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Seven analysts and top management from twenty-seven sector firms examine the REITs sector in this special 141-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info380.htm

TWST: Chris, how have the real estate investment trusts performed over the past 12 months?

Mr. Haley: Over the past 12 months, real estate stocks have generated a near-20% total return (market-weighted). More interestingly, however, is that in the most recent six-month period, it has been the smaller cap, higher-yielding REIT stocks that have outperformed their faster-growth, larger cap brethren. We view this relative performance as a modest correction in the larger-cap names (from a late-2000 run-up) combined with increased appetite for higher-yield vehicles (and in many cases, substantially more risk). This yield action may simply be due to tremendous earnings deterioration in the general market, and investors wishing to “lock-in” minimum return levels. With the general market yielding between 1% and 2%, and earnings growth dropping to single-digit, real estate stocks offering 7%-or-better current yields, on top of 6% earnings/cash flow growth, gathered increased investor interest. And layer onto that the fact that earnings trends have improved for real estate stocks (+6.1% average forward growth in early 2000, now at +7.3% on March 31, 2001), whilst the general market’s expectations have soured materially.

TWST: What kind of economic backdrop best favors real estate investment trusts?

Mr. Haley: Our opinion is that it’s the combination of low single-digit economic growth, meaning real GDP growth in the 1.5%-2% range, combined with interest rates in the 6%-7% range. The reasons we are looking at these numbers are as follows. First, if we’re looking at more negative economic growth figures, we believe investors will hold off investing in real estate securities because most of the companies are unproven investments during a contracting economy; most had not been around (publicly traded) during the 1990-1991 economic contraction. Hence, we believe most investors would hold off incremental dollars, not knowing exactly how these stocks and their cash flows performed in the last actual recession. On the flip side, why wouldn’t we want more rapid growth to help these companies? We think one of the benefits of the real estate companies is the consistency of cash flows, and if we saw very significant economic GDP growth or job growth, we believe that would bring more developers out of the woodwork and, potentially, result in more capital coming to the marketplace (increased capacity/supply and existing asset price escalation). So we’d like to see a good balance between supply growth and demand growth. On the interest rate side, we don’t necessarily like higher interest rates because that may restrict the ability of real estate companies to refinance debt at roughly comparable levels. We don’t want very low interest rates because we believe that would, again, support higher levels of supply growth: increased development interest and cheap financing equals excess capacity risk. So we like moderate growth and mid-single-digit interest rates.

TWST: Are there any lodging REITs that you do like at this time?

Mr. Haley: The only one we’re recommending at this time is a smaller cap company, for defensive purposes — Innkeepers (NYSE:KPA). It’s a buy-rated stock rather than a strong buy. (We only have six of our 55 research names rated strong buy in our entire coverage universe.) Jeff Donnelly is our retail and lodging analyst. Innkeepers is his favorite hotel stock. The primary reason for Jeff’s enthusiasm for Innkeepers relates to a relatively low-leverage balance sheet. Second, with no significant refinancing risks over the next six years, we see very little balance sheet risk. Third, we believe that the company’s market position in the Northern California market will continue to enable them to generate same-store or same-room RevPAR growth, which will be comparable, if not better than, a typical hotel REIT or hotel C-corp.

This special issue includes:

1) REITs - In an in-depth (15,800 words) Analyst Roundtable, Samuel Lieber, CEO/Portfolio Manager at Alpine Management & Research LLC, Daniel Pine, Senior Vice President at Alliance Capital Management, Lawrence Raiman, Managing Director at Credit Suisse First Boston, David Shulman, Managing Director at Lehman Brothers, Ross Smotrich, Managing Director at Bear, Stearns & Co. and Louis Taylor, Managing Director at Deutsche Banc Alex. Brown, examine the outlook for the sector including, recent stock performance, prospects for upside growth and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at twenty-six sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Outlook for REITs - In an in-depth (5,500 words) Analyst Interview, Christopher Haley, Director of Real Estate Securities Group at First Union Securities Equity Research, examines the outlook for the sector and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of twenty-seven sector firms examine the outlook for their firm and the sector.