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By Andrew Gogerty | 03-17-2010 04:05 PM

Can Real Estate Funds Keep Building on Their Rally?

First American Real Estate Fund's Jay Rosenberg on the drivers behind real estate funds' recent performance and the fundamentals and outlook today.

Andrew Gogerty: Hi, I'm Andrew Gogerty with Morningstar, and today we're talking domestic real estate funds. The group went on a tremendous rally in 2009. From April to December, the group gained nearly 87%, more than doubling the S&P 500 Index's 42% rise.

Coming into 2010 after a short breather, the category is back on a tear, gaining almost 9% through mid-March, again doubling the S&P's comparative 4.5% gain. But the most important question is really where do we go today and what's the state of the fundamentals.

Joining me today is Jay Rosenberg, co-manager of the First American Real Estate Fund. Jay, thank you for joining me today.

Jay Rosenberg: Thanks for having me.

Gogerty: One of the things, obviously the rally was tremendous last year, especially in the middle part of the year. I wonder of you can comment on the primary drivers of that rally, especially from a total return perspective.

Rosenberg: The rally last year was really predicated on a change in the cost of capital and availability of capital. The industry was really re-capitalized. We went into the year with many of the stocks being priced for bankruptcy, essentially the present value of their cash flow until their next big debt expiration, and then zero residual value.

That was way too bearish, way to draconian. And when these companies started showing access to capital, starting with Simon Properties Group and many of the other companies issuing capital between March and the middle of the summer last year, we saw a huge rally as these companies proved to have access to the capital market, both debt and equity.

Gogerty: How about the change in terms of other fundamentals? Obviously REITs and real estate operating companies, leverage is the name of the game. But have fundamental operations changed, or was it really just that access to capital that really drove the optimism?

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