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Four analysts and top management from twelve sector firms examine the real estate investment trusts sector in this special 63-page Real Estate Investment Trusts issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info471.htm.

TWST: Greg, why have the REITS continued to perform so well and what will drive the group in 2002?

Mr. Whyte: To tackle the first part of your question, I would echo some of the comments that Stu made, but I would go further and say that, in our opinion, the single most significant driver of performance in this group this year was the yield component of the stocks. The outperformance of the group that started at the beginning of the year coincided with the Fed starting to ease for the first time. Also, if you look at this sector on the basis of yield, that is to say, if you took the REIT index and divided it into quintiles on the basis of yield, and then examined the total return performance of each quintile, the correlation between performance and yield is pretty phenomenal — certainly it was through the latter part of September, anyway. Investors really sought out yield, and REITS met their requirements. I also believe that the incremental investment dollar that came into the group this year was often from faster money looking for yield, and I’m not sure how discerning investors were about either market cap or the institutional quality of the company; often they were focused on the smaller cap, less institutionally held names. Many of the stocks with the highest yield are up over 45%, whereas the index is up on the order of 12%. So by focusing at the higher yield end of the spectrum, you could have outperformed by a multiple of the average total return of the sector. Turning to the second part of your question regarding how REITS will perform in 2002, beyond just saying it’s a $64 million question, I believe it really depends on the rate of recovery in the general economy and the direction of interest rates. To the extent that we see rates move up meaningfully, that would obviously have a major negative impact on the sector; and to the extent that these are typical late cycle names that don’t have the operating leverage that many other sectors of the market have, the companies will likely lag the economy. Consequently, we would be surprised if REITs outperform the general market. Having said that, my sense is that we are likely to experience a one-time inflation in the valuation of the sector as a result of the inclusion of REITS in the S&P 500. This is the one wild card that could mitigate the extent to which REITs would ordinarily underperform.

TWST: Moving on, are there other office REITS that anyone would like to highlight, any that could become more attractive or should be on an investor’s watch list for when the economy improves a little? How about you, Greg?

Mr. Whyte: I think that CarrAmerica (NYSE:CRE), which is primarily a suburban REIT, is at interesting price levels here around $29, and clearly they don’t have the downtown exposure that Equity Office Properties (NYSE:EOP) or Boston Properties (NYSE:BXP) have. If I wanted some exposure to the suburban office area, I think CarrAmerica has decent assets, it’s national enough to mitigate some of the suburban risks, and it’s got good development capacity. They’ve done a great job of improving their balance sheet recently and, frankly, I think they’re underappreciated for the capital recycling that they’ve done. Also, from a valuation perspective, in the secondary stock transaction that’s under way right now, selling their one large shareholders’ position will remove the perceived overhang issue on the stock. I think Carr is interesting on the suburban office front.

1) Real Estate Investment Trusts - In an in-depth (11,500 words) Analyst Roundtable, Samuel A. Lieber, CEO/Portfolio Manager at Alpine Asset Management, Steve Sakwa, Senior Analyst at Merrill Lynch Global Securities, Stuart Seeley, Director at UBS Warburg and Greg Whyte, Head of Real Estate and REIT research team at Morgan Stanley, examine the outlook for the sector including overbuilding of offices markets, excess supply and share specific stock recommendations.

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

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