Mill Creek Capital Perspectives on REITS

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Investing in Real Estate Investment Trusts

Summary Mill Creek Perspectives

Real Estate Investment Trusts (REITs) offer investors exposure to a diversified portfolio of professionally managed commercial real estateproperties.

Unlike investing directly in real estate, REIT investors benefit from the greater transparency of publicly traded REITs, the ability of REITs toaccess both the debt and equity markets to finance real estate purchases, and the daily liquidity of REIT shares.

REITs typically pay higher dividend yields than most other types of equity securities, owing to their unique tax structure and to requirementson the amount of REIT income which must be distributed annually to shareholders.

Investment portfolios may benefit from the addition of REIT securities to their mix of assets because of their potential for producing returnsthat are uncorrelated to those of other asset classes. In recent periods, however, returns on REITs have been more tightly correlated to stockmarket returns than they have been to returns on commercial real estate.

REITs have several potential disadvantages about which investors should be aware. At times, they can become overvalued and offer poorexpected future returns. REITs are also reliant on the capital markets for funding, and therefore can become volatile and may decline in valuewhen other asset classes are also suffering from periods of poor-performing financial markets.

This publication has been prepared by Mill Creek Capital Advisors, LLC (MCCA). The publication is provided for information purposes only. The information contained in thispublication has been obtained from sources that MCCA believes to be reliable, but MCCA does not represent or warrant that it is accurate or complete. The views in this publication arethose of MCCA and are subject to change, and MCCA has no obligation to update its opinions or the information in this publication. While MCCA has obtained information believed tobe reliable, neither MCCA nor any of its respective officers, partners, or employees accept any liability whatsoever for any direct or consequential loss arising from any use of this publicationor its contents.


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REITs have been successful at convincing lenders to provide themwith longer-term financing at attractive rates, and as a result they haveincreased their financial leverage over time (even as US corporations asa whole have decreased their borrowing). The additional borrowingmeans that REIT leverage is now at all-time highs. To us, thisindebtedness is worrisome, and it makes REITs look less attractive incomparison to other types of U.S. corporations (which have lessenedtheir risks in the event of tough financing markets).

Conclusion

REITs can offer investors an attractive way to gain exposure to adiversified, liquid, professionally managed portfolio of commercial realestate assets. Historically, investors have been mostly well-served to haveplaced a portion of their portfolio in REITs due to the high returns onand moderate correlation of these securities to other asset classes. Forinvestors that desire a constant stream of dividend income, REITs canbe a viable investment alternative due to the low levels of REIT earnings

variability and dividend payments. However, we believe that investorsshould be prudent, investing in REITs only when valuations areattractive relative to other asset classes and not just on the basis of anattractive current yield. We will continue to actively monitor REITs asan asset class, and look for opportunities to invest in them on behalf of

our clients when REITs appear to offer attractive relative values versusother comparably risky asset classes.

Mill Creek Capital Advisors, LLCFebruary 2012

Data used in the preparation of this report was drawn from a variety of sources,including Bloomberg Finance LP, NAREIT, and Zephyr Associates.

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Since 1995 Last 5 Years

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REITs vs U.S. Equities - Growth Rates

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Mill Creek Capital Perspectives on REITS