Malcolm H. Gissen & Associates, LLC

We have been surprised that it took most money managers until mid-2002 to realize how attractive REIT’s are as an investment. We believed all along that real estate investment trusts are very attractive investments for most investors. Because by law they must pay out 90% of their net income to shareholders as dividends, REIT’s pay high current yields and also have the potential for their stocks to appreciate. When we think the real estate sector is undervalued, we increase the allocation to REIT’s in our client portfolios.

We did that starting in late 1999 and early 2000, and continued to increase the allocation throughout 2000 and 2001 until many clients had more than 30% of their portfolios invested in REIT’s. We doubt that any other money manage had more than a 20% allocation to REIT’s. This paid off handsomely for clients as REIT’s were the best-performing sector of the stock market during this period. In addition to timing the investment right, we were also fortunate in conducting our own research to prefer smaller less well-known REIT’s, which tended to pay higher dividends. This helped us choose a number of the best performing REIT’s. These securities have consistently outperformed the popular REIT mutual funds, which prefer the larger REIT’s because they had so much money to invest.

By mid-year 2003, REIT’s were finally attracting attention from other money managers and from the financial press as the REIT Index hit a 10-year high. It was then that we decided that it was time to start lightening up on our REIT positions. This is pure contrarian investing!

Lexington Corporate Properties (LXP): invests mostly in office buildings but also owns industrial and some retail properties. Properties are 99.1% occupied (as of midyear 2003) and almost all tenants have renewed expiring leases. Risk is reduced because all leases are triple-net – meaning that tenants pay increases in taxes, insurance or maintenance. LXP has always paid attractive dividends (usually between 7.25% and 8.25%, depending on the stock price) and has raised its dividend every year.

Annaly Mortgage (NLY): is a mortgage REIT investing in government-backed mortgages like Fannie Mae’s. They make money by leveraging the portfolio up to 10x and by smartly applying proprietary software to reduce risk of changing interest rates in the portfolio. NLY has excelled the last three years; their dividend has been between 12% and 16% for much of this time.

Capital Automotive (CARS): buys land and builds facilities that are leased to the largest and best auto dealers in the United States. They are the only major company doing this. Even in bad economic times when customers are not buying new cars, top car dealerships remain profitable as new car sales represent only about 20% of their revenues.

iStar Financial (SFI): is a mortgage REIT that has made about $6 billion in loans in its history and never had a default. They tend to charge more for their loans, but they are so well entrenched that their business has grown every year since they went public. The comparably high interest rates SFI charges has enabled them to pay dividends in excess of 8%, even considering the appreciated price of the stock.

These four REIT’s have been consistently excellent performers since 1999, but they are not for everyone. Investors must know that past performance is no assurance of future performance. Before investing, get the advice of a independent professional these or any investments are suitable for your portfolio.