Determinants of REIT Franchise Value by
James G. Young
B.A., Economics, 1986
University of California, Los Angeles
Submitted to the Department of Urban Studies and Planning in Partial Fulfillment of the Requirements for the Degree of
Master of Science in Real Estate Development at the
Massachusetts Institute of Technology
September, 1998
C 1998 James G. Young
All rights reserved
The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part.
Signature of Author
15prtment of ir an Studies and Planning
July 31, 1997
Certified by
-v Tod McGrath
Lecturer, Department of Urban Studies and Planning
Thesis Supervisor
Accepted by
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
William C. Wheaton
Chairman, Interdepartmental Degree Program in Real Estate Development
OCT

Determinants of REIT Franchise Value by
James G. Young
Submitted to the Department of Urban Studies and Planning on July 31, 1998 in partial fulfillment of the requirements for the Degree of Master of Science in
Real Estate Development
ABSTRACT
This paper defines and empirically examines the determinants of the premiums to net asset value
(commonly referred to as franchise value) at which most office and apartment REIT stocks currently trade.
Franchise value is often broadly defined as the present value which management is expected to add in terms of net revenue growth to shareholders. A more detailed definition of franchise value is presented in this paper, one which incorporates each of the characteristics that contribute to a REIT's financial success: the internal and external structural components, the human resource components, and the governance issues.
Independent variables are then developed as proxies for the components of the franchise value definition, in order to examine their individual impact. These independent variables are regressed against the premiums to net asset value at which a sample of office and apartment
REITs traded on December 31, 1997.
The results show that regional economic conditions, measures of balance sheet strength, low overhead expense ratios, and conflict of interest mitigations are statistically significant factors which contribute to franchise value. Somewhat less significant factors include total market capitalization, regional diversification, development capabilities, and the ability to acquire properties in exchange for operating partnership units. In addition, the results verify earlier work
by Wang, Erickson, Gau, and Chan which concluded that REITs with relatively higher analyst coverage and a larger following by institutional investors tend to perform better than other REIT stocks.
Thesis Supervisor: Tod McGrath
Title: Lecturer, Department of Urban Studies and Planning

Acknowledgements
I would like to thank my fellow group members of the class research project which preceded this thesis, especially Kristin Blount and Jay Hooper whose wisdom and humor carried me through some challenging times.
Also, Matt Ostrower's assistance was an essential component to the data gathering phase of this work. His patience and continued availability went beyond the call of duty for a supportive alumni.
Page 3

Table of Contents
1. INTRO DUCTIO N ....................................................................................................................................
6
1.1 CONTEXT OF RESEARCH......................................................................................................................6
1.2 VALUATION OF PUBLIC REAL ESTATE COMPANIES ......................... ... ...........................................
1.3 RESEARCH ISSUE.................................................................................................................................8
2. RESEARCH M ETH ODOLO GY..........................................................................................................10
7
2.1 LITERATURE REVIEW .........................................................................................................................
2.2 INFORMATIONAL INTERVIEWS ........................................................................................................
2.3 INDUSTRY PRACTITIONER INTERVIEWS ............................. ...... ....................................................
10
13
13
3. THE CRITERIA AND COMPONENTS OF FRANCHISE VALUE ..........................................
15
3.1 INTERNAL AND EXTERNAL STRUCTURAL COMPONENTS................................................................. 16
Focused Business Strategy ............................................................................................................ 16
Regional and Product Type Growth Opportunities................. ............... 16
Balance Sheet Strength & Access to Attractively Priced Capital.............................................
16
V is ib ility ........................................................................................................................................
1 7
Low Overhead...............................................................................................................................18
3.2 HUMAN RESOURCE COMPONENTS ...................................................................................................
Visionary Leadership ....................................................................................................................
Experienced M anagement with a Proven Track Record ...........................................................
18
19
20
23
24
3.3 GOVERNANCE....................................................................................................................................24
Conflicts of Interest .......................................................................................................................
Incentive Based Compensation Agreements...............................................................................
Significant Insider Ownership....................................................................................................
D isclo s u re ......................................................................................................................................
24
26
26
2 7
4. STATISTICAL EXAMINATION OF FRANCHISE VALUE DEFINITION .............................
29
4.1 STATISTICAL SAMPLE ........................................................................................................................
29
4.2 DEPENDENT VARIABLE......................................................................................................................29
Premium to Net Asset Value as of December 31, 1997. ........... ........ .... ........... 29
FFO M ultiple................................................................................................................................. 30
4.3 INDEPENDENT VARIABLES................................................................................................................. 30
Focused Business Strategy............................................................................................................
32
Growth Opportunities inherent within business strategy ..........................................................
33
Balance Sheet Strength / Access to Capital...............................................................................
34
V is ib ility ........................................................................................................................................
3 6
Low Overhead ...............................................................................................................................
37
Experienced M anagement with a Proven Track Record ........................................................... 38
Visionary Leadership ....................................................................................................................
D isclo su re..................................................................
Conflicts of Interest .......................................................................................................................
39
............................................................... 3 9
40
5. REGRESSION RESULTS ....................................................................................................................
42
5.1 A REVIEW OF THE STATISTICALLY SIGNIFICANT VARIABLES............................................................44
5.2 A REVIEW OF SELECT NON-STATISTICALLY SIGNIFICANT VARIABLES ............................................
5.3 VARIABLES NOT INCLUDED IN THE FINAL ANALYSIS......................................................................
5.4 ADDITIONAL STUDY ..........................................................................................................................
45
47
48
6. CO NCLUSIO NS ....................................................................................................................................
49
7. BIBLIO GRAPH Y ..................................................................................................................................
51
Determinants of REIT Franchise Value Page 4

Table of Exhibits
Exhibit 1 : Components of Franchise Value.........................................................................15
Exhibit 2 : Dependent Variable: Premiums to NAV December 31, 1997...........................29
Exhibit 3 : Independent Variable Descriptive Statistics ......................................................
31
Exhibit 4 : Statistical Results...............................................................................................43
Exhibit 5 : Overview of Statistical Results......................................................................... 50
Table of Appendices
Appendix 1 : Management Class Questionnaire Participants........................................... 53
Management Class Questionnaire................................................................54
Appendix
Appendix
Appendix
Appendix
Appendix
Appendix
Appendix
Management Class Questionnaire Results.................................................. 57
Dependent Variable (Premium to NAV) Calculation ................................. 58
Independent Variable Database ................................................................... 59
Apartment REIT Hartzell Regional Concentration......................................61
Office REIT Hartzell Regional Concentration ............................................ 62
Hartzell, Shulman, Wurtzebach Economic Region Definition....................63
Herfindahl Index of REIT Product Type Concentration..............................65
Quarterly REIT Earnings Surprise...............................................................66
Regression Results (SPSS Statistical Output) ............................................ 67
Determinants of REIT Franchise Value
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1. INTRODUCTION
1.1 Context of Research
As of December, 1997 there were 210 REITs with equity market capitalization of $140.5
billion'. This represents an almost 800% increase since year-end 1992, a statistic which speaks to the dramatic market impact the REIT sector has made in the 1990's real estate markets.
Compared to previous generations of REITs, the characteristics of the recent evolution are unique. Most notable is that the current generation is almost exclusively self-advised and self-managed. This, along with the significant management ("inside") ownership typical in this generation of REITs, has helped to solidify investor confidence in the sector. Indeed, many industry observers foresee a basic shift in the way investors will own commercial real estate, declaring that "the future of commercial real estate is in securities, not in direct asset ownership"
2 .
Such declarations are easy to understand given that investment in a REIT requires less capital than traditional real estate investment, is re-priced daily in the public markets, and is more liquid.
The growth of the REIT sector in the 1990's has also brought changes to the nature of the securities themselves. Liquidity has improved, as measured by bid/ask spreads that dropped 1.59 cents per share between 1992 and 19943, and the REIT sector's correlation with the S&P 500 has dropped from .770 (for the two years ending in 1987) to .401 (for the two years ending in 1996).
These shifts have caused some of the academic research into the sector done prior to
1993 to be arguably obsolete, leaving many aspects of the character of the REIT investment vehicle open for examination.
The purpose of this paper is to examine a particular characteristic of equity REITs: the premiums to net asset value at which most REITs currently trade. These premiums, commonly referred to as franchise value, will be defined and then empirically examined
As reported by the National Association of Real Estate Investment Trusts.
2 Richard Schoninger, Prudential Securities, as quoted by Maria Wood, "Cash-Rich for the Next Buying
Spree"
3 Below, Kiely, and McIntosh, "REIT Pricing Efficiency; Should Investors Still Be Concerned?" [1996]
Determinants of REIT Franchise Value Page 6

through proxy's developed to statistically explain the components of such franchise value.
1.2 Valuation of Public Real Estate Companies
Value the assets or the earnings?
In the private market, real estate value is derived by capitalizing net income or by discounting future expected cash flows.
In the public markets, one gauge of REIT value is to apply similar methods to the entire REIT portfolio to arrive at a net (of debt) asset value for the company's holdings. This provides a measure of the liquidation value, or private market value of the REIT's portfolio.
REITs generally trade at premiums or discounts to their net asset value. REITs which trade at higher premiums to are generally considered to have more growth potential than those which trade at a lower premium or at a discount to their net asset value.
Another common barometer for REIT stock pricing is the Funds From Operations
(FFO) multiple
4
(stock price divided by FFO per share). Since REITs are operating business which own a changing pool of real estate assets, the FFO multiple is considered to be a gauge of the income and growth prospects of a changing company. REITs which trade at high FFO multiples are considered to have better growth prospects than those which trade at lower multiples.
Both methods of gauging REIT value have inherent limitations. The net asset value calculation, while useful in theory, is often flawed in practice since a single capitalization rate is used for every property in the portfolio, regardless of market
4
FFO is an adjusted net income standard adopted by the REIT industry. Historical cost accounting allows for depreciation and amortization of real estate improvements as a deduction from net income. Since real estate values tend to rise and fall with market conditions rather than depreciate with age, net income is an inaccurate gauge of REIT operating performance. The FFO standard was therefore adopted by the REIT industry and refers to net income, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation, amortization, deferred taxes, and after adjustments for unconsolidated partnerships and joint ventures.
Determinants of REIT Franchise Value
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and asset dissimilarities. (The premise being that resulting overvaluations and FFO under-valuations will balance each other out.) The FFO multiple is criticized for not adjusting for rapidly depreciating items such as tenant improvements, carpet, and commissions, and thereby distorting the REITs "true" cash earnings. Also, the use of floating rate debt by REITs distorts FFO as a comparative measure of operating performance by not properly accounting for the volatility of interest expenses.
Adjusted funds from operations (AFFO) is considered to be a better indicator than
FFO of a REIT's true earnings, however there is no industry standard for the FFO to
AFFO adjustment, making it not suitable for comparisons.
Future Earnings Growth
Conventional finance theory maintains that in an efficient market, all relevant information is impounded into the stock price. As such, REITs which trade at premiums to their net asset value, or at high FFO multiples, are considered to have relatively higher growth prospects relating to future operating performance.
For a REIT, delivering increasing returns to shareholders requires growth through positive net present value investments, or through operating efficiencies (economies of scale). Investors' evaluation of management's ability to achieve earnings growth strategies is a key component of their investment decision.
1.3 Research Issue
There are differing uses of the term franchise value. Some use it to refer only to the internal and external growth opportunities available to a company. Others use it to refer to the ability of a management team to create value. For the purpose of this research, franchise value refers to all components of the premium to net asset value at which a
REIT stock trades.
As mentioned earlier, different REITs trade at different premiums to net asset value.
Indeed, some REITs currently reflect franchise value premiums of up to 74%5 over net asset value, yet research has not been undertaken to empirically examine its components.
Determinants of REIT Franchise Value
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Although franchise value can be understood to represent the present value which management is expected to add in terms of net revenue growth to the shareholders, the criteria underlying franchise value are not as easily understood.
The purpose of this paper is to identify a more rigorous definition of franchise value, one that pertains specifically to REITs. This definition will then be tested empirically through variables designed to proxy for the components of franchise value.
The following Chapter describes the research methodology used to review the concept of
REIT franchise value in the literature and explore its characteristics through discussions with industry experts. Chapter Three provides a more formal definition of REIT franchise value and summarizes the research findings. Chapter Four describes the variables used to empirically test the research findings, and Chapter Five summarizes the results of the empirical tests. Conclusions are presented in Chapter Six.
5 New Plan Realty, as reported by PaineWebber: "REIT Net Asset Value Comparative Analysis, Fourth
Quarter 1997 Update" (June 9, 1998).
Determinants of REIT Franchise Value Page 9

2. RESEARCH METHODOLOGY
This study defines the components of REIT franchise value, and quantifies them through empirical analysis. Numerous explanatory (independent) variables have been defined to represent proxys for the components of franchise value, and have been tested to measure the significance of their impact on the dependent variable, REIT stock premiums to net asset value.
The investigation into the determinants of franchise value began as a qualitative research project for the course Managing the Real Estate Company. The research was initiated with a review of academic and industry literature in real estate and finance to establish a list of the relevant criteria relating to franchise value. This work was complemented by informational interviews with academic and industry practitioners to refine and expand the list. From the initial literature review and informational interviews, a questionnaire was developed and formal interviews were conducted with REIT investors and REIT management. The purpose of the industry practitioner interviews was to explore the qualitative management issues that contribute to franchise value, and formalize a definition of franchise value with the benefit of a "real world" perspective.
2.1 Literature Review
A review of the literature pertaining to franchise value revealed articles and publications that addressed various portions of the topic. In the past several years there has been considerably more study of the REIT sector, including several empirical studies that addressed specific components of premiums in REIT stock pricing. The largest amount of literature is on REIT governance issues, including analysis of conflict of interest issues and empirical studies on compensation structures. Publications from independent research firms specializing in the REIT sector provided the most cogent overall explanation of the components of franchise value. The largest volume of writing is in non-academic publications covering current topical issues. When these articles include discussion of certain REIT growth, management, and structure issues, they sometimes provide examples of the franchise value theory in action.
Determinants of REIT Franchise Value Page 10

