Holiday Retail Outlook December 2015

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 Longest employment expansion in U.S. history

 GDP growth rate below 3%, job growth averaging 200K+ per month and unemployment at 5%

 Budget deal avoids a government shutdown for the next two years with 5% increase in discretionary spending next year

 Federal Reserve will raise short rates through 2016

 Household debt growing again but all of the increase is in auto and student loans

 Retail sales growth has turned anemic, non‐auto sales growth is negative year‐over‐year

 U.S. income distribution at historically unbalanced levels with lower income households having smallest share of income since WWII

2 AEW Research Conference Call: Holiday Retail Outlook Strongest Job Growth This Century

U.S. has added INDEX OF TOTAL EMPLOYMENT, 100 IN MONTH EACH RECESSION BEGAN 13.5 million jobs 115.0 since the 114.0 beginning of 2015 113.0 112.0 111.0 Longest 110.0 employment 109.0 expansion in U.S. 108.0 history with 70 107.0 106.0 consecutive 105.0 months of private 104.0 sector job growth 103.0 102.0 101.0 100.0 99.0 98.0 97.0 96.0 95.0 94.0 93.0 2012 92.0 2008 2009 2010 2011 2013 2014 2015 ‐ 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Current Cycle 2001 1990

Source: BLS, Moody’s Analytics 3 AEW U.S. Real Estate Market Outlook Consumer Sentiment Returns to Normal

Improvement in CONSUMER CONFIDENCE INDEX consumer sentiment appears 200 to have peaked for 180 this cycle 160

Expectations about 140 the future showing signs of trending 120 down again 100

80

60

40

20

0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Present Situation Future Expectations

Source: Conference Board 4 AEW Research Conference Call: Holiday Retail Outlook Consumer Credit Expansion?

Total outstanding OUTSTANDING CONSUMER CREDIT ($ BILLIONS) consumer debt is nearly $1 trillion $4,000.0 above pre‐crisis peak $3,500.0

All of the $3,000.0 increase has come in auto and $2,500.0 student loans $2,000.0

Total revolving credit is still $1,500.0 below pre‐crisis peak $1,000.0

$500.0

$0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Revolving Non‐Revolving

Source: Federal Reserve 5 AEW Research Conference Call: Holiday Retail Outlook Retail Sales Growth (Year-Over-Year Through November)

2008 2009 2010 2011 2012 2013 2014 2015 Retail and Food Services Sales ‐ Total ‐9.9% 1.3% 6.4% 6.8% 4.1% 3.4% 4.9% 1.4% Food Services & Drinking Places 1.4% ‐0.9% 5.2% 6.2% 5.2% 5.4% 6.2% 6.5% Retail Sales ex Food Service Sales ‐11.2% 1.6% 6.5% 6.9% 3.9% 3.1% 4.7% 0.7% Automobile/Other Motor Vehicle Dealers ‐29.3% 5.0% 13.6% 8.5% 8.6% 9.7% 9.7% 4.5% Retail Sales & Food Services ‐5.8% 0.9% 5.0% 6.5% 3.3% 2.0% 3.9% 0.7% ex Motor Vehicle & Parts Retail Sales ex Food Service & ‐6.8% 1.2% 5.0% 6.5% 3.0% 1.5% 3.5% ‐0.3% Motor Vehicles Furniture & Home Furnishings Stores ‐16.1% ‐8.3% 1.4% 3.7% 3.0% 7.3% 2.2% 5.4%

Electronics & Appliance Stores ‐7.7% ‐5.0% ‐1.0% 6.9% 0.7% ‐0.5% 4.2% ‐2.3% Building Material & Garden ‐11.9% ‐10.1% 4.1% 4.9% 4.8% 4.7% 8.2% 2.2% Equipment/Supplies Dealers Grocery Stores 1.8% 0.9% 2.8% 4.9% 2.4% 1.5% 3.9% 2.0% Health & Personal Care Stores 4.0% 2.9% 4.5% 2.6% 0.0% 5.4% 6.6% 3.5% Gasoline Stations ‐23.8% 14.7% 7.3% 16.3% 2.7% ‐5.2% ‐3.2% ‐19.9% Clothing & Clothing Accessory Stores ‐8.1% ‐0.5% 8.1% 4.5% 3.3% 1.4% 5.1% 0.3% Sporting Goods/Hobby/Book/Music Stores ‐7.5% ‐3.3% 4.9% ‐3.1% 1.7% 4.2% 3.1% 5.4% General Merchandise Stores 1.2% ‐0.9% 4.5% 2.5% 1.6% 2.3% 2.2% 2.3% Department Stores ‐5.4% ‐5.4% 1.6% ‐3.5% ‐4.6% ‐1.9% ‐1.1% ‐2.4%

Source: Commerce Dept. 6 AEW Research Conference Call: Holiday Retail Outlook E-Commerce Sales

Growth in SHARE OF TOTAL SALES AND YEAR‐OVER‐YEAR GROWTH e‐commerce sales has stabilized at 40% roughly 15% per 35% year over the past five years 30%

Total e‐commerce 25% sales still account for less than 10% 20% of total retail sales 15% Amazon and eBay 10% represent nearly 40% of all online 5% sales 0%

‐5%

‐10% 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3

Share of Total Sales Year‐Over‐Year Growth

Source: Commerce Department 7 AEW U.S. Real Estate Market Outlook Property Yields Near All-Time Lows

Near‐term cap HISTORICAL CAP RATE RANGE (%) rate expansion 11.00% will be limited by strong capital in‐ 10.00% flows 9.00% Property yield 8.00% spreads expected 7.00% Rate to compress through 2016 as 6.00% Cap

5.35% 5.23% Treasury yields 5.00% 4.73% rise 4.67% 4.53% 4.54% 4.00% Appraisal 3.00%

2.00%

1.00%

0.00%

Source: AEW Research, NCREIF 8 AEW U.S. Real Estate Market Outlook Estimated U.S. Retail Sales by Kind of Business - YTD November 2015

Sales % Total % Total Sales % Change $MM Sales Ex ‐ Auto vs. 2014 Retail & Food Total 4,804,236 100.0% 2.0% Autos 1,011,405 21.1% 6.9% Retail, Food & ex Auto 3,792,831 78.9% 100.0% 1.3%

Furniture & Home Furnishings 93,108 1.9% 2.5% 5.6% Electronics & Appliances 90,738 1.9% 2.4% ‐1.8% Building Materials 305,651 6.4% 8.1% 3.9% Food & Beverage Stores 618,844 12.9% 16.3% 2.8% Health & Personal care 284,541 5.9% 7.5% 4.3% Gasoline Stations 401,153 8.3% 10.6% ‐19.8% Clothing & Accessories 221,173 4.6% 5.8% 2.2% Sporting, Hobby, Book & Music 76,054 1.6% 2.0% 5.7% General Merchandise 598,348 12.5% 15.8% 1.1% – Department Stores 142,116 3.0% 3.7% ‐1.9% Non store Retailers 426,865 8.9% 11.3% 6.0% Restaurants & Bars 561,959 11.7% 14.8% 8.1%

GAFO 1,079,421 22.5% 28.5% 1.8%

Source: U.S. Census Bureau 9 AEW Research Conference Call: Holiday Retail Outlook Holiday Retail Outlook 2015

 Retail Real Estate –The Big Picture – Retail Real Estate –Center by Center

 Holiday Retail 2015 –The “New Reality” Year 7 “AL” – “Black November” 2015 – Omni‐Channel and Supply Chain –The Mobile “Tipping Point” – If the Economy is Improving Why is Store Traffic Down? – Those Millennials –They Don’t Like Malls and They Only Shop Online, Right?

 Holiday 2015 Retail Tour

 U.S. Income Distribution and Household Budgets

10 AEW U.S. Real Estate Market Outlook U.S. Shopping Center Industry Growth by Center Type 1980-2015

1980 1985 1990 1995 2000 2005 2010 2015 Total Shopping Center GLA (SF, MM) 3,087 3,717 4,650 5,224 5,939 6,740 7,412 7,541 Trailing 5 year CAGR 4.8% 3.8% 4.6% 2.4% 2.6% 2.6% 1.9% 0.3% Regional Malls (number) 713 839 972 1,032 1,102 1,166 1,218 1,231 %Retail GLA 21.8% 21.0% 19.3% 18.2% 17.2% 16.1% 15.3% 15.2% Total GLA (SF, Million) 672 778 894 950 1,020 1,085 1,126 1,136 Trailing 5 year CAGR 6.2% 3.0% 2.8% 1.2% 1.4% 1.2% 0.8% 0.2% N’Hood/Community (number) 18,625 22,822 28,586 31,369 34,789 38,455 41,482 42,078 %Retail GLA 57.7% 58.7% 60.1% 59.7% 58.7% 57.6% 56.4% 56.3% Total GLA (SF, Million) 1,780 2,184 2,793 3,120 3,488 3,881 4,180 4,247 Trailing 5 year CAGR 4.8% 4.2% 5.0% 2.2% 2.3% 2.2% 1.5% 0.3% Power Centers (number) 394 460 647 933 1,360 1,810 2,205 2,253 %Retail GLA 5.4% 5.2% 5.8% 7.7% 9.9% 11.7% 13.1% 13.1% Total GLA (SF, Million) 166 194 271 400 588 791 967 987 Trailing 5 year CAGR 2.7% 3.1% 6.9% 8.1% 8.0% 6.1% 4.1% 0.4% Lifestyle Centers (number) 80 100 132 145 184 277 409 446 %Retail GLA 0.9% 0.9% 0.9% 0.9% 1.0% 1.4% 1.9% 2.0% Total GLA (SF, Million) 27 32 41 45 59 94 138 148 Trailing 5 year CAGR 2.7% 3.8% 5.0% 2.1% 5.5% 9.7% 7.9% 1.5% Outlet Centers (number) 44 73 150 233 271 290 317 349 %Retail GLA 0.9% 1.6% 3.1% 5.1% 5.9% 6.0% 6.7% 7.5% Total GLA (SF, Million) 6 12 28 48 61 66 75 86 Trailing 5 year CAGR 4.1% 15.2% 17.4% 11.7% 4.7% 1.6% 2.8% 2.5%

*Source: ICSC, CoStar 11 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate 2015 – The Big Picture

 Dramatic reduction in new center development –now and for the foreseeable future

– Total U.S. Shopping Center GLA grew at annual rate of 0.3% over the last five years; substantially below the 4.2% annual growth rate in the ‘80s and the 2.3% annual growth rate experienced from 1990 to 2010

