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TWST: Looking at the retail REIT sector over the past 12 months, what are the key issues that pour over into the next 12 months?

Mr. Habermann: Looking back at 2000 from a macro perspective, you really saw things begin to slow down in the economy, which in turn had an impact on the retail REITs. You saw retail sales slow from peak levels and that hurt top-line revenue growth, especially with lower percentage rental income, which was most apparent in the fourth quarter of 2000. The mall and shopping center REITs both underperformed the REIT universe in 2000, which posted a total return north of 26%. That said, you’re still seeing rental rate releasing spreads that are pretty strong, especially in the mall sector. On average the malls are generating leasing spreads 15%-20% above expiring rental rates — and some companies are actually exceeding that level. However, the holiday shopping season in the fourth quarter of 2000 produced surprisingly weak results due to sharp declines in consumer spending and consumer confidence. As well, several high profile bankruptcies and store closings, including Bradlees, Montgomery Ward, J.C. Penney and Sears, served to dampen the overall enthusiasm in the retail sector. Looking into 2001, we’re basically forecasting that earnings growth (as measured by funds from operations, or REIT earnings) could actually slow compared to 2000, largely based on slower core NOI growth from downward pressure on occupancy levels and more modest leasing spreads. We are differentiated on Wall Street in voicing a more cautious outlook for the retail sector in the near term. In terms of earnings growth for 2001, Street consensus forecasts FFO growth of 8.3% for the mall REITs currently, and 7.3% for the strips. In contrast, we’re looking for REITs to generate below consensus 6%-8% trendline earnings growth, probably closer to the lower end of that range should the economy stay flat this year. In general, we expect mall trends should be stronger than community center trends, which has occurred in recent periods. We’re also forecasting 7%-9% total returns for the retail sector, which is below the 7%-10% total returns we are expecting from the REIT universe in 2001.

TWST: Who are you then focusing on within the retail REITs? As you look at those companies, what do you expect over the next year and what targets do you have for those companies?

Mr. Habermann: CBL & Associates (NYSE:CBL) and General Growth Properties (NYSE:GGP) are two buy rated regional-mall REITs that I‘d highlight in the mall category. Moving next to General Growth Properties, GGP is one of the best mall managers and operators in the REIT industry — hands down. They have demonstrated a superior ability in terms of buying and selling portfolios, generating growth from these acquisitions, and they’ve also been very smart developers. They developed in new markets and achieved very attractive yields on these projects. Both companies — CBL and General Growth Properties — employ higher leverage versus the REIT average, with debt to market caps of around 60%-65%. There is higher volatility, or risk, in earnings. But GGP and CBL are two names that have really performed well in the mall sector over time.