Chicago, IL – October 23, 2009 – Zacks.com announces the latest Industry Outlook. Today, Zacks Equity Research discusses the REITs sector, including American Capital Agency Corp. (AGNC), Fannie Mae (FNM), Freddie Mac (FRE), Vornado Realty Trust (VNO) and Simon Property Group Inc. (SPG).

The credit freeze will have a positive effect on commercial real estate down the road; new office, apartment and retail construction has slowed considerably, which will benefit owners in a couple of years. Many companies that we cover have stopped all-new construction.

In this environment, we like well-capitalized companies that have adequate liquidity and manageable near-term debt maturities. Currently, we are bullish on American Capital Agency Corp. (AGNC), a mortgage REIT that invests exclusively in agency securities for which the principal and interest payments are guaranteed by U.S. government agencies like Ginnie Mae, Fannie Mae (FNM) and Freddie Mac (FRE). During the second quarter of 2009, American Capital reported net spread of 3.66% with 39.8% return on equity (ROE), and is one of the few companies to have increased the dividend.

Another stock worth mentioning is Vornado Realty Trust (VNO), the largest publicly traded office REIT in the New York region concentrating on Class A office properties. The core properties of Vornado are still performing at a high level, maintaining strong occupancies and increasing rents in most property formats. We believe this puts the company well ahead of many competitors, and warrants upside potential.

We would also like to mention Simon Property Group Inc. (SPG), the largest publicly traded retail real estate company in North America, with assets in almost all retail distribution channels. The geographic and product diversity of the company insulates it from market volatility to a great extent and provides a steady source of income. Furthermore, Simon Property’s international presence gives it a more sustainable long-term growth story than its domestically focused peers.

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In what has been a volatile year, equity REITs gained approximately 29% (total return FTSE NAREIT Index) in the second quarter after falling 32% in the first quarter. So far in October, equity REITs are down about 1%; the worst performing sectors in October have been Self Storage (- 3.4%), Retail (-1.6%), Industrial/Office (-1.6%), and Residential (-0.8%).

OPPORTUNITIES

Many REITs are still trading at discounts to NAV (net asset value), traditionally a good "buy" signal. Over the past seven or so years, REITs have traded near or in excess of NAV.

With dividend cuts and share price gains, the average yield for equity REITs during the third quarter was about 4%. Although yields have exceeded that of the 10-year Treasury, the spread has narrowed considerably over the past quarter. Most companies have been raising cash through asset sales and equity financing, with the proceeds being used to pay down debt.

The credit freeze will have a positive effect on commercial real estate down the road; new office, apartment and retail construction has slowed considerably, which will benefit owners in a couple of years. Many companies that we cover have stopped all-new construction.

In this environment, we like well-capitalized companies that have adequate liquidity and manageable near-term debt maturities. Currently, we are bullish on American Capital Agency Corp. (AGNC), a mortgage REIT that invests exclusively in agency securities for which the principal and interest payments are guaranteed by U.S. government agencies like Ginnie Mae, Fannie Mae (FNM) and Freddie Mac (FRE). During the second quarter of 2009, American Capital reported net spread of 3.66% with 39.8% return on equity (ROE), and is one of the few companies to have increased the dividend.

Another stock worth mentioning is Vornado Realty Trust (VNO), the largest publicly traded office REIT in the New York region concentrating on Class A office properties. The core properties of Vornado are still performing at a high level, maintaining strong occupancies and increasing rents in most property formats. We believe this puts the company well ahead of many competitors, and warrants upside potential.

We would also like to mention Simon Property Group Inc. (SPG), the largest publicly traded retail real estate company in North America, with assets in almost all retail distribution channels. The geographic and product diversity of the company insulates it from market volatility to a great extent and provides a steady source of income. Furthermore, Simon Property's international presence gives it a more sustainable long-term growth story than its domestically focused peers.

