proceed with caution - evan hennessy · most reits lost their cost of capital advantage . 8...

January 2016

PROCEED WITH CAUTION

2

Who is Stifel?

Stifel Research:*

– Largest U.S. equity research platform

– 136 Senior analysts across 12 industry verticals

– 1,827 companies under coverage

– We are ranked 3rd globally in small-cap coverage and 13th overall in global coverage

Stifel is a market maker in roughly 3,700 U.S. domestic equities

Source: Stifel

*Includes KBW & UK

3

Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should

consider this report as only a single factor in making their investment decision.

All relevant disclosures and certifications appear on pages 133-135 of this report.

Analysts

John W. Guinee Office, Industrial

Matthew S. Heinz, CFA Data Centers & Towers

Nathan Isbee Retail

Rod Petrik Multifamily, Lodging

Chad Vanacore Healthcare

Simon Yarmak, CFA Triple-Nets, Lodging

Associates

Erin Aslakson Office, Industrial

Seth Canetto Healthcare

David Corak, CFA Multifamily

James Holmes Data Centers & Towers

Jennifer Hummert Retail

Kyle McGrady Office, Industrial

Elizabeth Moran Healthcare

Joseph van Bemmelen Triple-Nets, Lodging

Pricing as of December 30, 2015 unless otherwise noted.

Stifel REIT Team

4

REITs Up Modestly In 2015

Source: FactSet Research Systems, Stifel

5

2015 Relative Performance

Source: SNL Financial

1.5%

1.8%

2.0%

2.3%

2.5%

2.8%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%1

0-Y

ear Tre

asury Y

ield

Pe

rfo

rman

ce

RMZ 10-Year Treasury Yield

6

Storage Led The Way In 2015

Source: FactSet Research Systems, NAREIT, Stifel

7

2015 In Summary: Is It Over Yet?

10-Year Treasury was range bound 2.20% +/- 30 bps

Modest economic growth (GDP +2.1%)

REITs still modestly outperformed most major indices

Sector performance divergence (storage +42.4% vs. lodging -22.8%)

Quality largely outperformed

M&A occurred with minimal ripple effect

Most REITs lost their cost of capital advantage

8

Stifel’s 2015 Best Ideas

Source: FactSet Research Systems

Best Ideas from 2015 Stifel Rollout, January 2015

*QTS was not in the 2015 Rollout

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2015 Stifel Best Ideas Total Returns

Data Centers QTS* 38.1%

Industrial TRNO 14.3%

Triple-Net STOR 13.2%

Shopping Center EQY 11.3%

Industrial DRE 9.8%

Multi-Family CPT 8.8%

Malls GGP 0.0%

Office SLG -2.1%

Office VNO -2.7%

Healthcare NHI -7.0%

Lodging CLDT -24.8%

Healthcare SBRA -27.7%

Weighted Avg. Weighted Avg. 1.8%

RMS REIT Index RMS REIT Index3.4%

Alpha -1.6%

Sector StockTotal

Return

9

M&A Activity – Mostly Public To Private

Source: SNL Financial, Stifel estimates

Updated through 12/30/15

Buyer Seller

Blackstone Group Excel Trust Inc. (EXL)

Brookfield Asset Management Associated Estates Realty Corp. (AEC)

Lone Star Investment Advisors Home Properties Inc. (HME)

CyrusOne (CONE) Cervalis

QTS Realty (QTS) Carpathia

Digital Realty (DLR) Telx

Equinix (EQIX) Bit-isle

Chambers Street Properties (CSG) Gramercy Property Trust (GPT)

Blackstone Group Strategic Hotels & Resorts (BEE)

Blackstone Group BioMed Realty Trust (BMR)

Harrison Street Real Estate Capital Campus Crest Communities (CCG)

Weyerhauser Company (WY) Plum Creek Timber Co. (PCL)

American Homes 4 Rent (AMH) American Residential Properties Inc. (ARPI)

Equinix (EQIX) Telecity

2015 M&A Participants:

Announced:

0

5

10

15

20

25

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Tran

sactio

ns

(in

billio

ns)

REIT M&A Activity 2004-2015

Equity Value Total Value

10

Interest Rates Important – But Not the Whole Story

Source: FactSet Research Systems, Stifel

-

100

200

300

400

500

600

700

800

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Jan-8

6

Jan-8

7

Jan-8

8

Jan-8

9

Jan-9

0

Jan-9

1

Jan-9

2

Jan-9

3

Jan-9

4

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Ind

ex P

rice

10-Year Treasury Yield vs NAREIT FTSE All Equity Price Index and S&P 500

10 Yr Treasury Yield NAREIT FTSE All Equity Index

9/30/198610-Yr. 6.92%NAREIT Index 220.86

9/30/198710-Yr. 9.59%NAREIT Index 219.59REITs -0.6%

10/31/199310-Yr. 5.33%NAREIT Index 241.95


10/31/199810-Yr. 4.53%NAREIT Index 264.26


6/30/200310-Yr. 3.28%NAREIT Index 298.98

6/30/200610-Yr. 5.14%NAREIT Index 511.55REITs +71.1%

4/30/13 10-Yr. 1.67% NAREIT Index 585.66

12/31/13 10-Yr. 3.04% NAREIT Index 510.33 REITS 12.9%

11

Outlook & Recommendations

2016

12

Wide gap between top and bottom tier stocks

Stocks with strong earnings growth and solid balance sheets continue

to outperform

NAV and FFO multiple discounts are not a catalyst

More sectors will experience a deceleration of fundamentals

NAVs being questioned by a lack of buyer depth for lower quality

assets

Interest rate volatility could remain an overhang

REIT sector performance driven by funds flow and the search for the

incremental investor

REIT sub-sectors and stock performance driven by REIT dedicated

investors

Proceed With Caution

13

Where are REITs and Real Estate?

10-year Treasury at 2.20%

with modest upward

incremental movements

Private market has

significant cost of capital

advantage

Cap rates have bottomed,

but with fewer bidders

Spread investing limited to

select REITs

Real estate is late in its cycle

for most property types

Generalist investors are the

incremental investor

10-year Treasury at 2.40%

with modest upward

incremental movement

Private market still has a cost

of capital advantage

Cap rates expected to

increase slightly

Spread investing still limited

Late in the real estate cycle

Generalist investors are still

the incremental investor

10-year Treasury at +/-

2.10% with range bound

forecast

Private Investors have cost

of capital advantage

Cap rates declining; all asset

quality levels

Spread investing perceived

as ‘difficult’

Risk-off trade globally; yield

matters

Generalists involved, but

reluctant

January 2016 January 2017 January 2015

Source: Stifel Research

14

Broader Markets – The REIT Fit?

Equity Markets

S&P 500

Bond Market

REIT Fit

All about growth

Risk on/off trade constantly changing

Multiple expansion likely finished

Projected earnings growth: 3% - 5%

Average dividend: 2%

Total annual return: 5% - 7%

Interest rate overhang

Sub-3% income

Principal risk

Investors want equity-like returns

Interest rate overhang

Top-down fundamentals

Source: Stifel estimates

15

Funds Flows Overview

Domestic REIT Dedicated Inflows

Domestic Institutional – REIT interest modest due to late real estate cycle and rising interest

rate perceptions

Global Institutional – flight to safety and principal protection-oriented

Global Individual – Japanese funds flows constant while flows from other nations remain

minor

Source: Morningstar, Stifel estimates

Assumes 50% of global funds flows invested domestically

($ in Billions) 2010 2011 2012 2013 2014

Thru Nov.

2015

Mutual Funds

Actively Managed $2.5 $3.2 $2.9 $3.4 $1.2 ($4.5)

Passive (Index) $0.7 $1.0 $2.2 $3.1 $3.2 $1.6

Exchange Traded Funds $1.5 $3.2 $8.1 $2.9 $6.4 $0.8

$4.6 $7.4 $13.2 $9.5 $10.8 ($2.1)

*Data above may not sum exactly due to rounding

16

Funds Flows – Absolute & Percentage

Source: Morningstar

1/29/10 12/31/10 12/30/11 12/31/12 12/31/13 12/31/14 11/30/15

RMZ Equity Market Capitalization ($ Billions) $212 $317 $363 $449 $531 $727 $757

Japan-Domiciled U.S. REIT AUM as a % of the RMZ Mkt. Cap 6.9% 8.4% 11.3% 10.3% 8.2% 7.3% 6.7%

U.S. MF/ETF AUM as a % of the RMZ Mkt. Cap 24.4% 23.2% 23.1% 25.0% 19.2% 21.4% 20.2%

Combined 31.3% 31.6% 34.4% 35.3% 27.4% 28.7% 26.9%

17

CMBS market is functioning properly and lenders are providing appropriate capital to markets

Debt Market Conditions

Source: Commercial Mortgage Alert, Stifel estimates

Spreads have widened

Source: FactSet

BBB Index Yield Spread to

10 Year Treasury Yield

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

CMBS Issuance ($B)

18

Investment Sales Market & Net Asset Value

Perceived late cycle risk

Fewer real bidders

Cap rates have bottomed

Debt costs on upward

trajectory

Still strength in core asset

sales

Public leads private market

valuations

Public REIT Private Investor

Leverage Level +/- 40% > 70%

Term 7 years (+/-) < 5 years

Debt Cost (weighted avg.)

3.4% < 4.0%

Equity Invested 60% < 30%

Initial Equity Return 6% – 8% 8% – 10%

Estimated Cost of

Capital (70% LTV, Private)

5.0% – 6.2% 4.8% – 5.4%

Private market has cost of

capital advantage:


19

Private Markets & Public REITs: Similar Attributes


Capitalization Rates explicitly underwrite growth and value creation

REITs

Sub 5% - Expect NOI growth greater than inflation - Core - Coastal Multi-Family

- Meaningful barriers to entry - Global Pension Funds - Best Gateway City Office

- Sovereign Wealth Funds - Storage

- Best Malls

5%-6% - Expect Value Creation - Domestic Pension Funds - Other Multi-Family

- Rental rate increase likely - Other Gateway City Office

- Possible Barriers to Entry - Best Strip Centers

- Best NNN

- Best Industrial

6%-7% - Rents in place at market - Many Types of Investors - Private Pay Healthcare

- Few barriers to entry - Other Industrial

- Solid demand, sound fundamentals

Development in check

7%-8% - Primary component of return is levered NOI - Value-Add - Suburban Office

Average fundamentals - High Leverage - Gov't Reimbursed Healthcare

- Lower Quality NNN

Above 8% - Investment underwriting achieved - Opportunistic - B/C Malls

even with decrease in value - High Leverage

- Downside to income stream

- Principal or basis risk

Cap Rate Range Investment Attributes Private Investors

20

Multiple Levers For Growth & Value Creation

Internal Growth

− Positive leasing mark-to-market

− Annual/periodic rent bumps

− Occupancy gains

− Cost savings/operating margins

External Growth

− Accretive development/redevelopment

− Capital recycling that improves NAV

Cost of Capital Advantage

− Spread investing - Acquisitions

− Premiums to NAV

Leverage

− Never again

21

Sector Growth Drivers


SectorRental Rate

Growth

Annual/periodic

rent bumps

Operating Cost

Savings

Accretive

development/

redevelopment

Capital

recycling that

improves NAV

Spread

investing,

acquisitions

Premiums to

NAV

Multifamily C D C C C D C

Storage C D C C = D C

Lodging C D C D = D D

Gateway Office C C D C C C =Suburban Office D = D = C D D

Industrial C C D C C = =Malls C C = C D D D

Strips C C = C = = D

Data Centers C C = C D C D

Towers C C D D D D D

Healthcare = C D = C = D

Triple-net = C = D = C C

Internal Growth Cost of Capital AdvantageExternal Growth

22

Multifamily Storage Lodging Gateway Suburban Industrial Malls Strips Healthcare Triple-Net

