By Jada A. Graves

1. What factors are having the biggest impact on the REIT market so far in 2007?

The volume of mergers and acquisitions continues at a record level so far in 2007. Not only are we seeing a continuation of the consolidation wave from 2006, such as deals like New Plan (NYSE: NXL) and Spirit Finance Corporation (NYSE: SFC), but we are also seeing an increase in M&A transactions involving strategic buyers.

The bidding war between Ventas, Inc. (NYSE: VTR) and Health Care Property Investors, Inc. (NYSE: HCP) for Sunrise Senior Living REIT, and the major asset purchases by Ashford Hospitality Trust Inc. (NYSE: AHT) and Vornado Realty Trust (NYSE: VNO) illustrate REIT management teams’ growing confidence for bold moves using their M&A skills. These buyers were rewarded with great investor receptivity, which in turn encourages more bold moves.

This dynamic should lead to a continued M&A flow for the remainder of the year which, in turn, helps support valuation levels for the REIT market.

A second influential factor is the continued access to capital. Capital markets continue to be wide open for REITs. In the first quarter alone, we saw 27 equity or equity-linked transactions, with a particularly heavy issuance of convertible bonds.

This capital helps fuel continued growth in the sector as it provides dry powder for acquisitions and development. The debt markets also continue to be extremely deep and liquid, which also helps facilitate accretive transactions.

A third factor concerns the sub-prime/housing market. Despite the lack of a strong correlation between issues facing sub-prime lenders, home builders and the commercial real estate market, the entire equity market is experiencing some overhang from this crisis. Real estate stocks may continue to suffer from concerns that there could be a tightening of credit standards across the board, which would impact the access to, and the cost of, debt capital, or could lead to a recession.

2. Looking back over the past 10 years, what lessons can be learned regarding the performance of various REIT sectors?

I have seen various sectors rotate in and out of vogue, illustrating the importance of timing in achieving outperformance.

Sector outperformance often follows accelerated M&A, particularly privatizations. This has been the case with the lodging sector from 2002 to 2004, and the office sector from 2004 to 2006, as industry leaders have perceived trends that later became common wisdom.

3. What should REIT investors be mindful of in today’s REIT market?

REIT merger arbitrage has become very popular. Hedge funds and other players made more than $6 per share on the Equity Office Properties Trust deal with The Blackstone Group and it seems like there is a new merger deal announced every week.

However, the depth of potential buyers is less than you think. Unlike some of the Equity Office regional portfolio sales, the public company bidding process has had only 1.5 to 2.5 real bidders in most auctions.

Arbitrage has occasionally gotten ahead of the market in recent transactions—Reckson Associates Realty Corp. or Maguire Properties are examples. This strategy often relies on overly-aggressive expectations of which investors should be mindful.

Also, investors should be aware that assets are generally priced for perfection in today’s marketplace. While high NAVs support REIT share prices, they also increase investor risk. Active acquirors without a value—add proposition will have their returns subject to realization of these near perfect assumptions. History tells us to be careful in this environment.

4. In what ways are investors affected by REITs’ corporate governance practices?

The current environment provides REIT investors with far greater protections than they previously enjoyed. As the REIT sector has evolved, it has embraced more governance practices commonly accepted in the rest of corporate America. REIT boards now contain more independent directors and fewer insiders.

Independent boards assure investors that the interests of the common shareholders are the utmost priority. The destaggering of director elections is also highly meaningful, as it provides the framework for hostile transactions and investor recourse for mismanagement.

In addition to board composition changes, REITs are now subject to the same level of M&A technology as other sectors. We have recently seen several examples of hostile takeovers, topping bids and shareholder activists influencing corporate strategies.