CEO/President 2011 Letter to Shareholders

Dear Fellow Shareholders:
March 2012

In our 2011 Shareholder Letter we stated that we were in an investment environment much more to our liking. We further stated that we would not hesitate to pursue aggressively large and complex transactions in which we believe we have the skill sets to realize significant returns. We believe the company has executed on these goals during 2011. Moreover, the momentum of 2011 presently continues unabated into 2012.

In 2011, the Company made new, accretive investments exceeding $230 million comprising distressed debt, fulcrum securities, new loan originations, control transactions and traded securities. At all times, we closely held to our value investment strategies building on the investments made in 2009 and 2010. Operationally, leasing activity has improved, particularly with respect to those properties which we acquired through distressed debt investments.

An intriguing aspect of our investment strategy is indicated in the amount of assets in which we are invested. As the graph below indicates, our balance sheet does not reflect the full magnitude of these assets.


This growth results as much from the structure of our investments, for example joint ventures and portfolio transactions, as it does from the style of our investing. This chart is indicative of the company's relatively large imprint particularly when one considers its year end equity cap of approximately $375 million and total balance sheet assets of $734 million as compared with the $2.7 billion of assets in which we are invested.

We continue to see the trends described in our 2011 Shareholder Letter which remains somewhat a tale of two markets. We see highly sought trophy assets in gateway markets and lower priced assets in all other markets. This trend has evolved to include the addition of class A and B quality multifamily assets to the first grouping and an increase in major market leasing activity for the second grouping. We believe that the economic recovery while slow will continue throughout 2012 and 2013 with gradual increasing rental demand across most asset classes in most major markets. We also strongly believe that lenders will continue to take advantage of their improved balance sheets by accelerating the disposition of their real estate related assets, both debt and real estate owned. Accordingly, we anticipate no diminishment in value opportunities for investing in 2012 and 2013.

As mentioned, in 2011 we further executed on the investment strategies we described in our 2009 and 2010 Shareholder Letters. We focused on distressed debt and fulcrum securities with the expectation of benefitting from high risk adjusted returns if repaid or, in the alternative, participating in the equity ownership of the underlying real estate. To maximize diversification of risk and reduce capital concentration, we often acquired the investments through joint ventures utilizing third party co-investment capital. During 2011, we made more than $65 million of new equity investments and purchased, individually or through joint ventures, more than $175 million of debt securities relating to real estate collateral exceeding $850 million in value. During the first two months of 2012, we have invested an additional $25 million in joint ventures which have acquired debt and equity positions in real estate collateral exceeding $600 million in value. Most notable among these 2011 and 2012 investments was the purchase of the junior tranche of the $800 million Southern California first mortgage secured by 31 office properties, the purchase of $142 million Sullivan Center first mortgage and the acquisition of $50 million Stamford office portfolio mezzanine debt. We expect these types of opportunities to grow significantly in 2012 and 2013. In fact, third party investors are seeking our participation in their debt investments in view of their perception of the quality of the skill sets we bring to bear on debt restructuring issues.

Closely related to acquiring distressed debt is the origination of high yield junior loans or preferred equity investments. In 2011, we originated approximately $40 million of loans and preferred equity relating to approximately $120 million of real estate. Most notably, these investments include the High Line Building and the Hotel Wales both located in New York City. While we may consider seeking co-investor capital for larger investments, loan originations often allow us to restructure our ownership position so that a lower yielding senior portion may be sold to a third party reducing our investment while enhancing our return. Two examples of this were our issuance of senior participations in our San Marbaya loan and our Hotel Wales whole loans. Since these opportunities come hand in hand with those relating to distressed debt, we also anticipate an increase in loan origination investment in 2012 over 2011.

Our expansion of portfolio transactions while not as visible as our debt related investing still grew significantly in 2011. We, together with a joint venture partner, acquired the collateral manager of two CDOs with approximately $1.4 billion of loan and securities assets. In addition, we expanded the Vintage Senior Housing Portfolio by adding three properties through the acquisition of additional general partnership interests and preferred equity issued to fund a new project. These investments provide both a high return and the opportunity for a substantial flow of related and follow up investments. Expect more implementation of this investment strategy in 2012.

In November, we issued $40 million of our Series D Preferred and repurchased our Series B-1 and Series C Preferred which we otherwise were required to redeem in February 2012. As you may be aware, we recently re-opened the Series D issuance and raised in excess of an additional $70 million preferred investment capital. Our view is that until our common share price better reflects our belief in its underlying value, we are reluctant to issue new common shares. We are confident that for the time being the company is able to meet its capital needs through the issuance of preferred shares, the utilization of joint venture capital, asset specific debt and credit line borrowings.

We want to highlight one consequence of our investment strategy and the manner in which we structure our investments. We recognize that we can be difficult to analyze, as the intention behind each investment may not be readily apparent and a portion of the return on certain of our investments may be deferred. In addition, we often engage in transactions that are complex and potentially adversarial in nature. Compounding these issues is that different structures and different investments require different accounting treatments. Our management team is the largest shareholder of our company, and we are committed first and foremost to creating value for all of our shareholders. As you would expect, we do not believe that we should permit accounting complexity to prevent the company from pursuing otherwise worthwhile investments. That said, we do recognize that this may require more effort on the part of shareholders to evaluate our company. Ultimately, we believe this effort on your part will be rewarded in the form of outstanding returns. We encourage you to review our supplemental information provided on our website, and to contact us with any questions that you have related to our investments. Our entire management team seeks to facilitate our shareholders' as well as the general public's understanding of our company and our investments.

Finally, it's time to acknowledge the hard work of our acquisitions, asset management and accounting divisions. John Alba, Jay Cramer, Tom Staples, John Garilli and Peter Braverman have all had an important role in the complex, multifaceted transactions we've described, and we are grateful for their talent and commitment. All of us, together with our Board of Trustees, hope to see you at our annual shareholders meeting on May 8, 2012 at 11:00 am in New York.

Michael L. Ashner
Chairman of the Board and
Chief Executive Officer
Carolyn B. Tiffany