Mr. Adornato: To recap 2009, we upgraded the REITs to outperform in the middle of May 2009, after the REITs had already begun a pretty significant recovery from their lows earlier in the year. The reason that we did it in May was that at that point, it appeared that the capital markets would indeed have sustained improvements, which would greatly enhance the balance sheets and liquidity of the majority of REITs in the industry. So at that point we felt that the risk/reward tradeoff had turned much more positive for investors. We maintained that outperform rating through the summer until the middle of September 2009. And during that period, the REITs did outperform the broader market by about 35%, in addition to their very strong performance from February to May.
Right now we are maintaining our market-perform rating, and this is really based on the valuation of the industry as a whole. We still see the REITs trading at a pretty significant premium to estimated net asset value. By our measure, they are trading at a weighted average 23% premium to consensus-estimated NAV, versus a long-term peak NAV of 26% and a long-term average of trading on par with NAV. On an earnings multiple basis, looking at FFO and AFFO multiples, the REITs are trading above their long-term average but not as much as the NAV premium. So we think that at current levels, the REITs are already pricing in continued capital markets improvements on the upside and generally weak expected fundamentals over the next 12 to 24 months on the downside. We are very comfortable with a market-perform rating on the industry, however, we are becoming much more decisive on individual sectors and individual stocks. Whereas over the past two years, simply making the global decision of whether to be invested in U.S. REITs or not was the most critical investment decision, from here we believe that picking sectors and picking stocks will be very important, as we don't see the REITs moving as a group, as they have over the last two years.
Tickers included in this excerpt: BMR, CPT, DCT, DEI, DRE, FPO, HCN, HME, PSA, UDR
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