Commercial Mortgage-Backed Securities (CMBS) are fixed-income securities that are backed by loans on things like office buildings, malls, apartment buildings, retail properties and hotels. The underlying asset in a CMBS is a pool of real estate loans. The cash flow from the underlying loans comes from principal and interest payments. For investors who have a positive view on the commercial real estate market, CMBS may be a way to gain exposure with potentially less risk.

CMBS structure

CMBS sit highest in the real estate capital structure, which means they are the first lien holders on the underlying property assets and first payees in the case of default. They are structured in classes — or tranches — representing different levels of risk and return.

• Senior ranking classes receive a lower coupon, but take on less risk of non-payment in the event of default by a loan within the pool.
• Lower ranking classes receive a higher coupon, and in return, bear a greater risk of non-payment in the event that one of the loans in the pool defaults.

Our class or tranche selection varies based on the market environment, the underwriter as well as the specifications of the underlying loans and properties/collateral.

Interpreting CMBS holdings

Securities such as MSC 2007 T27 AJ (5.823) 06/11/42 listed among Invesco Global Real Estate Income Fund's top holdings are CMBS and denote the following information:

• Underwriter. The first portion of the name (Morgan Stanley Capital in this case)
• Year of issuance. 2007
• Identification. Letters and numbers used to differentiate CMBS issued in the same year (T27)
• Tranche. AJ (Junior AAA)
• Interest rate. 5.823%
• Final distribution date. Anticipated final distribution date of the entire trust (June 11, 2042)

Compelling income and capital appreciation opportunities

When compared to other types of fixed income securities with comparable credit quality, CMBS offer compelling yield. As of Dec. 31, 2012, CMBS BBB rated yielded 5.1% compared with REIT corporate debt BBB rated at 4.6% and non-REIT corporate debt BBB rated 4.8%.¹ CMBS represent a significant portion, about 67%, of the public US and non-US real estate fixed income market.

In the past, CMBS spreads to treasuries were quite low with little differentiation between CMBS credit qualities. As a result of the financial crisis, spreads widened significantly — especially for the lower-quality CMBS. This has presented capital appreciation opportunities as spreads have, and continue to, tighten from those high levels reached during the financial crisis. CMBS AAA spreads have tightened significantly, but still remain above pre-2007 levels. As the market environment has improved, we have increasingly dipped into lower-quality CMBS to increase yield and capital appreciation opportunities.

Potential benefits

The demand for CMBS has strengthened as investors intensify their search for income in a lowyielding environment. CMBS serve a number of different functions within the Invesco Global Real Estate Income Fund and offer investors the following key benefits:

• Lowest credit risk in the event of default
• Flexibility to fine tune risk/reward profile
• Higher yield potential
• Larger investment universe

^{1 Source: Invesco Real Estate}

About risk

To the extent the fund invests a greater amount in any one sector or industry, the fund's performance will depend to a greater extent on the overall condition of the sector or industry, and there is increased risk to the fund if conditions adversely affect that sector or industry.
The issuer of instruments in which the fund invests 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 the fund's foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.
The fund may invest in debt securities that are affected by changing interest rates and changes in their effective maturities and credit quality.
Securities issued by foreign companies and governments located in developing or emerging countries may be affected more negatively by inflation, devaluation of their currencies, higher transaction costs, delays in settlement, adverse political developments, the introduction of capital controls, withholding taxes, nationalization of private assets, expropriation, social unrest, war or lack of timely information than those in developed countries.
The fund's foreign investments may be affected by changes in the foreign country's exchange rates; political and social instability; changes in economic or taxation policies; difficulties when enforcing obligations; decreased liquidity; and increased volatility. Foreign companies may be subject to less regulation resulting in less publicly available information about the companies.
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 in response to company, political, regulatory or economic developments. Values of junk bonds 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 it is 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.
The fund may invest in mortgage- and asset-backed securities. These securities are subject to prepayment or call risk, which is the risk that payments from the borrower may be received earlier or later than expected due to changes in the rate at which the underlying loans are prepaid. Faster prepayments often happen when interest rates are falling. As a result, the fund may reinvest these early payments at lower interest rates, thereby reducing the fund's income. Conversely, when interest rates rise, prepayments may happen more slowly, causing security to lengthen in duration. Longer duration securities tend to be more volatile.
Investments in real-estate related instruments may be affected by economic, legal, cultural, environmental or technological factors that affect property values, rents or occupancies of real estate related to the fund's holdings. 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. The value of investments in real estate related companies may be affected by the quality of management, the ability to repay loans, the utilization of leverage and financial covenants related thereto, whether the company carries adequate insurance and environmental factors. If a real estate related company defaults, the fund may own real estate directly, which involves the following additional risks: environmental liabilities; difficulty in valuing and selling the real estate; and economic or regulatory changes.
Short sales may cause the fund to repurchase a security at a higher price, thereby 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 and may have little or no operating history or track record of success, and limited product lines, markets, management and financial resources. The securities of small and mid-sized companies may be more volatile due to less market interest and less publicly available issuer information. They also may be illiquid or restricted as to resale, or may trade less frequently and in smaller volumes, all of which may cause difficulty when establishing or closing a position at a desirable price.
Fluctuations in the values of synthetic instruments may not correlate perfectly with the instruments they are designed to replicate. Some synthetic instruments are more sensitive to interest rate changes and market price fluctuations than others.
Investments concentrated in single market segments, such as real estate, subject an investor to greater risk than more diversified investments.
REIT Corporate Non-Investment Grade Debt — Bonds rated BB or below by Standard & Poor's are typically considered non-investment grade or "junk bonds." The capacity of junk bonds to pay interest and repay principal is considered speculative. While junk bonds may provide an opportunity for greater income and gains, they are subject to greater risks than higher-rated debt securities. REIT Preferred Securities — Preferred stock, unlike common stock, often offers a specified dividend rate payable from a company's earnings. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. CMBS BBB Rated — BBB is the lowest investment grade credit rating as assessed by Standard and Poor's, based upon the likelihood of default and loss given default. Commercial mortgage backed securities (CMBS) represent ownership in pools of commercial mortgage loans. Corporate BBB Rated — The lowest investment grade credit rating as assessed by Standard and Poor's, based upon the likelihood of default and loss given default. Debt securities are subject to a variety of risks, such as interest rate risk, income risk, prepayment risk, inflation risk, credit risk, currency risk and default risk.
A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. NR indicates the debtor was not rated, and should not be interpreted as indicating low quality. For more information on Standard and Poor's rating methodology, please visit standardandpoors.com and select "Understanding Ratings" under Rating Resources on the homepage.

All data provided by Invesco unless otherwise noted.
Past performance cannot guarantee comparable future results.
Data as of Dec. 31, 2012, unless otherwise stated