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TWST: Let’s begin with an overview and outlook. What has set the stage over the past 12 months for the next 12 months?

Mr. Dembski: My focus is primarily with the office, the industrial, and the healthcare REITs. 2000 was a phenomenal year for rent growth in the office sector with high double digit, in some cases triple digit, rent growth on leases rolling in select markets such as San Francisco, Seattle, Portland, New York City, Washington, DC, and Boston. In our view, that rent growth drove valuations in 2000. As such, we went into 2001 with office REITs being valued at well above average levels and facing a slower economy. As we looked out to 2001 and tried to decide where investors should put their money based on the potential for a slowing economy, we focused our search on the more recession-resilient sectors. In 2000, we had the office sector as an overweighted sector. For 2001, we determined that the sector was less recession resilient than others, which caused us to lower our weighting to a market weight. That said, we certainly still find investment opportunities within the office group. We see companies that will outperform not only their office peers, but potentially REITs from other sectors, even sectors that we have as overweighted. In the face of a weakening economy, however, we believe investors should take the opportunity of relatively high valuations to take some chips off the table and possibly rotate into more recession-resistant sectors such as multifamily, industrial or health care. What are the primary negative impacts of the slowing economy on the office group? There could be a handful — possibly including increasing vacancy rates; cap rates going up in 2001 (and they already have) and slowing rent growth.

TWST: Is there a contrast in the office sector as we ask you to review a New York company — SL Green?

Mr. Dembski: On the flip side, one of the smaller names is SL Green (NYSE:SLG), which is rated BUY. It is focused in mid-town Manhattan, and its stock trades at a relatively inexpensive multiple despite consistently top-tier organic growth. They are a local sharpshooter. SL Green operates primarily class B CBD office space in a market that they know very well. Management leverages its local knowledge creatively. The company recently created a structured finance group to which it will commit up to 10% of assets. This unit makes subordinated investments in Manhattan office properties that typically include management responsibility and participation in sale proceeds. The risk profile of a subordinated interest in an office building is higher than owning it; however, we believe this risk is mitigated by SL Green’s unique New York focus. This unit stands to experience increased demand as banks decrease liquidity to office developers/buyers. This is a very high yielding group for the company, and it should slightly offset any impact from a weaker economy.

TWST: Is there a preference for a regional focus versus national diversification?

Mr. Dembski: You want diversification, because Medicaid reimbursements vary from state to state. Therefore, you do not want to be at the mercy of any one state.