This group of REIT pioneers may not have fully known what they were getting into, but they knew REITs were headed somewhere worth following

By Steve Bergsman

There is a certain aura of nostalgia associated with "firsts." We look back fondly on our firrst car, our firrst job, our firrst kiss. In conjunction with the 45th anniversary of the enacting of REIT legislation, Portfolio tracked down some of the industry's firrst analysts to get their thoughts on the evolution of the industry. These analysts, who were just starting what turned out to be highly successful careers, aren't surprised by the returns posted by the industry and the capital that it has attracted. What has surprised them is how long it took for the industry to get its "due."

Robert Frank
Back in 1976, Robert Frank was working for a bank when he went to interview with Alex Brown. The company was looking for a junior analyst to cover real estate investment trusts and since Frank had a background in statistics, it looked like a good match.

So Frank came on board just in time to witness the shocking convulsions in the very young REIT sector. "I felt like I got the short end of the straw," Frank says of his early years in the industry.

Frank, who today is director of real estate capital markets for investment banking firm Ferris, Baker Watts Inc., stayed with REITs long enough to see the market recover and eventually work through a number of other cycles that periodically whipsawed the real estate industry.

		Michael Oliver The elongated time factor stands out as the most repeated response from analyst veterans of the REIT sector when asked what has been the most unexpected development in the REIT market they've witnessed over the years.

There were some down moments for Frank and his involvement with the REIT markets, but there were many highs as well. The most interesting was when Alex Brown took Taubman Centers, Inc. (NYSE: TCO) public in the form of an umbrella partnership REIT, or UPREIT, which hadn't existed before. In fact, it was Frank who coined the term "UPREIT."

The biggest surprise for Frank, after being involved with REITs for so long, is the number of years it took before the product became a significant part of the investment landscape. Twenty years ago Frank was saying the REIT market could be as big as $300 billion. At a market capitalization (end of 2004) of $305 billion, it is finally there.

"It was one of the few times my predictions panned out," Frank says jokingly. But, it panned out over a period of decades.

For his efforts in devising ways to better measure and explain REIT performance, Frank was awarded NAREIT's Industry Achievement Award in 2000.

Keith Pauley
Keith Pauley, currently a managing director and chief investment officer of LaSalle Investment Management, is definitely the rookie out of the early REIT analysts interviewed for this story. He has only been in the industry for about 20 years. Pauley also began as a REIT analyst with Alex Brown, and he says he had quite a bit to learn about the industry when he started.

"I didn't even know what a REIT was. The first thing I did was help our portfolio manager construct an argument for why REITs were an attractive way to invest in real estate," Pauley says. "I can remember that one of the reasons the firm wanted to hire me was because I knew how to calculate correlations. Therefore I could construct an argument for investing in REITs as a way to diversify a portfolio and as an attractive way for institutional investors to get access to real estate."

Perhaps it was the excitement for real estate and REITs in the 1970s and 1980s at Alex Brown that great things were expected of the product, because, like Frank, Pauley did not anticipate that it would take so long for REITs to gain traction as an attractive way to access capital.

Looking back, Pauley shakes his head in bemusement. "It was such a hard sell to convince institutional investors that REITs were a good way to invest in real estate."

While REITs have come a long way, even during Pauley's two decades in the industry, he still says there is a long road ahead. "REITs still only represent a small part of most pension fund allocations to real estate. It could be a lot more given what the industry has to offer."

Kenneth Campbell
That seems to be the view of another REIT old-timer, Kenneth Campbell, who today is managing director of ING Clarion Real Estate Securities, which was a company he founded then sold. Like Frank, Campbell is a past recipient of NAREIT's Industry Achievement Award.

"The REIT industry today is hitting $300 billion in equity market capitalization," he says. "That's about 10 percent to 11 percent of commercial real estate in the United States. Over the next 10 to 20 years that number could go up to 20 percent. Down in Australia, their version of the REIT owns 50 percent of the commercial real estate. If that's a precedent, REITs have a ways to go."

Campbell is an interesting source because he segued into REITs from outside the investment banking industry. In 1969, he started a newsletter on the housing industry, but since mortgage REITs were so hot at the time, he decided to create another newsletter called Realty Trust Review (the first periodical devoted exclusively to this industry). Campbell became so close to the industry REIT market that in 1984 he began managing institutional money. That business became so successful, he sold his newsletter, which is still around today as Realty Stock Review.

