Hauser

Adornato

By Kyle Fishburn and Allen Kenney

In autumn, REITs continued to bounce back from their underperformance in the earlier part of the year. The FTSE NAREIT All REIT Index was up 4.24 percent for the month of September, marking the second-consecutive month in which the All REIT Index outperformed all other U.S. major market benchmarks.

Some attributed part of the sector's strong September to the Federal Reserve's recent cuts to the target federal funds and discount rates. William Hauser, portfolio manager with HVB Capital Management, cautioned that REITs would need more than just liquidity and cheaper borrowing to sustain their performance.

"The recent medicine of Fed action has clearly given REITs a much-needed boost," Hauser said. "However, long-term, Fed cuts alone will not bolster the sector. Fundamental issues such as employment gains, household formation and earnings growth will ultimately decide share price movement."

Paul Adornato, a senior REIT analyst with BMO Capital Markets, speculated that the Fed's actions had freed investors to focus on the "healthy, if not booming," fundamentals of most property sectors. He predicted that the REIT market would remain stable through the end of the year. "We think current valuations are reasonable, and don't see a potential catalyst which could move the group substantially higher or lower in 2007."

Hauser noted that the recent "turmoil" in the debt market might enable REITs with strong balance sheets to gain a competitive advantage over highly leveraged private competitors.

Overall from the year, the FTSE NAREIT All REIT Index (-6.68 percent) and the FTSE NAREIT Equity REIT Index (-3.46 percent) continue to trail the broader market. Through Sept. 30, the Russell 2000 is up 3.16 percent, the S&P is up 9.13 percent , the Dow Jones Industrial is up 11.49 percent and the NASDAQ Composite is up 11.85 percent.

KBW Opens for Business Financial services investment bank KBW, Inc. announced in September the creation of a new equity REIT department. At the time of the announcement, KBW already had begun coverage of more than 30 publicly traded REITs. The firm said it intended to expand its coverage to include more than 50 REITs by the end of 2007.