Empirical Research
Empirical research specific to the REIT sector is somewhat limited. This is surprising given that REITs have been in existence since the 1960s, and can perhaps be attributed to the relatively small size of the REIT sector prior to 1993. Indeed, the explosive growth of the REIT sector since 1993 has changed its character and makes some research done prior to that time arguably obsolete.
Notable among the empirical research found was work which examined REIT ownership's impact on returns
6
, which is described in Chapter Three, and the reductions in bid/ask spreads observed between the "pre-boom period (1992) and the post-boom period (1994)"'.
Two studies by Capozza, et. al., make up the empirical work most directly related to this study of franchise value. Capozza and Seguin examined characteristics of REIT
G&A expenses for geographically focused versus diversified companies, and concluded that creating larger, less-levered firms would enhance value . Capozza and Lee examined the premiums and discounts to net asset value at which different
REIT property sectors were trading from 1985-19929. This study provides NAV premium time series data, showing it changes with real estate cycles. However, the researchers did not find a relationship between the net asset value premiums/ discounts observed and the three variables examined (leverage, concentration and overhead expenses). As will be shown in Chapter Five, this is presumably because certain critical variables were omitted.
REIT Governance Articles
One component of franchise value, the governance issues associated with potential conflicts of interest, has received a fair amount of attention in the literature. This may be due to the subject's academic character, or to the fact the crash of REITs in
6
Wang, Erickson, Gau, and Chan " Market Microstructure and Real Estate Returns" [1995]
7 Below, Kiely, and McIntosh, "REIT Pricing Efficiency; Should Investors Still Be Concerned?" [1996]
8
Capozza and Seguin, "Managerial Style and Firm Value" [1998]
9 Capozza and Lee, "Property Type, Size and REIT Value" [1995]
Determinants of REIT Franchise Value Page I11

the 1970's was due to inherent conflicts of interest in their structure". Among the best articles to address conflict issues, Lynne Sagalyn's "Conflicts of Interest in the
Structure of REITs", systematically analyses the types of conflicts to look for and what each might imply for owners and investors.
A second publication, C.F. Sirmans "Research on REIT Corporate Governance" surveys some recent research on the issue of corporate governance. Sirmans outlines the issues and possible solutions for REITs to the agency problems which have historically plagued investment real estate.
Among the published materials most directly relevant to the subject of REIT franchise value are publications from nationally recognized independent research firms; in particular, a proprietary publication from Green Street Advisors, "REIT
Pricing: An Update of Our Pricing Model". The Green Street Advisors' pricing model represents the most complete summary and analysis found of the likely quantitative variables that contribute to REIT stock premiums. The model is based on their estimate of net asset value, with an adjustment for management, structural, and balance sheet features which add or detract from value. Adjustments are made based on the following variables: insider ownership, strategic focus, absence of potential conflicts, overhead expense, balance sheet strength, average monthly trading volume, and "franchise value". Green Street's definition of franchise value
"pertains to the ability of a management team to create value over and above the current value of the existing portfolio", and is a function of management talent and ability, internal and external growth, and access to capital.
Another publication, from The Penobscot Group, Inc., "Valuation Methodology and
Rationale ", examines relative stock valuations by separating their analysis of a
REIT into three components: growth, risk, and residual value. They arrive at a final
1
Most REITs formed in the 1960's and 1970's were run by external advisors, for the purpose of placing investors money in construction and development loans. There was very little alignment of advisor and investor interests, and fees were based on gross assets. As such, advisors were induced to lever to dangerous levels. When interest rates rose in the mid-1970's and real estate went into a recession, REITs crashed with a deeply tarnished reputation.
Determinants of REIT Franchise Value Page 12

valuation of the REIT stock, adjusted for risk. The growth and risk components evaluated include essentially all the criteria of REIT franchise value identified in this thesis, although they are specified differently. The Penobscot Group differs from
Green Street and the work undertaken for this thesis, in that they examine relative, not absolute, REIT valuation.
2.2 Informational Interviews
As part of the class research project for Managing the Real Estate Company, several informational interviews were conducted. The interviewees are listed in Appendix 1.
These discussions helped to clarify the perceived components of franchise value, and expand the definition slightly. However the main benefit of these interviews was the development of a grouping of the components into three broad categories which collectively define the criteria investors use to evaluate REITs:
" Internal and External Structural Components:
These components relate to the ability of a management team to create value over and above the current value of the existing portfolio.
" Human Resource Components:
These components pertain to management's expertise, strategy, and leadership.
" Governance:
These components deal with the relationship between the suppliers of capital and the managers of the firm.
2.3 Industry Practitioner Interviews
Having completed the initial literature review and discussed the issue with academics knowledgeable on the subject, industry practitioner interviews were conducted. These interviews were structured around a survey to evaluate the influence of management on a
REIT's stock price and were the crux of the management class research project.
Interviews were conducted under confidence that quoted responses would not be attributed to any particular individual.
Determinants of REIT Franchise Value Page 13

With a framework for the definition of franchise value in place, these interviews allowed for evidence of franchise value theory in action, and helped refine the definition. A few questions underscoring the investigation at this point were: e
What is the relative importance of the management characteristics identified in the literature review and informational interviews?
* What are the specific characteristics of REIT management that analysts and investors consider when they make investment decisions regarding REITs?
Data was collected through interviews with ten REIT analysts/investors and six REIT managers. The interviews were a rich source for data and education, and provided insights as to how the various franchise value criteria are inter-dependent. A list of interview participants and copies of the questionnaire and results are included within
Appendix 1.
Determinants of REIT Franchise Value Page 14

3. THE CRITERIA AND COMPONENTS OF FRANCHISE VALUE
From the literature review and interviews, the following general classification of the components of REIT franchise value was developed. The components are organized into three broad categories which collectively define REIT franchise value: Internal and
External Structural Components, Human Resource Components, and Governance. A short explanation of each component of franchise value and the relevant research follows.
Exhibit 1
-
COMPONENTS OF REIT FRANCHISE VALUE -
These components relate to the ability of a management team to create value over and above the current value of the existing portfolio.
e e
0
These components pertain to management's expertise, strategy, and leadership.
These components deal with the relationship between the suppliers of capital and the managers of the firm.
*
Determinants of REIT Franchise Value Page 15

3.1 Internal and External Structural Components
These components relate to the ability of a management team to create value over and above the current value of the existing portfolio.
Focused Business Strategy
Evaluating a company's strategy, and looking for evidence of that strategy in action, is a key component of any corporate evaluation. It is one way in which investors objectify their evaluation of a management team.
Indeed, the best way to evaluate a corporate strategy is to find examples of where it is working. Be it the acquisitions process, property management, or any (every) other business function, there should be evidence that the stated strategy is in place and delivering the desired results. "Overall advantage or disadvantage results from all a company's activities, not only afew. "n
Strategic opportunities change over time, and a company which is unable to execute strategy today will be unable to compete tomorrow. "Strategies are both plans for the future and patterns from the past1 ".
Regional and Product Type Growth Opportunities
Perceptions of inherent economic opportunities available within markets where a REIT owns properties is a key component when assessing a REIT's growth opportunities. In this sense, franchise value relates to perceptions of where a region and/or product is in the real estate cycle, and the corresponding acquisition and development opportunities that are available.
Balance Sheet Strength & Access to Attractively Priced Capital
A REIT's ability to grow and increase its shareholder returns depends to a large degree on its existing capital structure and subsequent ability to access capital. Since REITs are somewhat restricted with respect to retaining earnings, they must continually access
" Porter, "What is Strategy?" [1996]
12
Mintzberg, "Crafting Strategy" [1987]
Determinants of REIT Franchise Value
Page 16

outside capital, either equity or debt, to expand. As such, REITs are sometimes called
"capital-captive" companies.
Indeed, one of the idiosyncrasies of the REIT structure is that REITs with low share prices typically have such high capital costs that they cannot effectively compete for acquisitions. They basically become "dead in the water" or "road-kill". As a result, only those that maintain strong balance sheets and enjoy low costs of capital are able to continue to acquire and/or develop properties to deliver growth to their shareholders.
One of the perceived components of balance sheet strength is a low debt level. Finance
Theory argues that the disadvantages of debt tend to outweigh the advantages for a REIT
(REITs have no debt tax shield). In practice, however, the optimal debt component of a
REIT's capital structure is anecdotally believed to be around 35% to 40%. Not surprisingly, this is where the industry average currently falls.
"When (debt) becomes greater than 35% of capitalization, investor demand for the shares seems to drop off as investors begin to anticipate a future offering. As the share price weakens, the cost of capital goes up, and management becomes concerned about issuing equity at weakened price levels. Unless other sources develop, these REITs are boxed in, unable to fund asset expansion because of the cost of there capital relative to the expected yield.
1 3 "
Visibility
Wang, Erickson, Gau, and Chan
14 found REITs with a higher percentage of institutional investors, or with a larger following by security analysts, tend to perform better than other REIT stocks. Their research also indicated that financial analysts tend to follow
REIT stocks with more institutional owners, since the demand for their services is generally from institutional clients. Specifically:
"The stock performance of each individual REIT is positively correlated with the number of security analysts following the REIT stock and with the level of institutional participation. In other works, a REIT tends to perform better if there
13
Taylor and Paolone, "The Effect of REIT Mergers on REIT Stock Prices" [1997]
14
Wang, Erickson, Gau, and Chan, "Market Microstructure and Real Estate Returns" [1995]
Determinants of REIT Franchise Value Page 17

is more information (from security analysts) about the security and if there are more informed stockholders (institutional investors) monitoring the performance of its stock"
The increased visibility from analysts serves two functions for shareholders. Better dissemination of information on the REITs activities, and an additional monitor of the firm's actions. These qualities, together with the ability to oversee and monitor a number of firms in the sector and compare performance, provide investors of more visible firms with less investment risk.
Low Overhead
Low costs relative to one's competitors represent a competitive advantage in any sector.
For REITs, operating efficiencies have been the driving force behind many consolidations in the industry'
5
. Indeed, as the REIT industry has consolidated in recent years, average overhead costs, as reflected by general and administrative expenses
(G&A), have also decreased'
6
.
The empirical question of the existence of economies of scale has been addressed by
Capozza and Seguin1
7 .
Their study partitioned REIT G&A expenses into a nondiscretionary structural component (costs of asset and liability management) and a discretionary component (managerial "style"). Their findings "suggest that there are substantial wealth enhancing opportunities available by reorganizing existing firms into the use of debt in the capital structure."
3.2 Human Resource Components
These components pertain to management's expertise, strategy, and leadership.
" Bers and Springer, "Sources of Scale Economies for REITs" [1998]
16
Green Street Advisors, "REIT pricing: An Update of Our Pricing Model" [1998]
17
Capozza and Seguin, "Managerial Style and Firm Value" [1998]
Determinants of REIT Franchise Value Page 18

Visionary Leadership
Visionary leadership, evidenced by business strategy, is a key component of success in any industry. Although true visionaries are rare, one of the interviewees noted that the real estate sector has more self proclaimed visionaries per capita than any other industry that he knows. Perhaps this is why in the investor survey, "hype" and "ability to tell the story" were often mentioned alongside visionary leadership as qualities essential to success in real estate. Two investors put it this way:
"Sam (Zell) combines some real differences in approach and strategy with a good ability to hype. If you read the annual report of Equity Office, the concluding paragraph is almost explicitly an invitation to suspend judgement. The pitch is basically 'this is a whole new world, we are crossing ground where no man has been before. Please suspend all your prior expectations and assumptions'. To some extent that is playing pretty well in the market."
"Visionary leadership is an important component of strategy. Sometimes visionary leadership is purely hype, but it's an important investment consideration."
Indeed, the level of importance of visionary leadership, and the ability to sell the story seems to be one way in which franchise value for REITs is different than in other sectors.
This is only mentioned in the non-academic literature, and was not included as a component of franchise value until the informational interview phase, when it was consistently noted. Peter Linneman advocated the importance of visionary leadership in
"Changing Real Estate Forever ":
"Real estate has now joined the ranks of all other industries where capital is more or less efficiently rationed; perhaps for the first time in its history. Once capital demands a return, only those most skilled at predictably generating returns ultimately survive! It is particularly important in capital-intensive industries like real estate to concentrate asset control under a few visionary operators. Real estate owners should realize that collections of assets, without the ability to obtain visionary-driven growth, always trade at steep discounts."
Determinants of REIT Franchise Value Page 19

"Those operators with the ability to add the greatest value to their assets as
Warren Buffett has done at Berkshire Hathaway will ultimately outbid mere asset collectors for managerial talent, tenants, and additional properties."
Experienced Management with a Proven Track Record
A significant portion of the premium to net asset value is made up of investor perceptions of the REIT's management team. According to William Evans, Chairman of Patriot
American Hospitality 18
: looking for a brand, it sought out management. What was key was the people that we would acquire."
Similarly, John Barron of Deloitte & Touche LLP states
19
:
"When you purchase REIT shares, you are not only buying a portfolio of properties, you are also purchasing an ongoing company
just like any other company. You are essentially buying an investment in a management team and their ability to increase future earnings. There is an intrinsic, ongoing value that should allow for well-managed REITs to get a premium over their underlying net asset value."
The experience of management contributes significantly to every component of franchise value. When questioned how they measure experience, investors identified three measurements of management experience relevant to REITs; career experience in real estate, experience in the public markets, and the length of time the management team has worked together as a team.
Public market investors generally do not measure future growth opportunities by past events. When it comes to management, however, investors do analyze past performance as a means of gauging its ability to perform in the future.
18
Real Estate Review, "Edited proceedings of the 30t* Annual Real Estate Capital Markets Conference" [1998]
" Ibid.
Determinants of REIT Franchise Value Page 20

Exemplary of the value of experience and past performance is the recent private offering of Beacon Capital Partners. Beacon Capital was founded in March 1998 by the former principals of Beacon Properties, who in October, 1997 had sold the company to Equity
Office Properties. The management team of Beacon Properties had worked together for over ten years, and during its three years in the public market had delivered a total return to investors of nearly 245%. In March, 1998, the markets rewarded this past performance
by providing Beacon Capital Partners with $420 million, more than twice the anticipated offering proceeds, at a time when this team did not even own any assets. This is an excellent example of investor confidence in the management team, which Frederic
Wittman, Managing Partner of Holliday Fenoglio Fowler LP, articulated well: "What is truly impressive about this performance is that [Beacon] raised all this capital without holding any assets. Investors were just impressed with his track record. ,2
Several characteristics surfaced during the literature review and informational interviews as being critical factors to an investor's evaluation of "good management". The importance of these characteristics, which are listed below, shift depending on market cycles (where the positive net present value projects are), and business growth (Initial
Public Offering versus ongoing operations).
Demonstrated Knowledge of Public Market Requirements
The entrepreneurial skills essential to operating a private real estate company are considerably different from the skills needed to operate a publicly owed firm.
Management of a public company must understand fiduciary responsibilities, reporting requirements, and the need to communicate/articulate to investors/analysts what was once proprietary operating information. One of the investors in the survey put it this way:
"Public market knowledge is very important. It's the kind of thing that there are a couple of companies who are very good at it, and a couple of companies that are very poor at it... Knowledge of the public markets street smarts of the public
20
Miara, Jim, "Leventhal Roars Back onto the Scene" [1998]
Determinants of REIT Franchise Value Page 21

markets more than anything else is what is creating the dead meat out there that is ending up as merger bait for the bigger companies."
Strong Property Management Skills
As stated earlier, the three ways which a REIT will sustain stock price growth is through acquisitions, development, and economies of scale. Property management is an important element of achieving economies of scale through improved operating efficiencies at the property level, thereby delivering more of every rental income dollar to the shareholder. To use the words of E&Y Kenneth Leventhal's Clint McDonough
2 1
:
"Recent focus of growth has tilted more toward expanding through a series of acquisitions rather than maximizing property profits, or what he terms 'samestore growth'. But, market analysts are beginning to scrutinize how REITs handle their properties. The good managers are concentrating on same-store growth and making certain they are getting as many of the benefits of the economies of scale they should be getting for the kind of mass they've gotten through acquisitions."
In addition to economies of scale or cost efficiencies, certain property management activities will add value to a property by proper maintenance, setting appropriate rent levels, reducing tenant rollover, and searching for "highest and best" uses for a particular property or portion of a property. Also, it can be argued that management by a
"dedicated" team and creation of a full-service real estate company can promise operating efficiencies and alignment of interests.
Acquisition Capabilities
Operational efficiencies through effective property management and economies of scale only deliver, even on the best days, modest improvements in performance. As such,
REITs must grow through acquisitions and/or development in order to deliver increasing
21
Wood, Maria, "Cash-Rich For the Next Buying Spree" [1998]
22
Campbell, "Self-managed Equity REITs: A Cost-Efficient Investment Vehicle" [1993]
Determinants of REIT Franchise Value Page 22

returns to shareholders. Deal making abilities clearly are a vital ingredient of strong
REIT management.
Development Capabilities
As real estate rolls through its cycles, and accretive acquisition opportunities become more difficult to identify, REITs have recently turned to development as a source of growth.
Development capabilities can not be learned overnight, and there are great risks involved.
During the informational interviews, investors expressed that as long as development activities are one component of the company's total business which they do well (and which does not override the core business of managing wholly owned assets), they view the development capabilities positively.
Organizational Structure
The REIT's organizational structure is the framework, foundation, and future of the firm.
The continuous delivery of returns to investors is contingent upon an organizational structure which can accommodate growth. A company must be more than one "visionary leader" and a cadre of employees lacking leadership potential.
Another important aspect of organizational structure is the existence of checks and balances within the corporate structure. One investor put it this way:
"All companies need to have an organizational structure that works, that has proper checks and balances. So you have the acquisitions people that report to the control people on the finance side so there is a check and balance so you
don't have the head acquisitions officer approving every acquisition that his field people make. (Because obviously he is going to approve everything.) You need checks and balances, you need clarity."
Indeed, John McMahan in his article "REIT Governance: Protecting Shareholder
Interests", takes the concept of checks and balances in the corporate structure one step further:
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"Perhaps the most important single aspect of effective board governance is the separation of management and board leadership. Certainly the CEO should be a member of the board, perhaps along with one other management person, but the chairperson clearly should be an independent director, even if the CEO is the largest shareholder"
REITs with an organizational structure which maximizes the talents of its management and provides a foundation for corporate growth will better be able to maximize strategic opportunities as they arise. The positive implications for franchise value are clear.
Organizational Culture
This characteristic refers to the overall behavioral style of the company and the people in it. It primarily refers to human resource component of management style and the "esprit de corps" fostered by management. For example, a firm where new ideas are encouraged could indicate a greater level of organizational cohesiveness or an ability to execute a particular strategy. This will ultimately lead to a higher level of productivity and employee longevity. If this is visible to investors, it could add to franchise value.
3.3 Governance
Corporate governance deals with the relationship between the suppliers of capital and managers of the firm.
Conflicts of Interest
Conflicts of interest refer to situations where the interests of management and shareholders are misaligned. The impacts of conflicts can vary, depending on their severity, and investors' tolerance for them. Glaring conflicts are unusual; more common are issues of incompatible interests or distractions of management.
Common conflicts seen within REIT structures include:
Value
Page 24
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"
Outside properties; when REIT management has ownership interests in property and/or related businesses outside the REIT. Under this scenario, management could have conflicts with the level of resources it dedicates to the REIT.
* Inside sales; when insiders retain the right to sell property to a REIT. There is always a fair market value question with such purchases.
* Anti-takeover provisions in bylaws.
* Built in gain on sale; making disposition decisions contingent upon tax liability issues rather than market timing.
* Self-dealing; entering into transactions with related entities which may benefit inside parties who have ownership interests in both.
An example of self-dealing can be seen from Westfield America's behavior shortly after they went public in 199723:
"When Westfield America went public... some analysts were critical of the unusually close ties with Westfield Holdings. Shortly after its IPO Westfield
America made a $145 million loan to Westfield Holdings ...Jon Fosheim of Green
Street Advisors called the loan 'brazen self-dealing'."
"Fosheim and others also criticized Westfield America's decision to 'hire' a subsidiary of Westfield Holding as an outside property manager and advisor and pay the subsidiary management and development fees."
One interview participant summarized his assessment of the conflicts of interest problem in this way:
"I'm perfectly happy to invest in a company with conflicts, it's just that I'm not going to pay as much for that company as I would for another. People really think about this a lot. Whenever you see an IPO come out where there are obvious conflicts they get asked lots and lots of questions about them. But the
23
Hayes, "Westfield Becomes LA's Mall Power" [1998]
Determinants of REIT Franchise Value Page 25

