Homebuilders and Hotels
Lead Lieber's Portfolio

In the staid fraternity of real-estate mutual fund managers, Sam Lieber stands out for his willingness to bet his convictions.

Most real estate fund jockeys, after all, load up on real estate investment trusts (REITs) in order to generate outsized income for investors seeking a conservative hedge for their stock holdings.

But in the Alpine U.S. Real Estate Equity Fund, Lieber is out to generate outsized capital gains for his investors. These days, he's bullish on homebuilders and hotel companies, giving the two sectors a combined 70 percent weighting in his portfolio.

"This fund is not designed for widows and orphans,'' says Lieber, who usually holds no more than 35 stocks at any one time.

While the fund may be more volatile than the average real estate fund, it also has delivered far more impressive results. Over the past three years, it has generated a 34.5% yearly return, making it the leading real estate fund over that period, according to Morningstar, which has given it a five-star rating.

Barron's Online: These days, your fund is focused on homebuilding and lodging stocks, with REITs playing only a supportive role. Why is that?

Lieber: REITs have to pay out a significant portion of their income to their investors, at least 60% to 70% of their cash flow and often higher. We have felt that capital appreciation plays found in homebuilding and lodging were better, because companies could reinvest their capital in new real estate opportunities. One flaw in REITs is that they have relatively low return on equity and relatively low return on invested capital.

REITs have their place, and at the right price they make a lot of sense. But we are focused on companies that can offer higher return on equity. There have been times when we've had two-thirds or more of the portfolio in REITs. And [they have] typically been times when we think that REITs are very cheap, when the underlying real estate value is not reflected in the share prices.

Question: I know you're bullish on the larger homebuilding companies because of their ability to gain market share -- even in a weak new housing market--through acquisitions of smaller companies. Which company do you think embodies this trend?

Answer: Hovnanian Enterprises.

Question: Have you been buying the stock lately?

Answer: Yes. A couple of weeks ago.

Question: This company delivered some good earnings news this week, soundly beating estimates, and its shares have gained about 30% since hitting its mid-summer-low of $29 a share. But the stock is still far off its 52-week high of $48. Why do you like this volatile stock?

Answer: It's a company that transformed itself through the acquisition game. They bought a couple of private builders out west to get into California in a big way. They moved down south to Jacksonville, Florida and they bought in Texas and they bought mostly private builders.

They timed a lot of their purchases right and they bought in the right areas. For example, they bought in the Inland Empire in southern California a couple of years ago. It worked fabulously well because the coast along California is too expensive for most people.

Question: Does Hovnanian focus on middle-class homebuyers rather than the upper end?

Answer: Yes. They even have a division called Park Side down in Houston that does very much entry level homes that can go for under $100,000.

Question: Why did the stock fall so much earlier this year, more than many of its peers?

Answer: I think they haven't done a major deal recently I think that's part of it. Also, they do have a big California exposure and some people are nervous about California.

Question: Why have you been adding to Hovnanian lately?

Answer: We thought it was cheap on a cash flow basis. [Editor's note: The stock, however, is now trading at 7.9x forward cash flow, in line with its five-year median, according to Thomson Baseline.]

Question: Do you worry that housing prices in the U.S. have reached "bubble" proportions because of irrational exuberance?

Answer: No. There are geographical markets that are overheated, but a bubble is something that is going to pop. I think housing prices are rooted in supply and demand and right now, we don't have an oversupply. Inventories of new and existing homes are still running at around four months, and that is up only a little bit from the very bottom. Going back to the 1990 recession, we had nine to ten months of supply. Also, there is not a lot of extra new land, especially in the major communities, to build. And we also have a growing population of potential homeowners and mortgage rates that have remained low.

Question: Though you clearly like the homebuilders, why have you trimmed your position in this sector from around 65% of total assets in April to about 48% now?

Answer: We felt we were maxed out at about two-thirds of assets. We feel we have to have some balance in the portfolio. In early April, we started selling down, lowering our percentage of homebuilders to about 40% of assets. We've gradually been buying back and increasing it so that now we are about 48%. But my view is that we will have some opportunities to buy some builders on dips over the next few months. And we will probably increase our position back up towards the 60% level.

Question: What's another company that you have been buying aggressively lately on the homebuilding side?

Answer: Toll Brothers.

Question: Why Toll Brothers?

Answer: Their new order levels are up 70% over last year. Because Toll builds larger and more expensive homes and they do much more landscaping than others, it takes longer to build a home. So, homes will take them anywhere from a minimum of nine to 18 months to build. And their backlog basically gives visibility on almost all of next year right now. They've got over a year's worth of earnings already in the can in terms of new orders. We think this company can grow earnings [by] 20% to 25% per year over the next couple of years.

Question: What lodging stock have you been buying lately?

Answer: We bought a little bit of Gaylord Entertainment when it pulled back recently. [Gaylord specializes in convention centers. It operates several resorts, including Gaylord Opryland Resort and Convention Center in Nashville.] These are mega-complexes with dozens of restaurants.

Question: Why is it a good investment?

Answer: This is a unique franchise. The market hasn't fully realized that this company has greater stability of growth, because their lead time for booking [conventions] is roughly two to three years. So, they will have more stability of earnings than other hotels will. Also, I think this company could be acquired by a bigger hotel [chain], such as a Hilton or Starwood. It may not happen for two or three years. It is not a stock that I'm pounding the table on, but I think it is a nice story.

Email your comments to rjeditor@dowjones.com.