WEAKNESSES

REITs still depend on access to capital to fund growth, and with the credit markets still not fully back to normal, it is difficult to raise money for new developments/acquisitions. In this scenario, most REITs are raising capital through property level debt, dividend reductions and equity offerings. Although both debt and equity financings provide the much-needed cash infusion, they could potentially burden an already leveraged balance sheet and/or dilute earnings. Property level debt is also harder to obtain and more expensive as commercial real estate prices continue to remain under pressure.

Fundamentals are declining in many suburban office markets as corporate expansion continues to slow. More and more corporations are putting off leasing decisions until the economy recovers. Recent employment trends are also not encouraging as the U.S. economy continues to shed jobs at a rapid pace. To date, the U.S. has lost about 7.2 million jobs since the start of recession in December 2007. The national unemployment rate has surged to 9.8%. As the U.S. economy struggles with the economic downturn, REITs will have trouble holding tenants and leasing new space.

Given the market uncertainties, we are bearish on Developers Diversified Realty Corporation (DDR), which is primarily engaged in owning and leasing shopping centers across the U.S., Puerto Rico, Brazil, Russia and Canada. The current recession has led to increased tenant bankruptcies, which in turn have led to a decline in occupancy and an increase in vacancy rates. The possibility of store closings at many Developers Diversified centers further adds uncertainty to the earnings, and it might have to re-let large "big-box" spaces at significantly lower rents in a very tough leasing environment.

We would also avoid Post Properties, Inc. (PPC), an apartment REIT relying heavily on low-barrier markets such as Atlanta, Dallas, Houston, Orlando and Tampa. We think the company will have a difficult time continuing to raise rents in a faltering economy, and expect flat rental rates and negative same-store revenue growth in 2009. Zacks Investment Research

In what has been a volatile year, equity REITs gained approximately 29% (total return FTSE NAREIT Index) in the second quarter after falling 32% in the first quarter. So far in October, equity REITs are down about 1%; the worst performing sectors in October have been Self Storage (- 3.4%), Retail (-1.6%), Industrial/Office (-1.6%), and Residential (-0.8%).

OPPORTUNITIES

Many REITs are still trading at discounts to NAV (net asset value), traditionally a good "buy" signal. Over the past seven or so years, REITs have traded near or in excess of NAV.

With dividend cuts and share price gains, the average yield for equity REITs during the third quarter was about 4%. Although yields have exceeded that of the 10-year Treasury, the spread has narrowed considerably over the past quarter. Most companies have been raising cash through asset sales and equity financing, with the proceeds being used to pay down debt.

The credit freeze will have a positive effect on commercial real estate down the road; new office, apartment and retail construction has slowed considerably, which will benefit owners in a couple of years. Many companies that we cover have stopped all-new construction.

In this environment, we like well-capitalized companies that have adequate liquidity and manageable near-term debt maturities. Currently, we are bullish on American Capital Agency Corp. (AGNC), a mortgage REIT that invests exclusively in agency securities for which the principal and interest payments are guaranteed by U.S. government agencies like Ginnie Mae, Fannie Mae (FNM) and Freddie Mac (FRE). During the second quarter of 2009, American Capital reported net spread of 3.66% with 39.8% return on equity (ROE), and is one of the few companies to have increased the dividend.

Another stock worth mentioning is Vornado Realty Trust (VNO), the largest publicly traded office REIT in the New York region concentrating on Class A office properties. The core properties of Vornado are still performing at a high level, maintaining strong occupancies and increasing rents in most property formats. We believe this puts the company well ahead of many competitors, and warrants upside potential.

We would also like to mention Simon Property Group Inc. (SPG), the largest publicly traded retail real estate company in North America, with assets in almost all retail distribution channels. The geographic and product diversity of the company insulates it from market volatility to a great extent and provides a steady source of income. Furthermore, Simon Property's international presence gives it a more sustainable long-term growth story than its domestically focused peers.