		Bruce Garrison Bruce Garrison ran a similar career gauntlet as Oliver and Frank. Garrison succeeded Oliver at Morgan Guarantee, and then later joined him at Alex Brown.

As to Campbell's money management business, one needs to follow the appellation trail to figure out what happened. It was originally called Campbell Radnor Advisors, which was eventually shortened to CRA. The renamed entity became affiliated with Jones Lang Wooten Realty Advisors and later changed its name again to Clarion. Eventually Clarion was sold to ING Groep NV out of the Netherlands and became ING Clarion Real Estate Securities, based in Radnor, Pa.

However, back when he was starting out as an analyst/journalist with his newsletters he showed the prescience that made him so well known. In early 1974, he put out a "sell" on mortgage REITs. "Conditions were really getting bad, interest rates were rising fairly rapidly and we started to see the first bit of non-earning loans," he says. "So, we just put out an across-the-board sell on all mortgage REITs."

Hopefully, some investors took note because between April and December of that year, the NAREIT index fell 40 percent. "It was a perilous time," Campbell remembers.

Although mortgage REITs have come back in vogue in recent years, Campbell is still not buying in. "It's been about 10 to 15 years since I bought a mortgage REIT," he says. "I always felt equity REITs had better prospects."

When Campbell "reviewed" the REIT market back in the early 1970s he didn't work at an investment bank, which was fine with him because he felt their analysis, in general, was flawed. In some regards, he feels it hasn't improved very much since then.

The problem that Campbell sees is in the modeling concept. "When mortgage REITs were in their heyday there was a lot of focus on funding, which was the amount of mortgage loans you were going to put on our books and support over the next year," he explains. "All the analyst models at the time assumed every funding was going to perform 100 percent."

In today's world, Campbell says "funding" has become "acquisitions." As he notes, "every analyst that you talk to says something like, ‘I am modeling $100 million of acquisitions for X company,' and the underlying assumption is every acquisition is going to work out perfectly. Unfortunately, it is not quite that simple."

Morris Mark
About all that Morris Mark remembers about being hired at First Manhattan Company was that he was brought in as a "junior something." The year was 1968 when there was still plenty of momentum in the first mortgage REIT boom. Mark was hired as an analyst for companies that owned income producing real estate such as office buildings and shopping centers. Later, he followed the REITs because, as he says, "I understood real estate economics, many analysts at that time did not."

After five years, Mark moved to Goldman Sachs Group Inc. "I became a REIT analyst at First Manhattan and was one of the few that focused on the asset side. Mortgage REITs were a numbers game, that's why they blew up," Mark says. "If you followed real estate, you got to follow what they owned. Anyway, Goldman had a real need for somebody with an understanding of real estate fundamentals, that's why they hired me."

That's when things got real interesting for Mark, because he eventually ended up in Goldman's risk arbitrage department when it invested in a number of failed real estate companies including mortgage REITs. "Goldman and a lot of other firms earned a lot of money on the liquidations," Mark says.

Ironically, Goldman did so well on these liquidations that Mark became more of an investor specialist and less of a sell-side analyst, so in 1985 he decided to start his own investment partnership. "It's what people today call a hedge fund, but I was well ahead of that," he chuckles.

Today his company, Mark Asset Management Corp. in New York, would probably be considered an investment advisor although it runs a number of investment partnerships and some separate institutional accounts.

If there is anything that bothers Mark about the REIT world today, it's nomenclature. As he continually exhorts, "don't call it an industry, call it a vehicle."

He might sound a bit curmudgeonly, but he's really not. He finds the real estate industry a much better place today than in his early years in the business. "People learned a lot of lessons from what happened in the 1980s and 1990s," he says. "The REIT vehicle is different today, more transparent and far more, on balance, judicious. Financiers are much more interested today in seeing real equity in deals."

By and large, the gentlemen who have been following the REIT industry since its early days remain amazingly optimistic about the sector. It's easy to see why. When they joined the business world, REITs were a small class of stocks with little market capitalization. Except for some bumps and thumps along the way, the REIT market has really done nothing but expand—and REITs, themselves, certainly moved beyond the small niche investment vehicle known and understood by few.

"The REIT industry will continue to grow," thunders almost three-decades-in-the-business Robert Frank. While Morris Mark, soon to be looking at four decades, declares, "it's a great, great vehicle and has a phenomenal future."