by-sector basis, and do not necessarily buy stocks in a given geographical area because we think that area is going to accelerate faster than in other areas. However, if a particular area of the country is showing signs of overheating, i.e., California in early 2000, we will factor that into our buy decisions. Another example would be the Dallas/Fort Worth area, Houston in terms of office properties, and Atlanta in terms of apartment properties.
Question: We have seen your concern regarding lodging stocks and it makes sense. Many questions have revolved around office property REITs, but what are your favorites amongst the residential property REITs and what do you expect of this sector?
We recently met with the chief executive officer (CEO) of United Dominion Realty Trust, Inc. [UDR] and we're very impressed with the company's new management team and current strategy for 2001 and 2002. We like UDR because it's one of the larger apartment REITs. Additionally, we like Summit Properties Inc. [SMT] because of their recent development in the Washington D.C. area. Post Properties, Inc. [PPS] has also begun an initiative in the D.C. area and D.C. appears to be one of the fastest growing apartment markets in the country. |