Revenue 5.4% 6.6% 5.4% 7.0% 4.3% 4.1% 3.9% 3.3% 12.5% 3.0% 1.4%

SS NOI 6.0% 8.8% 11.6% 2.4% 3.3% 4.7% 4.4% 3.6% NA 3.5% 1.4%

Normalized FFO/sh 10.4% 11.1% 10.2% 4.9% 5.9% 1.6% 9.6% 5.7% 12.2% 8.9% 4.0%

FAD/sh 18.5% 12.2% 22.1% 11.2% 5.2% 7.6% 8.4% 13.9% 13.4% 8.9% 4.3%


Revenue 4.7% 6.0% 4.8% 4.0% 2.8% 2.5% 4.2% 3.1% 16.1% 3.0% 1.4%

SS NOI 5.0% 7.0% 7.1% 4.3% 2.5% 5.0% 4.6% 3.4% NA 3.0% 1.4%


FAD/sh 5.1% 13.0% 13.9% 8.9% 4.7% 4.7% 8.8% 5.6% 12.8% 8.1% 5.0%


Revenue 3.6% 5.1% 4.1% 4.4% 3.1% 5.9% 4.4% 3.2% 9.7% 3.0% 1.4%

SS NOI 3.8% 5.5% 4.2% 4.8% 3.4% 5.9% 4.6% 3.5% NA 2.5% 1.4%


FAD/sh 6.5% 8.0% 8.6% 12.7% 8.2% 10.5% 11.9% 7.4% 13.4% 5.5% 4.5%


NAV Premium/Discount 0.2% 31.8% (20.8%) 2.1% (11.2%) (7.3%) (12.2%) (3.6%) 2.9% (8.8%) 2.5%

2016E FAD Multiple 23.9x 25.1x 11.0x 29.5x 18.3x 21.8x 17.3x 16.9x 15.7x 13.7x 13.8x

Note - Revenue and NOI represent same-store estimates

Sources: Company data and Stifel estimates

Data

Centers &

Towers

Data

Centers &

Towers

Data

Centers &

Towers

Office Retail

Office Retail

Office Retail

Data

Centers &

Towers

Stifel NAV and Estimated 2016E FAD Multiples by Sector

Priced 12/30/15

2014-2015E Growth

Stifel Projected Growth by Sector


2015E-2016E Growth


2016E-2017E Growth

RetailOffice

Projected REIT Growth by Sector

23

Dividend Increase Deceleration Expected

Source: FactSet Research Systems, SNL Financial, Stifel estimates

2006 – 2015 Average growth: 2.7%

2010 – 2015 Average Growth: 10%

2016 – 2017 Estimated Average Growth: 7% - 9%

-43%-20%

-15%

-10%

-5%

0%

5%

10%

15%

2009 2010 2011 2012 2013 2014 2015 2016E 2017E

REITs Annual Dividend Increase / (Decrease)

24

Target Growth & Value Creation


Green Light BXP KRC DRE TRNO FRT REG DOC HCN NNN O EQIX DLR PSA CUBE

SLG VNO DCT PLD HR HTA STOR EPR CONE QTS

LTC OHI

Yellow Light BDN CUZ FR EGP BRX KIM HST CLDT CTRE NHI ACC CTT

ESRT PKY KRG RPT

AHH DEI

Red Light LXP EQC DRH HT HCP MPW

WRE CLI SHO AHT SBRA SNR

FPO FSP LHO

Office Industrial Malls

REXR

SPG

GGP

HIW

PEI

SKT

MAC

EDR

OFC

VTR

GPT

PEBUDR

CPT

RSE

ESS

WRI

COR

OtherStrip Centers Apartments Data CentersTriple-NetLodging Healthcare

AVB

EQR

HPT

EQY FPI

PDM

LPT DFTVERCBL CDR PPS

25

2016 Performance Predictions & Assumptions

REIT Performance 0% - 5% − Earnings Growth 5% - 7%

− Dividend 4.0%

− Dividend Growth 7% - 9%

− Multiple Contraction Moderate

Stifel projects 2,100 S&P 500 or 5% – 7% total return

REITs slightly underperform the S&P 500

10-year Treasury at YE 2016 in the 2.2% – 2.4% range

Moderate economic growth – GDP growth of 2.6% in 2016

Significant interest rate increase may cause severe REIT correction


26

2016 Sector Performance Predictions

Industrial

Gateway Office

Data Centers

“A” Malls

Shopping Centers

Multifamily

Storage

Triple-Net

Healthcare

Lodging

Suburban Office

“B” Malls

Overweight Equal-Weight Underweight

27

Catalysts – What Can Help REITs Out?

Positive

– Bear Market as REITs are more defensive

– More positive macroeconomic environment

– M&A could become a catalyst

– Reacceleration of fundamentals in key sectors

– Election cycle positive for REITs

– REITs will have their own Global Industry Classification System category (GICS)

– FIRPTA Reform

Negative

– Black Swan event

– Macro environment deteriorates

– Fundamentals decelerate faster than anticipated

– Increased regulatory oversight of lenders

– Interest rate shock

28

M&A Candidates by Sector

Office Equity Commonwealth (EQC)

Industrial Liberty Property Trust (LPT)

Apartment Post (PPS), Apartment Investment &

Management (AIV)

Hotel Host Hotels & Resorts (HST), Chesapeake

(CHSP), FelCor Lodging Trust (FCH)

Retail All Small-Cap Shopping Centers

Triple-Net

Four Corners Property Trust (FCPT),

Global Net Lease Inc. (GNL),

Spirit Realty Capital (SRC)

Healthcare Healthcare Trust of America (HTA)

Data Centers DuPont Fabros Technology (DFT),

CyrusOne (CONE)

Please note that we do not have any knowledge of any potential M&A activity or discussion.


29

Stifel REIT Income List

*We can make no assurances that the REITs on this list will not change their dividend policies, reducing the dividend and/or paying a portion in stock.

For investors looking for income with lower risk, please contact the Stifel's Fixed Income Desk about investing in REIT preferred shares or REIT bonds.

Source: FactSet Research Systems, SNL, Stifel Stifel Investment Rating: B - Buy, H - Hold, S - Sell

Ticker Dividend

Yield (%)

Investment

Rating

Price

12/30/2015

Current

Dividend

Morgan Stanley Total Return REIT Index (RMS) RMS 3.9%

CBL & Associates Properties CBL 8.5% H $12.53 $1.06

Armada Hoffler Properties AHH 6.4% B $10.65 $0.68

EPR Properties EPR 6.2% H $58.80 $3.63

STORE Capital Corporation STOR 4.6% B $23.32 $1.08

Hospitality Properties Trust HPT 7.5% B $26.71 $2.00

Welltower, Inc. HCN 4.8% B $68.32 $3.30

LTC Properties LTC 5.0% H $43.62 $2.16

National Health Investors NHI 5.5% B $61.63 $3.40

Omega Healthcare Inv. OHI 6.4% B $35.25 $2.24

Ventas Inc. VTR 5.2% B $56.63 $2.92

Digital Realty Trust DLR 4.4% B $76.93 $3.40

Average Stifel REIT Income List Yield 5.9%

Stifel REIT Income List*

30

Chad Vanacore [email protected]

(518) 587-2581

31

(25.0%)

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

SNL U.S. REIT Healthcare SNL U.S. REIT Equity S&P 500

YTD Index Price Performance(39.9%)

(32.2%)

(15.5%)

(12.2%)

(11.9%)

(9.8%)

(9.8%)

(9.7%)

(9.2%)

0.6%

1.0%

2.2%

3.5%

SNR

SBRA

MPW

HCP

NHI

VTR

OHI

HCN

CTRE

HTA

LTC

DOC

HRYTD Price

Performance

Interest rate panic (initial rise January 30th, jobs report February 6th)

NIC MAP data shows supply exceed absorption for first time this cycle (April 8th)

Beginning of S&P pullback (August)

3Q HCREIT earnings (October): managements indicate pull back in acquisitions,

clarify extent of seniors housing oversupply exposure

2015 – What Went Wrong?

Source: SNL Financial and FactSet

1

2

3

4

Increased cost of capital and reduced

growth expectations…

1 2

…Turned into a vicious cycle

for some (red light stocks)

For others, the story has not changed

much – but valuations have become more

attractive (yellow and green light stocks)

3 4

32

Headwinds from new seniors housing supply, higher cost of capital

paired with sticky cap rates, and uncertainty around the evolving health

system

Valuation metrics indicate HCREITs are undervalued relative to historical

on a P/FAD, implied yield, and discount to NAV basis

What’s driving Buy ratings?

– We believe MOBs will be resilient

– Access to capital at reasonable spreads to investment

– Low leverage

– High portfolio quality / diversification

– Well cushioned lease coverage

– Discounts to historical valuation

2016 Healthcare REITs Equal-Weight with Selective Picks


33 Risk (supply growth / healthcare demand / cap rate stability / reimbursement)

Medical Office

Demand driven development, virtually no spec

Higher healthcare utilization driving demand for space

No direct exposure to government reimbursement

Stable cap rates – 5.5% - 7.5%

Divergent Asset Class Fundamentals

Source: Company reports and Stifel estimates

>80% of NOI: DOC, HR, HTA

15% - 30% of NOI: HCN, HCP, VTR

Skilled Nursing / Post-Acute

Fragmented market ripe for consolidation

Risks related to evolving healthcare payment system

Overall stable supply

>50% of NOI: CTRE, LTC, OHI, SBRA

20% - 35% of NOI: HCN, HCP, NHI

Hospital

Hospitals have benefited from healthcare reform

via higher volumes and better payor mix

New patient criteria will put pressure on LTACHs

Signs of slowing volume growth and unfavorable

mix shift going into 2016

100% of NOI: MPW

5% - 20% of NOI: DOC, HCP, HR, HTA, SBRA, VTR

>50% of NOI: HCN, NHI, VTR

30% - 50% of NOI: HCP, LTC, SBRA

Seniors Housing

Expect 3%-4% SS NOI growth in 2016

Increasing risk of oversupply – adverse impact to

occupancy and rate growth could slow 2017 growth

Lease coverages thinner than we would like

Long term (7-10 year), demographics highly favorable

Gro

wth

(FA

D p

er

sha

re)

23.3% 19.4%

12.2% 10.7% 10.2%

8.3% 7.9% 7.6% 5.5% 5.3% 4.9%

3.3% 3.0%

DOC SNR HR CTRE LTC HCN OHI VTR NHI SBRA HTA MPW HCP

2016E FAD Growth

34

Valuation – Depressed vs Historical

Undervalued vs historical multiples and interest rates

– Price / 2016 FAD more than 1x below historical - we

believe the market is overestimating earnings growth

deceleration in 2016

– Implied yield spread to 10-year treasury is 50bps

wide of historical. Even after adjusting for 25-50bps

rate increase, still looks cheap

– HCREIT vs Equity REIT dividend yield spread 20bps

wide of historical

HCREITs trading at 3.5% median discount to NAV

…but all of this could reverse if interest rate fears and

fundamentals concerns prove overblown

(2.0%)

