Nancy Holland

Manager hasn't lost faith in real estate.

Michael Ryval 28 September, 2007 | 1:00PM
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These are trying times for real estate investors, but Nancy Holland urges them to be patient and ride out the current malaise that's been brought on by the subprime mortgage crisis in the U.S.

"If you believed that real estate was an attractive asset class last January, then, it is even more attractive today," says Holland, manager of the $235.3-millionMackenzie Universal World Real Estate Class and head of global property at Chicago-based ABN AMRO Asset Management.

Real estate provides diversification benefits in one's portfolio, adds Holland, and it should continue to play a role. "I eat my own cooking," says Holland, "and have about 10% invested in real estate."

While the past few years have been positive, Holland argues that investors cannot expect markets to go straight up. "We did some catching up in previous years, in terms of returns, but there's been a change in 2007. Interest rates have been on the rise, and it has impacted property prices," she says.

"Besides, many companies were fully valued," adds Holland, who travels extensively and meets frequently with her global team that manages about $8 billion in assets. "There's been a change in the risk premium, and what investors are expecting."

For the 12 months ended Aug. 31, the fund lost 2.5%, placing it in the fourth quartile and trailing the median fund in the Real Estate Equity category, which earned 12%. Over two years, the fund averaged 8.2%, compared with 15.2% for the median.

Holland, who assumed the fund in June 2005, continues to focus on the fundamentals. "We will eventually get back to normalized returns of 8% to 12%. That's what it has been over the long term."

In principle, Holland seeks to emulate the characteristics of ownership by buying owners and operators of commercial, retail and industrial properties. Relying on team members in Chicago, Amsterdam, Hong Kong and Sydney, Australia, she screens about 400 companies around the world before settling on around 84.

Potential holdings must derive at least 75% of their recurring income from property activities, and at least 25% of that recurring income must be rental income. Other criteria include balance sheet strength, management's track record and liquidity. Holland and her team also conduct top-down analyses, examining factors such as demand and supply indicators, the interest-rate outlook and sentiment in local markets.

As a rule, Holland limits holdings to around 8% of fund assets, although she can go as high as 10%. Turnover has been moderate, at 58.5% for the year ended June 30, 2006.

A representative holding is Simon Property Group Inc. ( SPG/NYSE). "It's one of the largest publicly owned property companies in the world and the largest in North America," says Holland. "There is also a high degree of insider ownership. That's important to us as it indicates that management's interests are aligned with shareholders."

The firm's valuation is attractive relative to its peers and it has good earnings growth rate, says Holland, adding that the consensus estimate is 9.8% for 2008. "Overall, we like this name."

A native of St. Louis, Holland has spent most of her 24-year career in the real estate sector in various capacities. After graduating in 1983 from Saint Louis University with a bachelor of business administration, she worked as an accountant at a local data systems firm. Within seven months, she was hired by Laventhol & Horvath and joined the management advisory group.

During a six-year stay, Holland worked with clients from the hotel and retirement community industries. She was also involved in examining the real estate holdings of failed institutions when the savings and loans fiasco erupted. "These were very intense projects and we had only two or three weeks to study an entire portfolio."

In 1988, Holland joined St. Louis-based CentreMark Properties, a developer and owner of shopping malls. She was primarily involved in feasibility and financing studies for the firm's development arm. Six years later, she was hired as a real estate investment trust analyst by Edward Jones, the retail brokerage firm.

Holland joined ABN AMRO in 1997, initially as senior portfolio manager responsible for the U.S. property portfolio. In 2005, she was promoted to global head of property.

Holland maintains that the sub-prime mortgage crisis has tainted players who are not directly involved in the residential sector. But this could also offer investors a buying opportunity, since valuations have dropped significantly.

A year ago, many stocks sold at a 20% to 30% premium to net asset value. Today, many are selling at a 10% discount to NAV. Market sentiment has been very negative," says Holland. "But soon it will change. One day, the market may start to say, 'Maybe we over-reacted?'"

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Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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