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The relationship between interest rates and REITs is simple. One goes up, the other goes down. Right?

Not so, says Amos Rogers, managing director of the $136 million


SSgA Tuckerman Active REIT fund. He contends that the link isn't as ironclad as investors seem to think. Rogers says the recent correlation is a short-term phenomenon tied to investors chasing yield rather than watching improving REIT fundamentals.

So why should investors trust Rogers and not the conventional wisdom? One reason might be the success of his fund. Over the past five years, Rogers' fund has been up 18.7% annually, 21 percentage points better than the

S&P 500


checked in with Rogers to see if there are any other reasons why investors should take his word when it comes to REITs -- and rates.

When interest rates dropped last month, REITs regained a lot of what they lost in January. What's the true relationship between interest rates and REITs?

Over the long term, there is not a very high correlation between the two. You need to desegregate short term and long term, because we are going through a period right now where the market has a different characteristic. We've had five years of good performance, so investors are wary of a downturn. And we have a lot of nondedicated investors who came into the market looking for yield, and as a result, the REIT market has become hypersensitive to all macroeconomic news, including interest rates.

Also, with regard to interest rates and real estate, there is a more fundamental link which goes back to why interest rates increase. Interest rates increase because the economy is improving and there is a focus on managing inflation. Improving economic and inflationary periods have both traditionally been good periods for real estate, because it benefits from rising prices and rising rental rates. And real estate has traditionally been a good hedge against inflation. So when you get beyond the short-term rate movement and look at what's causing rates to rise, that's typically a good sign for the real estate market.

Where are REIT valuations right now?

Valuations in the REIT market over the past 12 to 18 months have gotten stretched between their long-term average and historical peak valuation levels. In April 2004, the market sold off in large part because of concerns over valuation. In January 2005, after the REIT market had been up 30% over 2004, there were concerns about valuation. And those concerns combined with portfolio rebalancing led to the selloff in REITs in the first quarter.

So are valuations more reasonable now?

Given the selloff in January, combined with increasing prices in the direct real estate market, which are having upward pressure on REIT net asset values, we are seeing much more reasonable valuations in the marketplace today.

How are the fundamentals of the REIT market?

We believe that the fundamentals in the real estate market bottomed in the midpoint of 2004 after being depressed for two to three years. Since then, we are seeing real estate fundamentals slowly improving along with the general economy.

We expect to see fundamentals continue in a positive direction for the next two to three years. The rate of that improvement depends to a large extent on the improvement in the economy, especially job growth.

How does the craze in residential real estate carry over to the REIT world?

It's a good idea for investors to segregate the single-family housing market and the commercial real estate market which includes office, retail industrial and apartments. Those are two very different markets.

That said, the low-interest environment has fueled the home-buying marketplace. And in turn, that's had a negative impact on the apartment rental market. The other big factor that impacts the apartment rental market is job growth. As the economy continues to expand and as job growth increases and as interest rates continue to rise with an improving economy, that should push more people into the workforce, which means more people will be renting apartments. And that means less people will be buying homes, because they will be less affordable. Basically, the number of apartment renters will increase as it becomes too expensive to buy a home. But that's a gradual process.

Which cities are hot in commercial real estate?

When you talk about geography and cities, you have to be careful, because the market is different for different product segments. However, it's fair to say that the markets that have done better recently are those with high barriers to entry. In other words, it's those markets where it's more difficult to build or more difficult to provide new product. As a result, those have traditionally been your coastal markets -- the East Coast, the Northeast and the California coastal markets.

In contrast, the lower-barrier-to-entry markets, like the Sun Belt markets, have lagged.

OK. So what are some of your favorite names?

On the apartment side, two of the names we like in the high-barrier-to-entry coastal markets are

AvalonBay Communities



Archstone-Smith Trust


. These are well-managed companies with high-quality portfolios.

On the office side, the names that we like include

Boston Properties



S.L. Green



Corporate Office Properties


. Once again, these are all office properties with a big focus on high barriers to entry, high business markets -- like Washington, D.C. and New York -- that are leading the recovery.

The old saying in real estate is that you first look for location, location, location. What do you look for in a REIT?

We try to stay fully invested across all the property sectors. And where we try to add value is by trying to identify the best-performing stocks in each of the sectors rather than making a big bet in any one sector. So we try and stay fully diversified to keep our market risk low. In addition to all the quantitative metrics that we use, we focus on three fundamental metrics: strong management teams, a competitive advantage relative to their peer group, and thirdly, we look for companies with a demonstrated track record.