0.0%

2.0%

4.0%

6.0%

8.0%

BBB Spread 10yr Tr Spread

3.6% Historical

1.4% Historical Avg

10-year Avg Time Period: 3Q05 - 3Q15 Source: FactSet and Stifel estimates

12/30/15 HCREIT to 10Y Tsy: 4.4%

Div Yld Spread: Healthcare REITs vs Equity REITs

(1.5%)

(0.5%)

0.5%

1.5%

2.5%

3.5%

Mean Spread

Mean - 156 bpsCurrent Spread - 178 bps


Mean - 156 bpsCurrent Spread - 178 bps


HCREITs Implied Yield Spread to

10 Year Treasury and BBB Index Yields

12x

13x

14x

15x

16x

17x

18x

19x

20x

HCREIT 5 yr Average P/FAD - 12 mth fwd

HCREIT 5-yr Wtd Avg - 16.0xHCREIT 5-yr Median - 15.4x

HCREIT Current Wtd Avg- 14.9xHCREIT Current Median - 14.8x

Source: Company reports and Factset

HCREITs – P/FAD – 12 Month Fwd

35

Risks

Source: _____________________________

Acceleration of seniors housing supply growth in excess of demand growth

Competition for assets

HCREITs’ cost of or access to capital erodes, making accretive external growth more

challenging

Adverse reimbursement headlines and real impact of healthcare system evolution

Risk mitigation will be essential to counteracting negative sentiment: We believe

companies with lower leverage and higher lease coverage are better positioned in light

of the above risks

4.6x 4.8x 4.9x 5.0x 5.8x 6.0x 6.2x 6.3x 6.3x 6.3x 6.3x

6.9x

9.5x

Source: Company filings

Leverage – 2016 Debt / Adj. EBITDA SNF EBITDAR Lease Coverage Srs Hsg EBITDAR Lease Coverage

1.4x 1.4x 1.3x

1.1x 1.1x 1.1x 1.1x 1.1x

OHI LTC SBRA SNR VTR HCN NHI HCP


12 3 3

2.2x

1.8x 1.7x 1.6x 1.4x 1.4x

1.3x

0.9x

NHI CTRE LTC VTR HCN OHI SBRA HCP


133 2

1 Includes HCR ManorCare; ex-HCR SNR EBITDAR coverage is 1.48x, EBITDARM coverage is 1.95x2 Same-store3 Estimate; assumes 5% management fee; operating margin of 35% for AL/IL, 20% for SNF, 15% for hospital

36

Path to resolution for the troubled HCREITs

Four HCREITs ended 2015 stuck in a cycle of lower growth expectations and higher cost

of capital – HCP, MPW, SBRA, and SNR

Path to resolution is more clear for some than others due to the nature of the challenges

they face. We believe the following has to happen for these companies to recover:

– Come to a reasonable resolution with its Forest Park issues

Clarity to Resolution

– See seniors housing supply growth moderate

– Delever

– See improvement in HCR operations that would aid lease coverage

– SHOP operator Brookdale shows sustainable operational improvement

– Eliminate capital overhang by terming out the credit facility

– Implement capital recycling program of size

High

Medium

Low

Low

SBRA

SNR

HCP

MPW


37

HCREIT Tiering Where It All Shakes Out

HCREITs have largely lost their cost of capital advantage vs private buyers – but that does

not mean they can’t grow though external investment

Companies with ability to source a sufficient volume of non-marketed, relationship-

driven deals to meet external growth expectations do not need to compete with private

buyers for the lowest cap rate assets

Development capabilities supplement acquisitions for HCN, HCP, HR, LTC, MPW, and OHI

Internal Growth / External Cost of Capital

Fundamentals Growth Advantage Rating

DOC P P Buy

HCN P P P Buy

HR P P P Buy

HTA P P P Buy

LTC P P P Hold

OHI P P P Buy

CTRE P P Hold

NHI P Buy

VTR P P Buy

HCP Hold

MPW Hold

SBRA Hold

SNR Hold


38

HCREIT 2016 Best Ideas – DOC

Physicians Realty Trust (DOC – Buy – $16.97)

Differentiated strategy of growth through acquisitions of medical office buildings in less

competitive markets at relatively higher yields

– Current cost of capital is sufficient for accretive growth

Attractive 23.3% FAD growth expected in 2016

– Compares favorably to 6.2% average for peers HR and HTA and 7.1% for all HCREITs

Medical office currently has the best fundamentals in the HCREIT world, in our view:

low supply growth, high healthcare/demographics-driven demand, and no direct exposure

to government reimbursement risk

Low leverage at 4.3x pro forma net debt/EBITDA and 27% pro forma debt to market cap

Discounted risk-adjusted valuation relative to peers

– 16.0x 2016 FAD vs 18.3x average for peers HR and HTA, and vs 14.0x for all HCREITs

– 6.0% Implied yield vs 5.8% average for peers HR and HTA, and vs 6.4% for all HCREITs

Risks include REIT interest rate sensitivity, reliance on accretive acquisitions for growth

and normal course tenant credit risks


39

HCREIT 2016 Best Ideas – HCN

Welltower, Inc. (HCN – Buy – $68.32)

High-quality portfolio, diversified across asset classes

Lowest cost of capital among the HCREITs

– Implied yield 5.6% vs 6.4% HCREIT median

Active capital recycling program with over $1 billion in dispositions expected through 2015

Robust investment pipeline through existing tenant/operator relationships

Attractive 8.3% FAD growth expected in 2016

Strong balance sheet with 6.2x net debt/EBITDA and 47.4% debt to market cap

Risks include REIT interest rate sensitivity, exposure to government reimbursement (24% of

NOI from hospitals and SNFs), and seniors housing oversupply (33% of NOI from SHOP)


40

Nate Isbee [email protected]

443-224-1346

41

Overweight Regional Malls

Grind it out year

Perception vs. Reality

Further integration of omni-channel retailing

Weak U.S. apparel sales

Retailers retrenching in most profitable locations

Expect more store closures – will disproportionately affect “B” malls

Retailer demand healthy at “A” malls, extends to stable/make sense

“B” malls

Leasing leverage in landlord’s favor; occupancy costs are reasonable

Concerns about anchor closures

Redevelopment is concentrated on highest productivity assets

Will traditional “far-out” outlets survive?

Access to capital at attractive rates

42

2015 Mall Performance

Source: SNL Financial, Stifel

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

SPG SRG MAC TCO RMS GGP PEI SKT RSE CBL WPG

43

The Internet is Killing Malls

Clicks Defeat Bricks During U.S. Retailers’ Black Friday Weekend

(Bloomberg Nov 29, 2015)

RetailNext Reports Brick-and-Mortar Sales Down 4.7% over

Thanksgiving and Black Friday Weekend

Built For Yesterday’s Consumer: The Demise of Malls and Traditional

Distribution Networks (Talking Logistics Oct 21, 2015)

Internet Sales Threaten Shopping Mall Culture (NPR Aug 12, 2014)

The Shopping Malls Really Are Being Killed By Online Shopping

(Forbes Jan 4, 2015)

Shopping Malls In Crisis (Business Insider Jan 6, 2015)

Death of the Salesmen: Technology’s Threat to Retail Jobs (The

Atlantic June 2013)

44

Need to Analyze Online Sales Growth

In 2013, e-commerce growth outpaced in-store growth by nearly 5 to 1.

However, the 17% growth only represents $38 billion in sales whereas

the in-store growth of 3.5% represents $144 billion of sales

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

E-commerce growth In-store growth

$-

$20

$40

$60

$80

$100

$120

$140

$160

E-commerce growth In-store growth

Dollars in billions.

Source: U.S. Census Bureau, ICSC, Stifel

45

Consumers Spending Less on Apparel

$17,000

$22,000

$27,000

$32,000

$37,000

$42,000

$450

$500

$550

$600

$650

$700

$750

$800D

ispo

sable In

com

e per C

apitaA

pp

arel

Sp

end

ing

per

Cap

ita

Apparel Spending per Capita Disposable Income per Capita

(1.9)%

2.9%

Source: Bureau of Economic Analysis, U.S. Census Bureau, Stifel

46

Attitudes Shifting on Apparel

Source: Bureau of Labor Statistics, Stifel

1%

2%

3%

4%

5%

6%

7%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Apparel Spending by Age as a % of Total Expenditures

Under 25 years 25-34 years 35-44 years 45-54 years

55-64 years 65 years and older 65-74 years 75 years and older

47

Expanding Retailers Outweigh Closings

Retailers Closing Stores

− Abercrombie & Fitch

− Aeropostale

− American Eagle

− Chico’s

− Christopher & Banks

− Children’s Place

− Claire’s

− Coach

− Express

− FYE

− GAP

− IZOD

− JC Penney

− Kmart/Sears

− Macy’s

− Wolverine World Wide (Stride Rite & Keds)

Expanding Retailers − & Other Stories − Art of Shaving − Apple − Arhaus Furniture − Brio Tuscan Grille − Carter’s − Cheesecake Factory − Clarks − COS − Crate & Barrel − Dick’s Sporting Goods − F&F − Foot Locker − Forever 21 − Fossil − Francesca’s − Free People − H&M − Johnston & Murphy − Kiehl’s − Lovesac − Lululemon Athletica

− Lush

− Mac Cosmetics

− Mango

− Merle Norman

− Michael Kors

− Microsoft

− New Balance

− The North Face

− Primark

− Seasons 52

− Sephora

− Skechers

− Starbucks

− TopShop

− TUMI

− Under Armour

− Urban Outfitters

− Vinyard Vines

− Williams Sonoma

− White Barn Candle

− Yellow Box Footwear

− Zara


48

Tenant Rosters Constantly Evolve

Top mall tenants for CBL, GGP, MAC, PEI, RSE, SPG, TCO, WPG

Data is as of year-end for 2000 and 2007 and 3Q for 2015

Highlighted companies are no longer operating

Source: Company reports, Stifel

49

Store Closures, Re-tenanting Activity Driving Sales Growth

0%

2%

4%

6%

8%

10%

12%

14%

SPG TCO GGP CBL WPG RSE MAC PEI

Y/Y Sales Growth


50

Anchor Concerns Could Weigh in 2016

Data is as of 12/31 for both years.

Includes outlet centers.


