Global Relative Real Estate Values
Commercial real estate securities are a $2 trillion investing
opportunity. However it also requires an understanding of underlying
property markets as well as the corporate capital structure and
management that lead these companies. Joe Rodriguez and Darin
Turner lead a team of managers and analysts to identify securities
and companies around the world that they believe offer superior
relative values.
What is the history of the company and the fund?
Invesco Real Estate has been investing in commercial real estate for institutional
investors since 1983. The firm oversees over $50 billion in real estate investments
around the globe. The Invesco Global Real Estate Income Fund was launched in
2002 and now has $1 billion under management as of March 30, 2013. The fund
invests in commercial real estate companies and related commercial real estate fixed
income securities.
Unlike traditional real estate funds, we not only invest in Real Estate Investment
Trusts (REITs) but also in debt securities that are linked to real estate. Since the
financial crisis of 2007 and 2008, we realized that there are inefficiencies between
equities and fixed income tied to commercial real estate.
We strive to provide equity-like returns with less volatility and a higher yield profile.
In commercial real estate investing there are certain risk-adjusted opportunities
when you have the capability to move within the capital structure between debt and
equity.
In 2011, we expanded the fund’s investment mandate from only domestic to
global real estate securities to take advantage of the economic growth in other parts
of the world and for the relatively attractive income stream that can be found outside
U.S. markets.
What are the advantages of relative value based investment strategy?
Over the last three to four years, the volatility of the capital markets has led to
certain periods when equities are in favor and other times fixed income. This fund is
particularly well positioned for the current environment because we look across the
entire capital structure in the real estate sector including both equity and debt. On a
daily basis, we are making a risk-adjusted return assessment of what is available in
the marketplace.
As an example, when the market gets potentially too positive about the equity
side of the equation, diminishing the potential for additional gains, we move into fixed
Joe Rodriguez, Jr. is managing director and head of
global real estate securities at Invesco Real Estate,
where he oversees all phases of the unit, including
securities research and administration. Mr. Rodriguez
began his investment career in 1983 and joined
Invesco Real Estate, the Dallas-based investment
management affiliate of Invesco Advisers, Inc., in
1990. He has served on the editorial board for the
Financial Times Stock Exchange National Association
of Real Estate Investment Trusts (FTSE NAREIT),
as well as the editorial board of the Institutional Real
Estate Securities newsletter. He is a member of
the National Association of Business Economists,
American Real Estate Society and the Institute of
Certified Financial Planners. He has also served as
adjunct professor of economics at The University of
Texas at Dallas.
Darin Turner is a portfolio manager and member
of the Real Estate Securities Portfolio Management
and Research Team with Invesco Real Estate.
His current duties involve evaluating structured
real estate securities with a focus on fixed-income
instruments such as commercial mortgage-backed
securities, corporate debt and corporate preferred
stock. Mr. Turner also provides tenant and credit
quality analysis, capital structure analysis and debt
pricing analysis for equity portfolios. Mr. Turner
joined Invesco in 2005 as an acquisitions analyst for
direct property investments and later served as an
associate portfolio manager for Invesco Real Estate.
He has been in the financial industry since 2003 and
previously was a financial analyst in the corporate
finance group at ORIX Capital Markets.
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income. The fund is designed to take advantage of relative
values in the sector by investing in any part of the capital
structure and providing a relatively lower volatility profile.
This is the type of daily rebalancing that an individual cannot
easily perform without certain resources and expertise.
We have a unique capability in that we are in essence
“local” investors because we have a large professional real
estate staff in 17 offices around the globe. We are in so
many markets because real estate requires an on the ground
knowledge of property valuations and risks. Additionally, you
also have to be able to assess investments across markets
to identify the best relative value opportunities.
What is your investment philosophy?
Long term we are looking for a return that is consistent
with owning a broadly diversified portfolio of real estate equities
with less volatility. Our goal is not necessarily to achieve the
highest returns, but we seek to deliver more consistent and
less volatile returns with a higher dividend yield than an all
equity portfolio.