deal still gets done and sometimes the stocks do really well. But I do think it's important, and it does discount the value."
As "insurance" against these agency problems, investors look for alignment of interests between shareholders and management. This is best achieved through significant inside ownership, and improves when a high percentage of management's wealth is tied up in the REIT.
Incentive Based Compensation Agreements
Although it appears in the literature as a component of premium pricing, analytical research on the subject has generally not been able to establish even a modest relationship between executive compensation and firm performance.
2 4
An investigation into the compensation of REIT executives, however, found
"compensation to be generally positively related to revenue". Incentive based compensation agreements is one way of aligning shareholder and management interests.
Investors questioned on the issue seemed much more concerned with insider ownership than compensation agreements.
Significant Insider Ownership
Significant management ownership of stock directly aligns management and investor interests to maximize profits. REITs have one of the highest insider ownership percentages of any industry sector in the public markets.
2 6 This is commonly attributed to their origins as private investment companies.
This alignment of interests has been empirically examined, and the results indicated "that insider ownership is a statistically significant variable that is related to abnormally high returns"
,,27
When questioned, investors revealed that they take insider ownership one step further.
They want to see a manager's net worth closely tied to the REIT's performance. As one
24
25
Jensen and Murphy [1990], Golec [1994], Solt and Miller [1985]
Chopin, Dickens and Shelor, "An Empirical Examination of Compensation of REIT Managers" [1995]
26
27
Green Street Advisors, "REIT Pricing: An Update of Our Pricing Model" [1998]
Kim, Francis, and Clark, "Investment Performance of Common Stocks in Relation to Insider Ownership" [1988]
Determinants of REIT Franchise Value Page 26

investor noted during his interview, "that way you keep them motivated". In an industry where REIT management sometimes owns property outside the REIT, investors view a high portion of wealth in the REIT as a hedge against activities which might be in conflict with investor's interests.
Disclosure
Disclosure was another issue which was not significantly mentioned in the literature, but which surfaced during the informational interview phase of the research as being a component of REIT franchise value. "Disclosure" refers to REIT managers' communication of all information, in a clear and concise manner, that investors need to make investment decisions. It is the second characteristic (along with the importance of visionary leadership) which is arguably unique to the real estate sector as being a component of franchise value.
Although disclosure may be taken for granted in other public industries, the concept conflicts with traditional, private real estate entrepreneurism. The traditional private real estate firm believes that the disclosure of information could either offer opportunities to the competition or could destroy a transaction. This point is evidenced by the following statement made by John Moody, President and Chief Executive Officer, Cornerstone
Properties 2 8 :
"We were a European public company when we offered our US. IPO in April. At the time we had put a property under contract in Boston. It became part of the public disclosure because it was huge and material. We ended up losing that deal, and I think that was 100% due to the fact that the information was out in the market place and too many people were talking about it. I'm convinced that had we not been going through the IPO process, we would have successfully bought the asset."
28
Real Estate Review, "Edited proceedings of the
3 0
* Annual Real Estate Capital Markets Conference" [1998]
Determinants of REIT Franchise Value Page 27

However, time is a scarce commodity for investors and analysts, and providing information to facilitate the investment decision can improve a company's image in the investment community. One investor relations executive put it this way 2 9
:
"Make it easy for analysts and shareholders to understand your company. Time is a scarce commodity for most stock investors and analysts. Provide information that will aid decision making. Employ such tools as regular conference calls, detailed press releases, supplemental information packages, a useful web site and investor conferences or property tours."
"Real estate companies are learning to play by new rules. Entrepreneurs are now adjusting to the detailed scrutiny of analysts and widely distributed reports on their companies."
Indeed, some believe that the improved disclosure practices required by the public marketplace (analysts and the SEC) will one day "eventually mitigate the volatility of the real estate cycle".
29
Parker, "Is Real Estate Still a Relationship Business?" [1998]
30 McCoy, "Will the Volatility of the Real Estate Cycle Continue" [1997]
Determinants of REIT Franchise Value Page 28

4. STATISTICAL EXAMINATION OF FRANCHISE VALUE DEFINITION
4.1 Statistical Sample
The initial database included all Office and Apartment REITs which existed as of December
31, 1997. From this sample, several REITs were excluded because dependent variable data was not available. Crescent Real Estate Equities was excluded as a result of their "paperclip" REIT status and opportunistic (i.e., non-real estate orientation). consists of the 42 REITs (24 Apartment and 18 Office) listed in Exhibit 2.
The final sample
4.2 Dependent Variable
Premium to Net Asset Value as of December 31, 1997
As described in Chapter One, portfolio net asset valuation is an imperfect calculation.
Different analysts apply differing assumptions to a changing portfolio of properties. To minimize the inherent errors in individual calculations, a weighted average net asset value is used. Data is for December 31, 1997 out of research reports from six sources.
The data is summarized in Exhibit 2, the calculations are in Appendix 2.
Exhibit 2
Premium to Net Asset Value as of December 31, 1997
Apartment REITs
Avalon Properties Inc.
Equity Residential Properties Trust
BRE Properties, Inc.
Irvine Apartment Communities, Inc.
Essex Property Trust, Inc.
Bay Apt Communities
Charles E. Smith Residential Realty, Inc.
Security Capital Pacific Trust
Apartment Investment and Management Company
Home Properties of New York, Inc.
Summit Properties, Inc.
Merry Land & Investment Company, Inc.
Post Properties, Inc.
Cornerstone Realty Income Trust Inc.
Town and Country Trust
Camden Property Trust
Amli Residential Properties Trust
Mid-America Apartment Communities, Inc.
Associated Estates Realty Corporation
Gables Residential Trust
United Dominion Realty Trust, Inc.
Walden Residential Properties, Inc.
Security Capital Atlantic Incorporated
Berkshire Realty Company, Inc.
131 %
127 %
127 %
124 %
124 %
124 %
122 %
121 %
118 %
115 %
115 %
114 %
112 %
112 %
112 %
112 %
110 %
109 %
108 %
104 %
102 %
99%
97 %
90%
Office REITs
Spieker Properties, Inc.
Arden Realty Inc.
Bedford Property Investors, Inc.
Equity Office Properties Trust
Highwoods Properties, Inc.
Kilroy Realty Corporation
Duke Realty Investments, Inc.
CarrAmerica Realty Corporation
Boston Properties, Inc.
Cornerstone Properties, Inc.
Reckson Associates Realty Corporation
Prentiss Properties Trust Inc.
Mack-Cali Realty Corporation
SL Green Realty Corp.
Brandywine Realty Trust
Koger Equity, Inc.
Parkway Properties, Inc.
Great Lakes REIT, Inc.
135 %
133 %
130 %
126 %
123 %
122 %
122 %
121 %
119%
119%
118%
115 %
113 %
112%
109 %
109 %
109%
107 %
Value
Page 29
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FFO Multiple
Consideration was given to using FFO multiple as an alternate dependent variable.
However, the correlation between premium to NAV and FFO multiple is only 69%.
Specifically, the correlation for apartment REITs is 75%, while for office it is 57%. This brings into question the value of any comparison of statistical results measuring the strength of the same set of independent variables against separate dependent variables with such low correlation. The lack of correlation between FFO multiple and NAV premium may be evidence of, and supports the case for, the recognized flaws in FFO. As mentioned in Chapter One, FFO, as a measurement of operating performance, is criticized for being distorted by the omission of rapidly depreciating and recurring capital items such as tenant improvements and leasing commissions. These costs are higher in the office sector, which perhaps explains why there is less correlation between the NAV and FFO pricing premiums in this sector. Adjusted FFO would be a better indicator, but consistent data was not available.
4.3 Independent Variables
Numerous independent variables have been used to test the definition of franchise value outlined in Chapter Three. The objective components were relatively easy to proxy for, indeed numerous variables are included in many cases, so that the strongest relationship can be identified. The subjective components were somewhat more challenging to proxy for, and required a certain degree of creativity.
Unless otherwise noted, data is from SNL Securities. All data is for year-end 1997.
Exhibit 3 provides descriptive statistics for the independent variable database, which is attached as Appendix 3. Assumptions and expectations for each variable follows.
Determinants of REIT Franchise Value Page 30

Exhibit 3
Independent Variable Descriptive Statistics
Mean
All REITs
Std Dev Min
Apt REITs
Max Mean Std Dev
Office REITs
Mean Std Dev
Business Strategy
Herfindahl Geographical Concentration
Herfindahl Product Type Index
Regional Growth Opp's
New England
Mid Atlantic
Old South
Industrial Mid West
Farm Belt
Mineral Extraction
S. California
N. Califonia
Balance Sheet Strength
Debt to Mkt Cap
Percentage Variable Rate Debt
EBITDA to Interest Expense Ratio
1998 Capital Deployment Capacity
Dividend Payout to '98 FFO Ratio
Visibility
Analyst Coverage
Number of Institutional Owners
% of Institutional Owners
Average Weekly Shares Traded
Average Weekly Trading Volume %
Total Market Cap (billions)
Low Overhead
G&A as Percentage of NOI
Experienced Management
Average Earnings Surprise
Visionary Leadership
Vision Test
Disclosure
Disclosure Test
Conflicts of Interest
O.P. Units Outstanding
Total Inside Ownership
Executive Inside Ownership
Indicator(Dummy) Variables
Focus
Prop Mgmt Capabily?
Development Capability?
Rated Debt?
Evidence of Nepotism
Structure
State of Incorporation
Independent Board Chair
57%
89%
3%
20%
26%
11%
1%
15%
16%
9%
32%
24%
4.02%
82%
68%
8
87
56%
159.9
1.34%
$2.2
6.6%
1.39%
1
3
7.6%
10.7%
6.0%
3
36
19%
5,281.8
.42%
$2.3
1
2
8.5%
7.2%
7.2%
2
19
4%
14
195
92% 51%
8
82
554.4 782.8 385.4
.43% 2.40% 1.23%
$.4 $13.3 $1.9
3.1% 1.2% 16.4% 6.2%
2.33% -2.35% 9.52% .33%
1= 0=
Office
Yes
Yes
Yes
Apt
No
No
No
No Yes
UPREIT Trad/Dwn
Other Maryland
Yes No
26%
18%
6%
31%
32%
24%
3%
19%
27%
17%
15%
50%
0%
0%
0%
0%
0%
100%
100%
21%
100%
98%
0% 100%
0% 14%
77%
0% 100%
65%
56%
99%
2%
14%
33%
9%
1%
18%
15%
7%
8%
19%
12%
0%
48%
76%
35%
20%
1.38% 0.00% 6.60% 3.86%
86% 0% 359% 93%
11% 39% 91% 73%
0
0
6
7
1
3
23%
2%
6%
26%
35%
20%
2%
22%
25%
17%
59%
75%
7%
15%
1.20%
104%
9%
28%
29%
4.23%
66%
62%
3
39
20%
220.7
8
94
63%
779.8
.36% 1.48%
$1.7 $2.6
7.0% 3.4%
1.46% 2.81%
1 1
2 3
4%
28%
17%
14%
1%
10%
16%
10%
30%
21%
6%
23%
1.60%
45%
10%
3
31
16%
1,147.9
.47%
$3.0
2.8%
7%
36%
26%
30%
3%
13%
30%
18%
2.55%
1
2
0.0% 37.2% 8.3%
.3% 34.8% 9.6%
0.0% 42.3% 5.3%
10.4%
6.4%
4.5%
6.7%
12.3%
7.0%
5.4%
8.0%
9.8%
All REITs
#=l #=0
18
39
32
22
34
26
11
19
24
3
10
20
8
16
31
23
0
22
19
17
22
13
7
10
Apt REITs
#=1 #=0
24
2
5
7
2
11
17
14
Office REITs
#=1 #=0
18
17
13
5
12
13
4
9
14
9
6
5
0
1
5
13
Value
Page 31
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Focused Business Strategy
Herfindahl index of geographical concentration, measured by Hartzell's eight region segmentation.
As described in Chapter Two, although analysts and investors in the past viewed geographic concentration as a desirable trait, they now foresee the paradigm of the local sharpshooter as disappearing. To test the hypothesis that a focused business strategy, as defined by geographic concentration, is no longer a significant determinant of franchise value and price to FFO multiples, an application of the Hirschman-Herfindahl index is used.
The Hirschman-Herfindahl index is a measure of concentration/ diversification, in this case applied to strategic business focus. This index addresses the distribution of each
REIT's properties across the eight U.S. economic regions defined by Hartzell, Shulman,
Wurtzebach (1987). The formula is:
8 Z
2 where Sj= proportion of the REIT's portfolio invested in region j.
j=1
The value of this index will vary between 1.0 for a non-geographically diversified REIT, to .125 for a REIT which is equally diversified across the eight regions.
Appendix 3 summarizes each REIT's holdings by economic region, Appendix 4 provides the Hartzell, Shulman, Wurtzebach economic region definition.
Herfindahl index ofproduct type concentration.
Anecdotal evidence from investor interviews suggests that unlike regional diversification, product type diversification is not viewed favorably at this point in the REIT market's evolution. (Although several investors voiced opinions that product type diversification will evolve over time and become more widely accepted.) To test this hypothesis, the
Hirschman-Herfindahl index of concentration/diversification is again applied, this time to product type diversification.
Determinants of REIT Franchise Value Page 32