– In a user‐driven business –where substantial pre‐leasing is the rule –lack of new supply reflects sub‐par consumption growth, retailers balancing CAPEX between omni‐channel investments and stores, and laser focus on profitability and operational efficiency  Relatively mature business –some weaker markets are arguably “under demolished” relative to foreseeable demand growth  Few of the larger national anchors have new store plans sufficient to drive substantial new center development  Wall Street not rewarding unit growth plans without proven four‐wall profit formula

– Omni‐channel retailers investing substantial capital in new distribution facilities and inventory systems to perfect the “cross channel fulfillment capabilities” they need to deliver a seamless, convenient shopping experience to demanding customers; at same time continuously investing in mobile apps to capture and serve rapidly growing mobile traffic  Modest new development driven by value‐oriented outlet centers, specialty grocers, mid‐market chain restaurants, large format off‐price apparel stores, sporting goods, and beauty concepts, focused primarily on in‐fill locations in established retail nodes or shopping centers

– Bifurcated/Bar‐Bell Market –off‐price and discount retailers increasingly chasing income‐ constrained/value‐oriented consumers while higher‐end specialty retailers jockey for increasingly scarce space in Class A centers

12 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate 2015 – The Big Picture

– Mass merchants in the shrinking middle more focused on improving profitability, developing omni‐channel capabilities to compete with Amazon – while buying back stock –with most new store plans geared towards smaller urban in‐fill concepts  Lack of new center development masks significant – and growing – redevelopment and repositioning activity as stronger retailers target established centers for limited new store growth, and developers gain control of ‐ or at least gain a “seat at the table” for ‐ existing space owned by anchor stores, which are culling their fleets and disposing of excess space

– Department stores –notably Sears, Macy’s and Dillard’s –have been exploring strategies to unlock the value of their owned real estate, including redevelopment of surplus space, spinning out real estate into separate NNN REITs via sale‐leasebacks, or sales

– Case in point is Seritage Growth Properties, a portfolio of 265 owned stores that Sears spun out into a public REIT last June in a sale‐leaseback transaction that positions these stores for eventual redevelopment  The leases allow Seritage to recapture and redevelop significant portions of these stores while allowing Sears to downsize or exit these locations; roughly 30 Seritage locations are in 50‐50 joint ventures with GGP, Simon and Macerich, giving these landlords a key role in directing the future re‐use of these stores while bringing their redevelopment skills and tenant relationships to the table

– Activity primarily focused on Class A and B properties in desirable markets –Class C properties limp along at lower sales and occupancy levels with those in more vibrant markets viewed as repositioning/repurposing plays (“a great mixed‐use site that happens to have a failing mall on it”)

13 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate 2015 – The Big Picture

 While net operating income from better quality centers is steadily increasing, along with quality of the rent roll, lower quality centers continue to lose ground

– Lack of new supply and steady demand driving solid occupancy gains for established higher quality centers –Class A malls and power centers achieving record occupancy levels of over 95%

– Class B centers in the middle either move up through reinvestment or continue to move sideways ‐ or down

– Tepid consumer and retailer demand continues to pressure occupancy in lower quality, Class C centers  Globally low investment yields and interest rates, combined with the more durable cash flows produced by better quality retail properties have driven cap rates lower and valuations significantly higher –now at historic levels

– Ownership of better quality retail – malls in particular –concentrated in REITs and institutional hands, limiting investment opportunities for the best retail

– A relative handful of high profile mall transactions, involving non‐controlling JV interests, have traded at record low cap rates in recent years

– Regardless, valuations are bifurcated by property class

– Publicly traded REITs trading at sizable discounts to private market valuations –in excess of 10 percent ‐ suggesting market is more heavily discounting future growth prospects for retail

14 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate – Center by Center

Grocery‐Anchored  As in other sectors, growth of new grocery‐anchored neighborhood centers has slowed dramatically

– Benefits of limited new supply favor higher quality centers

– Grocery‐anchored centers are the most abundant retail “product” with a substantial inventory of older, arguably obsolete centers; follows rooftops so muted new housing construction further limits center growth  Occupancy levels increasing steadily at better centers –in excess of 95% ‐ while lower quality centers tread water  Major supermarket chains continue to invest in significant store upgrades – expanding selection of organic and natural foods, improving quality of take‐home meals and expanding their fresh meat and seafood offerings to differentiate themselves from Wal*Mart, at the low‐end, and Whole Foods and The Fresh Market at the high end, while leveraging highly‐efficient supply chains and distribution systems to maintain margins and “invest” in price  While they continue to open new stores and enter new markets, Whole Foods, The Fresh Market and Trader Joe’s facing increasing competition from supermarkets adding similar products at lower prices for more frugal customers

– All rethinking pricing, profitability and operations to regain margins while slowing expansion plans

– Whole Foods rolling out more value‐oriented “365 Foods” stores for smaller markets

– While foodie revolution is in full swing, customers cherry pick specialty grocers for quality produce and proteins while shopping updated supermarkets for “center of the store” items

15 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate – Center by Center

– Regardless, slowing expansion by specialty grocers continues to fuel occupancy growth and selective redevelopments  Wal*Mart threat remains, but at reduced level – limited supercenter growth, comparative weakness in organics and prepared foods, and competitive responses by regional grocers, specialty grocers and even low‐end dollar stores have maintained balance  Dollar Stores continue to be one of the fastest growing segments in retail –growing store counts and maintaining solid profitability as struggling family’s trade down, expanding selections of convenience and frozen foods, and acting as mini‐anchors for centers in more moderate trade areas Power Centers  Benefitting substantially from the cyclical shift to home improvement (Home Depot/Lowe’s), continued success and expansion of off‐price apparel concepts (TJ Maxx, Ross and Nordstrom Rack), stabilization of books and electronics, and the addition of new traffic generating uses, such as moderate sit‐down restaurants, specialty grocers and entertainment

– Occupancy levels at historic highs –boxes vacated by failed concepts converted to new uses as value‐oriented junior box users continue to expand  Target and Wal*Mart fighting back against Amazon in the battle for the wallets and hearts of income‐constrained customers with enhanced omni‐channel capabilities, improved in‐stock positions, wage increases and measured improvements in food quality and selection –new store development muted as both retailers focus on re‐establishing sales and profit growth while aggressively buying back shares (combined recent share repurchases of over $11B with nearly $20B of remaining authorization)

16 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate – Center by Center

 While advent of e‐commerce was widely viewed as a major threat, big box retailers, most notably Lowe’s, Home Depot and Best Buy, have adopted key omni‐channel features – notably order online/pick‐up in store – that have proven popular and generated add‐on sales

– Conversely, off‐price apparel retailers have only a modest online presence –and they are killing it!  As alluded to above, the “Power Village” trend continues, driven by the solid growth of fast causal and moderate sit‐down restaurant concepts, and the spread of organic grocers, expanding the center’s draw and generating more frequent visits “A” Malls  The better continue to get better – while sales growth has slowed, only a small handful of new regional malls have been built in the last several years, driving up occupancies to record levels, improving rents as leases rollover and generating new redevelopment and repositioning opportunities

– “A” malls in popular tourist destinations and border areas have felt the negative effects of significantly stronger dollar  True A malls typically serve densely populated, high‐income trade areas with strong barriers to entry, first‐rate anchors and a steadily growing and improving mix of better merchants and restaurants – better retailers laser focused on the best centers  The recent uptick in mall renovations, store remodels and new store additions have updated and improved the look and feel of most better malls following the hunker down years of the recession – store remodels aim to align online image with in‐store reality  Current leasing hampered somewhat by falling demand from struggling teen and family apparel retailers, with lower price point fast fashion concepts actively expanding their presence in better centers

17 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate – Center by Center

 While mall traffic has declined over last few years, A mall sales continue to grow as customers increasingly browse and research online and then visit store to confirm fit and quality and ultimately buy – drives up in‐store conversion rates and average ticket but reduces visits

– Owners responding with expanded dining options, new customer amenities –charging stations and Wi‐Fi very popular ‐ and services  CAPEX to secure NOI gains can be substantial, but value creation given low cap rates is attractive  With no meaningful supply –either from malls or lifestyle centers –on the horizon, higher potential rents and lack of competition increasingly support renovations, redevelopments and expansions that previously did not pencil, enabling top‐tier malls to add compelling new uses, increase market share and further reinforce their market dominance

– Seritage JVs a potential opportunity to add larger format mini‐anchors, fast fashion and additional restaurant offerings to fully‐leased centers – key challenge is managing redevelopment and reconfiguration costs  The better retailers ‐ and department stores, Nordstrom in particular –in top‐tier malls have embraced omni‐channel retailing, ensuring that these centers will continue to feature the most updated flagship stores making full use of the most current retail technology  Mall REITs have aggressively sold or spun off their lower productivity centers to boost portfolio‐ level operating metrics and focus their leasing and redevelopment efforts on smaller, higher quality portfolios “B” Malls  Investor interest in B/C malls has fallen off following a substantial transfer of these assets from higher quality mall REITs to spin‐offs and new owner/operators, renewed volatility in the CMBS market, concerns over declining mall traffic and the difficulties faced by more moderate retailers and anchors, notably Sears and J.C. Penney 18 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate – Center by Center

 While A malls typically dominate larger, higher income trade areas, B malls typically serve submarkets in those trade areas or smaller, separate markets where they are the “only game in town”

– B malls typically anchored by J.C. Penney, Sears and one to two smaller regional chains, and a moderate mix of national and regional specialty tenants

– B malls experienced greater sales and occupancy declines during the Great Recession than the A malls and have been slower to recover given more tepid demand from moderate retailers – effects of recent tenant bankruptcies more pronounced in B centers

– New owners upgrading and improving the higher‐quality B centers through repositioning strategies that include extensive renovations, new mini‐anchors and restaurants, and a concentrated leasing effort, while capitalizing on opportunities to recapture and redevelop unproductive anchor stores – renewed focus and energy is notable with numerous projects underway

– Class C malls out of favor –those in good locations prime candidates for redevelopment and repurposing, often to non‐retail uses  Successful turnarounds by J.C. Penney and a rationalization of Sears’ extensive footprint would be significant positives for B centers

– J.C. Penney has made significant progress on its turnaround, and now appears to be on the mend and heading back toward profitability

– Sears continues to face competition from all sides and is accelerating its downsizing –the Seritage transaction is an important step towards rationalizing store base and realizing opportunities to redevelop obsolete stores

19 AEW Research Conference Call: Holiday Retail Outlook Retail Real Estate – Center by Center Lifestyle Centers  Development of new centers has all but ceased  Well‐located, well‐conceived centers with strong specialty tenancy and complimentary dining and food uses have performed well and command premium pricing in the marketplace – many of those that fall short of these characteristics continue to “run in place” in light of stagnant sales and modest leasing demand

