David Lee's money management mantra is the most tried and true in real estate investing: location, location, location.
That's because to Mr. Lee, portfolio manager of the $3.6 billion T. Rowe Price Real Estate Fund, location is one of three bedrock principles that guide the fund's investment strategy.
The other two are the quality of management and the valuation levels at the companies in which the fund invests.
“We're really into the real estate in which we invest,” said the 49-year-old Mr. Lee, who is not above turning a family outing into an excuse to do some research.
“I was recently touring college campuses with my daughter in North Carolina,” he said. “We went to a retail venue owned by a mall company I own in the portfolio. I spoke with a store clerk about how sales were doing, and he said business was good.”
The fund invests primarily in publicly traded real estate investment trusts, and Mr. Lee points to its biggest holding, Simon Property Group Inc., as a REIT that exemplifies the importance of location.
“We think Simon has incredible real estate,” Mr. Lee said. The REIT “owns so many of the high-productivity malls. They're the largest and they have excellent negotiating power with tenants. “
Simon Property Group, which made up 10.1% of the fund's portfolio at the end of March, owns more than 300 real estate properties across the country, including 270 large regional malls, Mr. Lee said. The properties include the King of Prussia Mall outside Philadelphia, Roosevelt Field in Garden City, N.Y., and factory outlet shopping centers such as Woodbury Commons in Central Valley, N.Y.
Mr. Lee calls Simon Property Group “the 800-pound gorilla” of REIT investing. “Simon was up over 30% last year,” he said. “You'd be very hard-pressed to make up that performance by investing proceeds elsewhere.”
Despite the severe downturn in commercial real estate, higher-end malls and the affluent shoppers who frequent them have held up well, Mr. Lee said. Adding to the strength of that sector is what he calls “scarcity value.”
“They haven't built any new malls,” which only adds to the value of the existing properties, Mr. Lee noted.
In addition to location, Mr Lee pays close attention to the management team running the real estate companies in the portfolio.
“We look for management teams that create value over the long run,” he said. “We spend a fair amount of time with the management team to understand their strategy and how they plan to execute their strategy.”
Finally, the fund looks at assets' valuations and “tries to purchase at best value,” he said.
Mr. Lee said the fund is a “total- return investor. We don't have a particular dogma or bias. We love income, but we love capital appreciation, too. That makes us different.”
Despite the troubles of the commercial real estate market since the financial crisis, Mr. Lee is optimistic about its future.
“It's about supply and demand,” Mr. Lee said. “There's very little new supply, and that's good news for existing landlords, assuming there is a demand, which is correlated to job growth. We really wish, like everybody else, that job growth was more robust.”
An upside to the tepid economy has been low interest rates, he said.
“That has been good for real estate companies because debt has been accessible and affordable,” he said. “Our companies are refinancing at very lucrative interest rate savings.”
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