The formula is:
6
LS t=1
2 where St= proportion of the REIT's portfolio invested in region t.
Product type diversification is being tested using both office and industrial as separate product types. This variable will equal 1.0 for a REIT with holdings in only one product type. For perfectly diversified REITs, the variable will be .167.
REITs with a low Herfindahl index for product type concentration are expected to have lower franchise values and price to FFO multiples.
Each REITs relative holdings by product type as of December, 1997 are displayed in
Appendix 5.
Growth Opportunities inherent within business strategy
Development Capabilities
As positive net present value acquisitions become increasingly difficult to identify in almost every market in the country, having the ability to profitably build new product
(i.e. at attractive risk-adjusted returns) should positively impact share price. Investors should be willing to pay a premium for the value enhancing returns associated with ground up development.
To test for this, an indicator (dummy) variable is used. Data was collected from 1997
Annual Reports. A REIT was considered to have development capabilities if it has both the organizational capacity to develop, and a track record of doing so.
Having development capabilities should have a positive impact on stock pricing premiums.
In-house Property Management
In-house property management capabilities is a characteristic of fully-integrated real estate companies, and provides an additional source of internal economies of scale and
Determinants of REIT Franchise Value Page 33

the internal profit potential
31 . However, in the survey investors were generally indifferent to such capabilities (especially for geographically diversified REITs) and did not report that it significantly impacts their evaluation of a REIT.
To test the hypothesis that property management capabilities will positively impact stock pricing, an indicator (dummy) variable is used. A significant relationship between inhouse property management and stock pricing premiums is not expected to be identified.
Regional Growth Opportunities
The current economic cycle has elevated market rents to levels high enough to equal or exceed those necessary to justify new development in many markets. For a given property type, differences with respect to a REIT's regional concentration of assets will likely impact investors perceptions of rental growth prospects.
To test for the impact of regional growth opportunities, the Hartzel economic region segmentation scale is being applied again to see if a relationship can be observed between regional focus and growth opportunities perceived in the defined regions. If a REIT has a high concentration of properties in a region perceived to have significant economic growth opportunities, its stock should be priced at a relative premium.
Appendix 4 shows each REITs diversification by Hartzel Regional Segmentation.
Balance Sheet Strength /Access to Capital
Debt to Total Market Capitalization Ratio
As described in Chapter Two, one of the key components of balance sheet strength is debt level. Anecdotally, an appropriate debt level for REITs is thought to be around 35% to 40%. Debt levels below this threshold offer a REIT the flexibility to take advantage of growth opportunities by going to the debt market, which is somewhat quicker than the equity markets, and doesn't further dilute the ownership of existing shareholders.
1
Bers and Springer, "Sources of Scale Economies for REITs"
Determinants of REIT Franchise Value Page 34

If a REIT carries low enough debt levels such that it is perceived to have growth potential without returning to the equity markets, then it should be priced at a premium to those with higher debt levels.
Additional Borrowing Capacity to Expected Capital Deployment Ratio
As another test of the advantages of low debt levels on investor perceptions and subsequently on share prices, the additional borrowing capacity to reach a 40% debt to total capitalization level is calculated, and compared to 1998 capital deployment estimates for each REIT. The resulting ratio is a gauge of the buffer existing shareholders have before the REIT can be expected to return to the equity markets.
Capital deployment (acquisition and development) estimate data was collected from
Morgan Stanley, Lehman Brothers, and Prudential analysts. The data ranges from 0% for a REIT already at or above a 40% debt level, to 359% for Security Atlantic, with 31% debt ratio and a $150 million anticipated 1998 acquisitions and development volume.
REITs with high ratios of borrowing capacity to acquisition and development volume should be priced at a premium to those with less debt capacity for growth.
Investment Grade Debt Rating
The ability to access unsecured debt can provide additional flexibility for growth opportunities. In addition, it introduces additional monitoring of management by the rating agencies, which is good arguably for shareholders at large.
To test the hypothesis that the existence of a credit rating will have a positive impact on growth prospects and firm monitoring, an indicator (dummy) variable was used.
Having an unsecured debt credit rating should positively impact relative REIT stock pricing premiums.
Variable Rate Debt to Total Debt Ratio
The threat of decreased FFO from a market increase in interest rates, and expected negative impact on stock pricing is tested here.
Determinants of REIT Franchise Value Page 35

If investors are concerned about the threat of rising interest rates, and if a REIT has enough variable rate debt that such an increase in interest rates will significantly affect
FFO, then the REITs should be priced at a relative discount to those REITs with higher percentages of variable-rate debt with less such exposure.
EBITDA to Interest Expense Ratio
The EBITA to interest expense ratio is used as a measure of corporate-level interest coverage. High interest coverage ratios indicate lower probabilities of financial distress, which can increase the cost of debt and equity. As such, high ratios in this category should correlate with higher relative REIT stock pricing premiums.
Dividend Payout to Estimated 1998 FFO Ratio
A higher dividend payout ratio leaves the REIT with less cash on hand for growth opportunities and unexpected financial events.
The hypothesis being tested is that lower payout ratio implies a more secure dividend
(along with opportunity for continued dividend growth) and, therefore, a positive impact on stock pricing premiums.
Visibility
Analyst Coverage and Institutional Ownership
As mentioned earlier, Wang, Erickson, Gau, and Chan [1995] found that REITs with a higher percentage of institutional investors, or with a larger following by security analysts, tend to perform better than other REIT stocks.
The analyst coverage data is from First Call for fourth quarter, 1997. The percentage of institutional common stock ownership data is from SNL Securities.
If increased investor visibility has a positive impact on stock pricing premiums, then those REITs with higher values for these two variables should be priced at relative premiums to other REITs.
Determinants of REIT Franchise Value Page 36

Relative Trading Volume
Higher trading volumes allow investors to trade in and out of a stock easily, quickly adjusting their exposure to a given REIT. To test whether a "liquidity premium" exists in
REIT stock pricing, a proxy for liquidity specified as the average weekly trading volume for shares traded each week during 1997, as a percentage of total shares outstanding, is used. When annual figures are not available, fourth quarter, 1997 figures were annualized.
If a "liquidity premium" does indeed exist in the pricing of REIT shares, then REITs with higher relative trading volumes should trade at a premium to those with lower trading volumes.
Market Capitalization
Is bigger better, or is better better? While the scale economies (primarily relating to operating expenses) associated with large market cap REITs are often cited in the current press, the diseconomies of large companies in terms of maintaining continued dramatic growth rates in per share operating performance are less often noted. Is there an important relationship between REIT size and stock pricing premiums? Does size really matter?
As a simple test of investor preference for bigger is better, total market capitalization
(debt & equity, in billions) as of December 31, 1997 is used. If investors indeed believe that bigger is better, a positive relationship between large market capitalizations and stock pricing should be observed.
Low Overhead
G&A as a percentage ofportfolio net operating income (GAAP).
G&A expenses are somewhat tricky to compare across companies, given the lack of standardized REIT accounting conventions, and the ability for owner/managers to "push down" corporate level expenses to the property level. However a more standardized or preferable measure of corporate operating efficiencies across REITs does not exist, especially considering that operating expense vary widely across product types.
Determinants of REIT Franchise Value Page 37

If investors perceive corporate G&A expense (expressed as a percentage charge against each dollar of property level net operating income) to be an accurate measure of a REIT's operating (overhead) efficiency, there should be a positive relationship between low
G&A costs and stock pricing premiums.
Experienced Management with a Proven Track Record
Average earnings surprise
Having a track record of delivering on investor's performance expectations is an incomparable yardstick of management skill.
To measure a REIT's track record and its affect on stock pricing, the average quarterly percentage earnings surprise, as reported by First Call, for the last four quarters reported as of December 31, 1997 (
3 rd quarter 1996 through
3 rd quarter 1997) was used. If investors consider REIT management's ability to deliver returns beyond expectations in their evaluation, then those REITs with positive average earnings surprises should be trading at a premium. Earnings surprise data is attached as Appendix 7.
Nepotism
Many UPREITs which began as family real estate businesses are now run by boards and/or management teams which have brothers, sisters, fathers, or wives as members.
Although these executives are likely to be highly experienced real estate executives, it is also likely they came into their positions through family relationships.
To measure nepotism's possible affect on stock pricing, an indicator (dummy) variable was used based on the existence/absence of family relationships within a REITs board and management. Data was gathered from biographical descriptions in SEC filings.
If investors view these management relationships negatively, REITs with clear evidence of nepotism in their board or management structure will be priced at a lower stock premiums than their competitors without such structures.
Determinants of REIT Franchise Value Page 38

Visionary Leadership
Number of companies which REIT Chairman has taken public
As mentioned in Chapter Two, investors often mentioned visionary leadership as playing a key role in their perception of a REIT. Although this is a difficult construct to quantify, it is possible it can be somewhat captured by measuring how often the Chairman has had a business vision which was popular enough to be validated by a public stock offering.
Data was gathered from biographical information in SEC filings. Credit was given for each public company the REIT Chair has taken public as Chairman, including the REIT itself, if applicable. Credit was not given for the creation of private companies since their size and success could not be measured.
Visionary leadership, if measurable in this manner, should have a positive affect on stock pricing premiums.
Disclosure
Press release disclosure test
Conversations with investors revealed that although corporate disclosure is very important, and does indeed affect perceptions of a REIT, it is not a significant factor in stock pricing.
In an attempt to statistically confirm this anecdotal evidence, REITs were scored on a scale from one to six based on the level of disclosure/detail in their quarterly earnings press release. Based on variables established through conversations with analysts, the following criteria was used and REITs were awarded one point for the existence of each of the following components in their quarterly press release:
" Complete (although unaudited) income statement.
" Complete (although unaudited) balance sheet.
* A breakdown of "same store" performance.
* Financial details of each new transaction (not just a summary).
Determinants of REIT Franchise Value Page 39

* A reconciliation of Net Income to Funds From Operations.
* A reconciliation of Net Income of Funds Available for Distribution.
If disclosure does play a role in stock pricing premiums, the REITs with high scores for the existence of many of the above variables in their quarterly earnings press releases will have a higher premium.
Conflicts of Interest
UPREIT Structure
The conflicts of interest inherent in the UPREIT structure are well documented in the literature and described in some detail in Chapter Three. If the existence of these conflicts has a negative affect on investors' perceptions of a REIT and it is priced into the stock, then UPREITs should trade a lower pricing premiums than their "traditionally" structured brethren. An indicator (dummy) variable is used.
Maryland Corporation
The state of Maryland provides strict anti-corporate takeover provisions. Many REITs have chosen to incorporate there as a measure of protection against unsolicited takeovers which could trigger unfavorable tax consequences for the operating partnership unit holders.
An indicator (dummy) variable is used to test if incorporation in Maryland has an effect on stock pricing, because shareholder value-enhancing tender offers will be less likely.
If this conflict of interest for the shareholders at large affects REIT stock pricing, then
REITs incorporated in Maryland will trade at a lower premium than those incorporated in other states.
Separation of Management and Board Leadership.
In his article, "REIT Governance Protecting Shareholder Interests", John McMahan states that "perhaps the most important single aspect of effective board governance is the separation of management and board leadership." Data was gathered to see if investors
Determinants of REIT Franchise Value Page 40

price this separation of roles he describes, where the CEO and/or President is on the board but the chairperson is an independent director, into stock premiums. If so, then independent board leadership will have a positive impact on REIT stock pricing premiums.
Percentage Insider Ownership
The advantages of the alignment of management and shareholder interests through significant insider ownership are described in detail in Chapter Two.
To test whether this anecdotal evidence can be substantiated quantifiably, the percentage of insider ownership is used as a proxy for protection against conflicts of interest. Data is from SNL Securities and represents last reported 1997 figures.
The higher the inside ownership, and alignment of investor interests, the higher the stock pricing premium should be.
Percentage Insider Ownership of Top Six Officers
As a second test of the alignment of management and shareholder interests, the percentage of beneficial stock ownership by the top six executives is used. The top positions reviewed were Board Chair, Chief Executive Officer, President, Chief Financial
Officer, Chief Operating Officer, and Chief Investment Officer. If a REIT's management team didn't include a certain title, close substitutes were used (Chief Acquisitions Officer in place of Chief Investment Officer, for example). When one executive plays more than one role (Chair and CEO), they are only counted once.
Data is from 1998 Proxy Statements.
The higher the inside ownership, and alignment of investor interests, the higher the stock pricing premium should be.
Determinants of REIT Franchise Value Page 41

5.
REGRESSION RESULTS
A regression analysis of the variables described in Chapter Five resulted in a statistical model which explains 72.9% of the variance in the premiums to net asset value across the sample of selected REITs. The strength of this relationship supports the franchise value definition outlined in Chapter Three, and indicates that the growth opportunities inherent in a REIT's business strategy, balance sheet strength, cost economies of scale, and certain conflict of interest mitigations, are statistically significant factors which contribute to REIT franchise value.
It is not surprising that the objective components of the franchise value definition in Chapter
Three tended to surface more readily in the model than the subjective components. The only exception to this pattern is the strength of the variables included to measure growth opportunities inherent within a REIT's business strategy. Indeed, such expected growth opportunities could be argued to be either subjective or objective.
The econometric results are summarized in Exhibit 4. A discussion of each of the statistically significant variables and of selected non-statistically significant variables from the model follows.
Determinants of REIT Franchise Value Page 42

Exhibit 4
Regression Results
Variable
Constant
Focus (1=Office, O=Apartment)
Business Strategy (subjective)
Herfindahl Geographical Concentration
Herfindahl Product Type Index
Inherent Growth Opportunities (subjective)
Southern California
Northern California
New England
Mineral Extraction
Development Capabilities
Farm Belt
Industrial Mid-West
Old South
Mid Atlantic
Balance Sheet Strength (objective)
1
1998 Capital Deployment Capacity
Percentage Variable Rate Debt
Total Market Capitalization
Rated Debt? (1=Yes, O=No)
EBITDA to Interest Expense Ratio
Dividend Payout to '98 FFO Ratio
Visibility (objective)
1
Number of Institutional Owners
Analyst Coverage
Average Weekly Shares Traded
Average Weekly Trading Volume Percent
Low Overhead (objective)
G&A as Percentage of NOI
Experienced Management (subjective)
Evidence of Nepotism (1=No, O=Yes)
Average Earnings Surprise
Visionary Leadership (subjective)
Vision Test
Disclosure (subjective)
Disclosure Test
Coefficient
Included Variables t-Stat
Excluded Variables
Significance if Coefficient t-Stat Significance
13.063
5.239
.143
.202
.447
-. 109
.041
-.150
-.852
~
..... ..........---
Total Inside Ownership .478
-.439 Executive Inside Ownership
Structure (1=UPREIT, 0=Traditional)
State of Incorporation (1=Other, 0=MD)
O.P. Units Outstanding
Independent Board Chair (1=No, O=Yes)
4.516
2.974
4.268
3.820
3.079
-2.222
3.712
-3.029
-3.026
2.873
-2.242
.006
000
.001
.004
.034
.001
.005
.005
.007
.032
-.188
-.023
.112
.072
.030
-.028
-.016
.142
.119
-.088
-.032
.150
.156
.064
-.077
.065
.052
.079
.055
.144
-.071
.025
-.016
-1.282
-. 166
1.272
.811
.325
-.244
-.149
1.570
1.208
-.790
-.281
1.585
1.507
.687
-.624
.640
.475
.929
.628
1.570
-.689
.257
-.178
.210
.869
.213
.424
.747
.809
.883
.127
.236
.436
.781
.123
.142
.497
.537
.527
.638
.360
.535
.127
.496
.799
.860
Adjusted R
2
= 72.9%
Determinants of REIT Franchise Value
Page 43

5.1 A Review of the Statistically Significant Variables
Growth Opportunities Inherent in Business Strategy
Four regions emerged from the group of variables designed to reflect economic opportunities by regional portfolio concentration as having a statistically significant impact on REIT franchise value. Three regions have a statistically positive impact on franchise value; Southern California, Northern California, and New England, and one region has a negative impact; Mineral Extraction.
The intuition behind the statistical significance of these variables is fairly straightforward.
Southern California was the last region of the country to emerge from the recession, and as such is widely considered to have significant upside rent (and value) potential. The
Pacific Northwest ("Northern California") and New England markets are experiencing significant growth in the high tech sector, and in the case of New England, also in the financial services sector. Both regions have significant impediments which will slow the pace of new development. The "Mineral Extraction" region, although economically vital, has few such impediments to new development, making replacement product a significant threat to rental upside, and thereby justifying less franchise value for REITs with significant holdings in this region.
1998 Capital Deployment Capacity
The volume of acquisition and development capacity which a REIT can undertake without returning to the equity markets is a fundamental measure of balance sheet strength. Assuming a threshold of 40% debt in the total capitalization of the REIT, the model indicates that those REITs which are perceived to have the ability to pursue their near term growth strategies without diluting existing equity holder's positions have more franchise value than those without such ability.
Percentage Variable Rate Debt
The model indicates that investors are concerned a REIT's vulnerability to a market increase in interest rates, and the corresponding decrease in FFO which would result.
Determinants of REIT Franchise Value
Page 44