– “A” Lifestyle centers pursuing similar expansion strategies as A Malls and Power Villages, adding new dining options and organic groceries to increase traffic  While interest remains in converting more challenged lifestyle centers to outlet uses or adding new restaurant and specialty grocers, outlet business is increasingly dominated by a handful of operators and tenants that prefer more standard outlet concepts Outlet Centers  Outlet center business has changed dramatically since the first wave of centers was developed in the early 90s

– Ownership of new generation outlet centers is highly concentrated among established outlet center developers partnered with one of the major Mall REITs

– The outlet store model has largely transitioned from the traditional clearance, out‐of‐season and irregular business to predominantly branded ‐made for outlet product  Renewed investment in larger outlet centers serving major tourist markets – particular interest from higher‐end retailers looking to clear out‐of‐season product  As a result, outlet centers now offer complete assortments of value‐priced fashion merchandise, basics and accessories –less of a treasure hunt than in the early days –which largely reflects full price retailers aiming to serve a more value conscious consumer with branded MFO product

20 AEW Research Conference Call: Holiday Retail Outlook Reported Same Store Sales ($ per square foot) Regional Mall REITs

Rolling 12‐ month 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

General $453 $462 $438 $406 $446 $505 $545 $564 $570 $593 Growth*

Macerich $452 $467 $441 $407 $433 $489 $517 $562 $587 $630

Simon** $476 $491 $470 $433 $494 $536 $568 $582 $619 $616

Taubman*** $539 $555 $533 $498 $564 $641 $688 $721 $809 $805

CBL $346 $346 $331 $313 $322 $336 $360 $356 $360 $371

PREIT NA $358 $342 $334 $350 $365 $378 $380 $394 $428

Green=Prior Peak Sales Year

*GGP Sales post 2011 reflect Rouse spin‐off **Simon Sales after 2010 include outlet centers ***Taubman Sales after 2013 reflect Starwood sale 21 AEW Research Conference Call: Holiday Retail Outlook Quotes From the Front – Retail Real Estate

 “…the fact is our GDP growth is anemic…we’re growing our general economy at 2%...I think retail can’t avoid that fact. The good news is we outperform that because we cater to generally the better consumer. And what I think we’ve seen from the better consumer this year – what happens in cycles –is a little bit more towards durable goods than non‐durable goods, which has the impact of making kind of a flattish comp sales growth increase.” (Simon)  “We will continue to look for opportunities within the portfolio. We’re not going to be looking for any ground‐up development or greenfield developments...and we will not start or put a shovel in the ground until those assets are 90% pre‐leased.” (GGP)  We’re seeking creative ways to strengthen our retail presence while monetizing or highlighting the value of our less productive space. These will take some time to execute.” (Macy’s)

 “…the most important thing…as it relates to real estate, is having a terrific location within a given shopping venue. So, we are not looking to get the lowest rents…we are looking to get the right locations.” (L Brands)

 “There’s plenty of room to grow…I’ve said 7,000 stores in the U.S., Dollar Tree stores, another 1,000 in Canada makes it 8,000. The Family Dollar, in talking to them, they said for some time 12,000 Family Dollar stores in the U.S. So, there’s potential of 20,000 stores there. We’ve got a little over 8,000 now, so there’s 13,000 now.” (Dollar Tree)

 “…we will launch our second growth vehicle, 365 by Whole Foods Market. With eight leases signed to date, we plan to open three stores in fiscal year 2016 and up to 10 stores in fiscal 2017. The time is right to take the high quality standards we have developed over the last 35+ years and make them more broadly accessible through a streamlined, value‐focused format and serve communities we would not be able to reach with our larger Whole Foods Market stores.” (Whole Foods)

22 AEW Research Conference Call: Holiday Retail Outlook Quotes From the Front – Retail Real Estate

 “…what we also see is when we put new stores in new markets, we also see a corresponding significant increase in our e‐commerce business as customers can now use and access the store for buy online, pickup in store and also return product. So we believe our fleet also encourages our e‐ commerce business.” (Dick’s Sporting Goods)  “The sale‐leaseback with Seritage Growth Properties generated $2.7 billion of gross cash proceeds to Sears Holdings in the second quarter of 2015. This has enabled us to operate Sears and Kmart stores in our current locations with lease terms…that we believe will accelerate the transformation of our physical stores…due to the structure of the leases, we expect that our cash rent obligations to Seritage and the joint venture partners will decline materially over time as space in these stores is recaptured.” (Sears)

 “…the market for disposing of lower sales productivity malls has deteriorated in 2015 as volatility in the financing markets has become a major obstacle. Given this current status, we no longer expect to complete the disposition of the remaining 19 properties by early 2017…the timeframe we originally announced is no longer realistic.” (CBL)

23 AEW Research Conference Call: Holiday Retail Outlook Holiday Retail Outlook – The “New Reality” – Year 7 AL (“After Lehman”)

 While overall economic fundamentals continue to improve, with steady job growth, recovering housing markets, lower gas prices and the Fed poised to raise short term interest rates for the first time in ages, 2015 is proving to be another challenging year for top‐line retail sales and bottom‐line operating profits  Clear sense during this earnings season that both analysts and retailers are scratching their heads trying to figure out why, if the macro news is generally positive, are retailers outside of off‐price apparel, home improvement and auto reporting such disappointing results?

– In particular, what happened in September and October –there were noticeable traffic declines across stores and online, as if somebody “hit a switch”. Tough to blame everything on e‐commerce, which seems to have become a common, and misleading, excuse for tepid retail results. Several opined shift towards “experiential” activities noting increase in Google searches for “apple picking” and “nearby national parks” during this time period….

– Outside of the categories noted above, earnings disappointment was widespread, with upper‐ end retailers hurt by stock market gyrations, the strong dollar and reduced international tourism and the remainder reporting noticeably lower traffic across channels  Major macro culprit is continued wage stagnation for the vast majority of consumers, constrained household budgets, and growing sense of a “new normal” with a shrinking middle class facing more of the same in the future; the biggest uncertainty – and hope –centers around the future impact 87 million Millennials will have when they leave home, get jobs, get married, have kids…and hopefully start spending like the Boomers did before them

– Ongoing effect on retail is widening bifurcation –bar‐belling ‐ between upper‐end specialty retailers catering to the upper income customers, on one end, and long‐term growth of off‐ price retailers serving everyone else, on the other; which leaves traditional mass merchants like Target and Wal*Mart in the middle to fight it out with Amazon

24 AEW Research Conference Call: Holiday Retail Outlook Holiday Retail Outlook – The “New Reality” – Year 7 AL (“After Lehman”)

– While overall industry has gradually shifted towards lower margin, value‐oriented formats over the last 20+ years, the trend has picked up steam since the recession with upper‐end chains like Nordstrom rolling out Nordstrom Rack stores and specialty retailers moving decisively into outlets with branded “made for outlet” product that caters to less affluent, value‐conscious consumers  Within retail, clear cyclical shift in spending towards big‐ticket durable items, notably cars, appliances and home improvements, along with increased spending on mobile devices, took significant market share from apparel and other discretionary purchases

– Age of U.S., auto fleet hit a new high of 11.5 years in 2014, with 2015 sales trending at over 17.7 million cars and light trucks, which represents a return to pre‐recession levels and a huge jump from the bottom of 9.6 million units sold in 2009

– Purchases obviously driven by need and low interest rates (adding further to debt burden)

– Autos sales currently represent over 20% of total retail sales in U.S.  Record warm weather in September and October had devastating effect on seasonal cold weather ‐ higher margin!! – apparel sales, which comes as a very rude shock to department stores, specialty apparel and teen merchants who took positive economic news, job growth and a decent back‐to‐school season as a signal it was safe to modestly increase inventories at what has turned out to be exactly the wrong time

– Many apparel retailers and department stores are heading into the 2015 holiday season with way too much seasonal inventory and little relief in sight from colder temps or increased spending – recognizing that customers have been trained to wait for sales, promotions began in early November, effectively diluting any excitement around Thanksgiving/Black Friday and signaling to shoppers that much better deals are in the offing

25 AEW Research Conference Call: Holiday Retail Outlook Holiday Retail Outlook – The “New Reality” – Year 7 AL (“After Lehman”)

– Expect remainder of December and January to be exceptionally promotional, especially if the weather remains warm

– Off‐price players benefitting from the unprecedented level of surplus first quality branded merchandise –packing away like crazy  The teen apparel business continues to struggle, with shares of several weaker chains “priced for bankruptcy” and stronger players experiencing profit setbacks as they rebuild their brands, refine their business models and search for the next “must have” fashion

– Teen population and spending power has declined from its 2007 peak, smartphones and dining out now capture a larger share of their limited budget, and the overall teen sector is arguably overstored –expect both M&A and shakeouts over next 12‐18 months  Department stores continue to face difficult apparel dynamics with no fashion excitement or “must haves” going into 2016 – while denim appears to have promise (and bottoms sales drive tops sales…) everyone is hedging their bets, watching operating costs and inventories and continuing to invest heavily in omni‐channel

– J.C. Penney is a relative bright spot and appears to be executing a solid turn around as it returns to its value‐ and fashion‐ oriented roots; Sears remains, and will remain a challenge going forward  Mobile traffic continues to grow significantly as larger, easy‐to‐use screens, more powerful 4G/LTE wireless networks, and increasingly sophisticated, user‐friendly retailer apps with improved graphics have dramatically increased the speed, reliability and convenience of mobile web searches

– While mobile’s share of website traffic increased over 15% compared to last year over the Thanksgiving holiday, mobile’s share of online sales increased over 25%

26 AEW Research Conference Call: Holiday Retail Outlook Holiday Retail Outlook – The “New Reality” – Year 7 AL (“After Lehman”)

– Smartphones have replaced tablets as the mobile device of choice and are quickly catching up to desktops  Comparatively strong performers remain off‐price branded apparel merchants (TJ Maxx and Ross), home improvement chains (Lowe’s and Home Depot) and jewelry stores (Signet)  Strengthening dollar hurt retailers with a strong international presence and concentration in key tourist and border markets

– Both a translation (converting foreign sales into dollars) and transaction issue (buying goods with dollars) with effects on international luxury players and mass merchants like Costco with significant international operations  Despite these continued headwinds, retailers continue to make significant investments in their business models, improving operational efficiency, reducing debt, better managing inventories and rolling out increasingly powerful new omni‐channel capabilities

– With the notable exception, Sears and a handful of others, retailers have refocused their capital spending on renovating their existing stores, selectively adding new stores and adding the “back of house” IT and shipping capabilities they need to become part of their integrated omni‐channel networks –store remodels aim to align online image with in‐store reality