Belk Bon Ton

Burlington

Coat

Dick's

Sporting

Goods Dillards JC Penney Kohls

Lord &

Taylor Macy's

Neiman

Marcus Nordstrom Saks Sears Target

Von

Maur

# of

Malls

CBL 34 19 2 16 52 74 7 NA 46 NA 2 2 70 3 2 84

General Growth 10 16 3 NA 56 84 8 9 108 9 23 5 82 13 6 126

Glimcher 6 11 4 4 3 15 1 NA 11 NA 2 3 17 NA 1 24

Macerich 3 5 3 3 23 37 5 3 53 4 14 2 39 8 2 63

Pennsylvania REIT 6 11 6 6 3 29 2 1 25 NA 1 NA 27 2 NA 38

Rouse 1 6 3 NA 13 25 5 NA 14 NA NA NA 24 4 NA 30

Simon 18 15 20 25 68 121 13 9 163 31 34 42 129 16 5 256

Taubman 1 NA 1 2 7 7 NA 5 21 8 10 8 4 NA NA 25

79 83 42 56 225 392 41 27 441 52 86 62 392 46 16 646

Belk Bon Ton

Burlington

Coat

Dick's

Sporting

Goods Dillards JC Penney Kohls

Lord &

Taylor Macy's

Neiman

Marcus Nordstrom Saks Sears Target

Von

Maur

# of

Malls

CBL 29 21 1 16 47 59 7 NA 40 NA 2 3 55 6 2 82

General Growth 10 14 4 13 56 82 7 8 104 10 25 5 69 11 5 121

Macerich 2 4 1 11 14 27 4 3 44 4 15 3 25 5 2 50

Pennsylvania REIT 7 6 3 9 2 23 1 1 23 NA 3 NA 20 3 NA 30

Rouse 6 7 3 2 12 29 3 NA 18 NA NA NA 24 6 NA 36

Simon 11 9 14 27 41 75 10 10 126 33 33 49 80 13 4 207

Taubman NA NA 2 NA 3 4 NA 4 19 6 9 8 3 NA NA 19

Washington Prime Glimcher 11 21 6 13 27 48 5 NA 36 NA 1 1 52 4 2 69

76 82 34 91 202 347 37 26 410 53 88 69 328 48 15 614

2011

2015

51

Simon Property Group (SPG, $195.16, Buy)

‒ Well-positioned to generate 4.5%+ NOI growth in 2016

‒ Double-digit leasing spreads and annual rent bumps sustain above-

average internal growth

‒ Actively re-tenanting underperforming retailers

‒ High productivity portfolio is better positioned to withstand future store

closures, in our view

‒ Stronger retailer demand for higher productivity mall space

‒ Spending $1 billion annually through 2018 on development/redevelopment

activity concentrated at highest productivity centers

‒ Best in class balance sheet with over $6 billion of liquidity

‒ Investment risks include a broad-based economic downturn or recession,

interest rate movements, weakening real estate fundamentals and general

market risks.

Regional Mall Best Idea

52

Shopping Centers – Overweight

Healthy fundamental environment

Expect same-store NOI growth to decelerate modestly in 2016

Extremely limited anchor availability

Small-shop remains an opportunity even as REITs near full occupancy

Limited new supply coming online

Ability to push rents – expect rental rate spreads to accelerate

Executing on redevelopment/value creation opportunities to drive growth

Proactively reducing exposure to “at risk” retailers

Tough acquisition environment

Private market transactions provide favorable valuations

Access to capital at attractive rates

53

2015 Shopping Center Performance

Source: SNL Financial, Stifel

-10%

-5%

0%

5%

10%

15%

FRT ROIC EQY REG KIM BRX AKR WRI IRC RMS UE CDR DDR KRG BFS RPT UBA RPAI

54

How High Can Occupancy Go?


92.5%

93.0%

93.5%

94.0%

94.5%

95.0%

95.5%

96.0%

96.5%

97.0%

97.5%

98.0%

FRT DDR KIM REG KRG WRI EQY RPT

Pre-recession Occupancy High 3Q15 Portfolio Occupancy

55

Limited Anchor Space Availability

Anchor occupancy as of 9/30/15.


94.0%

95.0%

96.0%

97.0%

98.0%

99.0%

100.0%

EQY KRG REG FRT KIM WRI DDR RPT BRX RPAI

56

Small-Shops = Opportunity


75%

80%

85%

90%

95%

100%

EQY REG WRI KIM RPT KRG

All-Time Small-Shop Occupancy High 3Q15 Small-Shop Occupancy

57

Limited New Development

Source: REIS, Stifel estimates

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E

SF (

in 0

00

s)

Shopping Center Supply vs. Demand

Completions Net Absorption

58

Limited Supply + Healthy Demand = Accelerating Leasing Spreads

Shopping Center REITs: BRX, CDR, DDR, EQY, EXL, FRT, KIM, KRG, REG, ROIC, RPAI, RPT, WRI

Source: Company documents, Stifel

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD

59

Upgrading Tenant Quality, Reducing Exposure to “at risk” Retailers

A&P has closed or sold its locations as part of bankruptcy filing subsequent to quarter-end.

Data is for shopping center REITs: DDR, EQY, FRT, KIM, KRG, REG, RPT, WRI . Data is as of year-end for 2009 and 2012 and 3Q for 2015.


Retailer 2009 2012 2015

24 Hour Fitness 7 13 24

AMC Theatres 4 9 20

AT&T 0 0 138

Bed Bath & Beyond 166 229 265

Dick's Sporting Goods 40 55 76

DSW 20 49 69

Five Below 0 0 53

GAP 133 129 166

Hobby Lobby 18 41 56

Kohl's 71 81 77

LA Fitness 8 30 52

Mattress Firm 0 8 84

Michael's 158 170 182

Nordstrom 0 13 35

Panera 0 0 68

Party City 44 89 96

Petco 83 129 173

PetsMart 179 190 224

Ross Stores 167 203 225

Starbucks 88 78 120

Stein Mart 4 4 17

TJX Companies 305 343 408

Trader Joe's 0 19 25

Ulta Beauty 0 55 108

Whole Foods 28 36 54

Number of Leases

Retailer 2009 2012 2015

A&P Company 21 11 11

Barnes & Noble 72 50 55

GameStop 0 109 102

Hallmark 51 40 45

Kmart/Sears 118 92 44

Office Depot/Office Max 184 185 164

Rite Aid 100 62 33

Sports Authority 40 61 65

Staples 137 129 117

SuperValu 76 70 11

Tops Markets 24 16 12

Toys 'R' Us/Babies 'R' Us 71 68 59

Winn Dixie 9 8 7

Number of Leases

60

Bricks & Mortar Retailers Succeeding Online

Highlighted names operate “bricks & mortar” stores.

Source: Internet Retailer, Stifel

Amazon.com Inc. Target Corp.

Apple Inc. Newegg Inc.

Walmart.com GAP Inc.

Staples Inc. Nordstrom Inc.

Sears Holdings Corp. Williams-Sonoma Inc.

Netflix Inc. Sony Electronics Inc.

Macy's Inc. Kohl's Corp.

Office Depot Inc. Symantec. Corp

CDW Corp. Etsy Inc.

The Home Depot Inc. HSN Inc.

Costco Wholesale Corp. Liberty Ventures Group

Dell Inc. Google Play

W.W. Grainger Inc. L Brands Inc.

Best Buy Co. Inc. Amway

QVC Inc. Groupon Goods

Top 30 Retailers By Online Sales

61

Focus on Value Creation


Nearly 200 properties identified as part of "Raising the Bar" initiative focused on strategic

BRX leasing and repositioning/redevelopment of anchor spaces to drive small shop occupancy

and rents.

EQY Plan to initiate $1 billion of redevelopment activity over the next 10 years on 12 large

assets.

FRT Potential total development/redevelopment pipeline is $3.5 billion -$4.5 billion over

the next 15 years.

KIM Identified redevelopment pipeline of $1 billion with a $2 billion plus shadow pipeline.

Targeting returns of 8%-13% on the redevelopment pipeline.

New developments - Holly Springs, Parkside Town Commons, and Tamiami Crossing

KRG should stabilize in 2016. Plan to spend $100 million on redevelopment activities every

18 months.

REG Expect to deliver an average of $200 million of developments and redevelopments

annually.

RPT Expect to deliver $65 million -$80 million of redevelopments annually.

New developments - Hilltop Village Center, Nottingham Commons, The Whittaker, and

WRI Wake Forest Crossing II stabilizing in 2016 and 2017. Walter Reed and Atlanta Civic Center

developments in shadow pipeline, $500 million development/redevelopment pipeline.

62

Private Market Provides Favorable Valuations

Cap rates for grocery anchored centers the trailing twelve months.

Source: Marcus & Millichap, Real Capital Analytics, REIS, Stifel

Top Quartile, "A" Centers "B"/"C" Centers

New York 4.5%-5.3% 6.9%-8.1%

Los Angeles 5.0%-5.8% 6.2%-7.5%

Chicago 5.1%-6.0% 7.0%-8.5%

Dallas Fort-Worth 5.7%-6.5% 7.0%-8.5%

Houston 5.0%-5.8% 7.0%-8.7%

Philadelphia 5.0%-6.0% 6.8%-7.8%

Washington DC, Northern VA 4.8%-5.6% 6.0%-9.0%

Miami 4.5%-5.5% 6.0%-7.9%

Atlanta 5.5%-6.5% 7.0%-8.5%

Boston 4.8%-5.5% 6.5%-8.5%

San Francisco 4.2%-5.0% 6.0%-7.5%

Phoenix 6.0%-6.6% 7.2%-8.5%

Riverside, San Bernadino 5.3%-5.9% 6.4%-8.4%

Detroit 6.0%-7.0% 8.0%-10.0%

Seattle 4.5%-5.5% 6.5%-8.0%

Minneapolis 5.8%-6.5% 7.0%-9.0%

San Diego 4.5%-5.2% 5.5%-8.0%

Tampa 6.0%-6.7% 7.3%-8.5%

St. Louis 6.2%-6.8% 7.3%-9.5%

Baltimore 5.0%-6.0% 7.0%-8.5%

Denver 5.5%-6.5% 7.0%-8.8%

Pittsburgh 6.0%-7.0% 7.5%-9.5%

Charlotte 5.0%-6.2% 7.2%-9.5%

Portland 5.0%-5.7% 6.5%-8.0%

San Antonio 6.5%-7.2% 7.5%-8.7%

Cap Rate Range

63

Equity One (EQY, $27.24, Buy)

‒ Expect same-store NOI growth above 3% for the foreseeable future

‒ Ability to push rents in most markets

‒ Embedded future growth as below market anchor leases are brought up to

market rents over the next few years

‒ Redevelopment activity a significant driver of future growth – expects to

start $1 billion of redevelopment over the next 10 years

‒ Redevelopment activity concentrated at larger assets with superior

demographics – enhancing future growth profile

‒ Investment risks include a broad-based economic downturn or recession,

interest rate movements, weakening real estate fundamentals and general

market risks.

Shopping Center Best Idea

64

Rod Petrik [email protected]

443-224-1306

65

Outperformed in 2015 (+18.0% vs. RMS +3.4%)

Best performing sector in 2014 (+41.1% vs. RMS +30.4%)

Multifamily supply increasing rapidly

Occupancies at all time highs

Rent growth re-accelerates in 3Q15 by 20bps to +5.6%

Single-family housing recovering slowly

Sector trading at 3.0% premium to NAV

Sector trading above historical multiples

Rising 10-year treasury could impact cap rates

M&A activity leading headlines (HME, TRSE, AEC)

Apartment Overview

66

Supply Rising But Sustainable

Source US Census Bureau, Stifel estimates

617

346359

389384

359

295

121135

177

285

341

382

430450

425

0

100

200

300

400

500

600

700

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

Nu

mb

er

of

Un

its

(0

00s

)

Multifamily Permits (5+ Units Not-Seasonally Adjusted)

67

Homeownership Falls as Renter Population Rises

Source: US Census Bureau, Stifel estimates

60.0%

61.0%

62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

69.0%

70.0%

30

32

34

36

38

40

42

44

46

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

Ho

me

ow

ne

rsh

ip R

ate

Mill

ion

of

Re

nte

r H

ou

seh

old

s

Renter Households vs. Homeownership

Renter Households Homeownership Rate

68

Occupancies Could Tick Down Next Year

Source: Company reports, Stifel estimates

93.5%

94.0%

94.5%

95.0%

95.5%

96.0%

96.5%4Q

06

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

4Q

15

E

2Q

16

E

4Q

16

E

Trailing 12-Month Apartment REITs Historical Occupancy

69

Apartments Tend to Outperform REITs During Acceleration

Source: SNL Financial, Company reports

Stifel Estimates

+5.6%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1Q

98

3Q

98

1Q

99

3Q

99

1Q

00

3Q

00

1Q

01

3Q

01

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

Apartment SectorY/Yr S-S Revenue Growth vs. Apartment Spread over REIT Returns

Total Return Spread Same Store Revenue Growth

+6.6% +6.4%

-3.2%-4.1%

70

Trading Above Historical Multiples

Source: Factset, SNL Financial, Stifel estimates

85.0%

95.0%

105.0%

115.0%

125.0%

135.0%

3Q

94

1Q

95

3Q

95

1Q

96

3Q

96

1Q

97

3Q

97

1Q

98

3Q

98

1Q

99

3Q

99

1Q

00

3Q

00

1Q

01

3Q

01

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

Apartment REIT Relative FFO Multiple Premium/Discount

Avg. Apartment REIT MultipleRelative to Equity REIT Multiple Avg.