The coefficient of this variable indicates that the more variable rate debt a REIT has, the lower its franchise value.
G&A as a Percentage of NOI
The presence of this variable as statistically significant supports earlier research by
Capozza and Seguin . Their study found that increases in the structural component
(asset and liability management) of G&A costs had a negative impact on share price.
Although this analysis does not segment the components of overhead costs as Capozza and Seguin did, the coefficient of the G&A variable in this model also indicates that higher G&A costs have a negative impact on share price, as reflected in franchise value.
Total Inside and Executive Inside Ownership
Among the intriguing characteristics of the model, is the combination of Total Inside
Ownership and Executive Inside Ownership. The signs of these variables suggest that while inside ownership is desirable to investors, REITs are penalized if too much of this ownership is concentrated in the hands of upper management.
5.2 A Review of Select Non-Statistically Significant Variables
Several of the variables in the model failed to surface as statistically significant in this sample of REITs, but are considered to be moderately significant.
Herfindahl Geographic Concentration Index
The sign of the Herfindahl Geographic Concentration variable indicates that investors indeed prefer REITs with more regional diversification. While only modestly statistically significant, it supports anecdotal evidence that the growth opportunities and portfolio diversification benefits of geographic diversity are attractive to investors.
Development Capabilities
As expected, development capabilities surfaced as a positive influence on franchise value. This supports anecdotal evidence from interviews with investors. The low t -
32 Capozza and Seguin, "Managerial Style and Firm Value" [1998]
Determinants of REIT Franchise Value
Page 45

statistic for this variable, however, indicates that it is only moderately significant contributor to those premiums.
Total Market Capitalization
The strength of the "Total Capitalization" variable indicates that a moderate, but not statistically significant, relationship exists between REIT size and franchise value premiums. This is somewhat surprising considering popular opinion that larger REITs enjoy better access to capital and improved liquidity, and may be a result of the sample size and/or the generally positive forecasts for the entire sector as of December, 1997.
Additional analysis of a larger sampling of REITs, or during less favorable market conditions, may achieve different results.
REIT Structure
The sign and moderate strength (although not statistically significant) of the "Structure"
(UPREIT/Traditional) variable was one of the surprises to surface in the model. This variable was included under the presumption that REITs with an UPREIT structure would be perceived to have more inherent conflicts of interest. However the sign of the variable suggests that the UPREIT structure is actually a net contributor of franchise value, negating the original hypothesis, and suggesting the ability to acquire properties through the issuance of operating partnership units in the REIT contributes to franchise value premiums.
Number of Institutional Owners and Analyst Coverage
The relative strength and coefficient of the "Number of Institutional Owners" and
"Analyst Coverage" variables support earlier findings by Wang, Erickson, Gau, and
Chan 3 3 34 with a larger following by security analysts, tend to perform better than other REIT stocks.
3
3
Wang, Erickson, Gau, and Chan "Market Microstructure and Real Estate Returns" [1995]
Wang, Erickson, Gau and Chan found a correlation between stock performance and the percentage of institutional investors. Although the "Percentage of Institutional Ownership" variable had to be removed from the model due to multicollinearity problems, the "Number of Institutional Investors" variable surfaced as statistically significant.
Determinants of REIT Franchise Value
Page 46

Average Weekly Trading Volume Percent
The sign of this variable indicates that the higher the average weekly trading volume, the lower the franchise value. This contradicts intuition, as well as the opinions of some
REIT analysts. However the weak statistical significance of the variable prohibits any conclusive observations.
Average Earnings Surprise
Although it was not completely a surprise that most of the subjective franchise value components failed to surface as statistically significant, this variable was considered to have the most promise of doing so. It was expected that a track record of exceeding analyst earnings estimates would be correlated to franchise value. However, this variable not only failed to surface as statistically significant, it also was relatively less significant than the "Evidence of Nepotism" variable, which was not expected to have statistical significance.
5.3 Variables not included in the final analysis
Four of the variables for which data was collected are not part of the final analysis:
" In-House Property Management: This variable emerged with a negative coefficient, implying that outsourcing property management capabilities contributes to franchise value. Although this is plausible, there are only three REITs in the sample which outsource this responsibility, raising the possibility of data problems. There were also multicollinearity problems with this variable, prompting its removal.
" Inside Board Members: This variable flipped from positive to negative in different model iterations, and created multicollinearity problems, provoking its removal.
* Percentage Debt to Market Capitalization: This is arguably a good indicator of balance sheet strength, however, the variable created significant instability in the model due to multicollinearity with other variables. Although it was removed, the
1998 Capital Deployment (acquisitions and development) Capacity variable remained in the model, and is perhaps a superior (or at least more practical) indicator of balance sheet strength.
Determinants of REIT Franchise Value Page 47

* Percentage Institutional Ownership: This variable caused multicollinearity problems in the model, prompting its removal. The number of institutional owners remains in the model, and emerged as a modest, although not statistically significant variable.
5.4 Additional Study
Overall, a statistical model explaining 73% of REIT franchise value is somewhat robust, and implies that the premiums to net asset value at which most REITs traded in December, 1997 can be quantified on a relative basis. Further study on a larger sample, or on time series, or pooled cross-sectional data would provide important verification of these results.
Determinants of REIT Franchise Value
Page 48

6. CONCLUSIONS
This paper examines the determinants of premiums to net asset value, also known as franchise value, at which most office and apartment REITs traded on December 31, 1997.
Through a review of relevant literature and informational interviews with academics, the components of franchise value were identified and grouped into three general criteria:
Internal and External Structural Components, Human Resource Components, and
Governance Issues. Interviews with industry practitioners provided additional insights and a refinement of the definition which had been developed.
The interviews clearly distinguished the importance of the subjective contributions of good management and visionary leadership. Although these characteristics are difficult to quantify, investors repeatedly stressed that their importance cannot be underestimated.
Examples were provided to demonstrate the interrelationship of the franchise value components, and to show that although good management and visionary leadership may be subjective, their impact will surface in measurable ways.
Specific components of franchise value were then empirically examined to explore and quantify their impact on REIT stock premiums to net asset values. Independent variables were developed as proxies for the components of the franchise value definition. Objective components of franchise value were measured through variables such as the percentage of inside ownership, the percentage of variable rate debt, and total market capitalization.
Subjective components of franchise value were measured through more creative proxies such as average earnings surprise, indexes of geographic portfolio concentration, and a test for visionary leadership.
The analyses revealed that several components have a statistically significant impact on
REIT franchise value. When tested against the dependent variable of premium to net asset value, the "Significant Variables" listed in Exhibit 5 explained approximately three-fourths of the variance in franchise value premiums across the selected office and apartment REITs.
The regression results output from the statistical program are attached as Appendix 8. The findings suggest that conflict of interest mitigations, low overhead, low amounts of variable
Determinants of REIT Franchise Value Page 49

rate debt, the ability to grow without issuing more equity, and regional economic factors, are significant determinants of REIT franchise value.
Although the "Marginally Significant Variables" were not found to have a statistically significant impact on franchise value in this model, the relationship is strong enough to conclude that a moderate relationship does exist. Prior studies and anecdotal evidence also supports the significance of many of these variables.
Several variables which some investors and analysts believe contribute to franchise value had no statistical significance in this model. Dividend payout to 1998 FFO ratio, average weekly shares traded (number), and average weekly trading volume (percent), all failed to have any statistically significant impact on the franchise value of the REITs in this sample.
Exhibit 5
Overview of Statistical Results
Significant Variables
(significant at a 95% confidence level)
Marginally Significant Variables
(significant at not less than a 76% confidence level) e Portfolio presence in certain geographical areas
* 1998 capital deployment capacity
* Percentage variable rate debt
* G&A as a percentage of NOI
* Total Inside Ownership
* Executive Inside Ownership
" Geographical Diversification
* Development Capabilities
" Total Market Capitalization
" Debt Rating
" Number of Institutional Owners
" Analyst Coverage
" Structure (UPREIT/Traditional)
Determinants of REIT Franchise Value Page 50

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1 3 1
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15 0
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Capozza, Dennis R. and Paul J. Saguin. "Why Focus Matters." unpublished (May 20, 1997 Version)
Carr, Fred. "Valuation Methodology and Rationale." The Penobscot Group, Inc
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Kirby, Mike, et al. "REIT Pricing: An Update of Our Pricing Model." Green Street Advisors (January,
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Determinants of REIT Franchise Value
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Appendix 1
Management Class Questionnaire Participants
Informational Interviews
1. Lynne Sagalyn, Professor of Business Administration, Columbia University
2. Tim Riddiough, Real Estate Finance and Capital Markets Professor, MIT
3. Tod McGrath, Lecturer in the Real Estate Program, MIT
Industry Professionals : Confidential Interviews
Interviews were conducted under confidence that quoted responses would not be attributed to any particular individual.
Investors/Analysts
1. Fred Carr, Principal, Penobscot Group
2. Greg Whyte, Managing Director, Morgan Stanley
3. Paul Adornato, Analyst, PaineWebber
4. Matt Ostrower, Equity Analyst, Boston Financial
5. Mark Roberts, Director of Research, Invesco Realty
6. Alexis Huges, Analyst, J.P. Morgan
7. William Morrill, Managing Director, LaSalle Advisors
8. Charles Lowrey, Managing Director, J.P. Morgan
9. Will Marks, Senior Analyst, Montgomery Securities
10. Daniel Miranda, President, Security Capital Preferred Growth
REIT Management
1. Paul Goodof, Treasurer, Fifty Associates
2. Doug Linde, Vice President, Boston Properties
3. Robert Melzer, President, Property Capital Trust
4. Rodney Dimock, Executive VP, Cornerstone Properties
5. Cordel Lietz, Senior Vice President, Taubman Company
6. Jean Hurley, Managing Director, AMB Institutional Realty
Page 53

Appendix 1
Management Class Questionnaire
MIT Center for Real Estate
CONFIDENTIAL QUESTIONNAIRE
FAX TO: Jay Hooper, Team Member, at. (617) 489-6904
We are evaluating the influence of management on a REIT's stock price. We would appreciate your candid responses to this voluntary questionnaire, which should take no longer than 10 minutes to complete. Your participation will assist in research for a student term project as part of the Masters Program at the MIT Center for Real Estate.
Your responses will be kept in strictest confidence by our research team. Any written reports will summarize responses, rather than attribute them to particular firms or individuals. Please contact Jim Young, Team Member, at (617) 867-0883 or by email
with any questions.
Name:
Company:
Position:
Years experience with public real estate market:
1. What are the four most important characteristics you consider, in order of importance, when evaluating a REIT's management?
Page 54

Appendix 1
Management Class Questionnaire (continued)
2. How much value do you place on the following characteristics when evaluating a REIT?
(PLEASE CIRCLE) Low
Value a) Experience of Management Team ....................................................... 1
b) Number of Independent Directors ....................................................... 1 c) Corporate Culture ............................................................................. 1
1 d) Level of Disclosure ............................................................................. e) Visionary Leadership........................................................................... 1
f) Track Record of Management Team ................................................... 1
g) Business Strategy e diversified by product type............................................................ 1
* geographic diversification............................................................. 1 e capital structure ............................................................................. 1
2
2
2
2
2
2
* developm ent ............................................................................. 1 2 h) Demonstrated Knowledge of Public
Market Requirements ............................................................. 1 2 i) No Perceived Conflicts of Interest....................................................... 1 2
Property Management Capabilities...................................................... 1 2
2 k) Organizational Structure ...................................................................... 1
1) Capacity to Accommodate Growth...................................................... 1 2 m) Other (specify): n) Other (specify):
............... 1
............... 1
2
2
2
2
2
3
3
3
3
3
3
4
4
4
4
4
4
High
Value
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
3
3
3
3
3
3
3
3
3
3
3
4
4
4
4
4
4
4
4
4
4
4
Page 55

Appendix 1
Management Class Questionnaire (continued)
3. Please describe the management characteristics you routinely consider when evaluating a
REIT? What is the basis for your evaluation?
4. Which characteristics impact your evaluation positively? Negatively?
5. Do you consider the potential for conflicts of interest when making your evaluation? If
so, which sources of conflict do you evaluate and what information do you seek?
6. REIT stocks are currently trading at a premium to NAV. Do you attempt to estimate what percentage of that premium is attributable to management? If so, what is your estimate and how do you determine it?
Page 56

Appendix 1
Management Class Questionnaire
Summary of Questionaire Responses
Analysts & Investors REITs
Experience of Management Team
Number of Independent Directors
Corporate Culture
Level of Disclosure
Visionary Leadership
Track Record of Management Team
Business Strategy diversified by product type geographic diversification capital structure development
Knowledge of Public Market Requirements
No Perceived Conflicts of Interest
Property Management Capabilities
Organizational Structure
Capacity to Accommodate Growth
Low
Value
1 2 3 4
High Weighted
Value Average
5
# of respondents at each value
Value
4.7
3.4
3.6
4.0
4.9
4.6
3.0 3.0 4.0
2.0 5.0
1.0
0.5 4.5
2.0
0.5 1.5
0.5 4.5
4.0
3.0
1.0 4.0 5.0
1.0 4.0 3.0
1.5 1.5 3.0
1.5
4.0
Other: Insider Ownership
Other: Relative value against similar REITs
Other: Capacity to develop
Other: Ability to articulate strategy
Other: Integrity
Other: Geographic Concentration
Other: Ability to listen to analysts/investors
1.0 1.0
1.0
1.0
1.0
Low
Value
High Weighted
Value Average
1 2 3 4 5
# of respondents at each value
Value
2.5 3.5
2.0 2.0 2.0
5.0 1.0
0.5 4.5 1.0
0.5 5.5
2.5 3.5
4.6
3.0
3.2
4.1
4.9
4.6
3.5 0.5 2.0
2.0 2.0 2.0
3.5
0.5 2.5 3.0
2.0 3.0
1.0 3.0
3.0
1.0 1.0 3.0
0.5 0.5 1.0
1.0
1.0
Note: Responses which fell between values (i.e., 2.5) were distributed with 0.5 to each closest whole value.
Response
Variances
0.12
0.40
0.43
(0.13)
(0.07)
(0.03)
0.35
0.23
(0.17)
0.01
6,70
(0.02)
0.23
0.08
Response
Observations
Note distribution of responses
Note distribution of responses
Note distribution of responses