– Significant investing in new supply chains, notably distribution centers handling inventory across channels with increased “pull” inventory capabilities, access to multiple shipping options (UPS/FEDEX/USPS hubs), and vastly improved inventory tracking to access and ship product from any channel –transit, store, distribution center

– Retailer balance sheets on average have improved dramatically since the Great Recession – significantly reduced debt and strong cash flows with many aggressively buying back shares (Home Depot and Lowe’s ‐ $10.7B combined in ’15; Target and Wal*Mart ‐ $11B combined in ’15; Macy’s ‐ $1.8B in ’15) 27 AEW Research Conference Call: Holiday Retail Outlook Holiday Retail Outlook – The “New Reality” – Year 7 AL (“After Lehman”)

– Improved operational efficiency enables retailers to leverage their operating expenses with lower comparable sales gains –from 3‐5% gains prior to 2008 to 1‐3% today

– Aside from the off‐price apparel players, specialty grocers like Whole Foods and Fresh Market, a handful of mini‐anchors, and moderate sit‐down restaurant chains, new store growth is measured –the major chains that are steadily expanding in the U.S. –H&M, Zara, Uniglo and Primark –are value‐oriented international apparel retailers with long histories serving income constrained consumers overseas…  Retail industry as a whole focused on restoring operating margins, generating increased ROIC and finding the most profitable balance between their bricks‐and‐mortar, outlet, online and catalogue categories

– Return to over‐emphasis on unit growth and footprint expansion not happening, which will continue to limit new supply growth  Heading into 2016, the overall retail industry is surprisingly resilient and better positioned to weather continued future volatility than it was prior to the Great Recession – while all stand to benefit significantly if and when economic prospects improve for middle income consumers – Millennials in particular –no retailers are expecting any such rebound soon and are managing their businesses accordingly

28 AEW Research Conference Call: Holiday Retail Outlook Quotes From the Front – New Reality Year 7 AL

 “We believe the retail industry is going through a tough period that we seem to experience…every five to seven years or so, and this one feels familiar in that regard.” (Macy’s)  “Consumers are picking and choosing when to spend because they have limited dollars. What you’re seeing in the labor markets isn’t really translating into confidence or spending on anything other than cars.” (Mizuho Securities)  “…we would like to return to a steady state environment, but we’re not counting on returning to a steady state environment.” (Ralph Lauren)  “Consumers have become increasingly sensitive to prices and tend to seek out the best bargains. We believe this trend took root during the financial crisis and the ensuing economic slowdown, but has since become entrenched in consumers’ habits. Rampant growth in online sales has made prices transparent and comparisons easy for a range of products.” (S&P)  “We’ve got less people buying clothes this quarter than we expected and there’s really nothing else to point to.” (Nordstrom)  “I don’t think the customer is without money, I think she’s without fashion newness.” (Urban Outfitters)  “…when we’re struggling like we are, everything is on the table.” (Zumiez)  “…for our Chico’s brand as we’ve said the stock market sometimes performs as her mood ring since a lot of these customers are either thinking about retirement or retired. So I think that has affected us, and honestly in September I haven’t in quite a while seen brakes come on business the way they did in that first three weeks of September. It was across all brands, all regions, across the board. It’s like somebody flipped a light switch...” (Chico’s)

29 AEW Research Conference Call: Holiday Retail Outlook Quotes From the Front – New Reality Year 7 AL

 “We are thrilled with our customer traffic gains as we continue to strive to take a bigger piece of the pie...we see a marketplace loaded –I say loaded –with quality branded merchandise and we are in excellent inventory position to take advantage of these great opportunities…In 38 years, we have seen only one annual comp decline, which very few retailers can say.” (TJX)  “…we continue to see a really strong supply of excess goods in the marketplace. As it pertains to pack away, pack away is typically the best bargains we carry on merchandise. We go in the market, we see what’s available, we see what the great deals are and then we go in and pack it away…we think of pack away as goods that aren’t for sale, they’re packed away in our warehouse to be released for sale in subsequent months or even next season.” (Ross)  “The challenge [we’re] going to face as we go into spring is that the off‐price channel has got just about anything they want right now. There’s more inventory in that channel than ever before. They’re being very aggressive in the pricing point of view. So we are being very aggressive about using our own retail stores to clear the goods in the most efficient way possible…” (PVH)  “…as a person who has been in the industry for 35 years, it’s hard to imagine going to bed one day and waking up the next day and seeing such a significant step change and think it’s all attributable to something that has been happening in the operating environment as opposed to the macro environment.” (Fresh Market)  “…their level of spending is not increasing but…they’re spending more in home improvements… [which] speaks to the fact that consumers are re‐engaging in discretionary spending around the home.” (Lowe’s)  “…the customer, especially our…middle income to low middle income to lower income customers, are still under pressure, and they’re concerned. They’ve seen lower gasoline prices and that’s helpful. But at the same time it’s not enough…to make a change in shopping habits…we are grateful that gasoline prices are lower but not much offset in their world and they’ve got to come a really long way to get their heads back above water.” (Dollar Tree)

30 AEW Research Conference Call: Holiday Retail Outlook “Black November” 2015

 The Black Friday weekend is no longer what it used to be –the retail tradition that started as Black Friday over 70 years ago, with customers lined up outside stores early Friday morning waiting to rush in for door busters, has become Black November, a month long promotion to get customers to shop earlier and help clear inventories with deep discounts online and in the store

– As Black Friday morphed into the Thanksgiving‐Black Friday‐Cyber Monday holiday shopping season with the advent of online sales (via desktops) and Thanksgiving day store openings, the impact and tradition of Black Friday was diluted

– Shoppers patiently wait for even better sales and have new smart phones with powerful search apps that instantly alert them to the best deals on items they want to buy – really don’t need to line up for anything, just follow your phone

– In recent years, store traffic peaked during the opening “door buster” hours and fell off dramatically after the initial surge – earlier openings, and Thanksgiving hours met with initial success but reverted to the same pattern shortly thereafter

– Noticeably few retailers discussed Black Friday in any meaningful way in their third quarter earnings calls, and some curried favor by closing on Thanksgiving so associates could spend time with their families

– End of an era?  While this years’ Thanksgiving –Black Friday –Cyber Monday shopping period generated little meaningful or comparable sales data, various surveys did provide important insights on changing shopping patterns – notably the impressive growth in the use of mobile devices in the overall shopping process

31 AEW Research Conference Call: Holiday Retail Outlook “Black November” 2015

– Overall promotional activity was strong before and during the Black Friday weekend as retailers pushed slow‐selling apparel through both the online and store channels

– The Thanksgiving shopping season is 85% self‐gifting as shoppers wait for the best deals and mark downs before buying apparel

– Channel traffic was split roughly 50/50 between stores and online with significant overlap between the two showing that customers had their smart phones with them at all times and were actively searching and browsing while in stores

– Mobile traffic over the Thanksgiving Holiday set new records –nearly 60% of website traffic on Thanksgiving was generated by smartphones and tablets, with smartphones accounting for nearly 45% of total traffic –a 29% increase over 2014  Reflects greater comfort with increasingly powerful smartphones with larger screens, easier‐to‐use apps, and retailers pushing clearance through their online channels to keep store inventories in line

– While mobile conversion rates remain low (2.9%), as customers primarily use their smartphones to search for deals, actual smartphone sales increased over 25% to 35% of total online sales

– Online sales growth grew substantially over the Thanksgiving holiday, increasing 21.5% on Thanksgiving and 17.8% on Cyber Monday, driven by clearance activity and increasing smartphone traffic

– Aside from increased online sales and mobile traffic, overall website metrics remained relatively consistent – abandonment rates ranged from 68‐75%, conversion rates remained low at 3.6% to 5.4% and average order values declined modestly to approximately $125 per order

32 AEW Research Conference Call: Holiday Retail Outlook E-Commerce - Black Friday/Cyber Monday E-Commerce Metrics - 2015/2014 U.S. Sales*

Thanksgiving Black Friday Black Friday Cyber Monday Cyber Monday 2015 2015 2015 vs. 2014 2015 2015 VS. 2014 Total U.S. Sales 26.0% 21.5% 17.8% Increase Year Over Year Transaction Metrics: Items/Order 4.20 4.08 2.77% 3.97 (2.7%) Average Order Value $123.45 $127.84 (1.18%) $123.43 (0.63%) Conversion Metrics: Conversion Rate 3.65% 4.20% 6.33% 5.37% 4.27% New Visitor Conversion Rate 2.70% 3.26% 2.69% 4.39% 6.04% Shopping Cart Sessions 14.63% 15.36% 14.63% 17.17% 14.09% Shopping Cart 75.18% 72.81% 0.52% 68.95% (0.83%) Abandonment Rate Session Traffic Metrics: Average Session Length 8:26 8:44 3.56% 8:39 2.17% Bounce Rate 32.40% 31.26% (0.35%) 30.41% (1.39%) Browsing Sessions 49.52% 50.60% 6.19% 52.60% 6.59% Page Views Per Session 8.64 8.76 4.66% 8.71% 3.69% Mobile Metrics: Mobile % of Sales 40.03% 36.16% 27.56% 27.64% 25.67% Mobile % of Site Traffic 59.81% 57.19% 15.23% 47.94% 16.33% Mobile Bounce Rate 34.18% 33.57% (3.48%) 33.63% (4.08%) Mobile Conversion Rate 2.82% 2.97% 12.08% 3.56% 9.54% Smartphone Traffic NA 44.7% 28.8% 36.8% 29.1% Tablet Traffic NA 12.5% (14.4%) 11.1% (11.2%)

*Sales from 800 U.S. Retail websites Source: IBM Watson Trend 33 AEW Research Conference Call: Holiday Retail Outlook Omni-Channel and Supply Chain – The Mobile “Tipping Point”

 2016 shaping up to be the year mobile phones drive the majority of online search traffic – overtaking tablets and desktop – but remains well behind desktops as the preferred vehicle for actual sales –the tipping point in mobile search has powerful implications

– Most smartphone owners have their devices handy nearly all of their waking hours – Millennials, in particular, seem to have grown them as permanent appendages –this makes connection to a retail app possible at nearly all times

– Increasing screen size, improved graphics, continually improving apps and evolving 4G/LTE networks can handle massive amounts of data

– Power and around the clock access is a powerful combination –convenience and impulse