109.7%

Current Level:107.2%

Avg. Apartment REIT MultipleRelative to Equity REIT Multiple Avg.

109.9%Average

since 3Q99:113.8%

Current Level:123.3%

71

Camden Property Trust (CPT, Buy, $77.41)

– Largest discount (14.5%) to net asset value

– Exposure to high growth markets (West Coast and Sunbelt) and

late recovery markets outweigh oil concerns in Texas

– Second highest rent growth in sector

– Third largest development pipeline*

– Recent portfolio sale serves as a good benchmark

– Third highest dividend yield

– Risks include continued economic slowdown or recession and excess housing inventories that will negatively impact fundamentals and, by extension, asset values.

Apartment Best Idea

*Relative to enterprise value

72


443-224-1306

73

Underperformed in 2015 (+1.1% vs. RMS +3.4% vs. Conventional +18.0%)

Fundamentals improving, but slightly lagging apartments

Supply growth flat in 2016

Improving demographic and enrollment trends drive demand

Rent growth is inflationary, less volatile than apartments

Price per bed trends at all time high

Overarching industry theme: Modernization

Trading at significant P/FFO discount to apartments

Sector trading at 2.2% NAV discount

Student Housing Overview

74

Student Housing vs. Conventional Multifamily

Source: SNL Financial, Company reports

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

Same-Store Revenue Growth: Student Housing vs. Conventional Multifamily

Conventional Multifamily Student Housing

10-Year Avg. Apartments: 3.44%

10-Year Avg. Student Housing: 2.77%

75

Valuation Appears Favorable


0.0

5.0

10.0

15.0

20.0

25.0

2016E P/FFO MultipleStudent Housing & Conventional Multifamily

76

American Campus Communities (ACC, Buy, $41.45)

– Largest student housing owner with top management team

– Portfolio of core-pedestrian assets at tier-1 universities.

– Supply growth down 15% in 2016 in ACC’s markets

– Accelerating fundamentals through 2017

– Leveraged for Modernization: Best in class on campus partner

– Large development pipeline will be accretive

– Inland portfolio will serve as a good benchmark

– Trading at significant P/FFO discount to peers

– Strong late cycle performer

– Risks include continued economic slowdown or recession and excess housing inventories that will negatively impact fundamentals and, by extension, asset values.

Student Housing Best Idea

77


443-224-1306

78

Best performing sector in 2015 (+42.4% vs. REITs +3.4%)

Outperformed in 2014 (+31.4% vs. REITs +30.4%)

Occupancies at all time high levels

Rents up across the country, should have another strong year

New supply limited as development remains challenging

Sector trading above historical multiples

Sector trading at 33.1% premium to NAV

Many recent acquisitions have traded above replacement cost

Dividend yield (2.7%) below REIT average

Self-Storage Overview

79

Occupancy At All Time Highs

Source: REIS, Company reports, Stifel estimates

65.0%

67.5%

70.0%

72.5%

75.0%

77.5%

80.0%

82.5%

85.0%

87.5%

90.0%

92.5%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E

REIT vs. National Occupancy

National Occupancy REIT Occupancy Premium

10-Yr Avg Premium: 3.5%2015E Premium 1.7%

80

Sector Valuation Steep


70.0%

90.0%

110.0%

130.0%

150.0%

170.0%

Storage REIT Relative Historical FFO Multiple Premium/Discount

Avg. Storage REIT MultipleRelative to Equity REIT Multiple Avg.

112.6%

81


443-224-1306

82

Underperformed in 2015 (-22.8% vs. Sector +3.4%)

Outperformed in 2014 (+32.5% vs. sector +30.4%)

Should benefit from an inflationary environment

2015-2017 RevPAR growth +4.0%-6.0%

Limited supply growth accelerating

Demand growth remains healthy, but decelerating

International visitation concerns, but remains positive

Headline risk in Airbnb could materialize

Group segment recovery underway

Middle-Late innings of cycle, which could be extended

Lodging REIT Overview

83

Where are We in the Cycle?

Source: SNL Financial, STR Research

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

National Y/Y RevPAR % Change

121 Months 56 Months 69 Months

0

20

40

60

80

100

Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

SNL Hotel REIT Index - Price Change

64 Months 50 Months73 Months

84

Supply Accelerating

Source: STR Research

85

International Visitation Suffering

Source: Office of Tourism and Travel, Bloomberg

1

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

Y/Y Growth of International Arrivals vs. EUR/USD

Y/Y Growth of International Arrivals EUR/USD

100

105

110

115

120

125

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

Y/Y Growth of International Arrivals vs. USD/JPY

Y/Y Growth of International Arrivals USD/JPY

86

RevPAR Continues Strength, Decelerating

Source: STR Research

8.6%

-20.4%

0

50

100

150

200

250

300

350

400

450

500

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%D

ec-0

6

Ma

r-0

7

Ju

n-0

7

Sep

-07

Dec-0

7

Ma

r-0

8

Ju

n-0

8

Sep

-08

Dec-0

8

Ma

r-0

9

Ju

n-0

9

Sep

-09

Dec-0

9

Ma

r-1

0

Ju

n-1

0

Sep

-10

Dec-1

0

Ma

r-1

1

Ju

n-1

1

Sep

-11

Dec-1

1

Ma

r-1

2

Ju

n-1

2

Sep

-12

Dec-1

2

Ma

r-1

3

Ju

n-1

3

Sep

-13

Dec-1

4

Ma

r-1

4

Ju

n-1

4

Sep

-14

Dec-1

4

Ma

r-1

5

Ju

n-1

5

Sep

-15

SN

L U

S R

EIT

Ho

tel

Ind

ex

Re

vP

AR

(Y

/Y %

Ch

an

ge

)

Industry RevPAR vs. Share Price Performance

RevPAR SNL US REIT Hotel Index

November RevPAR +4.3%

87

Pebblebrook Hotel Trust (PEB, Buy, $28.33)

– Trading in line with sector on EV/EBITDA, well below historical premium

– Sector-leading RevPAR and ADR demand premium

– Potential New York City portfolio disposition could be catalyst

– Best in class management

– Trades at $451K per room, 23.2% below replacement cost

Risks: Lodging is correlated to the overall health of the economy. The prolonged economic downturn could have an adverse effect on stock performance.

Lodging REIT Best Idea

88

Simon Yarmak [email protected]

443-224-1345

89

Sector has lost multiple, likely not to come back this cycle

Negative investor sentiment, high short interest for the group

Airbnb impact

C-Corps have tougher comps than the REITs

Fundamentals are decelerating

Inbound international demand impacted by stronger USD

Global economic growth, geopolitical risks, and terrorism threats

Brands continue to grow market-share this cycle

Industry consolidation

HLT REIT spin-off

2016 Lodging C-Corps – Underweight

90

2015 C-Corps Performance

Source: FactSet, SNL, Stifel

2.4%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

SP

X

CH

H

MA

R

HO

T

ST

AY

WY

N

HL

T H

VA

C

LQ

Lodging C-Corps 2015 Performance

91

Sector Has Lost Multiple, Not Coming Back

Source: FactSet, SNL, Company reports, Stifel estimates

-2.5x

-3.5x

-5.0x

-2.5x

0.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

WY

N

HO

T

ST

AY

HL

T H

CH

H

C-C

orp

sA

vera

ge

LQ

RE

ITs

Avera

ge

MA

R

VA

C

Ch

an

ge

In

Mu

ltip

le

NT

M E

V/E

BIT

DA

Mu

ltip

le

NTM EV/EBITDA Multiples

YE2014 YE2015 Multiple Change

92

Short Interest Relatively High

Source: FactSet, Company reports, Stifel estimates

0.0%

5.0%

10.0%

15.0%

20.0%

H

MA

R

WY

N

VA

C

LQ

CH

H

HL

T

HO

T

ST

AY

Lodging C-Corps Short Interest as % of Float

0.0%

5.0%

10.0%

15.0%

20.0%

H

MA

R

WY

N

VA

C

LQ

CH

H

HL

T

HO

T

ST

AY

Short Interest as % of Float, 2015

1Q15 2Q15 3Q15 4QTD

93

Airbnb

Note: Search volume index represents search interest relative to the highest point on the chart

Source: Google trends, InsideAirbnb.com (July 2015), PKF, Stifel estimates

5.0%

10.0%

15.0%

20.0%

25.0%

Au

sti

n,

TX

New

Yo

rk, N

Y

Lo

ng

Isla

nd

San

Fra

ncis

co

/San

…

Oa

kla

nd

, C

A

Lo

s A

ng

ele

s,

Lo

ng

Beac

h

Sac

ram

en

to,

CA

Po

rtla

nd

, O

R

Mia

mi, H

iale

ah

, F

L

Sea

ttle

, W

A

Bo

sto

n, M

A

San

Die

go

, C

A

New

Orl

ean

s, L

A

San

Jo

se

/Sa

nta

Cru

z, C

A

Oa

hu

Is

lan

d,

HI

Nash

ville

, T

N

Ph

ila

delp

hia

, P

A

Ft.

La

ud

erd

ale

, F

L

Ch

arl

es

ton

, S

C

Airbnb Rooms as % of Hotel Rooms, Markets > 5.0%

0

20

40

60

80

100

120

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Ja

n-1

3

Ja

n-1

4

Ja

n-1

5

Se

arc

h V

olu

me

In

de

x

Interest In Short-Term Rentals

Airbnb VRBO HomeAway FlipKey

94

EBITDA/RevPAR Growth

0.0%

5.0%

10.0%

15.0%

20.0%

MAR VAC H HLT CHH STAY HOT WYN LQ

EBITDA Growth

2015E 2016E 2017E 2014-2017E CAGR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

STAY CHH MAR H HOT LQ WYN

RevPAR Growth

2015E 2016E 2017E 2014-2017E CAGR

Note: Company RevPAR adjusted for FX

Source: SNL, Company reports, Stifel estimates

95

Room Growth, Relative Pipelines

Note: YTD room growth and pipeline figures as of 9/30/2015

Source: Company reports, FactSet, Stifel estimates

-5.0%

0.0%

5.0%

10.0%

H HLT MAR LQ HOT WYN CHH STAY

Room Growth

2013 2014 2015 YTD 2012-2015 CAGR

0.0%

10.0%

20.0%

30.0%

40.0%

HL

T

MA

R H

MA

R-H

OT

AC

.PA

HO

T

IHG

Carl

so

n

LQ

WY

N

CH

H

ST

AY

Pipeline By % Of Existing Rooms

96

Lodging C-Corps 2016 Green Light Best Idea

Wyndham Worldwide Corporation (WYN, $72.88, Buy)

- Diversified asset-light fee business model (60.0% of revenue generated from fees)

- Defensive play in the C-Corp sector

- 15 brands (7,760 hotels) primarily in the mid-scale to economy segment

- Global timeshare leader

- World’s largest timeshare and rental exchange

- Significant annual free cash flow generation ~$7.00/share

- Returns cash to shareholders (over $5.3 billion of cash in the form of buybacks and dividends since 2006)

Risks: Lodging is correlated to the overall health of the economy. A prolonged economic downturn could have adverse effects on sector performance.


