Tom Mitchell, Senior Analyst at Miller Tabak + Co., LLC: Apartment REITs Continue to See Improved Fundamentals Coupled with Pricing Power: an Interview with the Wall Street Transcript

Wall Street Transcript

67 WALL STREET, New York - October 26, 2012 - The Wall Street Transcript has just published its REITs Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Acquisition and Financing Costs - Pricing Power Outlook - Residential and Commercial REITs - Real Estate New Supply - Inexpensive Access to Capital - Apartment, Lodging, Self-Storage and Office REITs

Companies include: Home Properties Inc. (HME), Apartment Investment & Managem (AIV), UDR, Inc. (UDR), Equity Residential (EQR), Duke Realty Corp. (DRE) and many others.

In the following excerpt from the REITs Report, an expert analyst discusses the outlook for the sector for investors:

TWST: We'll be focusing on the REITs today. Based on the ones you cover, what's your overall sentiment on the space right now and why?

Mr. Mitchell: There has been a sort of tug of war going on in the sense that the Federal Reserve policy is extremely favorable for REITs. The current policy and the previous policy, when the Federal Reserve tries to drive down long-term interest rates, creates opportunities for companies in the REIT space either to refinance existing debt at lower rates or else make acquisitions and finance the acquisitions on a favorable basis with low-cost financing. So in general, for the whole REIT sector, as long as Fed policy continues as it has, it's very favorable for their business models.

My secondary comment to that is that investors know that. Generally speaking, in recent years, we've seen REITs trade in the upper quintile of what historically their price to funds from operations valuations have been. We have seen valuations in 2010 to 2011 and into 2012 very close to where they were in 2006 and early 2007, which were peaks; 2006, 2007 was a peak for REIT valuations. So the tug of war is that underlying business models are being supported by the current environment, which for REITs is a little bit like a Goldilocks scenario - not too hot, not too cold - and the valuations that REITs are receiving for their good fortune are in the higher area than where they've been historically in earlier times.

What we think has gone on very recently is that there's been a movement of funds away from REITs, not so much that anybody is terribly disappointed in how the REITs are doing, but every time there's a little bit more of a sense of risk on in the capital markets, REITs go out of favor because they don't give you the biggest bang for the buck. It would, instead, be stocks that have been more out of favor for longer, or that have more of a cyclical sensitivity, that move to the forefront, so then REITs sort of take a backseat at that point. I think that's what we've seen recently, let's say since midsummer.

TWST: What industry trends are most important right now?

Mr. Mitchell: In the different subsectors, I would say that there are a few things going on that are different from what they used to be before the Great Recession. The most obvious, of course, is in the apartment sector, where the percentage of the American population that owns its homes and the percentage of the younger population that is trying to own their own homes has gone down significantly since 2008. This has given a tremendous underpinning to the fundamentals in the apartment business. The whole apartment sector has seen 95%-plus occupancies now for several years, and 95% is close enough to full occupancy in the apartment market that there has been considerable pricing power, really starting from the first quarter of 2010, depending, of course, on location and the specific geographic market. But in general, there has been a tremendous tailwind for apartment REITs. Not only have the stocks enjoyed that, but the underlying fundamentals have continued to improve and are continuing to improve even now.

The secondary impact is that

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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