While Beam cautions that REIT preferred shares aren't appropriate for a retiree who can't afford to ride out the volatility in the market, "They may be worthwhile for someone who has a long time horizon and wants to get much of their total return from a fairly reliable stream of income." He says missed dividend payments are rare among portfolio companies, although a couple of hotel holdings skipped their dividend payments in late 2008 and early 2009.

To find preferred securities he likes, Beam evaluates an issuer's enterprise value, which reflects the breakup value of a business. He also looks at fixed charge coverage, which gauges the company's ability to pay bond interest and preferred stock dividends with cash flow.
"REITs are more transparent and easier to understand than most companies, he says. "Sometimes it's hard to figure out what's really going on by looking at a typical company's 10-K. But to me, commercial real estate is a very understandable business."

Beam's comfort level in evaluating REITs comes from years of experience in the real estate business. As an undergraduate student at the University of California at Berkeley, he held a clerical job at a local real estate developer, where he spent time answering phones and learning about construction and leasing contracts.

After graduation, he was responsible for the valuation and pricing of real estate limited partnership and institutional commingled investment fund securities, as well as the underlying properties, for a firm called Liquidity Financial Advisors. He moved to the securities side of the business when he joined Kensington Investment Group in 1995 as a senior analyst, and began managing portfolios of real estate securities in 1997. When Forward Management bought Kensington in 2009, he continued managing the fund under the acquirer's name.

Despite the REIT run-up since the name change, Beam sees plenty of weakness in both the commercial and residential sectors of the market. Nationally, the vacancy rate for offices is 17%, its highest levels since the early 1990s. In many parts of the country, strip malls are dominated by empty storefronts. And residential real estate continues to struggle with high foreclosures and delinquent mortgages. "But you have to differentiate by sector, property type and location," he says. "There is a big difference between trying to lease an office building in a low-demand area than downtown office space that's on top of a subway station."

As real estate investors await better days, public real estate companies are in a better position to weather the downturn than private firms, says Beam. Since they don't have access to the public capital markets, the latter must rely heavily on bank loans for expansion, which have been difficult to obtain with tougher lending restrictions. Over the next several years, the firms will need to refinance mortgages used to fund boom-time projects from the mid-2000s. "With property values way down, that's going to be a big problem," Beam observes.

By contrast, publicly traded REITs have better access to capital through the public markets. And with investors enthusiastic about their shares, many portfolio firms have successfully launched new issues over the past year.

"Access to capital means public real estate companies have the wherewithal to weather the soft operating environment and the effects of the recession," says Beam. "With double-digit vacancy rates in many parts of the country, these firms still have the means and the muscle to attract and keep tenants. They also have the capital to buy assets at today's attractive prices."

Beam likes to run a broadly diversified portfolio that spreads its bets among a variety of sectors and locations. The fund owns 135 different securities with exposure to 71 issuers.

Retail, office and specialty REITs each make up about one-quarter of the fund's assets. One of the specialty REITs is LTC Properties, which acquires properties and leases them to long-term care providers and has more than 200 nursing home and skilled care facilities spread throughout the country. Beam labels it "one of the best-performing REITs since its first public offering in the late 1990s." He also likes the company's low debt, as well as the fact that management has been buying back the company's common and preferred stock.