– At same time, retailers continue to improve their omni‐channel networks, essentially enabling smartphone users to access their inventory and shop their stores at any time  Omni‐channel –Brick‐and‐mortar’s response to eCommerce, the rapid adaptation of increasingly powerful mobile devices, and an increasingly price‐ and time‐ sensitive consumer, combining the overhaul of legacy supply chain and inventory systems to link these systems with a website or app that allows customers to shop whenever they want using the channel –bricks‐and‐mortar, mobile app or website ‐ they find most convenient  A classic “pull” inventory system, in which customers pull the items they want out of a retailers’ inventory, as opposed to the classic “push” system in which retailers push standard quantities of goods out to stores

– Pull system more complicated as every order is a special order

– Push systems very efficient at getting replenishment goods to stores

34 AEW Research Conference Call: Holiday Retail Outlook Omni-Channel and Supply Chain – The Mobile “Tipping Point”

 Three key steps in buying process – browsing/research, buying, and delivery –all of which are opportunities to better serve customers and make the sale, and all of which are opportunities to preserve or sacrifice profit margins

– The buying process increasingly starts with browsing on a mobile device – searching for product, comparing prices, and availability ‐ with subsequent research, buying and delivery steps executed through a combination of channels –a trip to the store, a session on the retailers’ mobile app, or on your desktop online

– Throughout the shopping trip, the retailer must have the “back of house” inventory management and fulfillment systems in place to seamlessly move the customer between channels –the legacy “silo” inventory systems used for catalogue operations and centralized warehouse based ordering systems are no longer viable.  Overall goal is to satisfy customers with convenience and speed, drive repeat business, and maximize sales AND profits

– Customers that shop via multiple channels tend to be the retailers’ most loyal and productive customers, often outspending those who shop via single channel by 2‐3 times

– Shoppers overwhelmingly prefer retailers with physical stores for fashion or big‐ticket purchase – validate quality and fit, assistance and advice from trained sales associates, and the ability to return merchandise or have items serviced

35 AEW Research Conference Call: Holiday Retail Outlook Omni-Channel and Supply Chain – The Mobile “Tipping Point”

 While online sales continue to grow at a double digit pace –albeit from a small base ‐ retailers are clearly using their omni‐channel capabilities to drive store traffic after the initial browsing session

– Over 90% of retail sales are made in traditional bricks‐and‐mortar stores with well‐established profit metrics backed up by increasing efficient supply chains and inventory management systems – moving product through stores is the most profitable avenue for most purchases (except deep promotion)

– Aside from search, mobile apps and customized e‐mail blasts keep shoppers up‐to‐date on new products, special offers and in‐store events that drive more productive and successful store visits

– Retailer CapEx dollars for store remodels designed to align the online image with the in‐store reality  Key “back‐of‐house” enhancements include:

– Buy online, ship to store, pick‐up in store (and buy a bunch of other things while you’re there…)

– Buy online, ship to home –higher delivery costs

– Buy in store, ship to home

– Sourcing across inventory platforms –find closest product –in nearby store, distribution center or central warehouse –and ship to customer’s preferred pick‐up point – keep inventory from going stale, increase inventory turns, lower shipping costs  Bottom‐line –a well‐designed, well executed customer‐centric omni‐channel retail capability is a critical component of a successful bricks and mortar retail business model

36 AEW Research Conference Call: Holiday Retail Outlook Quotes From the Front - Omni-Channel and Supply Chain – The Mobile “Tipping Point”

 “The world of retail is moving to more of a pull system than a push in that as customers use a website or mobile app to tell us what they’re looking for and what they want, that increases our accuracy as it relates to how we choose to flow that item to a customer and how we anticipate demand.” (Wal*Mart)  “Although roughly 80% of transactions start with some sort of digital interaction, 88% are still completed at a store, demonstrating how critical it is to have both great digital content and exciting places to actually go touch, feel and try on the product and experience our brand. We will continue to invest meaningfully in both digital and bricks and mortar.” (Footlocker)  “…what we’re…seeing is consumers using the mobile device while she is in the center, while she is on the street, while she is in our store. I was in the store about a week ago and a customer came in holding her phone and said “I want that”. (New York & Co)  “…what you’re seeing is mobile traffic defined primarily as phones…[W]e’ve talked about digital contact points that live with all of us every day. It’s our mobile device. We have it on us at all times, usually in our hands…I don’t right now. I’m actually paying attention to this conversation…this is the lens we use for everything we’re doing…” (Zumiez)  “Regardless of where our guest demand is ultimately fulfilled, in a store or on a guests’ front porch, we know the vast majority of our sales in all our channels are digitally enabled. For example, our guests access our brands through a digital device both in advance of and during their trip to one of our stores. As a result, we don’t think of digital as simply a selling channel but a critical enabler of the shopping experience in all of our channels…over 80% of our guests start their shopping journey online…and that digitally influenced guest is coming into our stores more often.” (Target)  “…Ship from Store and Buy Online, Pick Up in Store…at the end of the third quarter was 3% or 4% of our business. We’ve hit days in this quarter where it’s been 6% to 8%. Our expectations for the fourth quarter is that will be about 10% of our business online, and that comes at no shipping costs. Still not as profitable as bricks and mortar but we’re closing the gap.” (Kohl’s)

37 AEW Research Conference Call: Holiday Retail Outlook If the Economy is Improving, Why is Store Traffic Down?

 Fall 2015 has brought with it worrisome global events, endless political debates, a gyrating stock market, and unseasonably warm weather that have combined to make an already anxious shopper even more anxious

– Noticeable decline in September/October traffic was felt across the board (restaurants, groceries, apparel and department stores) and across channels (bricks and mortar and online) –warm weather was partly to blame as it reduced demand for the cold weather clothing featured in the malls and perhaps encouraged many to enjoy the weather rather than shop  Aside from significant income inequality and budget constraint issues discussed elsewhere, the recent slowdown in traffic also reflects several other factors, notably:  Overall shift in spending towards big ticket durable goods – autos, home appliances and building supplies –crowds out limited spend available for apparel and non‐durables, especially for the vast majority of consumers on tight budgets

– Long deferred purchases as recession stretched the replacement cycle – average age of US auto at historic high

– Modest rebound in housing prices and home sales –replace outdated appliances, paint and carpet, remodel a kitchen and fix a back deck

– Smart phones squeezing out apparel spend among teens –an iPhone with data plan substitutes for a full fall wardrobe  Apple store in mall does more business than the average Sears or J.C. Penney combined  Fashion cycle has been horrendous –only “must have” fashion seems to be the latest smartphone  Browsing and product search has increasingly moved online , especially mobile

38 AEW Research Conference Call: Holiday Retail Outlook What’s on your Kid’s Holiday List?

2015 Holiday Preferred iPhone 6 with regular display $300 One Year data plan ($70/mth) $840 Total (One Gift!) $1,140

2015 Holiday ‐ Guys' Wardrobe from A&F 2015 Holiday ‐ Gals' Wardrobe from H&M Quilt Lined Wool Jacket $110 Oversized Parka $149 3 Iconic Plaid Shirts ($34/shirt) $102 3 Oversized Denim Shirts ($34.99/shirt) $105 3 Muscle Fit Tartan Twill Shirts ($34/shirt) $102 4 Plaid Flannel Shirts ($29.99/shirt) $120 4 Iconic V‐Neck Sweaters ($33.60/sweater) $134 4 Rib‐Knit Sweaters ($39.99/sweater) $160 2 Contrast Trim Henleys ($57.60/shirt) $58 3 Classic Sweatshirts ($24.99/shirt) $75 3 Classic Straight Jeans ($39.00/pair) $117 4 Straight Fit Jeans ($49.99/pair) $200 1 Pair Eastland Sherman 1955 Boots $230 1 Pair Crocodile Print Leather Shoes $99 1 Pair NB 515 Sneakers $70 1 Pair Leather Platform Ankle Boots $99 6 Pair Classic Fit Boxers ($12.60/pair) $76 3 ‐ 3 packs Hipster Briefs ($14.99/pack) $45 5 Pair Textured Classic Socks ($20/pair) $100 8 Pair Jacquard Knit Socks ($4.99/pair) $40 2 Pair Patterned Sleep Pants ($19.20/pair) $38 2 Pair Two Piece Pajamas ($19.90/pair) $40 1 Starbucks Grande Latte $3 2 Starbucks Vente Lattes ($4.50/cup) $9 Total ‐ 31 Items $1,140 Total ‐ 35 Items $1,140

39 AEW Research Conference Call: Holiday Retail Outlook If the Economy is Improving, Why is Store Traffic Down?

– Mobile traffic up dramatically but conversion remains low ‐ store traffic is down, but conversion rates are up

– Shoppers browse, research and search for the best deals online, buying standardized commodity goods with clicks and specialized goods in stores –cuts out the “browsing” trip and

– Retailer websites continue to improve, with increased content, high resolution photos, easy search functions, and customer preferences, at same time that mobile technology –notably the recent roll‐out of 4G/LTE networks (“Fourth Generation/Long Term Evolution”) ‐ dramatically increases band width and download speeds  Moderate to lower income consumers carefully watching budgets, avoiding store trips and impulse purchases

– Particularly troublesome with regards to Millennials – while they visit malls more frequently than any other age group, a significant proportion live at home, have comparatively low incomes and came of age during the worst years of the Great Recession, making them cautious, extremely pragmatic shoppers  As seen over Thanksgiving, use mobile to find the best deals and only buy when store is 50% off  In many ways, retailers push mobile apps to keep them top of mind with reluctant customers, so when the urge or need to shop arises, they are only a click away

40 AEW Research Conference Call: Holiday Retail Outlook Those Millennials – They Don’t Like Malls and They Only Shop Online, Right?

 While definitions vary widely, and the census has yet to issue an “official” definition, Millennials are generally considered to be the age cohort born between 1980 and the early‐mid 2000s –15‐35 year olds  Millennials are the largest, most diverse generation in the U.S. population, numbering over 87 million and representing one‐third of the total population

– Compared to the 76 million member Baby Boom generation, Millennials are more diverse, more highly educated and have come of age in one of the most difficult economic situations since the 1930s –as the Council of Economic Advisers noted in an October 2014 report, “…perhaps the most important marker for Millennials is that many of them came of age during a very difficult time in our economy, as the oldest Millennials were just 27 years old when the recession began…while the economy is well into its recovery, the recession still affects lives of Millennials and will likely continue to do so…Millennials are…the generation that will shape our economy for decades to come…”

– As such, Millennials faced substantial challenges entering the labor force and establishing careers – while they have experienced a substantial recovery in employment, the early challenges have forced many to delay home ownership, families and the spending that comes along with those life phases – unlike their Baby Boom predecessors who entered a world of relative opportunity  Millennials have come of age during the information revolution and have lived with computers, the internet and smartphones much of their lives –a world in which the “frontiers” of technology appear unlimited

– Millennials use social media more frequently, are more likely to sleep near their smartphones

41 AEW Research Conference Call: Holiday Retail Outlook Those Millennials – They Don’t Like Malls and They Only Shop Online, Right?

