Allegiance Realty Corporation

A open letter from Chris Smith, Allegiance CEO

I believe the economic climate in which we find ourselves today presents an extraordinary opportunity for wealth transfer that very few will capture. The fundamental philosophy of buying, holding and selling commercial real estate is to identify opportunities where the underpinnings of the marketplace are sound and the projected return is in-line with the risk associated with the investment. In recent years we've witnessed an abandonment of those core principles. Massive inflow of capital into the real estate investment sector based on market momentum and speculation, amplified by aggressive underwriting without appropriate adjustments for risk, and why? All in the pursuit of "chasing" yield.

Now, we're entering an unavoidable yet absolutely necessary period of correction to deleverage assets being held which is only exaggerated by the failure of lending institutions and the resulting credit crunch. Investors of commercial real estate, among other classes, are feeling the pressure in the loss of tenant income, rising interest rates and a need to deleverage current loan positions. The ability to survive in a marketplace with these attributes requires a company platform that is properly managed, conservatively capitalized and appropriately staffed with experienced professionals. Some companies with these core competencies will find it difficult to survive to the next recovery if the excessive availability of capital and lax underwriting standards were the impetus of their investment decisions. Investment managers will be measured not only on historical yield returns to their clients, but more importantly how they're managing the assets within their portfolio through these turbulent times.

The opportunity to actively and prudently participate in the upside of this market correction will be dependent upon your ability to identify vehicles with the strength and platform built to manage through the unprecedented change in the market landscape resulting. Timing the exact bottom date of the market value for commercial real estate isn't as important as understanding underlying economic dynamics of each marketplace and determining the fundamental value baseline. Another essential component for achieving this success will be engaging companies with solidly established working relationships with their balance sheet lenders.

In my opinion, the next 24 months will be the most favorable for capturing assets at these levels before the value trends begin to turn upward. Commercial real estate is a cyclical investment -- it always has been and always will be. Investors with the expertise to identify the opportunities based on market fundamentals, proven asset management and leasing strategies and most importantly … hard work, will be the most successful in acquiring undervalued assets during this cycle.

The Allegiance team has been preparing for this market transition since the end of 2005 with the divesting of stabilized and non-core assets. We've been working diligently to raise and preserve capital, protect our underlying assets and continue to fine-tune our already sound strategy for value creation.

We are very excited about the prospects in the upcoming years, both yours and ours.


Christopher R. Smith, CEO