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Wall Street Transcript Interview with Paul E. Adornato, Senior Analyst for BMO Capital Markets Group: A Bright Spot for Industrial REITs in a Slow-Growth Economy

67 WALL STREET, New York - November 1, 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: Forest City Enterprises Inc. (FCE-A), Duke Realty Corp. (DRE), W. P. Carey & Co. LLC (WPC), Realty Income Corp. (O) and many others.

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

TWST: What property sector are you finding most favorable today?

Mr. Adornato: I think that the industrial REITs, companies that own and operate warehouses used for international trade and domestic distribution of goods, are still a relative bright spot. We still see very, very low levels of new construction in industrial, and at the same time, we see modest increases in demand. This has produced a steady increase in occupancy.

More recently, we've also started to see the burnoff of the high rents that were signed during the prerecession peak of the market, so the negative rent rollovers have just about ended. Together with a steadily increasing occupancy, we have seen a return to positive same-property net operating income for just about all of the industrial operators.

We're just at the beginning of this cycle, so we still have good underlying fundamentals for the industrial REITs going forward. I would also add that, given the fact that there is still, let's say, 400 basis points to 600 basis points of additional occupancy upside, there's still a decent runway for earnings growth within the industrial REIT space.

TWST: Are there any other property sectors you have a favorable view of?

Mr. Adornato: It's more of a mixed bag within the retail segment. More specifically, within shopping centers, there are some companies that are able to access the capital markets and make accretive acquisitions of shopping centers, often buying from financially distressed developers or from banks in short sales.

A key consideration here is that shopping center ownership is capital intensive. That is, when there is tenant turnover, the landlord needs to invest capital in order to build out the space for the next tenant. A lot of private owners are either unwilling or unable to invest the capital, and therefore, they would rather sell the property than make that capital investment. This is benefiting well-capitalized property owners, including a number of the public shopping center REITs.

TWST: Are you cautious about any property types in the sector?

Mr. Adornato: I would say that if we were to look at the office segment, although the economy is steadily improving, we're not seeing very robust job growth yet. And so it remains to be seen - perhaps following the presidential election - when we might see businesses start to make more hiring decisions. But at this point, we're not seeing that, and so absent robust job growth, it's really hard to make a case for office at this point.

Having said that, there are some deep value investors that are starting to get interested in office properties, and so if we were recommending a sector that might have a higher risk/return profile, then office might fall into that category. For the more mainstream real estate investors, it still might be considered a little bit early to take a serious look at office.

TWST: What are your top stock picks right now?

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.