 Observers continue to assert that Millennials prefer online shopping and avoid the malls –these observations ignore two key issues:

– Having come of age and entered the work force in the wake of the Great Recession, Millennials are clearly more budget constrained and money conscious than previous generations, and they readily use technology to save time and money

– By delaying families and home ownership, Millennials favor cities and metropolitan areas away from the major shopping venues found in more suburban, bedroom communities – likewise spending less on goods needed to furnish a home and raise kids  Survey data prepared by the UBS Evidence Lab indicate that Millennials spend more on clothing, shop more online and also visit malls more frequently than non‐Millennials, making them the preferred current, and potentially lucrative future, customers for omni‐channel retailers

– Millennials spend an average of $126 on clothing per month, 30% more than the average consumer, and visit the mall 1.7 times per month (which has been increasing), well above the 0.8 trip frequency for non‐Millennials – while Millennials buy 50% more of their apparel purchases online, the fact they purchase both online and in‐store makes them a retailers’ most desired customer

42 AEW Research Conference Call: Holiday Retail Outlook Quotes From the Front – Millennials

 “Millennials is going to be an issue for the total pie in general if people move home after college for a period of time, if they move into a smaller place, if they get married later, if they have fewer kids. It’s going to rain on all of us. So we certainly having increased the share that we get of those people will help, but we’re going to keep driving value and…we’ll see where it goes. We have not looked at that. If we start looking at it, I’d be scared.” (Costco)  “…I think the millennials, 80 million deep, grew up in the mall environment. They are comfortable with the mall environment. And as their income grows and as they age and have kids, I think they’ll be loyal mall shoppers especially given the environment we’re creating.” (Simon)  “…consumers that are looking for value, especially these millennial consumers who are…more prone to look for a deal and more pressured right now given their economic circumstances, especially…when you compare to where they were economically pre‐recession. That demo is obviously a very important demo to everybody and they’re not nearly as financially sound as they were pre‐recession.” (Brinker)  “Yeah, we are getting the younger customers. We absolutely are. Even our HomeGoods is getting…[a]…younger customer. And they’re targeting it. We want to get them young and we want to keep them.” (TJX)  “…it’s still in the early days in the evaluation process for Backstage, but our belief is that the model has been proven by others. And I think in the last…two to three years, there has been a consumer migration into these lower price‐point options and that’s where we know that there’s a consumer interest there…We’re also seeing the younger customer migrating to that space, and with our intense focus on the Millennial consumer, which we’re getting inside of our Macy’s stores, we think this is another way to attract that younger consumer.” (Macy’s)

43 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour

 Four dimensional tour – venue, retail segment, performance since 2006, and customer base

– Venue and retail segment  Apparel in the mall – teen, family, women’s and department store  Power center across the street –mass merchant, off‐price apparel, home improvement and electronics  Warehouse clubs and dollar stores

– Summary performance metrics  Net sales, gross margin and operating income  Number of stores, comparable sales and percent of sales from DTC channel

– Historic performance through three retail “eras” since 2006  2006‐2007 –end of the “Go‐Go” years –high margins, sales and unit growth fueled by home appreciation induced debt  2008‐2010 –the “OMG” years – bottom falls out of housing market, debt crisis ensues, massive unemployment and the Great Recession is on –retailers hoard cash, clear bloated inventories and watch their profit margins vanish  2011‐Present – Hunker Down/“control what we can” mindset –re‐engineer business to carefully manage size, content and flow of inventory; lower comp leverage point to maintain profits with tepid sales growth; race like crazy to catch up with consumer’s adaptation of online price comparisons; improve convenience by selectively investing in omni‐channel capabilities; bolster balance sheet, shed debt and buy back shares; and wait/hope for growth to resume –someday

44 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour

– Customer Base  Mall – middle‐to‐upper income Boomers, Millennials and their kids  Power Center –lower‐to‐middle income families, increasingly older Millennials  Warehouse/Dollar Store –lower to middle with many receiving some form of government assistance  Key Takeaways

– Retail profit margins fell dramatically during the recession, and while most have engineered gradual recoveries, overall operating margins appear to have ratcheted down permanently – where many specialty retailers generated operating margins in the high teens/low twenties prior to 2008, they now focus on achieving low‐to mid‐teen level operating margins; likewise, store count growth has slowed as retailers rationalize their fleets and focus on renovations and new prototypes

– Masked in the margin decline is the substantial cash flow most companies continue to generate, largely reflecting more operational efficiency, restrained capital spending, reduced debt burdens, and lower inventory investments

– Teen retailers and moderate women’s apparel stores –mainstays of the mall sector –have seen their operating profits cut in half, with weaker teen retailers currently suffering through a second wage of margin compression as teen demographic is smaller, income constrained and favoring smart phones over apparel while women’s business is suffering from a prolonged absence of new “must have” fashion –the iPhone has become “must have” fashion!

– In department store sector, J.C. Penney slowly coming back to life after a disastrous attempt to upscale its offering –from value‐oriented customers to what turned out to be a thin upper moderate customer base

45 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour

 Nordstrom widely considered the leader in customer‐centric omni‐channel retailing has moved aggressively into the value business with Nordstrom Rack (aka –their version of TJ Maxx) –regardless, recent pull back in apparel sales has been a disappointing set‐back to sales and margins

– Big boxes have largely stabilized margins at slightly lower levels –again with modest unit growth –mass merchants Target and Wal*Mart regaining their footing in face of Amazon, demanding customers, data breaches and execution errors; Home Depot and Lowe’s riding wave of renewed interest in home improvements while Best Buy has made significant service and omni‐channel changes to offset deflationary pressure and intense online competition

– Off‐price apparel retailers –TJ Maxx, Ross and Nordstrom Rack –have profited off the excess inventories in the branded apparel business, utilizing “pack away” to buy steeply discounted branded apparel and then gradually flowing product out to stores over several seasons –no compelling need for e‐commerce given growing customer demand, solid margins and sales growth –in many ways, off‐price is achieving the profit margins most specialty retailers used to enjoy and are trying to regain

– Net sales, profit margins and store counts in off‐price and dollar stores continue to grow at an unprecedented pace – Dollar General sales have doubled since the advent of the Great Recession and are now greater than J.C. Penney’s 2007 peak

– Many retailers no longer report DTC sales separately – include these sales in “comparable sales” to reflect omni‐channel strategies  DTC sales for off‐price, mass merchants, and warehouse stores considerably lower in comparison to specialty retail – while reporting is spotty, most report DTC sales of less the 3‐5% of total sales

46 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour: Specialty Retailers – Teens American Eagle Outfitters FY 2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $2.794 $3.055 $2,989 $2,967 $2,968 $3,120 $3,476 $3,306 $3,283 $3,560 Gross Margin % 47.9% 46.6% 39.3% 39.3% 39.5% 36.7% 40.0% 34.6% 35.2% 37.5% Operating Income % 21.0% 19.6% 10.1% 9.6% 10.7% 9.4% 12.4% 7.1% 6.3% 9.7% Number of Stores 911 987 1,098 1,103 1,086 1,090 1,044 1,066 1,056 1,065 % Comp Sales 12.0% 1.0% (10.3%) (3.6%) (1.0%) 3.0% 7.0% (6.0%) (5.0%) 6.5% % Sales DTC 0.0% 8.0% 10.3% 11.6% 11.3% 12.3% 13.4% N/A* N/A* N/A*

Abercrombie & Fitch FY 2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $3,318 $3,750 $3,540 $2,962 $3,469 $4,158 $4,511 $4,117 $3,744 $3,513 Gross Margin % 66.6% 67.0% 66.7% 64.6% 63.8% 61.3% 62.4% 62.6% 61.8% 61.7% Operating Income % 19.8% 19.7% 12.4% 5.1% 8.3% 5.3% 8.3% 5.4% 5.1% 3.6% Number of Stores 944 1,035 1,125 1,096 1,069 1,045 1,051 1,066 969 973 % Comp Sales 2.0% (1.4%) (13.3%) (22.9%) 7.3% 5.0% (1.4%) (11.3%) (8.0%) (3.0%) % Sales DTC 6.0% 7.9% 8.6% 9.7% 11.7% 13.3% 15.5% 18.9% 22.2% 24.0%

Tilly’s FY 2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $199 $246 $255 $ 283 $333 $401 $467 $496 $518 $548 Gross Margin % 37.0% 37.2% 32.5% 30.9% 30.9% 32.2% 32.1% 30.4% 30.0% 30.4% Operating Income % 16.0% 16.0% 9.3% 7.6% 7.5% 8.7% 8.3% 6.0% 4.5% 3.2% Number of Stores 61 73 99 111 125 140 168 195 212 224 % Comp Sales 17.3% 8.7% (12.5%) (3.1%) 6.7% 10.7% 2.3% (1.9%) (2.8%) 0.7% % Sales DTC 2.0% 5.0% 6.0% 8.0% 9.9% 10.9% 11.3% 12.0% 11.3% 11.0% *Sales from online channels included in store sales 47 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour: Specialty Retailers – Family Apparel

The Gap FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $15,923 $15,772 $14,526 $14,197 $14,664 $14,549 $15,651 $16,148 $16,435 $16,010

Gross Margin % 35.5% 36.1% 37.5% 40.3% 40.2% 36.2% 39.4% 39.0% 38.3% 36.4%

Operating Income % 7.7% 8.3% 10.7% 12.8% 13.4% 9.9% 12.4% 13.3% 12.4% 10.5%

Number of Stores 3,131 3,167 3,149 3,095 3,068 3,038 3,095 3,164 3,280 3,324

% Comp Sales (7%) (4.0%) (11.5%) (3.0%) 1.0% (4.0%) 4.8% 2.2% 0.0% (2.8%)

% Sales DTC 4.6% 5.8% 7.1% 7.9% 8.9% 10.7% 12.0% 14.0% 15.2% N/A*

Urban Outfitters FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $1,092 $1,508 $1,835 $1,938 $2,274 $2,474 $2,795 $3,087 $3,323 $3,446

Gross Margin % 41.1% 38.3% 38.9% 40.6% 41.2% 34.8% 36.9% 37.6% 35.4% 34.6%

Operating Income % 19.0% 14.9% 16.3% 17.5% 18.2% 11.5% 13.4% 13.8% 11.0% 9.9%

Number of Stores 207 245 293 326 371 427 472 507 544 574

% Comp Sales 10.9% 5.5% 8.0% (3.4%) 4.3% (3.8%) (0.8%) 6.0% 2.0% 1.0%

% Sales DTC 12.0% 13.6% 14.9% 16.7% 19.1% 20.4% 23.7% 24.0% N/A* N/A*

*Sales from online channels included in store sales 48 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour: Specialty Retailers – Women’s Apparel

