REIT Investor

September 2007 REIT Performance

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September 2007 REIT Performance

September 2007 marked a return to "normalcy" for REIT performance as the market continued the pattern established in mid August and continued its move off the bottom of its recent downturn. The NAREIT Equity REIT Index (NERI) ended the month of September up +4.4% for the month.

Again recall that in 2006 the NERI was up +35.1% and in 2005 it was up +12.2%. More significant is that, as of September 30th, for the trailing five year period, the NERI is up an annualized +21.5%. This five year performance compares to +13.4% for the S&P500, +12.9% for the DJIA, and +18.2% for the NASDAQ. It has been a good time to hold investment real estate and REITs. As previously reported, however, the REIT market had gotten quite pricey and a correction like we recently experienced was not unexpected. The NERI, once again, out-performed all of the three major indices we compare to September. For the month, the S&P500 was up +3.6%, the DJIA was up +4.0% and the NASDAQ was up +4.0%. On a year to date basis, the NERI still significantly trails these other indices and is now down -3.5%, while the S&P500 is up +7.6%, the DJIA is up +11.5% and the NASDAQ is up +11.8%.

Most analysts, including myself, agree that it had been time for a breather and a correction like we recently experienced was expected and necessary. I do believe, however, that this downturn is now behind us. REITs, in the past, have been quite resilient and usually rebounded quickly after a downturn. I do not expect any significant gains for the remainder of the year and 2007 returns are, at best, expected to be in the 5% to 8% range. This would equate to approximately an average 4% to 5% total return for each the remaining three months in 2007. Contributing to this will be solid, but not exceptional operating performance at the REIT level, a downward trend in Price/FFO multiples which are unsustainable at their current levels, and more funds earmarked for Real Estate going into Private Equity as opposed to Publicly Traded REITs. It is expected, however, that rents and occupancies will rise and REIT dividends will not only be very secure but should see average increases in the 5%+ range during 2007 and 2008.

Regardless, long term REIT returns should remain very acceptable especially when compared to other investments. They should revert to the mean and show average returns over longer periods of time in the mid teens which is similar to historic Real Estate returns in general. Also, a strong demand by both domestic and international investors continues to buoy up the real estate investment markets.

The high level of Privatization activity that was seen in 2006 has continued albeit at a lesser pace in 2007. There were no deals that I am aware of announced in September. ArchStone Smith shareholders approved its buyout by Tishman/Lehman and it is scheduled to close on Oct 5th. With REIT share prices appearing to be recovering from their recent lows, but still trading well below NAV values, I wouldn't be surprised to see some more attempts at privatization. Whether management and shareholders would accept an offer at current levels is questionable. These continue to be interesting times as the potential for more buyouts or mergers still exists. This is a direct cause and effect relationship to the amount of unfilled commitments to acquire private real estate both by domestic and international fund managers.

I continue to worry, however, that pricing on the institutional private level has been pushed to an unsustainable level and that these current purchasers of investment quality real estate may experience difficulty in realizing the level of total returns that real estate investments have achieved over recent history. I also expect this buying frenzy to dry up in the next six to twelve months which will lead to higher cap rates and the beginning of some selling pressure. On a positive note, unless you are a renter, owners are continuing to ask for and get higher rental rates to compensate for these high purchase prices. Whether these higher rental rates are sustainable remains a question. I tend to think that they will remain, especially for quality real estate in good locations.

On a year to date basis, Hotels, retail mall REITs, neighborhood shopping center REITs, CBD Office and, more recently, Industrial have had better than average performance. Suburban office, Multi-Family, and Health Care have the higher negative returns on a year to date basis.

As I mentioned previously, my data source for fund flows into the REIT sector has decided to start reporting with a one month delay. In the month of August, 2007 with ($1.7B) we see the additional outflow of funds that started in March, 2007. Year to date fund flows through August 2007 now stand at ($6.6 B) of non ETF outflows. Some early estimates for September, moreover, have shown continued yet slowing negative outflows. In fact, initial estimates for the final week of September show positive inflows. Offsetting this somewhat is the estimated $13.5B of inflows to global and closed end funds. The rate of inflows has slowed however in August to approximately $276 million. I do not know, however, how much of these global inflows come from domestic sources.

2006 domestic inflows, excluding ETFs were $4.2 Billion. Recall that the net inflows for 2005 were $2.1 billion. This was the lowest amount of inflows since 2001 and follows inflows of $5.3, $7.8, and $6.9 Billion in 2002, 2003, and 2004.

I do expect investors to begin taking advantage of the current reduced pricing for REITs and would not be surprised to see net inflows to REIT mutual funds for the remainder of 2007.

Those who continue to take a longer term buy and hold approach, with some selective sales as REIT sectors rotate through their cycles, should be rewarded over time with a low risk, high income component, and a strong total return. I continue to believe that, because of the diversity of these real estate asset classes within the REIT universe, there are always good buying and selling opportunities. I also continue to feel that the low risk and high return features of REITs should encourage all investors to have 10% to 20% of their invested assets devoted to REITs on a long term, if not permanent, basis.

Please let me know if I can answer or assist with you with any of your REIT or Real Estate questions.