97

Lodging C-Corps 2016 Yellow Light Best Idea

Note: We do not have any knowledge of any potential M&A activity or discussions


La Quinta Holdings (LQ, $13.85, Buy)

- Over-levered balance sheet

- Searching for a permanent CEO

- BX stills owns almost 27.0% of shares outstanding

- Impacted by low oil prices & call center transition

- Losing RevPAR index

- Dramatic underperformer last year (-37.2% vs S&P 500 +2.4%)

- Trading below replacement cost, franchising business is receiving zero value

- Potential M&A candidate

- Pipeline has 221 hotels and 19,500 rooms

Risks: Lodging is correlated to the overall health of the economy. A prolonged economic downturn could have adverse effects on sector performance.

98

Simon Yarmak [email protected]

443-224-1345

99

Sector outperformed in 2015, +6.3% vs. RMS +3.4%

However, performance was quite bifurcated

Companies are in a “have” and “have-not” situation

Sector trading at a 2.5% premium to NAV

Cost of capital disparity

Most non-traded REITs essentially out of business

Strong 1031 market

Spin-off legislation could create opportunities

Sector fundamentals are not that cyclical, defensive

Income investors still searching for yield, sector dividend 5.8%

Interest rate volatility

Source: FactSet, Stifel estimates

2016 Triple-Net – Equal-weight

100

3.4% 2.4%

-20.0%

-10.0%

0.0%

10.0%

20.0%

AD

C O

ST

OR

EP

R

NN

N

RM

S

SP

X

GT

Y

VE

R

SIR

WP

C

GP

T

SR

C

Triple-Net REITs 2015 Performance

Bifurcated Performance Last Year

Source: FactSet, Stifel estimates

101

Stifel NAV Analysis - Premium (Discount) to NAV

-37.1%

-12.2%

-11.2%

-9.0%

-8.7%

-8.4%

2.5%

3.2%

6.0%

14.7%

23.6%

-45% -35% -25% -15% -5% 5% 15% 25% 35%

Select Income REIT

Spirit Realty

W.P. Carey & Co.

VEREIT

Gramercy Property Trust

Agree Realty Corp.

NNN Weighted Average

EPR Properties

STORE Capital Corporation

National Retail Properties

Realty Income

$22.00

$32.00

$8.50

$37.50

$67.25

$57.00

$11.50

$8.75

$35.00

$42.00

Sector Trading Above NAV Large Disparity Between “Haves” And “Have-Nots”

Source: Stifel estimates for EPR, GPT, NNN, O, STOR, VER; rest of sector from SNL

102

0.0%

5.0%

10.0%

15.0%

O

NN

N

ST

OR

AD

C

EP

R

GP

T

WP

C

SR

C

VE

R

SIR

Initial Nominal Cost Of Capital

Cost of Equity Cost of Debt WACC

Cost Of Capital Remains Important

Note: WACC assumes 65% equity and 35% debt structure; GPT AFFO is adjusted to account for capital expenditures

Source: Company reports, Stifel estimates

-0.8x

-3.0x

-1.5x

0.0x

1.5x

0.0x

5.0x

10.0x

15.0x

20.0x

AD

C

VE

R O

Avera

ge

EP

R

NN

N

ST

OR

WP

C

SIR

GP

T

SR

C

Ch

an

ge

In

Mu

ltip

le

Pri

ce

/NT

M A

FF

O M

ult

iple

Price/Next Year AFFO Multiple

YE2015 YE2016 Multiple Change

103

Prudent Portfolio Growth Results In AFFO Growth

Note: Asset base is as of YE’14; acquisitions do not include GPT’s acquisition of CSG or SIR’s acquisition of CCIT; includes estimated 4Q15 acquisitions;

GPT AFFO is adjusted to account for capital expenditures

Source: FactSet, SNL, Company reports, Stifel

-15.0%

0.0%

15.0%

30.0%

45.0%

-25.0%

0.0%

25.0%

50.0%

75.0%

100.0%

125.0%

GPT STOR ADC EPR NNN SIR O WPC SRC VER

To

tal

Re

turn

Acq

uis

itio

ns/

Dis

po

siti

on

s

2015 Acquisitions vs. Dispositions (% Of Asset Base)

Acquisitions Dispositions Net Acquisition Activity 2015 Total Return

24.8%

8.9% 7.2% 6.4% 5.9% 5.6% 4.1% 3.6% 1.8%

-7.4%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

GP

T

ST

OR

EP

R

NN

N

AD

C O

SR

C

SIR

WP

C

VE

R

AFFO Growth

2016E 2017E 2014-2017E CAGR

104

Implied Prices at Historical Highs


$51.92

$55.54 $55.48

$58.07

$62.59

4.0%

5.0%

6.0%

$40.00

$50.00

$60.00

$70.00

Current OPricing

O All-TimePrice High

O LowestImplied

Cap Rate

Implied OPrice,

UsingImplied

Cap

Spread

Implied OPrice,

UsingLowestImplied

Cap Rate

Imp

lie

d C

ap

Ra

te

Sto

ck P

rice

Realty

Income (O) Event Date Price

Implied

Cap Rate

10-Yr

Treasury Spread

12/30/2015 Current Pricing $51.92 5.4% 2.3% 3.1%

1/28/2015 All-Time Price High $55.54 5.0% 1.7% 3.3%

5/22/2013 Lowest Implied Cap Rate $55.48 4.7% 2.0% 2.7%

$62.59 4.7% - -

$58.07 5.0% 2.3% 2.7%

Based on 5/22/13 Implied Cap Rate

Based on 5/22/13 Spread

National Retail

Properties (NNN) Event Date Price

Implied

Cap Rate

10-Yr

Treasury Spread

12/30/2015 Current Pricing $40.15 5.9% 2.3% 3.6%

1/27/2015 All-Time High $44.43 5.3% 1.8% 3.5%

5/22/2013 Lowest Implied Cap Rate $41.98 5.3% 2.0% 3.3%

$46.91 5.3% - -

$43.73 5.6% 2.3% 3.3%

Based on 5/22/13 Implied Cap Rate

Based on 5/22/13 Spread

$40.15

$44.43

$41.98

$43.73

$46.91

4.00%

5.00%

6.00%

7.00%

$30.00

$40.00

$50.00

CurrentNNN

Pricing

NNN All-Time Price

High

NNNLowest

ImpliedCap Rate

ImpliedNNN

Price,Using

Implied

CapSpread

ImpliedNNN

Price,Using

Lowest

ImpliedCap Rate

Imp

lie

d C

ap

Ra

te

Sto

ck P

rice

105

Dividend Yield Spreads Above Historical Averages

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Yie

ld (

%)

Triple-Net Dividend Yields vs. 10-Year, Bond & REIT Yields

US REIT Dividend Yield US 10-Year Treasury US Corp Bond BBB Yield

Avg. Triple-Net Yield: 6.5%

Spread to Triple-Net Dividend Yield

15-Year Average 12/30/15

REITs 1.64% 1.85%

BBB Bonds 1.02% 1.54%

10Y Treasury 2.96% 3.48%

Source: SNL Financial, Bloomberg, Company Reports, Stifel

106

-

100

200

300

400

500

600

700

800

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%D

ec-9

4

Dec-9

5

Dec-9

6

Dec-9

7

Dec-9

8

Dec-9

9

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

Dec-1

5

FT

SE

NA

RE

IT P

rice

In

de

xe

s

10-Y

ea

r T

rea

sury

Yie

ld

10-Year Treasury Yield vs. FTSE NAREIT Free-Standing Retail Price Index

10 Yr Treasury Yield FTSE NAREIT Free Standing Retail Price Index FTSE NAREIT All Equity REITs Price Index

10/31/1993

10-Yr. 5.33%NAREIT Index 241.95

Triple-Net REITs 100.00

11/30/1994

10-Yr. 7.96%REITs -15.5%

Triple-Net REITs -20.5%

10/31/1998



1/31/2000

10-Yr. 6.66%REITs -14.0%


6/30/2003



6/30/2006

10-Yr. 5.14%REITs +71.1%

Triple-Net REITs +33.9%12/31/2013

10-Yr. 3.04%REITs -13.4%


4/30/2013



Historical Rate Impact On The Sector

Source: Bloomberg, Stifel

107

National Retail Properties (NNN, $40.15, Buy)

– Underperformed (+6.5%) quality peers last year (O +14.0%, STOR

+13.2%)

– Non-investment grade tenants enable higher yield

– Portfolio fundamentals less cyclical

– Slow and steady portfolio earnings growth (7.0%-8.0%)

– Strong balance sheet, in our view

– Pays well-covered, consistent, and growing dividend yield

– Well-respected management team

Risks include a prolonged economic downturn or recession, interest rate movements,

and general market risk, including continued weakness in the mortgage-backed

securities market and commercial real estate fundamentals.

Triple-Net Sector 2016 Green Light Best Idea


108

Gramercy Property Trust (GPT, $7.76, Buy)

– Focuses on office, industrial, and specialty properties

– Has grown rapidly since converting to net-lease company in 2012

– Underperformed last year (-9.8% vs. RMS +3.4%)

– Recently merged with CSG

– Portfolio repositioning plan to take place over next 12-24 months

– Will reset dividend payout to be more in line with peers

– Experienced management team, aligned with shareholder interests

– Opportunity in Europe through Gramercy European Property Fund

Risks include a prolonged economic downturn or recession, interest rate

movements, and general market risk, including continued weakness in the

mortgage-backed securities market and commercial real estate fundamentals.

Triple-Net Sector 2016 Yellow Light Best Idea


109

Matthew Heinz, CFA [email protected]

443-224-1382

110

Investment Themes - 2016

Secondary markets continue to emerge

as customers seek lower power costs

Wider variety of power densities and

redundancy offerings as customers seek

flexibility across different workloads

The “edge” continues to move further

away from traditional hubs due to

explosion in mobile, IoT, and M2M

Focus on services, connectivity, and

customer ecosystems to reduce churn

and drive MRR/kW

Wholesale continues to move downmarket

Ongoing consolidation as market matures

Strong M&A appetite likely resumes

following digestion of recent deals

Continued migration of the enterprise

data center to multi-tenant environments

Cloud provider and hyperscale demand

continue to provide growth tailwinds

Stable to increasing $/kW as market

supply remains rational

Data sovereignty concerns in Europe

create opportunity for providers with a

global footprint

Shift to distributed hybrid clouds makes

interconnection a key differentiator

111

QTS Realty Trust (Buy, $45.25)

See strong value creation potential as QTS continues to build out existing powered shell

at below average incremental cost

Estimate fully built-out NAV of $60-$65 per share (3-5 years) with no greenfield

development

Carpathia acquisition provides cross-selling opportunity of cloud & managed services to

legacy QTS customers (and vice-versa); and ongoing cost synergies as Carpathia

workloads are moved to QTS data centers

Book-not-billed backlog of $61.3M (17% of LQA revenues) provides low-risk and visible

growth path into 2016

Delivery of Chicago asset in 2H16 provides roadmap for continued revenue growth in

2017 as rates in the urban Chicago market remain strong

Data Center Best Idea: QTS

112

2016: Can the Outperformance Continue?