Ann Taylor FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $2,343 $2,397 $2,195 $1,829 $1,980 $2,212 $2,376 $2,493 $2,533 $2,516

Gross Margin % 53.7% 52.2% 48.1% 54.4% 55.8% 54.6% 54.8% 53.9% 51.0% 52.5%

Operating Income % 9.6% 6.5% (16.9%) 1.5% 6.3% 6.8% 7.0% 6.8% 4.4% 5.9%

Number of Stores 869 929 935 907 896 953 984 1,025 1,030 1,010

% Comp Sales 2.8% (3.3%) (14.8%) (17.4%) 10.7% 6.8% 3.3% 2.3% (1.9%) 0.3%

% Sales DTC N/A 5.0% 6.0% 6.6% 9.6% 11.2% 12.4% 12.8% N/A* N/A*

L Brands FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $10,671 $10,134 $9,043 $8,632 $9,613 $10,364 $10,459 $10,773 $11,454 $12,006

Gross Margin % 37.6% 34.6% 33.2% 35.1% 37.8% 39.1% 41.9% 41.1% 42.0% 42.6%

Operating Income % 11.0% 11.0% 6.5% 9.9% 13.4% 11.9% 15.0% 16.2% 17.1% 17.6%

Number of Stores 2,897 2,926 3,014 2,971 2,968 2,941 2,876 2,923 2,969 3,004

% Comp Sales 7.0% (2.0%) (9.0%) (5.0%) 9.0% 10.0% 6.0% 2.0% 4.0% 5.0%

% Sales DTC 13.3% 13.8% 16.8% 16.1% 15.6% 15.0% 17.3% 16.4% 15.8% 15.3%

*Sales from online channels included in store sales 49 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour: Department Stores

J.C. Penney FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $19,903 $19,860 $18,486 $17,556 $17,759 $17,260 $12,985 $11,859 $12,257 $12,634 Gross Margin % 39.3% 38.6% 37.4% 39.4% 39.2% 36.0% 31.3% 29.4% 34.8% 36.1%

Operating Income % 9.7% 9.5% 6.1% 3.8% 4.7% 0.0% (10.1%) (12.0%) (2.5%) 0.3%

Number of Stores 1033 1,067 1,093 1,108 1,106 1,112 1,117 1,094 1,062 1,024

% Comp Sales 4.9% 0.0% (8.5%) (6.3%) 2.5% 0.2% (25.2%) (7.4%) 4.4% 4.8%

% Sales DTC N/A N/A N/A N/A 8.6% 8.8% 7.9% 9.1% 10.0% 11.0%

Nordstrom FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $8,561 $8,828 $8,272 $8,258 $9,310 $10,497 $11,762 $12,166 $13,110 $14,119

Gross Margin % 37.5% 37.4% 34.5% 35.5% 36.7% 37.2% 36.8% 36.4% 35.9% 35.4%

Operating Income % 12.9% 13.7% 9.1% 9.7% 11.5% 11.5% 11.0% 10.8% 9.8% 8.2%

Number of Stores 155 156 169 184 204 225 240 260 292 327

% Comp Sales 7.5% 3.9% (12.4%) (3.6%) 8.1% 7.2% 7.3% 2.5% 4.0% 2.5%

% Sales DTC 5.0% 5.1% 5.8% 6.8% 7.6% 8.7% 10.8% 13.3% 15.2% 16.3%

50 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour: Big Box Stores

Target (US Segment) FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $63,368 $63,368 $64,948 $65,357 $65,787 $68,466 $71,960 $71,279 $72,618 $74,374

Gross Margin % 30.3% 30.2% 29.8% 30.5% 30.5% 30.1% 29.7% 29.8% 29.4% 29.6%

Operating Income % 8.5% 8.3% 6.8% 7.1% 8.0% 7.8% 7.3% 5.7% 6.2% 6.7%

Number of Stores 1,488 1,591 1,682 1,740 1,750 1,763 1,778 1,793 1,790 1,803

% Comp Sales 4.8% 3.0% (2.9%) (2.5%) 2.1% 3.0% 2.7% 0.4% 1.3% 2.0%

% Sales DTC N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Ross Stores FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $5,570 $5,975 $6,486 $7,184 $7,866 $8,608 $9,721 $10,230 $11,042 $11,896

Gross Margin % 22.5% 22.7% 23.6% 25.8% 27.2% 27.5% 27.9% 28.0% 28.1% 28.3%

Operating Income % 7.0% 7.0% 7.6% 10.1% 11.5% 12.4% 13.1% 13.1% 13.5% 13.6%

Number of Stores 797 890 945 995 1,042 1,103 1,181 1,276 1,362 1,448

% Comp Sales 4.0% 1.0% 2.0% 6.0% 5.0% 5.0% 6.0% 3.0% 3.3% 3.1%

% Sales DTC N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

51 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour: Big Box Stores

Home Depot FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $79,022 $77,349 $71,288 $66,176 $67,997 $70,395 $74,754 $78,812 $83,176 $88,023

Gross Margin % 33.6% 33.6% 33.7% 33.9% 34.3% 34.5% 34.6% 34.8% 34.8% 34.2%

Operating Income % 11.2% 9.4% 6.2% 7.3% 8.6% 9.5% 10.4% 11.6% 12.6% 13.4%

Number of Stores 2,147 2,234 2,274 2,244 2,248 2,252 2,246 2,263 2,269 2,276

% Comp Sales (2.8%) (6.7%) (8.7%) (6.6%) 2.9% 3.4% 4.6% 6.9% 5.4% 4.9%

% Sales DTC N/A N/A N/A N/A N/A 1.8% 2.4% 3.5% 4.5% 5.0%

Best Buy ‐ Domestic FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $27,380 $31,031 $33,328 $35,070 $37,314 $37,070 $37,615 $35,831 $36,055 $36,574

Gross Margin % 24.8% 24.5% 24.5% 24.6% 24.2% 25.1% 24.4% 23.1% 22.4% 22.9%

Operating Income % 6.1% 6.0% 6.0% 5.0% 5.6% 5.5% 4.9% 3.2% 4.0% 4.0%

Number of Stores 774 873 971 1,107 1,192 1,317 1,503 1,495 1,448 1,427

% Comp Sales 5.1% 4.1% 1.9% (1.3%) 1.7% (3.0%) (1.6%) (0.4%) 1.0% 1.3%

% Sales DTC N/A N/A N/A N/A N/A N/A 7.2% 8.5% 9.8% N/A

52 AEW Research Conference Call: Holiday Retail Outlook Holiday 2015 Retail Tour: Warehouse/Dollar Stores

Costco FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $63,545 $70,977 $69,892 $76,255 $87,048 $97,062 $102,870 $110,212 $113,666 $119,555

Gross Margin % 10.6% 10.5% 10.8% 10.8% 10.7% 10.6% 10.6% 10.7% 11.1% 11.1%

Operating Income % 2.8% 2.7% 2.6% 2.7% 2.7% 2.8% 2.9% 2.9% 3.1% 3.1%

Number of Stores 518 543 558 572 592 608 634 663 686 718

% Comp Sales 5.2% 8.2% (3.7%) 6.9% 9.8% 6.8% 5.5% 4.2% 1.0% 2.7%

% Sales DTC N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Dollar General FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E Net Sales ($MM) $9,170 $9,495 $10,458 $11,796 $13,035 $14,807 $16,022 $17,504 $18,910 $20,352

Gross Margin % 25.8% 27.8% 29.3% 31.3% 32.0% 31.7% 31.7% 31.1% 30.7% 30.9%

Operating Income % 2.7% 2.7% 5.6% 8.1% 9.8% 10.1% 10.3% 10.0% 9.4% 9.4%

Number of Stores 8,229 8,194 8,362 8,828 9,372 9,837 10,506 11,132 11,789 12,483

% Comp Sales 3.3% 2.1% 9.0% 9.5% 4.9% 6.0% 4.7% 3.3% 2.9% 2.7%

% Sales DTC N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

53 AEW Research Conference Call: Holiday Retail Outlook U.S. Income Distribution

 Income inequality in the U.S. has been steadily growing since the mid 70’s – effectively transferring a 15% share of national income from the lower 90% of the income distribution to the top 10%

– Within the top 10% of the income distribution, 2/3rds of the 15% transfer went to the top 1%  Following a brief pause during the depths of the Great Recession, income equality has accelerated to the point where Janet Yellen, Chair of the Federal Reserve Bank, noted last fall that “income and wealth inequality are near their highest levels in the past hundred years” and that the “past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority”

– From 1944 to 1980, roughly 2/3rds of annual income (excluding capital gains) accrued to the bottom 90% of taxpayers while the remaining 1/3 accrued to the top 10%

– Since 1980, the income share accruing to the bottom 90% has dropped to just over 50% while the share accruing to the top 10% has increased to nearly 50%

– Income has become even further concentrated in the top 1%, increasing from 8.2% of income in 1980 to over 19% in 2012

– Recent analysis by the Federal Reserve found that families in the middle to upper income brackets (between 40% and 90%) saw little change in average real incomes since the end of the recession in 2010 and thus had failed to recover the losses suffered between 2007 and 2010 – at the same time families at the very top of the income distribution saw widespread gains  Improving average household income and net worth is masking the effects of substantial income disparity as the vast majority of American shoppers are not benefitting from the recovery –not a new event as their fortunes have been in decline for quite sometime

54 AEW Research Conference Call: Holiday Retail Outlook U.S. Income Distribution

– To make matters worse, the bottom 90% of the income distribution owes 73% of outstanding debt –the 90% effectively borrowed to compensate for stagnating wages, effectively “de‐ saving” in the years leading to the Great Recession, magnifying the effects of the downturn, dampening any recovery and clearly effecting retail sales and the retail landscape  In this context, the slowdown in retail sales and lack of new shopping center construction reflects what many retailers have known – and reacted to –for some time: the middle income consumer is permanently budget constrained with limited “wallet” for discretionary purchases and non‐ essentials

– Not surprisingly the “Golden Age” of mall development took place in the midst of the 1945‐ 1980 time period when the middle class enjoyed a steady and significant share of national income –with the Baby Boom and suburbanization magnifying the multiplier effect

– The next wave of retail development –big box, lower margin power centers ‐ followed in the 90s as income disparity grew, income growth for the 90% slowed and the need for value to make ends meet became a necessity –most department stores adopted a heavily promotional strategy to drive sales

