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REIT market rally continued
As access to the capital markets continued to improve, REITs benefited, driving the NAREIT Equity Index to its best-ever quarterly gain: 33.3%. Columbia Real Estate Equity Fund underperformed the NAREIT Equity Index for the third quarter. However, it remained ahead of the benchmark for the year to date. The broader markets also rallied during the quarter. The S&P 500 Index, the Dow Jones Industrial Average and the Nasdaq Composite rose 15.6%, 15.7% and 15.7%, respectively.
Market factors drove commercial real estate values higher
REITs have demonstrated considerable ability to raise capital in the unsecured, secured and equity markets. Since the beginning of the year, REITs have raised more than $18 billion in equity and $6 billion in unsecured debt. Given the general demand for unsecured paper, as well as the improvement of REIT balance sheets, the cost of both unsecured and secured debt have declined significantly since the beginning of the year, helping to drive the implied value of commercial real estate higher. Unsecured REIT spreads have narrowed from a high of 1,250 basis points in January to under 400 basis points at the end of September — approximately on par with pre-Lehman Brothers bankruptcy levels.
In addition, the government’s attempts to jump start commercial real estate lending in the securitized markets by including commercial mortgage backed securities (CMBS) in its Term Asset-Backed Securities Loan Facility (TALF) may be progressing. The interest rate costs on CMBS loans in the secondary market have declined to the point that new issuance may be cost effective for companies that lack an investment-grade rating and access to the cheaper, unsecured debt markets. However, this progression has been slow to transpire, and the shape of this market upon its return is unclear, as is its potential to make a significant impact.
REITs continue to lose occupancy and rental rates continue to decline; however, the rate of decline has slowed and many REIT management teams believe that fundamentals are at or near the bottom. Although we agree with this assessment, we believe that the more important question is when demand for commercial real estate space will return. The timing and magnitude of an uptick in demand will determine the internal growth prospects for REITs — and ultimately the value of their underlying properties.
Drivers of performance1
Although the management team continued to shift the fund slowly away from its defensive positioning, its conservative approach hampered performance relative to the index for the third quarter. Sector allocation also hurt performance. The fund’s only hotel holding, Starwood Hotels & Resorts, outperformed. However, the fund was underweight relative to the index, and the sector was a strong performer. As a result, the impact of Starwood’s stellar return was less than within the index. An underweight in office property REITs and security selection in the sector also hampered returns. Within residential property REITs, Equity Lifestyles Properties and Corporate Office Properties underperformed as investors moved away from names that worked during the downturn and toward higher beta names.
The portfolio benefited from stock selection within retail real estate, as CBL & Associates and The Macerich Company continued to outperform in an environment of improved confidence in the American consumer. In addition, both companies continued to execute on their balance sheet restructuring plans.
Performance data quoted represents past performance, and current performance may be lower or higher. Past performance is no guarantee of future results.
Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a prospectus, which contains this and other important information about the fund, contact your Columbia Management representative or financial advisor or go to www.columbiamanagement.com.
The Financial Times Stock Exchange (FTSE) National Association of Real Estate Investment Trusts (NAREIT) Equity Real Estate Investment Trusts (REITs) Index is an index that reflects performance of all publicly-traded equity REITs.
Unlike mutual funds, indices are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. 1Determinations of contributors and detractors are based on performance relative to the fund’s benchmark.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of Columbia Management Group, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other Columbia Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security or sector.
There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein.
Columbia Management Group, LLC (“Columbia Management”) is the investment management division of Bank of America Corporation. Columbia Management entities furnish investment management services and products for institutional and individual investors. Columbia Funds are distributed by Columbia Management Distributors, Inc., member FINRA and SIPC. Columbia Management Distributors, Inc. is part of Columbia Management and an affiliate of Bank of America Corporation. |