Appendix 2
Dependent Variable (Premium to NAV) Calculation
Name Ticker
Associated Estates Realty Corp AEC Apt
Apartment Investment and Man AIV Apt
Town and Country Trust TCT Apt
United Domuiuon Realty Trust, UDR Apt
W4de
' Ap
Net Asset Value Per Share, As Calculated By:
Morgan Green Merrill Paine Raymon Jeffries
Stanley Street Lynch Webber LaSalle James & Co.
Data NAVper Share
Count Mean Std Dev
12/31/97 hare Pric
$23.25 $21.25 $20.60 $23.22
$29.27 $32.96 $30.82
Arden Realty Inc. ARI Office $24.58 $22.75 $20.03 $22.49 $25.33
Avalon Properties Inc
B Re fy'lrust
AVN
BD)N
Apt
Of*c
Bedford Property Investors, Inc BED Office
BRE Properties, Inc BRE Apt
Berks e
Ret Copay. ;nc R
Boston Properties, Inc.
Apt .
BXP Office
Bay Apt Communities BYA Apt
$24.36 $22.00 $24.10 $23.22 $24.35
2 ,7 2 3
$16.81
$222
$26.96 $22.25 $23 82 $15.24
11..464S44444.4
$30.17 $25.00 $27.69 $25.65 $30.39
$30.18 S33.75 $31.68
$33.30
M k yCorori CL
S36 06 536 80
Cornerstone Properties, Inc.
Camden Property Trust
CPP Office $14.73 $15.75 $17.14 $17.12
CPT Apt
CRB
$27.29
Of44 e.4
$27.25
$2425
$27.79 $25.65 $30.41
C nAic
Duke Realty Investments, Inc. DRE Office $17.00 $19.95 $21.26 $21.52
4. S
$16.84
$23.09
$28.75
Equity Office Properties Trust EOP Office
EkiyResdnilrlete T ER At
Essex Property Trust, Inc ESS Apt
Gables Residential Trust
Grerat Ic
.
Highwoods Properties, Inc.
GBP Apt
GL Office
HIW Office
Home Properties of New York, HME Apt
4vine4Apart4mnt s ur4es,, IAC Apt
Parkw ay Properties, Inc.
Prents ProperteiTe Inc
PKY
PK
Office
Office
Post Properties, Inc. PPS Apt
Security Capital Pacific Trust PTR Apt
4
$24.50 $25.93 $23.72 $26.00
384 S44 3 43484
$35.56 $24.00
$25.83 $24.50 $28.56 $27.19
257
7719 fl.70
$29.50 $29.00 $27.85 $34.39
Koger Equity, Inc. KE Office
Kilroy Realty Corporation KR C Offce irAoi A roraitCom MKA Apt
Merry Land & Investment Coin MRY Apt
$2 7.87
S20.55 $19.50
$23.56
f Y26.00s
$20.13
$2
H t
$20.20
$29.38
$34.29 $34.25 $39.90 $34.04 $38.27
$21.97 $19.50 $21.16 $18.08
43.9
$30.25 $23.22
29,3 9
$33.64
00
$19,72
Security Capital Atlantic Incorp SCA Apt
SL Green Realty Corp. SLG Office
$21.00 $22.54
%9
73 S 2
$21.57
55
$32.00 $34.91 $27.42 $35.12
$24.71
$29.42
Spieker Properties, Inc. SPK Office
Charles E Smith Residential R SRW Apt $30.33 $26.26 $31.06
$16.75 $14.94
S14.09 $12.00 $14.20 $14.42
$24444,444444 444444
<w $2~
444
4
3
2
4
4
4
4
4
5
5
$22.08
$31.02
$20.
$23.04
$23.61
$1.36
$1.85
32
$2.07
$1 01
4
2
5
$2L.00 SL.221
$16.83 $0.02
$22.27 $4.32
5
5
2 . 7 9
$27.78 $2.49
$31.53 $2.10
S363 S$
$16.19 $1.17
$27.79 $1.97
$26,24 $1.95
$19.93 $2.07
$25.04 $1.12
$23.75
S2 5.13
$21.88
$28.25
Net Asset
Value
376,988,908
Equity Mkt
Capitalization
$405,502,109
$36.75 1,254,289,745 $1,486,141,262
22 3
3,
$&- 8
1,5
$30.75 824,612,873 $1,100,748,648
330.94 990,867,515 $1,298,629,975
553'4780,8
379,973,562
S60j5,193,79
$494,022,091
929,604,415 $1,179,118,388
$33.06 1,074,920,459 $1,279,341,078
$39.00 822,276,298 $1,017,023,202
1
1,16.264,68 2,44 ,10749
$19.19 1,346,459,591 $1,596,284,623
$31.00 887,841,890 $990,574,000
$31 .69 ,
$24.25 1,516,165,613 $1,844,576,250
$31.56 6,260,136,215 $7,891 709,610
_,4 A 1533,J,-,60 1S454124
4 $28.26 $5.80
$35.00 469,489,518 $581,514,045
4
4
$26.52 s1 2
S30.19
$1.75
$06
4
$2.89
1
$23.56 $0.00
$27.63
$27.19
53sl
583,191,799
219,511,583
510,981,517
$607,491,458
I1 4J4 29
#8
S307,917,883
$37.19 1,413,805,030 $1,741,811,544
$253,314,130
$33,11476
5 525 68 5L 21
1
$20.13 $0.00
4 $23. 84
31
3
2
$21.94
$28.75
S2, 12
$20.08
$4A41
$0.53
$31.51 $3.01
$28 56
$22.88
$34.31
511,438,723
576,386,250
482,734,27S
786,804,750
307,700,696
$557,374,203
$703,656,250
$52$16;990
$896,173,875
$335,072,484
27.44 805,667,931 $927, 303,65
S40.63 1,107,151,301 $l,244,205,300
$24.38 1,869,116,966 $2,257,947,023
444
5
3
2
2
3.
5
4
4
$36.15
S20.18
$244
S4 4 6
$2.74
$1.74
$ 2.52
$21.77
$23.14
$1.09
S2.22
$18.45' g213
$31.77 $3.38
$29.22 $2.59
$25.3g 8Ijf69 849 9547
$21.13 1,039,747,827 $1,008,942,253
$25.94 284,444,077 $318,837,963
S<t 13 431,876,009 $44,5 9, 1924
$42 88 1,889,941,287 $2,550,237,071
$35.50
4S44 46
436,567,967
1$8
24
$530,456,230
428 6475
2
I 1034
$15.85
S00
$1.28
4 $13.68 $1.13
3 $25,86 S1:38
$17.69 249,739,621 $278,787,909
$13.94 1,219,601,365 $1,242,829,745
'25 90 466 495744 4(4
NAV
Premium
107.56%
118.48%
133.49%
131.06%
130.01%
126.84%
119.02%
123.68%
4
:.4yl54%~
118.55%
111.57%
120:76%e
121.66%
126.06%
1274
123.86%
104.17%
N06..W%
123 .20%
115.40%
108.98%
122.08%
113.90%
108.90%
112.38%
120.80%
118:30%.
97.04%
112.09%
114i.%
134.94%
121.51%
11232%/
111.63%
Average
Standard Deviatio
Minimum
Maximum
115.93%
9.89%
89.99%
134.94%
Page 58

Appendix 3
Independent Variable Database
Bay Apt Communities BYA 124%
MwacI lih'tyCor4pr CLI
CawrAnicaaety Cot CRE
Equity Office Properties
12/31/98 1998 Focus
NAV FFO
Strategy
1=
-Herfindahl - I dev =In Hous
Growth Opportunities Inherent within Business Strategy
Regional Growth Oppornu
Name Ticker Premium Multiple Office Geograp Prod Typ apabilitie Prop Mgmt New En
Associated Estates Realt AEC 108% 10.84 0 84%/ 100% 1
1
0%/
1
Apartment Investment an
AyIV 118% 10.75 0 29%/ 99%/ 0 0%/
Amli ksidetial Propa
AMI, 110% 9,63 0 32% jw00%
1,
1 0
Arden Realty Inc ARI 133% 12.92 1 100/0 80% 0 1 0%0
1 21%
Avalon Properties Inc AVN 131% 13.81 0 33% 100% 1
Bandywinelty Trust BDN 109% 11.80 :
%
68%. 1 .
Bedford Property Investo BED 130% 11.82 1 34% 60% 1 1 0*/0
1 0 0%
BRE Properties, Inc BRE 127% 13.45 0 46% 95%
Brk ealty Cor4 BRI 90% 0 # 33% 100%
1 0
1 1 19%
Boston Properties, Inc
BXP 119% 13 44 1 69% 60%
113%
Cornerstone Properties, I CPP 119%
Camden Property Trust CPT 112%
121% J:3
Duke Realty Investments DRE 122%
EOP 126%
'EquitjaeddeiialPrpe EQR 127%
Essex Property Trust Inc
ESS 124%
13.42
10.69
14.68
1
0
1
0&
12.50 0
Focused Business
13 93 0 50% 100%
1331
1- 5% 4%
18% 100%
31% j .9 00,
13.25 1 100%
21. 0%.
52%
98%
55%
15% 100%
94%
-
1
1
0
1
:v
'
1
1
1
1
1
1
0
1
1
1
1
-
0/
1
18%
0%
0%
0%
16%
*
Mid At
3%
5% 29
0%
48%
0%
0%
0*/
81%
7
0
13% 24%
0/
4%'
0! l
d Sout Mid Wst arm Bet i.E S a N.-0%fMt a 06)GaeRt
5% 91% 0%/ 40%/ 21% 0%/ 31%
1
5% '
2
%
0 /
9%
0% '/%
0%
0%
6
%*
0%
0%
21%
%
0
0%
0%9 5% 18% 34% 43%
0%
0%
0%
0%
/o
19%
6%
13% 100%
0% 100%
12% 16% 21%
0% 0
9 /
%
0%
0/i
5%
0
0 /
0%
0
0%
I%
0% 43%
0%
13%
01% 13%
1% 41% 31%
0%
0%
4(r/ '20%
0
0%
0%
0%
0% 100%
%
33%
0%
0% xtie
0%
0 %
'0%.'
48/
48%
0%
0%
0% 0%
0%
40%
-0%
0
0%
0%
%
0%
5%
52%
12%
120%
0%
0%
0%
0/o 13% 11% 11%
0
% 11%
60%
0%
DettBoa1 a n
BlneSetSrnt aiale eIt tor
DeCalif Grae Rtg DeVibtloe
41%
8
28%
25%
21%
12%
42%
42%
29%
35%
35%
31%
4 /o6%
24%
32%
294%
34% t0
0
0
1 o
0
0
0
1
0
1
1
1
14072
0
1 ett 29%ns
16%
30%
%
0%
25%
71%
15%
39-
19
%
19%
26%
32%
32%
19
6%
27%
314
2% t
In
It xeneCpacyeto '98 FFO
2.60it
2.40
244
47
4.70
6.11
660
5.40
3.99
2320%
2.32
6.45 q 2672%%
3.26
5.32
4
45
45
2.86
4.84 epoyetgv.Pah
0% '85%
323% 854%6
02%, 76%
6
26%
24
102%
0%
109%
7
67%
65%
65%
66%
51%
51%
60%
39
21% 39%
84% 68%
66%
166%
10% 56%
103% 64%
7
20%
66%
6%
71%
Gables GBP 104% 10.42 0 51% 100% 0 1 0% 0% 58% 0% 0% 42% 0%
160% 0% ; 0% 7 % 0 % ' 29% 0 34% 43697% 64%
Great Lakes.RETi GL 107% '1.43' t '6% 90% 0
1 34% 475 97% 64%
Highwoods Properties, I H1W 123% 11.62 1 75% 65% 1 1 0* 7% 86% 0% 0 70 0% 0% 29%
HomePropertiesofNew HME 115% 11.28 0 37% 99% 1 1 18% 42% 00% 40% 004
;'9/'jQ
0 0%
>
4%
!
33% 75% rvine Apartment Comm
Koger Equity, Inc
Kilroy Realty Corporatio
KE
KRC 122%
Merry Land & Investmen MRY
1090
114%
10.16
12.29 1
,58
10.49
0 100% O~4.2
1
0.;
0
56%
78%
98%
50%
76% 100%
68% 100%
1
1
1
1
1
1
1
1
1
0
0%
0*
00/.
0%
0%
00
70%
70%/
004
1 % 80
0%
0%
0%
004
24
0%4 004 24%
0%
5%
5%
87%
%
013
13%
>1%
%
2% w
0% 37% 00
00%
0%
3 3
25%
25%
34%
34%
25%
0
0
0
0%
57%
11%
6%
3.52
5.91
4 16
4.16
5.44
46%
47% 66%
36%?72%
36% 74%
47%
Parkway Properties, Inc PKY 1090% 11.55 1 41% 100% 0 1 0 9 51%
19%20%80%
1904 004
PretisPfppresterust PP 115%
1 I%50% 73% 0% -2%i% 6% 35% 0 59%9 3.40 658% 71%0/0
Post Properties, Inc PPS 112%
Security Capital Pacific PTR 121%
RRA 18%
12.13 0
13.54 0 t3.36 J
600% 96%
36%
45%7o
94%
50%"
1
1
1
1
1
1
0%
0%
3% 73%
8
/1
004
000 6% 93%
00% 00
0%
24%
1% 47%
00% >0*/
1 % 004
0% 00%
32% 20%
0%5 04
00 0/
0%
0%
35%
31%
31%
1
1
03%
1
5906
26%
13%
4.50
3.81
5.42
158% 71%
359%
145%
76%
83%
104% 83%
Security Capital Atlantic SCA 97% 11.00 0 87% 100% 1 1
27% 0 53% 4.99 37% 7004
SLG 112% 12.97 1 100%4 1000% 0 1 0% 100% 0% 00 00% 004 0% 0%4
65% 3.% i
164"" 2496% 8%
Summit Petinc SMT 115% 10.56 0 6%5 100% 1 1 0%: -16% 79% 0% 34%
3.42 96% 78%
Spieker Properties, Inc. SPK 135% 14.63 1 54% 50% 1 1 004 00 1% 00 0% 004 34% 65% 31% 1 14%
Charles E Smith Reside SRW 122% 12.28 0 85% 95% 1 1 1% 92% 0% 7% 00% 04 0% % 0 17% '98 58% 72% sodunl st
TCT
112%
Town and Country Trust TCT 11%
10.11
10.11
0
0
6%
68%
1000%
10
0 1 00% 81%2%
%0
17% 4 0%
30%/
00
5%/
0%
1%
48%
43%o
0 0%
01%
267
6%
91%
9%
(D
Mean
StandardDeviation
115.9%
9.9%
11.9
1.5
57%
26%
89%
18%
3%
6
2%
31% 32% 24%
1%
0%
% %
1% 2%
8%
17%
32%
7%
24%
19%
4.02
1.8
0.82
0
68%
11%

Ni.am
ewer
Associated Estates Realt AEC
Apartment Investment an AIV
Arden Realty Inc. ARI
Avalon Properties Inc AVN
Brnywe Realty Trust BDN
Bedford Property Investo BED
BRE Properties, Inc BRE
Bek e ayCona BRL
Boston Properties, Inc BXP
Bay Apt Communities BYA
Mac aiReay Corpor CL
Cornerstone Properties, I CPP
Camden Property Trust CPT
CPKCCE
Duke Realty Investments DRE
Equity Office Properties EOP
EquityResidentialProp EQ
Essex Property Trust, Inc ESS
Gables Residential Trust GBP
GreLAkRI nc- GL-
Highwoods Properties, I HIW
Home Properties of New HME rine Apartment Comni LAC
Koger Equity, Inc KE
Kilroy Realty Corporatio KRC
Mid-America Aprmiten(MAA
Merry Land & Investmen MRY
Parkway Properties, Inc PKY
PrentisProper rust PP,
Post Properties, Inc. PPS
Security Capital Pacific PTR
Reckonrsscii aes.Real
RA
Security Capital Atlantic SCA
SL Green Realty Corp SLG
Spieker Properties, Inc SPK
Charles E Smith Reside SRW
Cornsone Ra ty n
Town and Country Trust TCT
United Dominion Realty UDR
WaldenResieniPrWDN
I # of Analysts go
6
9
3
9
10
7,.
5
11
3
7
12
9
5
9
9
6
410
6
9
5
11
7
14
4
7
10 '92
129
148
195
58
60
45,
115
45 bili Vsa tY
# Inst. Instit Holder Avg Wdy Avg Wkly Total Mt
Owners To Shares O/S Vat/hre
55 27.42% 286.84 l/hrs
1.68%
.hre
0.8
107
63'~
99
79. 30%
46.74%
79.95%
554.02
193.-96
579.91
1.37%
1.62%
2.6
1.7
91 73.84% 369.38 0.88% 2.0
72.
69
92
0.6
1.7
65
107
84
139:
66
89
69
67
106
67.97%
54.13%
47.31%
34.85%
404.67
277-78
358.95
534.12:
59.24%
0
67 10
928.66
297.28
91,53% -4 798 5
33.00% 557.39
59.50%
40.74%
56.66%
444.16
':4910951
738.47
5,281.80 57.04%
82,04%
66.61%
8815.4
279.13
44.16%
3154%/
72.34%
54.64%
59.62%
74 71%
72 48%
1.23%
0.86%
41
2.40%
1.14%
6
0.67%
1.39%
0Z9
1.03%
211%
09*
1.68%
1.39% 305.67
228.11-
669.78
163.98
1.43%
1.76%
24279
208.34 0,82%
538.45 2.20%
32
1.7
2.6
1.6
3.0
133
.
1.
1.3
0
3.4
0.7
11
0.7
1.1
-
9
7
7
12
' 9
4
4
7
10
6
-3
2
11
6
:
670
114
51
103
145
84 ,-
56
60
58$
127
64
43
152
65 e
36.16%
34.82%
55.67%
6038%
79.04%
,79.09%
30.56%
75.67%
188-49
540.64
164.06
587.4
275.64
592.86
555.22'
205.37
169.63
',021
1.38%
1.68%
090%
0.64%
147%/
0.43%
1.38%
~39% 337.1.2
65.30% 856.52
72 16%
3.56%
30.68%
42.05%
44.82%
159.88 1.07%
404,82 1. 140.
217.51 1.38%
1,05220
362.40
,4?
1.44%
1.18%
2.01%
1.8
04
2.3
36
1.7
1.5
0.5
1.
4.6
1.7
0.6
27
1.6
Appendix 3
Independent Variable Database
Experienced Management
Low
Overhea..d
G&A as % of NOI
10.77%
10.44%
With a Proven Track Visionary
Leadership Disclosure
Average % =No Evidenc # Public Co' Press Releas 1=
Conflicts of Interest
OP Marylan
1=Inde
% Insider ownershi
Earnsurpris of Nepotism. of Chairman Disclosure UPREI Units o/s Corp =0 Chair ncl. Option top six
(0.98%) 1 2 0 0.0% 0 0 15.67% 6.9%
1.53% 1 4 1 7.5% 0 0 1310% 171%
5.86%
4.76%
1.21%
6.97%
5.01%
12.09%/
6.63%
795%
7.01%
4.17%
9-98%o
3,26%
7.92%
3.66%
463%
2.90%
-9.79%
5.69%
7.36%
5.68%
1202%
713%
7.64%
3.73%
8.68%
2.97%
6.48%
4.78%
7.79%^
4.88%
6.47%
3.22%-
6.50%
6.12%
16.36%
3.01%
7.03%
0.87%
0.12%
125%/a
4.23%
1.86%
246%
0.89%
0.43W,
2.54%
0.73%
1.04%
9.52%
2.03%
1.84%
0.29%
.50%
012%
0.00%
3
.0
7
%
7. 80%
0.72%
(094%)<
2.71%
4. 500%
0.03%
(1.06%)
(0.31%)
0.00%
3.38%
0.81%
1.52%
(1.67%)
(2.35%)
-
19%
1
1
0
1
1
1
1
0
1
1
1
1
1
1
1
1
0
0
1
0
0
1
0
I
1
1
1
1
1
1
1
1
1
0
0
0
0
6
3
0
0
0
0
2
~1
1
90
1 i2
1
16
0
5
1
3
4
0
4
0
3
6
2
7
4
2
0
0
3
4
0
7
0
4
3
2
3
I
1
0
0
0
0
1 17.7%
0 0.7%
1 14.%
0 0.6%
0 4.7%
1
1
1
1
6.5%
0.0%
1.5%
0.4%
0.0%
$
8.7%
6.9%
5:4%4
6.8%
88%
0
0
0
0
1
0
0
0
1
1 29.6%
0
1 01% -0
1 11.4%
0
0
0
1 37.2%-4 '
0.00/
1 91%
1
0
0
0
0.0%
000/.
1 7.0%,
1 9.1%
0 0.0%
0 0.
10.9v
00
/
1 118%
1
1
8:1%,
6.9%
1 28.2%
0,1 .0%
1
0
7.00/
0.5%
0 20.6%
1
0
0
1
1
1
0
0
1
0
0
0
0
0
0
0
1j
0
1
0
0
0
1
1
1l
1
0
0
1
5.80%
0
1 9.93,%
0
1
1
0
34.85%
5.76%
1 2A3Y
0 1.28%
0 11.20%
0
10.70%
17.90% 4.80%
I
2;33% 123%
0 2.93% 1.50%
1
18.40% 11.43%
1
1
0
0
9.19%
3.80%
9,17%
20.40%
0.28%
2,80%0/
8.98%
3.50%
3.38 %
5.22%
1.55%
16.96%
42.03%
4.59%
0.00%
3.22%
3.17%
12.82% 17.62%
5.91% 3.61%
11,77% 3.84 %
1390% 13.23%
5.70%
1 %
4.69%
0.00%
6.90% 2.65%
10.08% 9,75%
0 r-12%
3.51%
'5.77 %
0.25%
0 ;A2.00%
1 0.25%
0 20.80%
7
0.47%
1.02%
0
11-' I
-9.80%
8.30% 673%
0 1330%
5.87%,
1 21.85%
0 2.73%
1 13.00%
1.18%
-89%
9.39%
1.14%
2.83%
Minimum
Maximum
Mean
2
14
F.57
!E78
19
195
86.81
36.03
3.56%
91.53%
55.77%
18.99%
159.88 0.43%
5,281.80 2.40%
554.42
782.79
1.34%
0.42%
04 1.21%
13.3
16.36%
2.2 6.58%
2.3 3.09%
(2.35%)
9.52%
1.39%
2.33%
I = 34
0=8
1
2 0.0%
0 = 1 37.2%
7.6%
8.5%
1=11
1 = 19 0.25 % 0.00%
0 = 31 0 = 23 34.85 % 42.03%
10.74%
7.18%
6.03%
7.21%
.
.

