Mortgage companies and REITs

September 12, 2007
Americas: Real Estate: REITs
Takeaways from our Retail REIT Rotisserie Dinner

Industry context
We recently held our Retail REIT Rotisserie Dinner in New York City,
featuring management from six of the nation’s leading REITs, including
Simon Property Group (SPG), Vornado Realty Trust (VNO), Kimco Realty
Trust (KIM), Developers Diversified Realty (DDR), Federal Realty
Investment Trust (FRT), and Tanger Factory Outlet Centers (SKT). We note
several key takeaways from our discussions with management: (1) Cap
rates for class-A properties in high-barrier-to-entry markets could
experience modest increases as the re-pricing of risk increasingly impacts
higher quality real estate; (2) credit markets volatility could persist for
some time, dampening institutional demand for real estate and negatively
impacting REITs’ fund management businesses; (3) despite the credit
crunch, retailers have taken a longer-term view of the market and have yet
to push back their store expansion plans; (4) given its defensive attributes,
retail real estate should outperform other property types should the
economic environment deteriorate; and (5) the credit markets dislocation
has increased the importance of internal growth as a contributor to FFO
growth.

Source of opportunity
Given the growing potential for an economic slowdown, we believe retail
real estate makes sense for REIT investors given its defensive attributes
(long average lease terms, predictable income streams, and investment
grade tenants).

Catalyst
We believe an increase in transactional activity could serve as a catalyst to
the shares. In our view, any indication that institutional demand for retail
real estate remains strong could push retail REIT shares upwards. In
particular, we believe the market could respond positively if the Pyramid
portfolio trades at a lower-than-expected cap rate.

Risks
These include development risk, a marked decline in consumer sentiment,
and a slowdown in tenant store openings.

Best buy idea
Simon Property Group (SPG); Vornado Realty (VNO); Kimco Realty (KIM)

October 2, 2007
United States: Real Estate: REITs
Revisiting key investment ideas; Retail REITs looking more attractive

Industry context
In this report, we review our key investment themes and also look at the
performance of retail REITs during the last US recession in 2001 and their
subsequent period of relative outperformance versus the other major
property types, such as office, apartment and industrial. Since the start of
the year, we have favored global Industrial and NYC Office names within
our coverage universe and select retail REITs. However, with the risk of a
recession in the US higher today versus only a few months ago, we note
that retail REITs could outperform over the near term as investors wait for
a more definitive outlook on broader economic trends. We remind
investors that we continue to be most cautious on the apartment REITs,
given the over supply of single-family homes/condos, current valuations
and slower expected job growth next year. We remain Neutral on REITs.

Source of opportunity
We continue to recommend several names within the global Industrial
(PLD) and NYC Office segments (BXP, SLG), but also highlight several high
quality retail REITs (KIM, SPG). We believe investors should continue to
focus on best in class companies within each property sector with strong
balance sheets, portfolios in infill markets with embedded rent growth and
modest exposure to development (given higher risks).

Catalyst
REITs are defensive in nature owing to their long-average lease terms,
high quality tenant bases, and still reasonable dividend yields. As such, we
believe investors could favor the stocks in the event of a US economic
slowdown, similar to the period after the last recession in 2001.

Risks
Risks for REITs include higher interest rates, higher cap rates and a
slowdown in commercial real estate trends (peaking fundamentals).

Best Buy idea
ProLogis, Boston Properties, and Simon Property.
Best Sell idea
Mack Cali, Maguire Properties, and Post Properties.