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George

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REIT Performance for August, 2007

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Every month I post a commentary on the REIT industry to the Marketocracy forums. I thought it would be interesting to also include it here:

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August 2007 REIT Performance

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August 2007 was a volatile month for REIT performance as the market tried to establish a bottom for its recent downturn. The low for the month (and the year) was established on August 15th when the index was off -2.7% for the month of August and -27.4% from its high point for the year on February 7th. The NAREIT Equity REIT Index (NERI) rebounded from its low and ended the month of August up +6.7% for the month.

Again recall that in 2006 the NERI was up +35.1% and in 2005 it was up +12.2%. More significant is that, as of August 31st, for the trailing five year period, the NERI is up an annualized +19.5%. This five year performance compares to +10.0% for the S&P500, +9.0% for the DJIA, and +14.6% for the NASDAQ. It has been a good time to hold investment real estate and REITs. As previously reported, however, the REIT market had gotten quite pricey and a correction like we experienced was not unexpected. The NERI out-performed all of the three major indices we compare to August. For the month, the S&P500 was up +1.3%, the DJIA was up +101% and the NASDAQ was up +2.0%. On a year to date basis, the NERI still significantly trails the other indices and is now down -7.5%, the S&P500 is up +3.9%, the DJIA is up +7.2% and the NASDAQ is up +7.5%.

Most analysts, including myself, agree that it had been time for a breather and a correction like we recently experienced was expected and necessary. I do believe, however, that this downturn is now behind us. REITs, in the past, have been quite resilient and rebounded quickly after a downturn. I do not expect any significant gains for the remainder of the year and 2007 returns are, at best, expected to be in the 5% to 8% range. Contributing to this will be solid, but not exceptional operating performance at the REIT level, a downward trend in Price/FFO multiples which are unsustainable at their current levels, and more funds earmarked for Real Estate going into Private Equity as opposed to Publicly Traded REITs. It is expected, however, that rents and occupancies will rise and REIT dividends will not only be very secure but should see average increases in the 5%+ range during 2007.

Regardless, long term REIT returns should remain very acceptable especially when compared to other investments. They should revert to the mean and show average returns over longer periods of time in the mid teens which is similar to historic Real Estate returns in general. Also, a strong demand by both domestic and international investors continues to buoy up the real estate investment markets.

The high level of Privatization activity that was seen in 2006 has continued albeit at a lesser pace in 2007. There were no deals that I am aware of announced in August. ArchStone Smith shareholders approved its buyout by Tishman/Lehman and it is scheduled to close on Oct 5th. With REIT share prices appearing to be recovering from their recent lows, but still trading well below NAV values, I wouldn't be surprised to see some more attempts at privatization. Whether management and shareholders would accept an offer at current levels is questionable. These continue to be interesting times as the potential for more buyouts or mergers still exists. This is a direct cause and effect relationship to the amount of unfilled commitments to acquire private real estate both by domestic and international fund managers.

I continue to worry, however, that pricing on the institutional private level has been pushed to an unsustainable level and that these current purchasers of investment quality real estate may experience difficulty in realizing the level of total returns that real estate investments have achieved over recent history. I also expect this buying frenzy to dry up in the next six to twelve months which will lead to higher cap rates and the beginning of some selling pressure. On a positive note, unless you are a renter, owners are continuing to ask for and get higher rental rates to compensate for these high purchase prices. Whether these higher rental rates are sustainable remains a question. I tend to think that they will remain, especially for quality real estate in good locations.

On a year to date basis, Hotels, retail mall REITs, neighborhood shopping center REITs and CBD Office, while all negative, have had better than average performance. Suburban office, Multi-Family, and Health Care have the higher negative returns on a year to date basis.

As I mentioned previously, my data source for fund flows into the REIT sector has decided to start reporting with a one month delay. In the month of July, 2007 with ($2.5B) we see the additional outflow of funds that started in March, 2007. Year to date fund flows through June 2007 now stand at ($4.9 B) of non ETF outflows. Some early estimates for August, moreover, have shown continued yet slowing negative outflows. Offsetting this somewhat is the estimated $11.5B of inflows to global and closed end funds. I do not know how much of these global inflows come from domestic sources.

2006 domestic inflows, excluding ETFs were $4.2 Billion. Recall that the net inflows for 2005 were $2.1 billion. This was the lowest amount of inflows since 2001 and follows inflows of $5.3, $7.8, and $6.9 Billion in 2002, 2003, and 2004.

I do expect investors to begin taking advantage of the current reduced pricing for REITs and would not be surprised to see inflows to REIT mutual funds for the remainder of 2007.

Those who continue to take a longer term buy and hold approach, with some selective sales as REIT sectors rotate through their cycles, should be rewarded over time with a low risk, high income component, and a strong total return. I continue to believe that, because of the diversity of these real estate asset classes within the REIT universe, there are always good buying and selling opportunities. I also continue to feel that the low risk and high return features of REITs should encourage all investors to have 10% to 20% of their invested assets devoted to REITs on a long term, if not permanent, basis.

Please let me know if I can answer or assist with you with any of your REIT or Real Estate questions.

---------------------------------------------------------------
George

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REIT

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My portfolio consists entirely of high quality REITs. Since the REIT market has been depressed a little lately, I am looking for some growth along with income.

I do not expect to add new shares to the portfolio, but rather trade within the portfolio as various REIT sectors show strength and weakness.

George

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