Our investment process is a three-step process.
The first step is the allocation decision of equity versus
debt. This decision drives the performance as it relates to
lower-volatility type returns. When we are looking at allocating
between equity and debt, there are multiple inputs that go into
that decision. Two important factors include expectations on
economic growth and expectations of real estate fundamentals
as they relate to occupancy improvements, cash flow growth,
and other property metrics we track.
Another factor is the pricing in the real estate equity and
debt markets. We regularly evaluate return expectations implied
by the markets to evaluate whether there is sufficient reward
for accepting the additional volatility normally associated with
equity investing, and if this is not present, we normally tend
to emphasize debt over equity. Conversely, when the market
is overly pessimistic regarding property growth expectations
and there is a return premium associated with taking additional
risk, we tend to increase our exposure to real estate equity.
T he second step is our security selection process. Within
our equity and debt allocations, we want to make sure we are
getting the best securities for the best price. We view ourselves
as a fundamental real estate manager and consequently
have a bottom-up security selection process. For both equity
and debt investments, this process is driven by real estate
underwriting and fundamental expectations. Through this
process, we underwrite the underlying assets of a portfolio and
analyze the capital structure or balance sheet risk. We then
decide on what are the best securities that provide the best
risk-adjusted return within real estate.
One of the ways we differ from a general fixed income
manager that invests in real estate as a sector in a broader
fund, is that we have a fundamental analysis process for both
debt and equity. The goal of this is to ensure we are focused
on the higher quality securities with better capital structures
and better expectations for real estate growth. Our collateral
underwriting includes the understanding of individual office
buildings, malls, warehouses, and apartments, as well as the
markets in which they are located. This is something that a
general fixed income manger may not have the ability to do.
The third step is focused on portfolio construction. This
part of the process is to ensure that the securities selection
process is not skewing the portfolio from our overall allocation
decision. We do also have certain metrics that we monitor
from a risk perspective within the portfolio such as the duration
of the debt holdings and allocations by region.
Our focus throughout our investment process is not on a
one-year return for the fund. We have a much longer-term real
estate view and therefore are looking at rolling three to five
year return expectations as relates to relative equity and debt
pricing.
What is your securities selection process?
We have a bottom-up selection process. We focus on
underwriting the underlying assets of companies to understand
the impact on cash flows or asset valuations on the equity side,
and how this translates to loss expectations for fixed income
investments.
Through this process we are seeking to provide
outperformance from our specific security weights within
the portfolio. The bottom-up security selection process also
generally drives our over or underweights to specific property
sectors or regions.
What global themes are driving real estate markets?
Real estate opportunities in the Asia-Pacific region are
driven by infrastructure needs. For example, China is going
through a rapid urbanization as people move from farmland
to cities. These emerging consumers are creating demand
for consumption of goods and services. Housing, retail, and
logistics have to be built to support that shift.
Although Japan is a developed market, we are still
witnessing a migration of multinational and domestic tenants
from older office buildings to newer construction that is
seismically superior with better electric power support. The
earthquake and tsunami that occurred in 2011 is still fresh
on everybody’s mind and due to growing power shortages,
backup power generation is a top tenant requirement. We
also see continued migration into the central Tokyo area,
creating more demand for housing and retail properties.
Australia is a developed and balanced market with a
modest growth outlook. Due to higher base interest rates,
there is still relatively attractive yields, creating some interesting risk-adjusted
investment opportunities. Across all property types in the U.S., there is a general
rebound as a recovering economy combined with a lack of new real estate supply
has created a positive fundamental environment. Broadly speaking, new construction
should be far below tenant demands for the next several years driving occupancy
rates higher and increasing rental rates.
Canada provides fairly similar fundamentals to the U.S. but potentially more
stable economic growth and slightly more attractive valuations. Additionally, the
currency will be potentially stronger long-term relative to the U.S. dollar.