WEAKNESSES

REITs still depend on access to capital to fund growth, and with the credit markets still not fully back to normal, it is difficult to raise money for new developments/acquisitions. In this scenario, most REITs are raising capital through property level debt, dividend reductions and equity offerings. Although both debt and equity financings provide the much-needed cash infusion, they could potentially burden an already leveraged balance sheet and/or dilute earnings. Property level debt is also harder to obtain and more expensive as commercial real estate prices continue to remain under pressure.

Fundamentals are declining in many suburban office markets as corporate expansion continues to slow. More and more corporations are putting off leasing decisions until the economy recovers. Recent employment trends are also not encouraging as the U.S. economy continues to shed jobs at a rapid pace. To date, the U.S. has lost about 7.2 million jobs since the start of recession in December 2007. The national unemployment rate has surged to 9.8%. As the U.S. economy struggles with the economic downturn, REITs will have trouble holding tenants and leasing new space.

Given the market uncertainties, we are bearish on Developers Diversified Realty Corporation (DDR), which is primarily engaged in owning and leasing shopping centers across the U.S., Puerto Rico, Brazil, Russia and Canada. The current recession has led to increased tenant bankruptcies, which in turn have led to a decline in occupancy and an increase in vacancy rates. The possibility of store closings at many Developers Diversified centers further adds uncertainty to the earnings, and it might have to re-let large "big-box" spaces at significantly lower rents in a very tough leasing environment.

We would also avoid Post Properties, Inc. (PPC), an apartment REIT relying heavily on low-barrier markets such as Atlanta, Dallas, Houston, Orlando and Tampa. We think the company will have a difficult time continuing to raise rents in a faltering economy, and expect flat rental rates and negative same-store revenue growth in 2009. Zacks Investment Research

These have to be the most exciting ETF filings to hit the Securities and Exchange Commission in years.

In case you missed the story, PowerShares filed to launch two new ETFs targeting the MBS market. Unlike other MBS ETFs, these products will not buy mortgages underwritten by federal agencies like Fannie Mae and Ginnie Mae. Those mortgages come with either an explicit or implicit federal guarantee, and are as boring as dirt.

Instead, the PowerShares ETFs will buy so-called "non-agency securities": MBSs that don't have the backing of the federal government. These are the securities that we read about in the papers; the ones that are illiquid and difficult to price, and that are causing banks so many problems.

The PowerShares ETFs will be available in two flavors: Prime, focused on mortgages backed by good credit; and Alt-A, which are backed by weaker credits.

PowerShares CEO Bruce Bond minced no words in the press release announcing the filing. 

"We believe that various economic factors have converged to push the prices of many Prime and Alt-A residential mortgage-backed securities well below their fundamental values," said Bruce Bond, president and CEO of Invesco PowerShares. "We are hopeful that these ETFs will provide access and transparency into these markets along with some of the much needed additional liquidity originally intended by the TARP."

The quote is a great one, and surprising.

In the first half, Bond comes straight out and says that he thinks this market is fundamentally undervalued. By proxy, he's saying these ETFs will be great buys when they come to market. I happen to agree with him, but it's rare to see such direct language coming from a product issuer.

The second half of the quote is even more interesting: Bond suggests that these ETFs, if successful, could actually help financial recovery efforts by providing liquidity and transparency into the frozen MBS market.

I happen to agree with him here, too. The biggest problem with these markets is that they haven't been functioning properly. Liquidity has disappeared, price discovery has halted and banks have had to guess at the value of these securities. There's been a buyer's strike, as all the people who could bid on these securities—institutions, hedge funds, etc.—have been locked out of the market because they faced massive deleveraging and have no capital to put at risk.

Now, people like me—people who have been watching this market from the sidelines—will have the means to jump in, add liquidity, provide price discovery and make a market. It's a beautiful thing.

There is a risk here: Many investors do not understand how the MBS market works, and may not understand where these ETFs fit in a portfolio. PowerShares has a duty to provide education and research into the MBS space so that investors and advisors can understand what they are buying. But assuming they do that, these ETFs strike me as a home run.