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NEW YORK CITY-Moody’s Investors Services Real Estate Finance Team held a REIT Credit Review and Outlook Tuesday detailing Moody’s rating outlook for REITs and key issues to focus on for 2003. Unemployment’s effect on economic recovery was one key issue discussed by the team.

“A prolonged economic recovery does not bode well for REITs,” advised Lesia Bates Moss, senior analyst. She said Moody’s is working with REITs to provide information not included in financials to have an accurate and full picture of companies.”REIT managements need to keep portfolio’s competitive,” she advised.

Moody’s chief economist John Lonski pointed out that while the economy is proving to be “less of an adversary” than in the recession of 1990-91, private-sector employment has not grown quarterly since early 2001. “Employment leads capital spending,” he noted, adding that there is every reason to believe that 2003 is where construction activity for offices will decline. “Employment will lead office construction recovery.”

Karen Nickerson, CPA, senior analyst, cautioned that secondary markets such as neighborhood, grocery and community centers are vulnerable to big box and supercenters. She added that power centers are rising in stability and value. Nickerson also noted that unemployment is hurting occupancy in the multifamily sector and that low interest rates support home ownership. Also, a new supply is eroding the performance of existing properties.

Merrie Frankel, ESQ, senior analyst, said that REIT mergers have slowed down over the past few years. “There was only one in 2002 and two so far for 2003.” REIT mergers face challenges such as systems integration, accounting procedures and combining the cultures of the merged companies. Retail and lodging are the two markets to watch, she said.

Philip Kibel, CPA, senior analyst, said some corporate governance points REITs are making include adding board members who have corporate as opposed to simply real estate experience.

“REITs poised for opportunistic investment can act on real estate recovery,” noted Arlene Isaacs-Lowe, CPA, CFA, senior analyst. While large REITs tend to be rated higher because they have a more diversified portfolio, there is still a role for niche companies who focus on assets, she said, adding that good corporate governance with REITs will be key for investors.

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