Company
Amli Residential Properties Trust AML
Apartment Investment and Management AIV
Associated Estates Realty Corporation AEC
Bay Apt Communities
Berkshire Realty Company, Inc.
BYA
BRI
BRE Properties, Inc.
BRE
CPT
Charles E. Smith Residential Realty, Inc SRW
Cornerstone Realty Income Trust Inc. TCR
Equity Residential Properties Trust EQR
Esigx ProperiyjTts Inc
Gables Residential Trust
Home Properties of New York, Inc.
Irvine Apartment Communities, Inc.
ESS2,32
GBP
HME
IAC
Mid-America Apartment Communities, MAA
Post Properties, Inc. PPS
Security Capital Atlantic Incorporated SCA
Seowuity Cayital PacificTrust
Sumnit Properties, Inc.
Town and Country Trust
Umited Dominion Realty Trust, Inc
P'i2$5
SMT
TCT
UDR
24 Companies
Appendix 4
Apartment REIT Regional Concentration
Hartzell Eight-Region Segmentation
December, 1997
Total Units -
Stabilized
Units
17,789
40,411
19,120
'I
New Mid-
England Atlantic
1 2
2,113
652
Old
South
3
4,422
11,807
988
Industrial
Midwest
4
3,786
1,916
17,480
Farm
Belt
5
1,620
Mineral Southern Northern
Extraction California California
6 7 8
7,961
16,046 8,529
16,959
21,293
19,097
19,371
12,719
134,013
22,971
16,382
14,991
31,116
27,908
24,908
15,312
13,961
71,864
749,641
188
1,611
3,017
8,991
5,920
17,802
258
7,131
6,867
8,078
10,232
12,461
32,930
13,298
700
1,380
26,924
20,487
23,240
2,389
11,259
4,769
12,051
330
41,294 r,
71,023 253,707
214
2,89
1,381
10,437
6,498
534
288
872
2,372
53,540
596
3,772
546
6,534
7,081
1,754
20,681
29,152
9,673
3,658
6,721
241 141
8,133
11,204
15,43 6
34,326
4,913
14,991
16;270
8,826
6,139
14,654
7,449 f0,065
21,406
33040- |
3,408
-4af(
187,676 120,050
987
48,120
Company
Amli Residential Properties Trust
Associated Estates Realty Corporation AEC 83.96% 19,120
Avalon B CO W In A.2 20,5 2&
Bay Apt Communities BYA 50.08% 16,959
Berkshire Realty Company, Inc.
BRE Properties, Inc.
Percentage of Portfolio -
New Mid-
Herfindahl Stabilized England Atlantic
Index Units
AML 31.57% 17,789
1 2
Apartment Investment and Management AIV
BRI
29.26% 40,411
33.19% 21,293
BRE 45.60% 19,097
S 3
Charles E. Smith Residential Realty, Inc SRW 84.97% 19,371
Cornerstone Realty Income Trust Inc. TCR 96.03% 12,719
Equity Residential Properties Trust EQR 19.51% 134,013
1 %
1 %
5 %
3 %
28 %
92 %
2 %
5 %
Old
South
3
25 %
29%
5 %
38 %
98 %
25 %
Gables Residential Trust
Home Properties of New York, Inc.
Irvine Apartment Communities, Inc. o4
GBP 51.25% 22,971
HME 36.70% 16,382
IAC 100.00% 14,991
~>P2
Mid-America Apartment Communities, MAA 76.28% 31,116
Post Properties, Inc. PPS 59.75% 27,908
Security Capital Atlantic Incorporated
A~
SCA
NOV
87.38% 24,908
Summit Properties, Inc.
Town and Country Trust
United Dominion Realty Trust, Inc.
Wa sen
SMT 64.70% 15,312
TCT 67.98% 13,961
UDR 42.57% 71,864
W 6f26
24 Companies 749,641
18 % 42 %
3 %
6 %
>.7
16 %
81 %
7 %
9%
58 %
,.
87 %
73 %
93 %
79 %
2%
57 %
%
34%
Industrial
Midwest
4
21 %
5 %
91 %
1 %
6%
7 %
8 %
40 %
2 %
1 %
6 %
17%
1%
7%
Farm
Belt
5
9%
Mineral Southern Northern
Extraction California California
6 7 8
45 %
40% 21 %
1 %
3 %
1 %
33 %
9%
4 14%
22 %
42 %
12 %
24 %
30 %
77%
25%
48%
59%
3 %
26 %
100 %
5 %
%
16%
52%
32%
11 %
1 %
6%
Page 61

Company
Arden Realty Inc. ARI
Bedford Property Investors, Inc. BED
Brandywine Realty Trust BDN
CarrAmerica Realty Corporatio CRE
Duke Realty Investments, Inc. DRE
Equity Office Properties Trust EOP
Highwoods Properties, Inc.
Kilroy Realty Corporation
HIW
KRC SP
Mack-Cali Realty Corporation CLI
Parkway Properties, Inc. PKY
Reci1Associates Realty Cor RA
SL Green Realty Corp. SLG
18 Companies
Appendix 4
Office REIT Regional Concentration
Hartzell Eight-Region Segmentation
December, 1997
Total
Square Feet
14,434,061
1,622,953
Total Square Feet -
New
England
1
Mid-
Atlantic
2
Old
South
3
Industrial
Midwest
4
5,863,764
20,567,508
5,747,562 733 4,6
4,957,291 2606,500 1,570,556
10,433,233 10,433,233
66,674,093 10,628,193 7,776,647 10,763,755 14,263,835
23,741,774 1,574,954 20401,333
5 74 5627,9
9,0rEgl1,430c
18,828,752
6,462,960
133,000 13,580,115 1,107,019
652,983 3,266,971
7,597,100
3,"281,000
798,3 4,417,183 2,3 1,75
3,281,000
4,6
118,727
120,279
Farm
Belt
5
79,316
Mineral
287,701
Southern
555,783
Northern
Extraction California California
6 7
14,434,061
8
700,153
72,265
3 43 137 2,898,658 191,366
8,873 342 7,023,558 7,344,763
1,765,487
3,065,508
2,422,727
2,271
3,694,530
47,8
484,672
531,596
267,446
268,926,681 15,364,608 55,391,919 52,110,967 32,690,030 677,248 50,459,815 36,218,857 26,013,237
Herfindahl
Index
Arden Realty Inc. AM 100.0%
Bedford Property Investors, Inc. BED 33.7%
Total
SquareFeet
14,434,061
1,622,953
-Percentage of Portfolio -
New
England
1
Mid-
Atlantic
2
Old
South
3
Industrial
Midwest
4
Brandywine Realty Trust BDN
CarrAmerica Realty Corporatio CRE
96.1%
1
5,863,764
20,567,508
98 %
24%
1 %
13 %
1 %
8%
Duke Realty Investments, Inc.
Equity Office Properties Trust
DRE
EOP
100.0%
15.20/
10,433,'233
66,674,093 6'2 16%
100 %
21%
174, 8 %
SL Green Realty Corp
18 Companies4
HW 74.8%
SLG 100.0%
23,741,774
Kilroy Realty Corporation KRC 78.0%
C00437
$
Mack-Cali Realty Corporation CLI 55.1%
4,226,126
41.0
18,828,752
Parkway Properties Inc PKY 40.7% 6,462,960
! $ 1 24$4
Reckson Associates Realty Cor RA 44.7% 7,597,100
3,281,000
26, 8 1
100
11 /
18 Companies 268,926,681 6%
72
10%,
65
4783
100 %
21%
34
67%
51 %
381
19%
118
22
6
12%
Farm
Belt
5
5%
026
0%
Mineral Southern Northern
Extraction California California
6 7 8
18%
100%
34% 43%
16%
13 % 1%
,7
87%
2,9140 476
16 ,3
37%
19%
14%
3__,8,85
13%
25%
1%
13%
26I%
10%
Page 62

Appendix 5
Hartzell, Shulman, Wurtzebach Economic Region Definition
Eight-Region Segmentation
Northern
California
Description of Regions
We have divided the U.S. into eight cohesive economic activity regions that are mapped in Exhibit 1. We define our regions as New England, Mid-Atlantic Corridor, Old South,
Industrial Midwest, Farm Belt, Mineral Extraction Area, Southern California and Northern
California. In doing this we have, in many cases, ignored state boundaries. For example, we classify eastern Pennsylvania as part of the Mid-Atlantic Corridor and western Pennsylvania as part of the Industrial Midwest. Similarly, California has been divided into northern and southern portions with the southern portion including Arizona and southern Nevada. The northern portion includes Oregon, Washington and northern Nevada.
New England This region includes all of the New England states with the exception of Fairfield
County, Connecticut, which is part of the Mid-Atlantic Corridor. The employment base here has shifted dramatically from old-line manufacturing to high-technology production and business, financial and education services. The high education level of the region and the willingness of its huge college student population to settle after graduation has created the basis for a post-industrial economy. The infrastructure is old and the combination of an already built-up environment and strong land use regulation make additions to supply difficult.
Harsh winter weather makes this region a net energy importer. Defense spending, especially in Connecticut and Massachusetts, is an important contributor to New England's economic well-being.
Mid-Atlantic Corridor This region stretches along the Atlantic Coast from Fairfield County,
Connecticut to Northern Virginia. The region is dominated by financial and business services in the greater New York City area and government/defense in the Washington, D.C. area.
The region has benefited from the import boom by serving as the East Coast port of entry
Page 63

Appendix 5 for imported goods and from the explosion of debt caused by the budget and trade deficits and the deregulation of financial services. The region has the densest population in the U.S. and it is a net energy importer. The infrastructure is old and the cities historically have centralized around an extensive system of public transportation. This has changed recently as rapid development along the Washington, D.C. beltway and the highway corridors of
New Jersey took place.
Old South This region stretches from Virginia south to Florida and west to Arkansas and grew rapidly in the 1970s as manufacturing companies relocated from the North. This movement created the need for infrastructure that basically has been put in place within the last two decades. The region is characterized by heavy federal investment in military bases, highways and electric power. There is a higher percentage of low-income nonunion workers here than in other parts of the country. As a result, the region has lower production and living costs than the rest of the country. The region's economic growth has spurred the development of an office economy that did not exist twenty-five years ago and would not exist, were it not for the widespread use of air conditioning since the 1960s.
Industrial Midwest This is the industrial heartland of the United States. It encompasses the
Ohio and northern Mississippi valleys and is dominated by the unionized mass production industries. Employment is based on steel, automobiles, machinery and farm equipment. The region has been the hardest hit by cyclical declines and global competition. There is a dense transportation system for the movement of goods from the major cities of Chicago and
Detroit. The area is a net energy importer and lost both population and employment from the late 1970s to the mid-1980s. However, the decline has abated and several of the area's major cities have been restructured into service economies. The region will benefit the most from a lower exchange value of the dollar.
Farm Belt This region is dominated by the production and processing of agricultural commodities and is typified by mostly rural areas with sparse population on the flat land of the Great Plains. The agricultural depression of the 1980s led to an outmigration of population. The major urban area within this region is Kansas City.
Mineral Extraction Area Stretching from Louisiana to Montana and including Alaska, this area rose and fell with the price of oil. In the 1970s the region achieved an unprecedented prosperity only to see it evaporate in the mid-1980s. The boom left in its wake the largest amount of overbuilding in the United States. However, the 1970s boom enabled many of the larger cities in the region to achieve a critical mass in finance, business services and, to some extent, high-technology production. The presence of these other industries along with a gradual recovery in energy' will enable the region to gradually recover.
Southern California This region is the United States capital of the Pacific Basin and includes
Arizona, southern Nevada and Hawaii. It is the focus of trade and financial relations with the Far East. As a result, it has benefited from the United States trade deficit. The region has grown rapidly in the past by attracting people from all over the United States and the rest of the world. It has the highest concentration of Mexican-Americans in the United States and their presence has enabled many low-wage manufacturing and service industries to succeed.
The region also has the highest concentration of defense production in the United States.
Both land prices and incomes are high and in recent years there have been strong movements to restrict growth by controlling land use.
Northern California In addition to northern California this area includes northern Nevada,
Oregon and Washington. The region is characterized by high education levels, a strong defense industry and modern infrastructure. Although it has lost market share to southern California, finance and business services remain strong industries here. In addition, there is a focus on renewable resources in the form of l-mber and hydroelectric power that gives the region stronger environmental concerns than elsewhere. Foreign trade remains an important part of the economy and this region too has been a major beneficiary of the import boom.
Page 64