Europe is likely a wait and see situation. We have a somewhat conservative
view and have been rather cautious generally owning only the best companies with
the better balance sheets in Europe. Although we would not say there are wholesale
opportunities throughout Europe, certain fundamental opportunities do look attractive.
For example, the U.K. based Commercial Mortgage-Backed Securities or CMBS
provides much higher yield opportunities when compared to the U.S. and can be
secured by ultra-premium locations of London office buildings.
Invesco Global Real
Estate Income Fund
Symbol ASRAX
CompanyInvesco
Website
www.invesco.com
Address
11 Greenway Plaza
Suite 1000
Houston, TX 77046-1173
Telephone 800-347-1919
Source: Company Documents
What is your investible universe?
Our investible universe is about $2 trillion in size ranging from real estate equity
and debt securities. A third of the market is eliminated through our fundamental ranking
process focused on underlying real estate fundamentals, balance sheet strength, and
management or borrower alignment.1
We are a diversified fund and focus heavily on risk control. We generally have between
150 and 225 different securities holdings, including common and preferred stock of
Real Estate Investment Trusts or Real Estate Operating Companies, Commercial
Mortgage-Backed Securities, and unsecured corporate debt.
How are these securities divided across the globe?
On the equity side, the universe is comprised of approximately 45% U.S. with
the next largest being Hong Kong at 12%. Japan and Australia also have a large
representation in the investable universe.
On the real estate debt securities side, about 80% of the marketplace is in the U.S.
Generally speaking, the U.S. fixed income market is much more mature and liquid,
than other regions globally.
What is your fundamental ranking process?
At a high level, for either debt or equity, our fundamental analysis involves scoring
all potential investments on a scale of one to 10. For us to be able to invest, the security
has to score a five or above. If at any time an investment that we own falls below a
five, it would be an automatic sell. In essence, we have our own quality rating for each
security in the real estate universe.
Our scoring is broken down into three segments. The first segment is focused on
the real estate market. Our proprietary real estate research sets the expectations of
growth at the property sector level based on supply and demand in specific markets
around the world. This research produces what our expectations are for occupancy
and for market rate growth in those areas.
The second part of the process relates to the actual real estate assets that either a
company or trust owns in those markets. As bottom-up real estate investors, we have
expectations for our analysts to go and see these properties and to have their own
opinion as to the position of those properties in the market.
These two segments comprise 60% of our fundamental ranking score. Over the
1 Source: Invesco Real Estate as of March 31, 2013
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About Ticker Q&A
Our research staff analyzes and selects
funds based on their consistency
in performance and durability of
investment style.
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long term we believe that market and underlying property
selection will drive the majority of performance. The remaining
40% is focused on balance sheets, management or borrower
incentives, and overall investment transparency which
will either be additive or dilutive to the real estate market
exposures.
Our process does have a quality bias. If you look at longterm real estate performance, it has been those companies
that have had the best assets in the most desirable markets
and better balance sheet that have outperformed.
Can you give two examples to explain your research process?
A UK based commercial mortgage-backed security
(CMBS) would be a good example to discuss from a debt
perspective. In the UK, CMBS is generally secured by two to
three properties, located centrally around London, which can
be backed by only one borrower.
These are relatively small pools, which gives us the
capability to actually underwrite the underlying property cash
flows and make a judgment on current and potential future
asset values. This process can be different from a more
general fixed income manager who may look at that same
London office CMBS trust and possibly view the concentration
risk as too high or be unable to underwrite the specific assets.
We actually prefer these smaller pools because we can
gain a better understanding of the collateral. Our real estate
expertise and knowledge of specific markets and assets allows
us to concentrate on those investments that we believe can
outperform.
Through the underwriting process, we are making our own
assumptions through market knowledge on what underlying
market rents are for these properties, what are expectations for
stabilized occupancy levels, what are average expenses, and
where we believe that property should be valued. This then
translates to a determination of true loan-to-value and debt
service coverage at the loan level.
