4th Quarter 2013
While broad U.S. equity markets finished 2013 with a strong surge, capping one of the best years in two decades, real estate investment trusts (REITs) continued to face the perceived headwinds of rising interest rates. The Fund’s FTSE/NAREIT All Equity REIT Index benchmark posted a slight loss during the quarter, compared with a more than 10% rise in the broad market S&P 500 Index. After outpacing the broader equity market the past several years, REITs struggled against the upward move in the 10-year U.S. Treasury yield sparked by Federal Reserve comments in late May.
REITs have exhibited a history of performing poorly at the onset of interest rate increases—reflecting the presumption that higher interest rates will translate to higher capitalization-rates, and thus lower net asset values (NAV) for commercial real estate, and higher cost of capital generally. Through year-end, scant evidence of higher cap-rates has manifested in the transactions market. Meanwhile, REITs continued to capture highly competitive rates on incremental borrowing and refinancing. In the near term, REITs tend to trade in sympathy with rate “fears.” Over longer periods, however, durable business models as well as visible cash flow and dividend growth tend to preserve the intrinsic value thesis, allowing REITs to thrive. We also note, that interest rates appear to be rising in part due to rising conviction that the U.S. economy is expanding—a constructive underpinning for high quality commercial real estate by preserving rental streams and property fundamentals overall.
We’re still forecasting solid cap-weighted growth in funds from operations (FFO) for REITs in 2014, on the heels of a strong 2013. This growth should support another year of dividend growth. The sector traded at a reasonable discount to net asset value (NAV) as of year-end, remaining well within the 10% premium/discount bandwidth typical of the sector the past 20 years. Considering these parameters, stable internal growth potential (high occupancy levels and recovering rent levels), and visible external acquisition and development pipelines for many REITs, we believe the sector remains fairly valued.
The Fund performed essentially in line with its benchmark during the fourth quarter, and modestly lagged for the full year. Top contributors to relative performance during the quarter came from holdings in cell tower owner American Tower, timber landlord Weyerhaeuser, and Hyatt Hotel, while laggards included timber REIT Rayonier and Health Care REIT.
Harrison Street Securities
As of December 31, 2013, American Tower comprised 0.00% of the portfolio's assets, Weyerhaeuser – 5.47%, Hyatt Hotels – 3.12%, Rayonier – 2.35%, and Health Care REIT – 5.37%.
Note: The Fund is classified as non-diversified and may be more susceptible to risk than funds that invest more broadly. In addition, REITs may decline from deteriorating economic conditions, changes in the value of the underlying property, and defaults by borrowers. Small- and mid-cap equities are considered riskier than large-cap equities due to greater potential volatility and less liquidity.
Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.