INSIGHTS

On November 06, 2012

REITs Fundamentals Remain Strong as Capital Investment from Europe Continues

1) REITs continue to have an YTD positive return of 14.9% through September 30,

2012 (MSCI US REIT (Real Estate Investment Trusts) Total Return Index, per Bloomberg)

a) Earnings season has begun. Overall, the REITs have shown some good results and some disappointing results. Some investors are beginning to weigh asset quality, type and location higher than other metrics such as balance sheet strength.

b) Recent turmoil in Europe is causing fears of the capital markets becoming less liquid. But, capital, at this time, is flowing into the United States for safety. REIT yield and recent return has attracted numerous foreign investors, especially from Japan. This capital flow into REITs is helping support the increase in the index.

c) REITs balance sheets have positioned REITs to weather an economic downturn, increase operations and opportunistically recycle their assets to higher and better use assets.

d) If the economy recovers, a large risk to the REIT equities, would be sector rotation as investors may move to higher risk assets.

2) Capital Availability

a) Capital continues to be available to REITs, but availability may be slowing due to concerns over Europe.

b) The preferred market continues to issue equity. Prudent management teams are beginning to term out debt to stagger future maturities.

3) Acquisition Updates

a) REITs continue to see acquisition opportunities in the future, but private

Real Estate buyers are beginning to bid aggressively in different markets.

b) GSE availability for certain asset classes, such as multi-family and student housing, has lowered the cost of debt for certain REITs. This cost of debt is causing cap rate compression in these asset classes, causing targets to be highly priced. The government-sponsored enterprise (GSE) cost of capital is showing some signs of rising.

c) Transaction velocity appears to be increasing. Levels are still far below the 2005-2007 acquisition levels. REITs are comparing the current acquisition market as 2005 price levels without the liquid market.

4) Valuation

a) REITs have had a great return YTD, up 14.9% through August 31, 2012.

Multiples have expanded with the rise of stock prices.

b) We expect REIT operational fundamentals to grow into the multiples especially if an economic recovery occurs.

Overall, REITs continue to be positioned to grow organically and via acquisition. Foreign capital is moving towards safety, and U.S. based REITs are considered safe. U.S. capital looking for yield and safety is continuing to go into the REIT market. Yields continue to be more than the median 10-year spread over the 10-year USD Treasury, which should be attractive to certain yield seeking capital.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at www.aamlive.com/blog/about/disclosures. For additional commentary or financial resources, please visit www.aamlive.com


The information contained herein is obtained from Confluence Investment Management LLC and believed to be reliable. The information is not warranted as to completeness and accuracy and is subject to change without notice. The foregoing has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security.


Advisors Asset Management, Inc. (AAM) and Confluence Investment Management LLC are not affiliated and the views expressed in this commentary are not necessarily that of AAM.
Confluence Investment Management LLC is the Portfolio Consultant to the Confluence Utilities Portfolio. The Portfolio Consultant is not an affiliate of Advisors Asset Management, Inc. (AAM), the sponsor of this trust.