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Two analysts and top management from eleven sector firms examine the Real Estate/Property Services sector in this special 51-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info401.htm.

TWST: Steve, let’s start with the approach that you at Merrill Lynch take to investing in real estate investment trusts.

Mr. Sakwa: We obviously look at a lot of different things. Number one, we take a look at the property types that a company is in. Number two, we take a look at the fundamentals of the individual markets. Within the apartment and office markets, we’re obviously looking at supply/demand trends. Demand is a little bit harder to always gauge because it’s sensitive to economic changes. We have a much easier time getting a handle on the level of new supplies. So we spend a lot of time focusing on that. We obviously take a look at the valuation of the individual companies. We look at the balance sheets, we look at managements’ track records, and we put all of that into a pot and come up with different recommendations for different companies based on multiples and growth rates as well as dividends and projected dividend growth.

TWST: What’s your sense of the current valuations, and what, in your view, is an appropriate valuation for REITs?

Mr. Sakwa: We look at valuation a number of different ways. We look at price to adjusted FFO, which is akin to cash flow. We look at price to net asset value, and we also look at adjusted EBITDA multiples. Those three metrics allow us to look at companies in different ways. Some of them allow us to look at things on a leveraged basis, some of them allow us to look at things on an unleveraged basis so we can compare companies in sectors with different capital structures. Basically, what I would say is that the group is moderately undervalued at this point. It is hard to make the case that REITs are substantially undervalued like they were in early 2000. The group has had a very good run over the last 18 months, and I would say that the group is trading at 2, 3, or maybe 4 percentage points below what I’d call fair value today.

TWST: Are there any common characteristics among the companies that you are recommending that investors buy today?

Mr. Sakwa: We’ve got different ratings in different sectors. I would say, on the office side, if you look at our buy-rated stocks, they tend to be the companies that have more central business district exposure and less suburban exposure.

TWST: Why is that?

Mr. Sakwa: We think there’s less supply risk in the CBDs than in the suburbs, which is where more of the construction is taking place. And we’ve found the valuation to be relatively attractive compared to some of the other companies that are experiencing weaker fundamentals. Equity Office (NYSE:EOP), conversely, reported what I thought was a pretty strong quarter, and while they’re not immune to the slowdown, they have been able to weather the storm better. So we’ve been focusing on companies with really high-quality assets in very strong markets where we think there’s limited supply risk and where the valuations have been attractive.

TWST: Is there a compelling reason to buy Equity Office Properties today?

Mr. Sakwa: We think, if you’re looking for a one-stop shop in the REIT sector, if you want liquidity, if you want national diversification, you’re getting a very good management team, you’re getting a sound balance sheet, and the valuation is compelling. We think the downside risk to estimates is limited. I think it’s a pretty compelling story. You’re not really making a bet on any one particular market. You’re obviously making a bet on the office sector, but Equity Office owns great assets in good long-term markets, and I think investors will be well rewarded.

This special issue includes:

1) Property Services - In an in-depth (3,600 words) Analyst Interview, Jay Leupp, Managing Director and Senior Real Estate Equity Analyst at Robertson Stephens, examines the outlook for the sector and shares specific stock recommendations.

2) Outlook for REITs - In an in-depth (3,800 words) Analyst Interview, Steve Sakwa, Senior Analyst in the Global Securities Research and Economic Group at Merrill Lynch, examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of eleven sector firms examine the outlook for their firm and the sector.