Winter 2000
	Cover Story REITs at the Millennium Industry veterans look into their crystal balls. Where are REITs headed? Company Spotlight Can Crescent Get Its Groove Back? John Goff is working to restore Crescent Real Estate Equities’ reputation as a REIT that "gets it." Property Fundamentals Lack of Correlation J.P. Morgan’s Michael Giliberto provides answers to the age-old question, "Are REITs really real estate?" Awards Spotlight Best & Brightest Realty Stock Review’s eighth annual awards presentation recognized the top vote getters in a number of categories, including outstanding analysts, CEOs, and CFOs. Voters also chose the industry’s man of the year and men of the decade. Investment Analysis Applying MPT to REIT Portfolios Careful portfolio construction can make or break the performance of a pool of assets. Investment Fundamentals The High Cost of Real Estate Ownership Swapping net income for FFO might not be such a bad idea after all. By The Numbers A Fund Manager’s Worst Nightmare If it’s true that what doesn’t kill you makes you stronger, real estate fund managers may be some of the strongest folks around. Point Of View REITs and Rights Plans Criticism of REITs that adopt rights plans is simply misplaced. Investment Spotlight Spooked What happens when more than a dozen REIT UITs start unwinding in the midst of the worst bear market in a quarter of a century? The New Economy When Worlds Collide The Internet will provide investment opportunities for innovative office and retail real estate companies that embrace the changing landcape. Investment Insight LBO Math The market is beginning to understand that LBO valuation does not equal net asset value. Parting Shot Coming of Age REITs have evolved from pools of properties to focused real estate operating companies. Newsline Captec Wants to Shed REIT Status Investor's Guide Questions Back Issues Feedback

By Steven Wechsler

When President Dwight Eisenhower signed into law legislation creating REITs in 1960, little did he - or we - know what the future held. REITs, in one form or another, have been a part of the American landscape much longer than you may realize. In fact, their ancestry can be traced back to 19th century New England. There, trusts served as investment pools for those with sufficient capital to invest in real estate in such then-distant locations as Chicago and Kansas City. Held for income and growth, the trust’s purpose was common investment in the improvement of real estate. Sound familiar?

Today, after a series of constructive changes to the nation’s tax laws, REITs have evolved from pools of properties to focused real estate operating companies. They offer investors from all walks of life easy access to seasoned management, sound business plans and income-producing commercial real estate nationwide.

When Congress created REITs 40 years ago, it did so with persons of modest means in mind. A committee report issued in 1960 stated that through REITs, "… small investors can secure advantages normally available only to those with large resources." And just as Congress intended, REITs have succeeded in changing the face of real estate investment. In a 1998 assessment, House Ways and Means Committee Chairman Bill Archer, R-Texas, noted that "REITs serve small investors by providing them opportunities previously limited to the affluent or well-connected."

Beyond making investments in portfolios of properties ranging from shopping centers to self-storage facilities accessible to any and all investors, the securitization of real estate also appears to have helped minimize the volatility of the real estate cycle - and is likely to do so increasingly. "Boom or bust" has made way for moderation, as the accountability and discipline demanded by the public debt and equity markets have helped strike a balance between property market supply and demand.

It is worth remembering that REITs played a limited role in real estate investment for more than three decades after being sanctioned by Congress. Early on, REITs were prevented from operating or managing the real estate they owned - an arrangement not readily accepted by the investment community. Only after passage of The Tax Reform Act of 1986 did the REIT picture begin to brighten. The law drastically reduced the potential for real estate investment to generate tax shelter opportunities. It also empowered REITs by permitting them to operate and manage most types of income-producing commercial properties they owned.

The recent enactment of a REIT modernization package may play an equally important role in the industry’s growth. The advent of taxable REIT subsidiaries in 2001 will enable REITs to remain competitive in the rapidly changing real estate marketplace. Nimble executives with the backing of the investment community will be empowered to identify opportunities to engage in innovative real estate-related activities. There will be new services for customers, new income for the REITs and, because the subsidiaries will be fully taxable, increased revenue for the government.

Are REITs here to stay? Challenges associated with the disconnect today between earnings and stock prices notwithstanding, the answer is an emphatic "yes." After all, this is an industry that has grown from a handful of companies whose investments were valued at $200 million in the 1960s to more than 200 publicly traded real estate companies with a total market capitalization of $325 billion today. Even with the unprecedented growth REITs have enjoyed over the course of the last decade, they still represent only 10 percent of all available commercial properties in the United States.

Over time, REITs’ liquidity, security, and performance have helped transform what was a frequently mispronounced acronym into a better-known, predictable investment that yields high income and has the potential for capital appreciation. Publicly traded real estate companies are continually adapting to changes in the use of - and demand for - real estate. While no one can say for certain how REITs will fare or how the REIT structure may evolve in the years to come, it seems safe to say that they will continue to reshape real estate investment well into the 21st century. Though still in its infancy, this is an industry that has, in many ways, come of age.

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