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Real Estate Investment Trusts (REITs) are a form of ownership which have been around for quite a while but really began going public in earnest to delever their balance sheets in the early 1990s. And thrive they did in the mid to late 1990s. However, their dominance was somewhat muted in our most recent bull market in the mid- 2000s. I would like to share a perspective with you that I think is very interesting. REITs have the potential to become an even more dominant force in our investment sales market beyond where they are today. Let’s take a look at why this could be the case.Let’s consider current market conditions. The speed of deterioration in loan performance is unprecedented, even relative to what was experienced during the Savings & Loan crisis in the early 1990s. The total delinquency rate has reached 4.1% recently which reflects an increase of over 350% from the rate at the end of 2008. Deliquency rates are likely to increase substantially over the next two to three years as billions of dollars of pro-forma loans that never reached stabilization mature. Loans which have interest-only periods expiring or interest reserves burning off will fall into this category as well. Additionally, numerous properties are hanging on by a hair only because the mortgage rates are floating over LIBOR, which is minscule today.In New York City, we had $106 billion of investment property sales in 2005, 2006 and 2007. Based upon loan-to-value ratios available during these years and the reductions in value that we have seen, an extrapolation would indicate that approximately $80 billion of this total or about 6,000 properties have negative equity today. Clearly not all of these properties (or the notes on them) will come to the market as distressed assets as many owners have the ability to service the debt and want to own the assets for the long term. Notwithstanding this fact, a substantial percentage of these properties will come to the market needing to be sold.Refinancing requirements will add to stresses in the market and will prove challenging, particularly for larger loans which are not generally available from community banks and regional banks due to their magnitude.  They will also be challenging due to reductions in value and more conservative LTVs which will exacerbate the massive deleveraging that the market must go through. It has been projected that well over $2 trillion in commercial mortgages will be maturing between now and 2013.  Much of this financing was delivered to the market by banks, life companies and CMBS intermediaries.The CMBS market has evaporated. In 2007, there were $230 billion of issuance and in 2008, this number dwindled to just $12 billion (all of which was in the first half of the year). Since July of 2008, there have been no new issuances. A disturbing fact is that even if the banking and insurance industries were operating at full throttle, they do not have the capacity to meet the refinancing demand. Access to public capital is crucial. Enter the REITs.Not surprisingly, REITs have been negatively affected by current market fundamentals, as all sectors have.  The Dow Jones Equity and REIT Total Return Index, which tracks 113 stocks, had posted a negative return of approximately 68% from its peak in February of 2007. While the Index has improved, it is still well below peak levels and REIT stocks are trading at double digit percentages below net asset value (net asset value was nearly impossible to determine 8 months ago and, while it is not much easier today, there are some data points from which to form a reasonable estimate). By contrast, REITs traded at a 25% premium to NAV between 2004 and 2007. Presently, the REIT dividend yield spread to the 10-year Treasury note is approximately 260 basis points, well above the long term average of 118 basis points. They are also trading at approximately 325 basis points below their long-term average FFO multiple of 12.8x. These facts should help REITs facilitate capital raising efforts.REITs own a significant portion of the better quality properties in the United States. They currently have access to over $30 billion in credit lines and have generated in excess of $5 billion of liquidity since mid-2008 via dozens of dividend reductions, eliminations and in-kind payments. Most importantly, REITs have access to the public capital which was regularly accessed via the CMBS market. Several well capitalized REITs have successfully raised capital recently, an extremely positive sign in a market sorely missing them.Fortunately for the sector, relative to other professional commercial real estate investors, REITs were among the least active buyers as cap rates declined significantly between 2005 and 2007. REITs were the purchasers of only about 11% of investment properties during these years. During this same period, private equity funds and private owners acquired in excess of 55% of the investment properties sold. Therefore, a number of REITs should be well positioned to acquire assets from these entities at significantly more attractive prices as these over-leveraged properties and owners become distressed. Surely, some REITs will face challenging times and may need to be folded into other entities. The well capitalized players should be in great shape.Access to public capital and large stockpiles of dry powder should make REITs even more powerful as we try to manuever our way out of current market conditions. We clearly have a long way to go to get through this cycle. As we emerge, look for the well capitalized REITs to lead the way, particularly if CMBS fails to make a tangible comeback.

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