Rob Freeman

"managed REITs made some fantastic mistakes by forcing capital out to unqualified borrowers at unprofitable spreads. Result—one of the worst financial debacles in the history of this country oc- curred in the last ten years because of these excesses. The banks thought that by having huge advisory fees and using OPM (other people's money) they could earn more for the stock- holders of the banks than they could earn if the banks made the loans directly to the developers. Because of this huge surplus of capital, the risks taken by REITs were unwarranted and the com- petition to put funds out was so great that the spread between the cost of money and the return received produced no profit to the lenders. In addition, most of the leverage was created through open lines of credit to the REITs at floating rates. On the other hand, the REITS were making largely long-term fixed rate commitments to their customers with this short-term money. When prime rates went to 12 percent in 1974, the roof fell in. Practically every REIT in the country was in serious trouble and many of them will never recover. Since practically all of the leading banks in the country lent money to the REITs, aggregating even today many billions of dol- lars, the situation finally reached the stage where the banks could not foreclose their mortgages. They have had to be satisfied with work-out situations at low-interest rates requiring many years in the future to resolve. I'm glad to say that one of the very few REITs that has come through this situation intact is Realty Income Trust, which has never missed an interest payment to its banks or to its debenture holders and is currently paying dividends at the rate of Si.40 per share. It is, I believe, the only REIT in the country that is currently paying such a high return through dividends on its total equity capital—approximately 9 percent. The two young managers of Realty Income Trust, Ron Kutrieb and Rob Freeman, have done an outstanding job in an industry that has been nothing but disaster for practically every other REIT ever formed."