Percentages reflect total returns

Source: FactSet and SNL data

Data Centers have outpaced REITs by 19% annually since 2011

REIT investors have added to positions but remain underweight vs. benchmark

Strong fundamental trends likely to continue, but are valuations too rich?

Data Centers REIT Sectors

-0.2%

0.2%

2.4%

7.0%

10.5%

22.0%

38.1%

41.9%

42.0%

50.7%

-10% 0% 10% 20% 30% 40% 50% 60%

RMZ

SPX

DFT

COMP

INXN

DLR

QTS

CONE

EQIX

COR

-20.1%

-6.9%

-6.3%

-0.2%

0.1%

1.5%

2.7%

11.0%

12.1%

32.9%

-30% -20% -10% 0% 10% 20% 30% 40%

Hotel & Resort

Diversified

Health Care

RMZ

Retail

Office

Industrial

Residential

Specialized (ex-DC)

Data Center

113

Data Centers trading slightly above historical average at ~17x NTM AFFO

Discount to RMZ has narrowed from -3.5x to -0.5x during 2015

Organic growth and cost of capital advantage an offset to rising rates

Fundamental growth drivers in place to sustain higher valuations

AFFO Multiples Have Converged

-6.0x

-5.0x

-4.0x

-3.0x

-2.0x

-1.0x

0.0x

1.0x

2.0x

3.0x

12.0x

13.0x

14.0x

15.0x

16.0x

17.0x

18.0x

19.0x

20.0x

21.0x

22.0x

De

c-10

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-11

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-12

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

De

c-13

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

De

c-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

De

c-15

DC-RMZ Spread DC REITS 5-yr DC Average

Hist. Avg. = -1.6x Discount vs. RMZ

Source: FactSet and Stifel research

Relative P/AFFO Multiples

114

Growth & Value Creation Potential

Internal Growth

External

Growth/Development Cost of Capital

Advantage Rating

Implied

Cap Rate

2016E

AFFO

Multiple

QTS B 8.7% 17.0x

CONE B 8.1% 14.8x

EQIX* B 8.7% 17.6x

DLR B 7.1% 16.2x

COR H 7.0% 21.0x

DFT H 9.4% 11.8x

*This outlook is priced for 12/30/15. EQIX was upgraded on 1/5/16 with a closing price from 1/4/16. Please see our full note for additional information.


Internal growth prospects strongest for QTS, CONE, and COR

Interconnection provides internal growth tailwind for EQIX

Heavyweights DLR and EQIX will likely remain acquisitive

Cost of capital advantage likely to drive further public-private M&A

115

Net Asset Value

Note: DLR, CONE, and QTS figures have been adjusted to reflect recent acquisitions

Source: FactSet Research Systems and Stifel estimates

6.0%

6.5%

6.9%

7.3% 7.2%

8.4%

7.0% 7.0%

8.2% 8.2%

8.7%

9.2%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

COR DLR CONE EQIX QTS DFT

Implied Cap Rate

LQA NTM

9.3%

1.0%

11.8% 12.0%

4.6%

1.0%

-8.3%

-11.3% -10.8%

-3.4%

-16.6%

-10.5%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

COR DLR CONE EQIX QTS DFT

Premium / Discount to NAV

LQA NTM

116

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

Spre

ad (

%)

Yie

ld (

%)

Spread vs. BBB (right) DC Yield (left) DC 5-YR Avg. Yield

Dividend Yield vs. BBB Index

Source: FactSet Research Systems and St. Louis Federal Reserve

117

Revenues by U.S. Metro

27%21%

66%

22%15%

4%

7%

17%

8%

22%

12%

12%28%

10%

17%

12%

8%

16%

13%

11%8%

27%10%

4%3%

19%

7%

14%

42%

4%

24%

4%10%

38%

6%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

QTS COR CONE DFT* EQIX* DLR

NoVa NY Metro Silicon Valley Chicago LA Dallas Atlanta Houston Other

(1,500)

(1,000)

*451 Research estimates

Source: 451 Research, company reports and Stifel Research

118

John W. Guinee, III [email protected]

443-224-1307

119

423,500 SF Class A Industrial

Warehouse

63,263 SF Class B Flex

60K SF Flex Bldg.

40K SF 1-Story Office Bldg. 120K SF 4-Story Office Bldg.

with surface parking 60K SF 2-Story Office Bldg.

60,000 SF Class B Office Bldg 38,618 SF Class B Office Bldg 120,000 SF Class A Office Bldg

150K SF 4-6 Story Office Bldg.

with structured parking

152,242 SF Class A Office

655,000 SF Class A Office

350K SF+ 12-13 Story Office

534,918 SF Class A Office 1,561,277 SF Class A Office

768,000 SF Class A Industrial Warehouse

Source: CoStar data, Stifel estimates

216,752 SF Class B Industrial

Warehouse

Office &

Industrial

Continuum

Office Industrial

Flex

750K SF Industrial Bldg. 400K SF Industrial Bldg. Typical CBD Office Bldg. Trophy Office Tower

200K SF Industrial Bldg.

120

Major Investment Themes - 2016

Industry growth critical and few very good markets

Demand is very industry-driven and long term in nature

Strong rental rate growth needed to offset capital costs

CapEx costs very difficult to monitor, use value creation/destruction

methodology

Developmental risk overstated and functional obsolescence

understated

Platform value vs. collection of assets under-appreciated

121

2015 Office REITs – Total Returns

Source: FactSet Research Systems, SNL Financial and Stifel

B = Buy, H = Hold, S = Sell

Gateway City Low Barrier Averages

Overweight Underweight

B B H H S B H H B S B B H B H H H S H

122

Office Replacement Cost Analysis

12/30/2015 Inv (Debt+Pref'd)/ Total PSF Per Square Foot

Company Share Price Rating TEV TEV Gross RC Adjusted RC Prem/(Disc)

I. CORE OFFICE/INDUSTRIAL REITS

GATEWAY CITIES

KILROY REALTY KRC $63.94 H 32% $536 $566 $484 11%

VORNADO VNO $101.16 B 39% NA NA NA NA

EMPIRE STATE ESRT $18.06 B 25% $671 $1,317 $618 9%

DOUGLAS EMMETT DEI $31.50 H 40% $519 $648 $479 8%

BOSTON PROP. BXP $128.60 B 31% $780 $735 $589 32%

SL GREEN 1 SLG $114.03 B 47% $815 $1,357 $844 -3%

SUBURBAN MIXED

MACK-CALI CLI $23.82 B 46% $157 $362 $201 -22%

EQUITY COMMONWEALTH EQC $27.94 H 39% $185 $351 $232 -20%

CORP. OFFICE OFC $22.17 S 52% $225 $258 $213 6%

FIRST POTOMAC FPO $11.53 S 57% $179 $240 $188 -5%

FRANKLIN STREET FSP $10.41 H 47% $191 $285 $219 -13%

BRANDYWINE BDN $13.74 H 54% $201 $309 $232 -13%

PIEDMONT PDM $19.11 S 47% $250 $427 $338 -26%

SUNBELT OFFICE

COUSINS PROP CUZ $9.55 H 33% $210 $335 $237 -12%

HIGHWOODS HIW $44.08 H 41% $208 $251 $192 8%

PARKWAY PKY $15.90 B 47% $258 $337 $268 -4%

SPECIALTY

LEXINGTON LXP $8.07 H 49% NA NA NA NA

ARMADA HOFFLER AHH $10.65 B 51% NA NA NA NA

WASH REIT WRE $27.45 H 42% $315 $537 $342 -8%

1 (Manhattan only - RC)2 Forward NAV estimate used


Investment Rating: B -- Buy, H -- Hold, S -- Sell, NR -- Not Rated

123

Gateway City – Market Fundamentals

Stock Under Construction 2Q15 Vacancy 3Q15 Vacancy

Metro Companies (MM) SF Const. (MM SF) % of Stock 13Q14 3Q15 Chg 2

+ Construction + Construction Chg 2

New York City

Midtown South, NY SLG, VNO, ESRT 71 0.3 0.5% 7.5% 6.4% -1.1% 6.3% 6.9% 0.5%

Midtown, NY SLG, BXP, VNO, ESRT 294 9.1 3.1% 7.9% 7.8% -0.1% 10.6% 10.9% 0.3%

Uptown, NY SLG, VNO 8 0.6 7.8% 4.7% 3.9% -0.8% 10.8% 11.7% 0.9%

Downtown, NY CLI, SLG, VNO, PDM 113 2.9 2.6% 11.2% 10.4% -0.8% 13.3% 13.0% -0.3%

Manhattan Totals 486 12.9 2.7% 8.6% 8.1% -0.4% 10.6% 10.8% 0.2%

Washington DC, NoVA, Suburban MD 469 7.9 1.7% 14.8% 14.8% 0.0% 16.4% 16.5% 0.1%

(See Exhibit B)*

Los Angeles County

Burbank/ Glendale/ Pasadena, CA DEI, PDM 44 0.2 0.6% 12.0% 10.5% -1.5% 11.6% 11.1% -0.5%

West Los Angeles/Beverly Hills, CA KRC, DEI 65 0.6 0.9% 12.1% 11.2% -0.9% 11.2% 12.1% 0.9%

San Gabriel Valley, CA 21 0.1 0.4% 11.3% 12.2% 0.9% 11.4% 12.6% 1.1%

San Fernando Valley, CA DEI 29 0.1 0.4% 12.5% 13.6% 1.1% 14.4% 14.0% -0.4%

South Bay, LA, CA KRC, LXP 52 0.2 0.3% 16.8% 15.5% -1.3% 16.6% 15.8% -0.8%

CBD Los Angeles, CA 58 1.6 2.7% 14.9% 13.5% -1.4% 15.4% 16.2% 0.7%

Mid Wilshire Corridor/Hollywood, CA KRC 31 1.3 4.1% 14.6% 14.0% -0.6% 18.0% 18.1% 0.1%

Los Angeles County Totals 300 4.0 1.3% 13.7% 12.9% -0.8% 14.0% 14.2% 0.2%

Boston Area

Financial District, Boston, MA BXP, EQC, LXP 40 0.0 0.0% 12.1% 8.9% -3.2% 9.4% 8.9% -0.5%

Back Bay, Boston, MA BXP 16 0.4 2.7% 7.9% 9.6% 1.7% 11.0% 12.3% 1.3%

Cambridge, MA BXP, PDM, EQC 26 2.2 8.7% 9.3% 7.1% -2.2% 17.4% 15.8% -1.6%

Route 128 BXP, EQC, LXP 94 0.6 0.6% 11.5% 11.1% -0.4% 11.9% 11.8% -0.1%

Inner Suburbs BXP, EQC, LXP, PDM 46 2.6 5.7% 6.4% 6.5% 0.1% 11.2% 12.2% 1.0%

Route 495, MA PDM, LXP 54 0.2 0.4% 13.2% 14.2% 1.0% 14.4% 14.6% 0.2%

Boston Area Totals 276 6.1 2.2% 10.7% 10.2% -0.5% 12.3% 12.4% 0.1%

San Francisco Area

San Francisco CBD, CA BXP, VNO, KRC 55 3.2 5.9% 8.0% 6.6% -1.4% 12.5% 12.5% 0.1%

San Mateo County, CA BXP, LXP 40 1.9 4.8% 11.4% 9.8% -1.6% 14.9% 14.6% -0.3%

South Bay / San Jose, CA BXP, FSP, KRC 90 6.7 7.5% 10.6% 8.5% -2.1% 19.0% 16.0% -3.0%