Once we have an understanding of how the structure is
levered and what is the valuation of the property versus the
debt, we then can make a decision on where we want to be
in the capital structure of that CMBS transaction. This riskadjusted decision is driven by yield or total return expectations
versus the potential for loss.
From an equity standpoint, Ventas REIT Inc is another
good example of our applied research discipline. Ventas is a
healthcare related company that has a healthy balance sheet
with a long management track record. Recently, Ventas issued
a fixed income security in the form of preferred stock that
was priced at a yield 300 basis points higher than where the
unsecured corporate debt was trading.
After analyzing the total amount of leverage including the
new preferred stock, the additional risk added to their balance
sheet was not, in our view, significant enough to warrant such
a large pricing difference to the outstanding unsecured debt.
By investing in both equity and debt, we are able to find
securities that we feel, from a relative value perspective, are
underpriced compared to the rest of the capital structure
What drives your portfolio construction process?
Our overall goal is to provide the best risk-adjusted real
estate returns and also provide an attractive stream of income.
We do not necessarily tie ourselves to one benchmark and can
often deviate quite considerably from the more traditional allequity indices, such as FTSE EPRA/NAREIT Developed Real
Estate Index, because of our assessment of relative value
opportunities.
Over the long-term, we have been able to produce total
returns in-line with those equity benchmarks with less volatility,
although in any one specific year this performance can deviate
such as was the case in 2012. By analyzing real estate equity
versus debt opportunities, we continue to believe that we can
provide those competitive returns.
How do you define risk and what do you do to manage it?
There are two ways we define risk. One is the volatility of
the underlying securities and by extension, the fund. On this
measure, our goal is to deliver a fund that produces equity
market competitive returns with less volatility. During the
ten year period since the fund started in 2002, the fund has
delivered (with dividends reinvested) annualized performance
in excess of 10% with approximately 30% less volatility than
real estate equity benchmarks.
The other definition of risk relates to investing in securities
that may not be fundamentally strong. Our fundamental ranking
of each security and excluding those that fall below our quality
threshold of five on our rating scale, goes a long way toward
managing fundamental risks in the portfolio. We work very hard
to focus our efforts on owning the better securities within the
commercial real estate universe.
Our investment process is designed to efficiently and
continually incorporate new and changing real estate,
financial market, economic, company and other information
into the investment decision making process. Our method of
integrating fundamental and quantitative techniques enables
us to assess and quantify the impact of changing economics
and perceptions on securities pricing and relative value. By
definition, many market changes are unforeseen; however, our
investment methodology has a systematic process that allows
us to incorporate market changes. In addition, it also allows us
to test the potential portfolio impact of these market changes. T
Invesco Global Real Estate Income Fund Class A Shares
Average Annual Total Returns (%) as of March 31, 2013
Period
Max Load 5.50%
NAV
Inception (05/31/02)
9.88
10.45
Expense Ratios
% Net % Total
10 Years
11.32
11.95
Class A Shares
1.32
1.32
5 Years
5.17
6.36
3 Years
10.81
12.93
1 Year
9.40
15.76
Performance quoted is past performance and cannot guarantee comparable future results; current performance may be lower or higher.
Visit invesco.com/performance for the most recent month-end performance. Performance figures reflect reinvested distributions and
changes in net asset value (NAV). Investment return and principal value will vary, and you may have a gain or a loss when you sell
shares. On March 12, 2007, the fund reorganized from a closed-end fund to an open-end fund. Class A share returns prior to that date
are those of the closed-end fund’s Common shares and include the fees applicable to Common shares. Class A share performance and
the closed-end fund’s Common share performance reflects any applicable fee waivers or expense reimbursements. Fund performance
was positively affected by a temporary 2% fee on redemptions that was in effect from March 12, 2007, to March 12, 2008. Without income
from this temporary fee, returns would have been lower. Had fees not been waived and/or expenses reimbursed currently or in the past,
returns would have been lower. Returns less than one year are cumulative; all others are annualized.
Top Holdings % of Total Net Assets (as of March 31, 2013)
Essex Property Trust Inc.
