Garrett Thornburg
Chairman and CEO
Thornburg Mortgage, Inc., Santa Fe, N.M.
• For the second consecutive year, Thornburg Mortgage was named one of the top 50 best performing stocks out of 1,000 companies by The Wall Street Journal.

"In 2004, mortgage REITs raised more equity capital from initial public offerings, follow-on offerings, and conversions to mortgage REITs than the entire equity REIT market. This growing interest in mortgage REITs goes beyond historically low mortgage interest rates. Today, investors are learning that mortgage REITs offer many different investment strategies. Some make money by originating and selling mortgages. Others invest in existing mortgages or mortgage backed securities (MBS). At Thornburg Mortgage, we follow still a different strategy. Our profitability is based on the spread between the interest income derived from the adjustable rate mortgage assets we originate and acquire and the interest expense of our borrowings."

"Our industry matured in the '90s and boomed in the millennium. REIT returns exceeded all indices. The period saw deleveraging, abundant capital, professional management, product specialization, and consolidation, especially in the regional mall segment, with its three giants, which may be a precursor.

Five years out, I see more founders turning the reins over to professional managers, more consolidation forming more giant companies, more development by the public companies, cross globalization with U.S. companies buying abroad and vice versa, branding by the giant companies, and an emphasis on delivering quality product and service to our tenants. Rapid growth, buying assets and companies, will continue. Rising rents will more than offset slightly more hostile capital markets. The surprise may well be interest by financial services players in real estate companies."

"After 10 years of exceptional performance, REITs are moving into adolescence. By that I mean we'll likely see more explosive growth combined with more volatility, given the rise of exchange traded funds that enable investors to move rapidly in and out of REIT stocks. Investor demographics may mitigate this volatility. As retiring baby boomers demand more relatively safe, high-yielding securities, capital inflows to REITs should increase.

On the management side, the retail, hotel and health care REITs have begun to extract undervalued real estate from operating companies and unlock value for investors. If property values and financing markets remain strong, this trend could accelerate."

"Maturing REIT markets have dramatic implications for REITs and the general real estate markets. The liquidity of REIT markets have enabled public real estate companies to quickly access more cost effective capital and become more competitive players in the real estate markets. Growing REIT and securitized debt markets have produced a more efficient real estate market. Today, simply having access to information and capital are no longer the only keys to successful real estate transactions. Real estate companies and entrepreneurs are being forced to be more creative and more efficient at executing their plans. The by-product of this is a more effective and efficient real estate industry."

"Over the past decade, individual REITs have distinguished themselves as companies and should not be viewed strictly as a collection of assets. I hope that investors will begin to recognize the distinction. In the past, investors have relied on net asset values (NAVs) to value REIT stocks. While this is a good measurement, it is only one. Today, many REITs have earned the right to be judged by cash flow growth, earnings per share growth, dividend growth, and other financial metrics that reflect the value added to NAV by strong management and good processes. In the end, it is people and what they do that make real estate assets profitable."

T. Ritson Ferguson
CIO, Managing Director
ING Clarion Real Estate Securities, Radnor, Pa.
• The ING Clarion Global Real Estate Income Fund, the largest closed-end real estate fund in the U.S., raised $1.35 billion in its initial public offering in 2004.

"The next great REIT story will be globalization. Since J-REITs were introduced in Japan in 2000, 15 companies have gone public. Today, their combined market capitalization is $17 billion. REIT structures have recently sprung up in France, Hong Kong and Taiwan. Germany and the United Kingdom will soon follow. Globalization already offers U.S. REITs opportunities for international investment and capital acquisition, and the trend can only grow stronger.

At the same time, real estate will remain a local industry. In coming years, the strongest real estate companies will combine local market expertise with global capital, bringing many opportunities to investors with global views."

"Equity REITs have provided investors with exceptional returns over the last decade—14 percent annually. Over the next five years, returns will likely revert to their long-term average of approximately 12 percent. Improving fundamentals will provide meaningful net operating income growth over the balance of this decade.

REITs enable investors to diversify their real estate portfolios geographically and by property type. They provide an attractive combination of income, growth and portfolio diversification. These factors will continue to drive increasing allocations to real estate in individual and institutional portfolios. Public equity REITs will be the primary beneficiaries because of their liquidity, strong management teams and high quality portfolios."

"Looking back on 19 years of investing in REITs, I believe that operating performance and investor sentiment have had the greatest impact on share prices and the sector's expansion. Increasingly, both investors' needs and REIT management's goals are linked in terms of total return expectations, which have attracted a growing investor base. While scale alone can't sustain performance, it can enable operational flexibility across property types and continents leveraging growth through fund management and alternative investments. Soon, a realignment of REIT valuations will favor progressive growth companies over spread investors. Investors will continue to follow performance."

"In coming years, the REIT market will likely continue growing dramatically. Forces driving REIT growth include greater acceptance by institutional investors; the conviction that REIT performance correlates strongly with real estate and only modestly with equities and bonds; and superior REIT management teams. Most compelling, REITs today own only 15 percent of institutional quality assets and should increase their market share over time. While REITs have significantly outperformed other asset classes for the past five years, investors must remember that REITs should generally provide returns that are greater than bonds but lower than equities over the long term. Investors that use REITs appropriately will find a bright future in real estate securities."