Oakland, CA BDN 21 0.0 0.0% 13.2% 7.8% -5.4% 10.7% 7.8% -2.9%

Oakland, CA; I-80, I-880 Corridor BDN 18 0.1 0.7% 15.1% 14.2% -0.9% 15.2% 14.9% -0.3%

San Francisco Area Totals 224 12.0 3.8% 10.7% 8.7% -2.0% 13.7% 12.5% -1.2%

Totals / Weighted Averages 1,754 42.9 2.4% 11.7% 11.1% -0.6% 13.6% 13.6% -0.1%

1 Cells highlighted: for Construction % of Stock > 2.5%2 Cells highlighted represent Yr/Yr Vacancy Change and Q/Q Change in Vac. + Const. > 2% or >-2%

*The Washington DC/Northern VA/Suburban MD numbers include Class A, Class B & Class C Office Space

Source: CoStar data

Gateway Cities Office Markets

Third Quarter 2015 - Class A & BCurrent Vacancy plus Construction in Progress

Quarter/Quarter Vac. + Const. Change

Yr/Yr Vacancy Change

Sort

124


Internal Growth External

Growth/Development

Cost of Capital

Advantage Rating

Implied

Cap Rate

2016 FFO

Multiple

BXP B 4.8% 22.7x

SLG B 4.7% 16.9x

HIW H 6.3% 13.8x

KRC H 5.4% 18.5x

VNO B 5.1% 19.2x

ESRT B 4.9% 17.2x

PKY B 6.5% 11.7x

AHH B 7.4% 10.3x

DEI H 4.7% 18.3x

BDN H 7.3% 10.5x

CUZ H 7.8% 10.2x

OFC S 7.8% 10.9x

CLI B 8.8% 11.6x

EQC H 8.1% 26.4x

WRE H 6.6% 15.8x

FSP H 7.5% 10.0x

LXP H 8.0% 8.6x

PDM S 7.2% 11.7x

FPO S 7.6% 11.1x

Source: FactSet Research Systems, Stifel estimates

125

Office Best Ideas

Empire State Realty Trust (ESRT, $18.06, Buy)

– Redevelopment of 2.2mm SF ($330 - $440mm investment basis) expected to yield 7% - 13%

– Stabilized Manhattan-only TEV of about $671/SF vs. gross/adjusted replacement cost estimates

of $1,317/$618SF, respectively

– Observatory earnings decline should be a ‘non-event’

– Value at 5.0% cap rate increased to $17.82/sh from $15.47 in 1Q14

– Risks include: greater than assumed visitation loss at the ESB observatory, re-leasing risk,

interest rate risk and macroeconomic risk

SL Green (SLG, $114.03, Buy)

– Value is created by this Opportunity Fund in a REIT structure. Platform value is under-

appreciated

– Downside projected at $815/SF, a 40%/3% discount relative to gross/adjusted replacement cost

of $1,357/$844/SF (Manhattan-only)

– Portfolio rents at an attractive price point for Manhattan office tenants at $50-$70/SF

– We think Manhattan is the best office market in the country for mid-term as well as long-term

– Risks include: company risk, market risk, interest rate risk and macroeconomic risk

126

John W. Guinee, III [email protected]

443-224-1307

127

Major Investment Themes - 2016

Mark-to-Market and same-store NOI growth: solid through 2016

Demand, driven by e-Commerce and small business, has been

surprisingly dependable

Development surprisingly in check

Development may not materially affect rental rates until demand

subsides

Functional obsolescence is a real risk

Supply limits in key markets provide long-term rental rate growth

potential – SoCal, NoCal & Seattle

128

2015 Industrial REIT Total Returns

Source: FactSet Research Systems, SNL Financial and Stifel

B = Buy, H = Hold, S = Sell

B B B B B B H S

129

Industrial Replacement Cost Analysis

12/30/2015 Inv (Debt+Pref'd)/ Total PSF Per Square Foot

Company Share Price Rating TEV TEV Gross RC Adjusted RC Prem/(Disc)

OFFICE/INDUSTRIAL

LIBERTY PROP. LPT $31.45 S 41% $61 $68 $63 -4%

DOMESTIC INDUSTRIAL

FIRST INDUSTRIAL FR $22.35 B 36% $61 $78 $62 -2%

EASTGROUP PROP. EGP $56.61 H 35% $78 $81 $70 11%

DUKE REALTY DRE $21.22 B 32% $65 $65 $60 10%

REXFORD INDUSTRIAL REXR $16.52 B 26% $113 $139 $112 0%

TERRENO REALTY TRNO $22.87 B 26% $121 $127 $106 14%

DCT INDUSTRIAL DCT $37.56 B 30% $75 $75 $70 7%

GLOBAL INDUSTRIAL

PROLOGIS INC PLD $43.24 B 36% $80 $82 $66 20%


Investment Rating: B -- Buy, H -- Hold, S -- Sell, NR -- Not Rated

130

Industrial – Market Fundamentals

1 Cells highlighted: for Construction % of Stock > 1.2%; Q/Q Change in Vac. + Const. > 2% or >-2%

Source: CoStar data

Total Stock Total Under Construction 3Q14 Vacancy Total Under Construction 3Q15 Vacancy

Metro Companies (MM) SF Const. (MM SF) % of Stock 1 + Construction Const. (MM SF) % of Stock 1 + Construction

1 Chicago, IL PLD,DRE,LPT,DCT,FR 1,159 14.7 1.3% 9.5% 10.2 0.9% 8.1%

2 LA Basin, CA PLD,KRC,DCT,EGP,TRNO,DRE,FR,REXR 988 1.8 0.2% 3.9% 2.4 0.2% 3.1%

3 Philadelphia/ Eastern PA PLD,LPT,DCT,FR 899 9.4 1.1% 9.2% 10.8 1.2% 8.6%

4 Dallas/Fort Worth, TX PLD,DRE,DCT,EGP,FR 816 15.7 2.0% 8.9% 14.4 1.8% 9.0%

5 North/Central New Jersey, NJ PLD,DRE,DCT,TRNO,FR 804 2.7 0.3% 8.6% 2.3 0.3% 8.0%

6 Atlanta, GA PLD,DRE,DCT,FR 668 9.6 1.5% 11.3% 14.3 2.1% 10.2%

7 Inland Empire, CA PLD,DCT, FR,REXR 551 13.6 2.6% 8.2% 17.6 3.2% 8.4%

Totals / Weighted Averages 5,886 67.6 1.2% 8.4% 72.0 1.2% 7.7%

Total Stock Total Under Construction 3Q14 Vacancy Total Under Construction 3Q15 Vacancy

Metro Companies (MM) SF Const. (MM SF) % of Stock 1 + Construction Const. (MM SF) % of Stock 1 + Construction

1 Boston, MA PLD 506 0.1 0.0% 8.6% 1.1 0.2% 8.5%

2 Long Island, NY PLD 350 0.1 0.0% 5.2% 0.4 0.1% 3.9%

3 Seattle / Puget Sound, WA PLD,DCT,TRNO,FR 308 3.1 1.0% 6.2% 1.9 0.6% 5.3%

4 Orange County, CA PLD,DCT,FR,REXR 302 0.6 0.2% 4.0% 1.1 0.4% 3.3%

5 East Bay / Oakland, CA DCT,EGP 263 2.2 0.8% 8.2% 2.6 1.0% 6.8%

6 Baltimore, MD PLD,DRE,DCT, FR 238 3.2 1.4% 10.3% 1.3 0.5% 10.0%

8 Miami / Dade County, FL PLD,LPT,DCT,TRNO,FR 233 0.8 0.3% 6.0% 0.6 0.3% 5.0%

7 Washington DC/ Suburban MD/ North VA PLD,DRE,LPT,DCT,TRNO,FR 216 1.5 0.7% 10.6% 2.7 1.2% 10.1%

9 South Bay / San Jose, CA PLD,DCT,TRNO 200 0.4 0.2% 8.8% 0.3 0.2% 7.5%

10 San Diego, CA DCT,EGP,FR, REXR 190 0.0 0.0% 7.2% 1.4 0.7% 6.2%

11 Palm Beach/ Broward County, FL PLD,DRE,EGP 186 1.1 0.6% 7.6% 1.2 0.7% 6.4%




Third Quarter 2015

Third Quarter 2015

Third Quarter 2015

Third Quarter 2015

Energy Driven Secondary Markets

Secondary Industrial Markets

Third Quarter 2014

Third Quarter 2014

Third Quarter 2014

Primary Distribution Markets

Barrier to Entry Industrial Markets

Third Quarter 2014

131


Internal Growth External

Growth/Development

Cost of Capital

Advantage Rating

Implied

Cap Rate

2016 FFO

Multiple

DRE B 6.1% 17.7x

DCT B 5.3% 18.2x

TRNO B 5.3% 20.2x

PLD B 5.6% 17.9x

FR B 6.4% 15.9x

REXR B 5.7% 18.6x

EGP H 6.3% 14.0x

LPT S 7.4% 12.6x


132

Industrial Best Ideas

Duke Realty Corp. (DRE, $21.22, Buy) – Implied cap rate of 6.1% for industrial only, and it is also 6.1% when we bifurcate the office

portfolio (valued at 7.5% cap rate) and the MOB portfolio (valued at 5.5% cap rate)

– The aforementioned industrial cap rate is 50 bps higher than Prologis, 80 bps higher than DCT

Industrial, 20 bps lower than EastGroup and 30 bps lower than First Industrial

– The asset recycling program and development have been accretive to value creation

– The embedded mark-to-market is strong through YE2016

– Reasonable $65/Industrial SF relative to Gross/Adjusted Replacement Cost of $65/$60

– Risks include: development risk, company-specific risk, interest rate risk and macroeconomic risk

Rexford Industrial Realty Inc. (REXR, $16.52, Buy) – We think SoCal is the best industrial market in the country

– At $113/SF, low basis and downside-protected at a (19%)/0% discount to gross/adjusted

replacement cost

– At a 5.7% implied cap rate, cap rate compression is likely

– Rental rate growth likely given low vacancy and minimal new supply

133

Important Disclosures & Certifications

We, John Guinee, Matthew Heinz, Nathan Isbee, Rod Petrik, Chad Vanacore and Simon Yarmak, certify, that our respective views expressed in this research report

accurately reflect our respective personal views about the subject securities or issuers; and we, John Guinee, Matthew Heinz, Nathan Isbee, Rod Petrik, Chad Vanacore and

Simon Yarmak, certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research

report. Our European Policy for Managing Research Conflicts of Interest is available at www.stifel.com

For applicable current disclosures for all covered companies please visit the research page at www.stifel.com or write to the Stifel Research Department at the following address.

US Research

Stifel Research Department

Stifel, Nicolaus & Company, Inc.

One South Street

16th Floor

Baltimore, Md. 21202

The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on various factors, including Stifel’s overall revenue, which includes

investment banking revenue.

Our investment rating system is three tiered, defined as follows:

BUY – We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plus dividend yield.

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Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/or target price, and/or coverage due to applicable

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Within the last 12 months, Stifel or an affiliate has provided investment banking services for 19%, 7%, 5% and 5% of the companies whose shares are rated Buy,

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134


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135


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proceed with caution - evan hennessy · most reits lost their cost of capital advantage . 8...

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