1.51
Health Care REIT Inc. (6.75%)
1.38
CBL & Associates Properties Inc.
1.22
British Land Co.
1.08
Hospitality Properties Trust
1.03
Senior Housing Properties Trust
1.00
Proul 1 A (0) 08/25/16
1.00
Health Care Realty Trust Inc.
1.00
Stockland
0.97
Public Storage Inc.
0.94
Fund Beta
Fund Standard Deviation
as of March 31, 2013
3 Years
0.47
8.74
5 Years
0.73
21.44
Holdings are subject to change and are not buy/sell recommendations.
About risk
To the extent the fund invests a greater amount in any one sector or industry, there is increased risk to the fund if conditions adversely
affect that sector or industry.
An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering
the issuer’s credit rating.
The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in
which those investments are traded.
Debt securities are affected by changing interest rates and changes in their effective maturities and credit quality.
An investment in emerging market countries carries greater risks compared to more developed economies.
The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political andeconomic instability,
and foreign taxation issues.
Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds
fluctuate more than those of high quality bonds and can decline significantly over short time periods.
Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
The fund may hold illiquid securities that they may be unable to sell at the preferred time or price and could lose its entire investment
in such securities.
The investment techniques and risk analysis used by portfolio managers may not produce desired results.
Mortgage- and asset-backed securities are subject to prepayment or call risk, which is the risk that the borrower’s payments may be
received earlier or later than expected due to changes in prepayment rates on underlying loans. Securities may be prepaid at a price less
than the original purchase value.
Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property
values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small- and mid-cap
companies, and their shares may be more volatile and less liquid.
Short sales may cause the fund to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price
of the security can increase, the fund’s exposure is unlimited.
Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be
illiquid or restricted as to resale.
Fluctuations in the values of synthetic securities may not correlate perfectly with the instruments they are designed to replicate.
Synthetic securities may be subject to interest rate changes, market price fluctuations, counterparty risk and liquidity risk.
Risks of collateralized loan obligations include the possibility that distributions from collateral securities will not be adequate to make interest
or other payments, the quality of the collateral may decline in value or default, the collateralized loan obligations may be subordinate to
other classes, values may be volatile, and disputes with the issuer may produce unexpected investment results.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the
investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors
should ask their advisers for a prospectus/summary prospectus.
Beta (cash adjusted) is a measure of relative risk and the slope of regression. Standard deviation measures a
fund’s range of total returns and identifies the spread of a fund’s short-term fluctuations. Duration is a measure of the sensitivity of the
price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. A
basis point is the movement of interest rates or yields expressed in hundredths of a point.
The fund holdings are organized according to the Global Industry Classification Standard, which was developed by and is the exclusive
property and service mark of MSCI Inc. and Standard & Poor’s.
The FTSE EPRA/NAREIT Developed Real Estate Index is an unmanaged index considered representative of global real estate
companies and REITs. Unmanaged index returns do not reflect any fees, expenses, or sales charges. An investment cannot be made
directly in an index.
Diversification does not guarantee a profit or eliminate the risk of loss.
Reprinted with permission from Ticker.com. While Invesco believes the information presented in this article to be reliable and current,
Invesco was not involved in writing the article and cannot guarantee its accuracy. Further circulation, disclosure, or dissemination of
all or any part of this material is prohibited. This article is provided for educational & informational purposes only and is not an offer of
investment advice or financial products. The views and opinions expressed are those of the portfolio manager at the time of publication
and are subject to change. There is no guarantee that these views will come to pass. All material presented is compiled from public sources
believed to be reliable and current, but accuracy cannot be guaranteed. This does not constitute a recommendation of the suitability of
any investment strategy for a particular investor and should not be relied upon as the sole factor in an investment making decision. As
with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. Past
performance is not indicative of future results.
Invesco Distributors, Inc. and Invesco Advisers, Inc. are wholly, owned indirect subsidiaries of Invesco Ltd.
All data provided by Invesco unless otherwise noted.
For US use only.
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