Doug Rubenstein
Managing Director and Real Estate Group Coordinator A.G. Edwards, St. Louis, Mo.
• A.G. Edwards has consistently been among the top five underwriters of real estate securities over the past five years. Rubenstein is in his 20th year in the industry.

"Following years of strong REIT equity growth, market setbacks in early 2005 may have discouraged some investors. Then again, a few months cannot necessarily characterize higher quality REIT equities and argue against continued good performance. Even as the market declined at the beginning of the year, most property sectors offered retail and institutional investors a choice of excellent REITs with strong, established management, low-cost debt, solid finances, efficient, cost-controlled operations, reliable cash flow for dividends, and opportunities for growth. While strategies may change from broad investment across the industry to more selective buying, investors will continue to find REIT opportunities in coming years."

"In recent years, investors have watched equity REITs withstand a recession without compromising their balance sheets or cutting their dividends. Several REITs have been added to equity market indices, and REIT stocks have significantly outperformed most every sector of the equity market.

In short, REITs have finally earned the credibility they deserve within the broad investment markets. This credibility is compounding with demand for yield- oriented stocks from an aging investor base, and manifesting itself in the steady funds flows to various investment vehicles focused on real estate stocks.

Longer term, I expect to see increased liquidity, expanded breadth of acceptance of REITs as an asset class and, ultimately, continued growth of this segment of the equity market."

"Investors seeking diversification and allocation alternatives will increasingly turn to REITs in coming years for two reasons. Thanks to the investment performance of REITs during the past 10 years, coupled with the transparency of management/operations and investor liquidity, investors now consider this asset class among mainstream investment alternatives. Increasing institutional allocations to REITs as well as the continuing adoption of new REIT structures by countries around the world support this contention.

Second, research completed by Ibbotson Associates has underscored the contribution REITs can make to diversify and enhance investment returns due to REITs low correlation to large stocks, small stocks and long-term bonds. Ibbotson tested model investment portfolios that had REIT allocations of 10 percent to 20 percent, which performed better than investment portfolios that excluded REITs."

"Since 1990, REITs have grown from $6 billion to $300 billion in market capitalization. This phenomenal growth has put the U.S. in the vanguard of a new era of global real estate securitization.

The hard part is over, but challenges remain. U.S. REITs must now develop strategies to continue growing. REIT management will have to think more broadly. For example, REITs may have to expand their geographic footprints. Regional companies may have to go national. National companies may have to go international. REITs may also have to expand their product footprints, moving into related, but different property sectors."

Michael J. Brody
Partner, Tax Department Latham & Watkins, LLP, Los Angeles, Calif.
• Latham & Watkins LLP was the leading law firm in terms of both REIT debt and equity issuance in 2003, according to data provided by Thomson Financial in the most recent "American Lawyer Corporate Scorecard."

"Low interest rates helped drive the strong performance of REITs in recent years. Low rates allowed even low-leveraged REITs to earn significant spreads on the difference between rental rates and interest rates. Moreover, low rates have boosted property values and returns from portfolio management techniques such as asset sales.

Looking ahead, an improving economy will likely result in rising interest rates. But economic growth will also reduce vacancies and boost rental rates for REITs. It's entirely possible that revenue increases will equal or exceed the cost of higher interest rates, and allow REITs to maintain strong earnings. Consequently, REITs appear to be positioned to continue to perform well in the coming years."

"The REIT sector has matured over the last decade, growing in terms of size and acumen. REIT management teams have demonstrated sound judgment through challenging property markets by improving asset quality, conservatively managing leverage, and diversifying funding sources. The sector has also benefited from a significant broadening of investor interest in real estate and REIT securities.

Offsetting progress in financial management and investor interest, REIT operating models have become increasingly complex with the proliferation of joint ventures and merchant building activities. In addition, debt protection measures have been weakened by financial covenant changes. I expect REITs to continue to evolve through the expansion of their operating platforms."

"REITs successfully managed the challenges of their first decade in the public spotlight. The growing economy and expanded access to capital early in the cycle provided the portfolio diversity and balance sheet strength required to withstand the later downturn, though weaker companies liquidated or merged with stronger players. But the investment landscape for institutional-quality properties is dramatically more competitive today, and lower yields are forcing many REITs to invest more creatively. As a result, we see REITs beginning to shift gears a bit, which could mean greater rewards for some, but greater risks for others."

"The REIT market is strong and getting stronger, here in the U.S. and around the world. In the U.S., REITs have firmly established themselves as an investment-grade fixture in the debt markets. But REITs are not just making it here. They're making it everywhere. For example, in recent years REIT structures have been adopted in Japan, Singapore and Hong Kong, and they are well established in Canada, Holland and Australia. Several European countries have announced plans to create REITs. Greater global acceptance is a new wind in the sails of the U.S. REIT market. The next stage for U.S. REITs will involve growing global investments and increasing activity via joint ventures and investment fund structures."

"Over the past few years, REITs have demonstrated that they can outperform in a down real estate market, while offering debt investors significant protection. Even today REIT bonds typically yield 100 basis points more than 10-year Treasuries, higher than A-rated industrial companies or financial institutions. And we're always happy to clip the excess yield.

Looking ahead, we remain positive about REIT debt. We also believe that REIT equities remain fundamentally undervalued on a cash flow basis. Recent acquirers consistently paid significant premiums to net asset value. When equities are undervalued, they don't reflect the real economic value of the underlying assets, further benefiting bondholders."