Listed Real Estate as Portfolio Mainstay

Chidem Kurdas

Publicly traded real estate investment vehicles have gone through a dramatic cycle. In the financial crisis they by and large became a distressed play, subsumed under the then-popular moniker of toxic waste. Fund managers with an eye to bargain basement prices went for them—that is, those who had capital to deploy, at that time probably a minority, given so many investors were demanding their money back.

Nowadays a range of such vehicles – not just REITs – are a popular way to be in the property market.

Thus Permal, Legg Mason’s hedge fund investment arm, has bought a bunch of them. One is Two Harbors Investment Corp., a specialist in residential mortgage-backed securities. It is run by a subsidiary of Pine River Capital, a hedge fund and listed vehicle manager that started in Minnesota but now has offices in China and Europe as well as New York and Austin.

Another is Colony Financial Inc., which focuses more on commercial mortgage loans, including some that are in default. Then there is Chimera Investment Corp. with the mythological name, a REIT that invests in both commercial mortgages and residential mortgage-backed securities. And RAIT Financial Trust, which finances commercial properties.

Many real estate stocks still look like good value, having not fully recovered and trading well below their pre-crisis highs. That must be part of the rationale for holding them.

It is notable that Permal chose to buy these stocks. Mostly Permal invests not directly in public securities but in hedge funds—many of which invest in real estate securities, so a portfolio of hedge funds often indirectly contains a large complement of such assets.

Like almost all funds of funds, Permal has had trouble raising money in recent years. But it has the advantage over freestanding funds of funds of being able to tap the distribution network and other resources of Legg Mason.

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