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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. 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: In both areas, the office and the industrial, what is the executive philosophy on diversification? Obviously, they have expertise in each local market, and yet companies do have exposure in more than one major geography. Is that a natural attribute today or does it relate to the individual management team and its ability to handle differing geographic markets?

Mr. Dembski: It’s important. There is only one industrial REIT focused in a single market, and that is CenterPoint (NYSE:CNT). On a diversification basis, ProLogis (NYSE:PLD) is probably the most diversified name — being in the United States as well as in Europe — and that has had its positives and its minuses. On the pure distribution side, which is really the company’s core skill set, it has worked well. Today, the European freight industry is more robust than in the United States, because the European economy is in more of an upswing, whereas our economy is coming off a record period of growth. That works to ProLogis’ benefit. They are still doing very creative development in Europe. The pace of development that they are doing in Europe probably would not be justified in the United States, based on where we think future demand will be for distribution facilities. None of its peers can compete with it on that basis. It has worked negatively for them to the extent that they tried to go beyond their core skill set and into the refrigerated logistics business, which really hurt them badly at the end of last year and continues to dog them this year. Not only did they take on a new business line, but they did it in new markets. Their European refrigerated logistics business is performing worse than their United States refrigerated logistics business. From my perspective, diversification is good, but it gets very risky when management goes beyond their core skill sets.