Appendix 6
Herfindahl Index of REIT Product Type Focus
Name TicKer rocus
Amli Residential Propertie AML Apt
Apartment Investment and AIV
Arden Realty Inc ARI
Apt
Office
Associated Estates Realty AEC
Avalon PropertiesInc. AVN
Apt
Apt
Bay Apt Communities BYA Apt
Bedford Property Investor BED Office
Berkshire Realty Compan BRI
Boston Properties, Inc. BXP
Apt
Office
Brandywme Realty Trust BDN Office
BRE Properties; Inc. --BRE. Apt
Camden Property Trust CPT Apt
CarrAmerica Realty Corpo CRE Office
Charles E. Smith Residenti SRW Apt:
Cornerstone Properties, In CPP Office
Cornerstone Realty Incom TCR Apt
Crescent Real Estste Eqjiit CEl :Office
Duke Realty Investments, DRE Office
Equity Office Properties T EOP Office
Equity ResidetialPropert EQR Apt
Essex Property Trust, Inc. ESS Apt
Gables Residential Trust GBP Apt
GreatLakes RUET, Inc. GL Ofmce
Highwoods Properties, Inc HIW Office
Hoie Properties of New H-ME: Apt
Irvine Apartment Commu IAC Apt
Kilroy Realty Corporation KRC Office
Koger Equity, Inc. KE Office
Mack-Cali Realty Corpora CLI Office
Merry Land & Investment MRY Apt
Mid-AmericaAprtment MAA' :Apt
Parkway Properties, Inc. PKY Office
Post Properties, Inc. PPS Apt
PentiisProperties Trust I PPr Office
Reckson Associates Realty RA Office
Security Capital Atlantic I SCA Apt
Security CapitalPacific Tr PTR Apt:
SL Green Realty Corp. SLG Office
Spieker Properties, Inc.
Summit PropertiesInc.
SPK Office
SMT ,Apt
Town and Countiy Trust TCT Apt
United Dominion Realty T UDR Apt
Walden Residential Proper WDN Apt
Herfindahl Total
100.0%
89.9%
65.2%
99.5%
100.0%
50.4%
97.6%
74.0%
100.0%
100.0%
100.0%
96.1%
50.4%
Index L
Square ret
100.0% 14,826,375
99.2%
79.5%
21,479,973'
16,304,020
14,917,270
19 583 608
100.0%
100.0%
100.0%
60.0%
100.0%
59.9%
67.7%
95.2%
98.4%
5,870,566
2711;244
14,453,457
7,354,885
8,991,834
39,108,870
20,567,508 100.0%
95.2%
100.0%
100.0%
91.8%
55.4%
99.8%
100.0%
94.1%
17,897,2512
9,284,455
10,899,539
28,841,231§
41,745,443
66,735,923
115,420;319;
9,819,428
17,686,211
3,937,858
30,621,063
13,417,207:
13,583,392
9,253,842
>9,114,030
22,253,108
28,249,653
28,536,435:
6,462,960
23,908,934
16,781,836
13,667,187 50.5%
100.0%
94.1%
100.0%
49.8%
100.0%
100.0%
97.9%
100.0%
3,281,000
34,362,286
12,420,319;'
11,687,797
32,752,230
31,397,212
Portfolio Sq uare Footage
H
1Residenti
14,826,375
21,389,973 90,000
144,225
14,917,270
19,583,608
14,434,061
I n d i l
1,725,734 lth C
158,585
120,141
1,622,953
2,711,244
10,764,508
5,863,764
8,773,760 128,553'
38,786,025 322,845
20,567,508
17,461,412, 435;z8140
9,284,455
10,899,539
580,176 27,623,198
2,133,297 10,433,233
61,830 66,674,093
115,420,319
9,521,207 235,990
17,686,211
62,231
'3,727,728
23,741,774
433382,207 35,000
13,583,392
4,226,126
112,600 9,001,430
2,264 18,828,752
28,249,653
'428,536,435
6,462,960
23,433,835 168,689
20,000
-9,124,466
7,597,100
3,281,000
286,250 15,192,694
-4-2,420,319
.' .
11,687,797
32,413,998 104,000
31,397,212
91,232
4,247,613
2,938,549
1,491,121
89,521
252,857
29,178,913
210,130
6,879,289
5,027,716
3,422,092
306,410
7,657,370
6,050,087
18,883,342
143,000
67,500
289,418
.'
Htel R
_.rII
750,400
385,00
100.0%
100.0%0
100.0%
100.%
97.6%
99.2%
97.6%
100.0%
100,0%a
97.0%
100.0%
-99-/%
100.0%
100.0%
100.0%
98.0%
100.0%
100.0%
100.0%
99.0%
100.0%
% of Porfolio by Product Type
Rt .ail Office industrial Health Care Hotel
2.0%_" 95f%"< 0,0.9%
5.1% 25.0% 69.9%
0.1% 99.9%
03
9% 88.5%
1.4%
2.4%
2.4%
1.2%
0.0%
0.7%
0.1%
0.8%
0.3%
27.6%
74.5%
79.7%
0.8%
100.0%
100.0%
0.6%
94:7%,
77.5%
45.7%
.98.8%
84.6%
100.0%
544%
55.6%
100.0%
44.2%
0.3%
10.6%
72.4%
20.3%
20.3%
1.0%
5.3%
22.5%
54.3%
15.4%
1.3%
45,6%
44.3%
55.0%
0.4%
1.0%
0.8%
0.89%
0.7%
5.2%
1.3%
1.0%

Appendix 7
Quarterly Earnings Surprise
First Call
(%)
Associated Estates
AIMCO
An4t
Arden Realty
Avalon Properties
Bedford Properties
BRE Properties erki I co
Boston Properties
Bay Apt Communities
Irvine Ap.i
Koger Equity
Kilroy Realty
,eisidential
Cornerstone Props
Camden Property Trust
CarrAmerica
Duke Realty Investments
Equity Office Properties
Essex Property Trust
Gables Residential
Great takps 1UOT
Highwoods Properties
Home Properties of New York
Merry Land Investment Co.
Parkway Properties
Preni P
Post Properties
Security Capital Pacific
Security Capital Atlantic
SL Green Realty Corp
Sum4it
Spieker Properties
Charles Smith
Cornkers tone* Realty Inom
Town & Country
United Dominion
3Q'96 - 3Q '97
Mean Std Dev
% %
1995
Q1 Q2 Q3 Q4
1996
Q1 Q2 Q3 Q4
1997
Qi Q2 Q3 Q4
(0.98)
1.53 1.33 2.48 0.00 1.85 1.82 0.00 0.69 0.00 -0.20
0.87
0.12
325
4.23
1.86
2.46
2.22
2.19
0.28
L6
3.17
.
000 00 0:70 -.64, .00 -2.04 039 0.00
4.25
0.00 0.39 0.76 0.75
0.00 0.00 6.25
8
4
857A
-4.55
0.00 0.48 -0.47 0.47
-1.74
0.76 -1.10
1.59 3.03
0.00 -1 89
3.58 1.17
-4.07 -3.17
1.73 1.37
L85
0.46 -0.45
-5.41 0.86 1.90 0.30
-0.30 0.26 0.22 0.00
4
7.94 2.94 4.23
-15.87
5.13 0.34 6.56
O:00 1,96 -3.0 .89
0.27 0.86 -0.26 -0.54
-370~ -2.1& 0& 0,00
0.00 7.37 0.00 -1.12
0.89 1.00 0.00 -0.72 2.67 1.551 4.53 6.93 3.42 0.60
8 1.1 0.43 270 ..
.
.
1.75 -0.39 1.61 0.00
3.5 0 52 -0.42 0,00
2.54 1.12
3.33 1.75 6.25
0.73 0.99
0.38 1.17 0.46 2.70
3.51 1.27 -0.41 0.33 0.40 2.20 0.00 0.74
2. 65L4
1.04 1.47
M"f-0.65 .-.92
2.13 0.33 0.53 2.02
0.00 1.15 2.99 2.08
2.,09 4,66 2.66 1.04
0.00 2.38
9.52
1.84
0.29
3.50
0.12
0.90
0.25
1.57
;0 5710 I7 .0
0.00 1.92 3.77 12.001 3.85 1.85 1.82 0.71
3.31 1.25 1.79 0.88
1.96 0.80 -0.92 -0.90
-2.17 000 112 000
-1.75 0.84 -3.27 2.16
9.52 1.38
5M2.24 b:43 ,rPQ
2.39 2.72 1.56 0.61
0.45 0.43 -1.73
3.50 0.6
-0.19 -1.65 0.15 0.77
0.00
3.07
7.80
1J7
4.79
-5.97 3.37 -0.63 -1.20
4.41 6:0 6 -2, 14 0.90
-3.08 -0.84 0.38 0.00
-1.42
3.65 279 L56 0AS
13.25 5.88 4.26 0.00
0.72
(0.94)
2.71
1.02
1.i
3.14
-2 -. 0-.4 4.35
0.45 -1.46 2.68 1.73
6230
1.66 3.18 0.99 -0.28
1.44 0.00 0.93
-3.18 0,00
7.14 1.96 2.00 2.63
4.50 4.15
1.92 0.56
0.00 13.16 1.55
9.25 2.71 0.51
1.29 2.9 0.72
0.03 1.05
4.87 1.64 1.05 3.13
1.79 1.93 2.23 -1.00
0.00 1.09 1.09
(1.06) 4.35
-0.71
-6.07
1.71 I.92
(0.31) 1.02
0.004 2.78 3,69 0. 3 1 q1
-1761 -035 088
3.36 4.55 4.55 0.00
1.78 1.12 1.72
3.89 2384 66 6:2
0.00 -1.79 0.56 2.17
3.38 1.22
0.81 0.89
0.65
".3'
1.52 2.38
(1.67)
(2.35)
1.82
3.56
-4.7 0,040 -.45
0.74 1.68 1.96 4.25
1.96 0.58 0.00 2.55
-5.26 -1.49 -2.22 4.44
4.43 -5.62 0.00 2.03
,-5.09
0., t
1.19 125 105 247
-
0.00 0.00 1.45
L7 2. 6 42 7
3 --.
-7.87
3
5.17 3.09 2.77 1.01
0.59 1.56 -0.36 -1.68
5.00 1.9 0.00 -2.44
5.00 0.00 0.00 4.44
-1.37 -2.94 1.86 -1.00 -106 435 -0.29 -1.13
00 0.65 0.61 1.42i -L82 -7,16 -1.85 0.84
Page 66

Appendix 8
Regression Results: Determents of REIT Franchise Value
Model Summary
Model: 23
R
.892
R Square
.795
Adjusted R Square
.729
Std. Error of the Estimate
5.15
ANOVA
Model: 23
Coefficlentsa
Model: 23
(Constant)
% Variable Rate Debt
G&A as % of NOt
Total Inside Ownership
Executive Inside Ownership
1998 Capital Deployment Capacity
Dummy Variable: Office (1) /Apartment (0)
Hartzell: New England
Hartzell: Mineral Extraction
Hartzell: Southern California
Hartzell: Northern California a. Dependent Variable: NAV Premium
Unstandardized
Coefficients
B
13.063
Std. Error
2.893
-.150
-.852
.049
.281
.478
-.349
.041
.166
.156
.011
5.239
.447
-.109
.143
.202
1.762
.145
.049
.034
.053
Standardized
Coefficients
Beta
-.289
-.266
.347
-.254
.324
.265
.281
-.204
.395
.351 t
4.516
-3.029
-3.026
2.873
-2.242
3.712
2.974
3.079
-2.222
4.268
3.820
95% Confidence
Interval for B
Sig.
.000 7.163 18.963
Correlations Collinearity Statistics
Lower Upper
Bound Bound Zero-order Partial Part Tolerance VIF
.005 -.251 -.049
.005 -1.426 -.278
-.108
-.166
-.478
-.477
-.246
-.246
.727
.853
1.376
1.172
.007 .139 .817
.032 -.666 -.031
.001 .018 .064
.006 1.646 8.833
.004 .151 .742
.034 -.208 -.009
.000 .075 .212
.001 .094 .309
.021
.041 -.373 -.182
.336
.269
.244
-.405
.531
.518
.459
.555
.471
.484
-.371
.608
.566
.234
.302
.242
.250
-.181
.347
.311
.453
.515
.780
.772
.785
2.209
1.942
.867 1.154
.830 1.204
.796 1.257
1.282
1.295
1.274
Page 67

Excluded Variablesx
Model: 23
Hartzell: Old South
Last 4Q's Earnings Surprise
Rated Debt? (1=Yes, O=No)
Nepotism? (1=No, 0=Yes)
EBITDA to Interest Expense
Vision Count
% Avg Weekly Trading Volume
State of Incorporation (1=Other, 0=MD)
Herfindahl Index by Product Type
Geographic Concentration
Dividend Payout Ratio: 98 FFO
Disclosure Test
Avg Weekly Shares Traded
# of Institutional Owners
Independent Chair? (1=No, O=Yes)
Total Capitalization
Operating Units Outstanding
Development Capabilities (1=Yes, O=No)
Structure (1=UPREIT,
0=Trad/DownREIT)
Analyst Coverage
Hartzell: Industrial Midwest
Hartzell: Mid-Atlantic
Hartzell: Farm Belt
Beta In
-.028"
.052
.119 t
-.244
.475
1.208
.065
-.088"
.640
-.790
.079
-.077"
-.071"
-.023"
.929
-.624
-.689
-.166
-.188" -1.282
-.032A -.281
.055
.064
.150
-.016"
.142
.025
.112
.144
.628
.687
1.585
-.178
1.570
.257
1.272
1.570
.156
.030
-.016'
.072
1.507
.325
-.149
.811
Sig.
.809
.638
.236
.527
.436
.360
.537
.496
.869
.210
.781
.535
.497
.123
.860
.127
.799
.213
.127
.142
.747
.883
.424
Collinearity Statistics
Partial
Correlation Tolerance VIF
Minimum
Tolerance
-.044 .516 1.939 .400
.086 .564 1.772 .453
.215 .667 1.499 .446
.116
-.143
.657
.540
1.523
1.853
.418
.450
.167 .908 1.102 .438
-.113
-.125
.439
.631
2.277
1.584
.375
.407
-.030
-.228
-.051
.114
.125
.278
-.033
.275
.047
.226
.276
.265
.059
-.027
.146
.346
.301
.521
.879
.778
.705
.850
.774
.699
.841
.749
.591
.825
.565
.837
2.892
3.323
1.919
1.137
1.285
1.418
1.176
1.291
1.430
1.189
1.334
1.692
1.213
1.769
1.195
.346
.301
.452
.452
.446
.446
.442
.453
.402
.452
.418
.452
.453
.407
.452
w. Predictors in the Model: (Constant), Hartzell: Northern California, % Variable Rate Debt, G&A as % of NOI, 1998 Capital Deployment Capacity,
Hartzell: Southern California, Hartzell: Mineral Extraction, Total Inside Ownership, Hartzell: New England, Executive Inside Ownership, Dummy
Variable: Office (1) / Apartment (0) x. Dependent Variable: NAV Premium
Page 68

Collinearity Diagnosticsa
Model: 23
2 1.272 2.156 .00 .00 .00 .01
Variance Proporti ns
Dummy
Dim ensi
1 5.911
Condition
1.000 .00
Variabl 3&A as % Total Inside Inside Deployment Apartment New Mineral Southem Northern
.01 .00 .00
Variable:
Executive 1998 Capital Office (1) on Eigenvalue Index (Constant) Rate Deb of NOI Ownership Ownership Capacity
.00 .01
(0)
.01
/ Hartzell: Hartzell: Hartzell: Hartzell:
England Extraction California California
.00 .00 .00 .00
.02 .01 .01 .16 .01 .12 .11
3 1.005 2.425 .00 .00 .00 .00 .02 .02 .02 .05 .21 .06 .12
4 .691 2.925 .00 .02 .00 .02 .02 .15 .06 .44 .01 .00 .04
5 .581 3.189 .00 .08 .00 .01 .20 .00 .28 .02 .01 .03 .00
6 .466 3.561 .00 .00 .00 .00 .01 .01 .00 .02 .03 .56 .63
7 .363 4.037 .00 .16 .00 .03 .01 .15 .29 .05 .38 .05 .00
8 .312 4.350 .00 .26 .03 .00 .00 .36 .21 .20 .12 .09 .02
9 .251 4.856 .01 .06 .31 .01 .19 .23 .11 .02 .03 .00 .01
10 .090 8.087 .06 .22 .11 .93 .44 .01 .02 .04 .13 .03 .06
11 .058 10.099 a. Dependent Variable: NAV Premium
.92 .20 .55 .00 .08 .05 .00 .01 .07 .05 .00