– As witnessed over the last several Thanksgivings, budget constrained consumers used their mobile apps to aggressively seek out the best deals –all low margin transactions for retailers – and skipped the purchase if the deals weren’t good enough –in 2015, many shoppers bypassed “Black November” altogether in anticipation of even better deals to come pre‐ and post‐ Christmas

55 AEW Research Conference Call: Holiday Retail Outlook U.S. Income Distribution

 Given income disparity, the average household budget is extremely constrained and poorly understood –the notion that gas savings would result in strong retail sales reflects how poorly understood the average household budget is; bottom line there is not much left over for discretionary retail after the bills are paid

– According the BLS, the average “consumer unit” has an annual income of $64,400 –once taxes, housing costs, food, transportation and healthcare costs are accounted for, the average consumer unit has $140/month to spend on apparel and services

– The median US income is simply not adequate to sustain a “decent yet modest” standard of living for a family of four in most U.S. metros –to achieve a “decent yet modest” standard of living in Seattle, Milwaukee or New York requires annual incomes 13% to almost 55% higher than the median income level  Retailers are well aware of this dynamic –they see more of America at the cash register in a day than most people see in a lifetime – and as such, without meaningful middle class wage growth, we should not expect a “break‐out” in retail sales or new center construction outside of more affluent markets for the foreseeable future

56 AEW Research Conference Call: Holiday Retail Outlook U.S. Income Distribution 1917-2014

70.0 1945 1980 67.4% 67.1% 65.0

60.0

% Total Income: Bottom 90% Top 10% Top 1% 55.0 2014 52.8% 47.2% 17.9% 1980 67.1% 32.9% 8.2% Average '45 - '80 67.7% 32.3% 8.9%

Income BP Gain/Loss '80 - '14 (1,432) 1,432 967 2014 50.0 Previous Peak: 52.8% % 68.6% 46.1% 19.6% Total 47.2% Year 1953 1928 1928 of Income Levels: 45.0 Average Income 2014 $32,352 $260,154 $983,896

Share Threshold Income <$118,140 >$118,140 >$387,810

%

40.0

Top 10% 35.0 Bottom 90%

1980 1945 32.9% 30.0 32.6% 1917 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Ordinary Income Excluding Capital Gains

Source: The World Wealth and Income Database 57 AEW Research Conference Call: Holiday Retail Outlook U.S. Income Distribution 1917-2014 Shopping Center Development Trends 1946-2014

70.0

65.0

• Suburbanization • 60.0 Golden Age of Middle Class ’46 ‐’64 Baby Boom 76,000,000 ’80 ‐’00 Millennials 55.0 87,000,000

’56 ‐’95 Regional Mall Income 50.0 ’85 ‐’10 Power Center

Total Lifestyle

of

45.0 Ecommerce Share

% 40.0

Top 10% 35.0 Bottom 90%

30.0 1917 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Ordinary Income Excluding Capital Gains

Source: The World Wealth and Income Database 58 AEW Research Conference Call: Holiday Retail Outlook U.S. Income Distribution - The Top 10%

20 % Total Income: Top 10-5% Top 5-1% Top 1% 2014 12.6% 16.8% 17.9% 1980 11.7% 13.0% 8.2% 18 Average '45 - '80 10.8% 12.5% 8.9% BP Gain/Loss '80 - '14 86 379 967 Previous Peak: % 13.7% 17.1% 18.7% 16 Year 1932 1934 1927 Income Levels: Average Income 2014 $38,471 $231,323 $983,896 Threshold Income <$118,140 >$167,240 >$387,810 14 Income

Total

of

12 Share

% 10 Top 10‐5% Top 5‐1% Top 1% 8

6 1917 1920 1923 1926 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Ordinary Income Excluding Capital Gains

Source: The World Wealth and Income Database 59 AEW Research Conference Call: Holiday Retail Outlook Average Expenditures and Income of All Consumer Units

INCOME % Of Pre‐Tax Item Annual Monthly Income Pre‐tax Income $64,432 $5,369 Taxes $12,499 $1,042 19.4% After‐tax Income $51,933 $4,328 80.6% EXPENSES % Of Pre‐Tax Item Annual Monthly Income Food $6,665 $555 10.3% Housing $17,377 $1,448 27.0% ‐ Shelter $10,275 $856 15.9% ‐ Utilities $3,861 $322 6.0% ‐ Furnishings & Equipment $1,484 $124 2.3% Apparel & Services $1,674 $140 2.6% Transportation $9,104 $759 14.1% Healthcare $3,919 $327 6.1% ‐ Health Insurance $2,505 $209 3.9% Entertainment $2,560 $213 4.0% Cash Contributions $1,790 $149 2.8% Insurance & Pensions $5,551 $463 8.6% All Other $3,294 $275 5.1%

Source: Bureau of Labor Statistics 60 AEW Research Conference Call: Holiday Retail Outlook The Family Budget* What Does a "Decent Yet Modest" Standard of Living Cost?

New York Milwaukee Seattle $/Month % Income $/Month % Income $/Month % Income Housing $1,440 17.5% $812 12.8% $1,123 18.6% Food $782 9.5% $782 12.3% $782 13.0% Child Care $2,011 24.4% $1,530 24.1% $1,159 19.2% Transportation $583 7.1% $608 9.6% $608 10.1% Health Care $1,061 12.9% $990 15.6% $831 13.8% Other Necessities** $1,073 13.0% $770 12.1% $920 15.3% Taxes $1,277 15.5% $850 13.4% $599 9.9% Monthly Budget $8,227 100.0% $6,342 100.0% $6,022 100.0%

Annual Income $98,724 $76,104 $72,264 Median Family Budget $63,740 $63,740 $63,740 Median ‐ Decent 54.9% 19.4% 13.4% Standard of Living Gap

*Assumes Two Parent, Two Child Family **Necessities ‐ apparel, entertainment, personal care expenses and household supplies & furnishings Source: Economic Policy Institute ‐ Family Budget Calculator BLS ‐ Consumer Expenditure Survey 61 AEW Research Conference Call: Holiday Retail Outlook Quotes From the Front – U.S. Income Distribution

 “By some estimates, income and wealth inequality are near the highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then. It is no secret that the past few decades of widening inequality can be summed up as significant wealth and income gains for those at the very top and stagnant standards for the majority.” (Janet Yellen)

 “More than 15 percent of US national income has shifted from the bottom 90 percent to the top 10 percent in the United States over the past 30 years. In effect, the top 1 percent alone has absorbed almost 60 percent of aggregate US income growth between 1976 and 2007. The fact that so much action has been taking place at the level of the top 1 percent, and relatively little at the level of the next 9 percent, is probably the most staggering evolution.” (Piketty/Saez – “Top Incomes and the Great Recession: Recent Evolutions and Policy Implications”)

 “…did rising inequality contribute in an important way to the unsustainable increase in household leverage that triggered the collapse in consumer demand and the Great Recession? Has the rise in inequality become a drag on demand growth since the Great Recession that has held back recovery? Our answer to both questions is yes.” (Cynammom/Fazzari – “Inequality, the Great Recession and Slow Recovery”)

 “So it is true that rich people can spend more money than middle class people, but there’s this upper limit on what we can spend…My family can afford to go out to eat more than most American families, but not more than 3 times a day. We can’t go out 3,000 times a day….My family…owns a pillow company, and the pillow business is tougher because fewer and fewer people can afford to buy pillows. I may earn a thousand times the median wage, but I can’t sleep on a thousand pillows. We need everyone to be able to afford a pillow every year...to have a successful pillow business, and concentrating wealth at the top essentially creates a death spiral of falling demand.” (Nick Hanauer)

 62 AEW Research Conference Call: Holiday Retail Outlook Quotes From the Front – U.S. Income Distribution

 “Our customer is always under pressure. I mean she lives that way…She is facing a lot of headwinds, especially in rents. I mean rents are up tremendously over the past few years. Our poor consumer…nearly 50% of her take‐home pay is going to rents today, versus 37% just a few short years ago…and quite frankly, not a lot of wage growth for her.” (Dollar General)

 “The Economic Policy Institute has found that the Walton wealth was larger than the wealth of the bottom 40 percent of all American families combined in 2010.” (Joseph Stiglitz)

63 AEW Research Conference Call: Holiday Retail Outlook Biographical Information

MICHAEL J. ACTON, CFA, Managing Director, AEW Research Michael J. Acton, CFA, is Director of Research for AEW Capital Management, L.P. with responsibility for directing the activitiesof AEW Research, the firm’s highly regarded in-house research group. Mike joined the firm in 1990 and has more than 30 years of experience as an economic analyst and forecaster and is a standing member of the firm’s Investment Committee and Management Committee. The resources of AEW Research are an integral part of AEW’s investment process and Mike works closely with senior professionals in all areas of the firm to develop investment strategies that match clients’ risk/reward objectives with market opportunities. Mike is also a member of the firm’s Compliance Committee and Risk Management Committee. Prior to joining AEW, he was with DRI/McGraw-Hill where he managed the Metropolitan Area Forecasting Service. He is a graduate of Bates College (B.A.) and a CFA charter holder.

RONALD M. PASTORE, Director, AEW Direct Investment Group Ronald M. Pastore is the Senior Retail Portfolio Manager in AEW’s Direct Investment Group. In this capacity he oversees AEW’s retail portfolio with particular emphasis on super regional malls, urban specialty centers and retail-oriented mixed-use projects. Ron brings to his position over 30 years of real estate experience, including extensive experience managing joint ventures, complex redevelopment projects, financings and dispositions at both the asset and portfolio level. Ron served as managing partner for separate ventures that owned historic Union Station in Washington D.C. and Woodfield Mall in Chicago, and currently serves in a similar capacity for Arden Fair Mall in Sacramento, California. He previously served on the partnership committee of the Taubman Realty Group and was a key player in the restructuring of the Taubman UPREIT in 1998. Ron recently advised an AEW client on the redevelopment of a downtown property holding in Salt Lake City into City Creek Center - a 20-acre, open-air mixed use project anchored by Nordstrom and Macy’s, featuring Please feel free to 300,000 square feet of specialty retail and 450 housing units. City Creek Center opened in March 2012 and received the International contact Mike or Ron Property Award for “Best Retail Development, USA”. Ron joined AEW in 1993 from Himmel/MKDG, where he was responsible for regarding any of the retail asset management, development planning and joint venture structuring. Prior to Himmel/MKDG, Ron was a consulting city planner information responsible for financing and managing infrastructure improvement and downtown revitalization projects in New England. He is a contained herein member of the International Council of Shopping Centers (ICSC). Ron is a graduate of Bowdoin College (B.A.), Harvard University’s [email protected] Kennedy School of Government (Masters in City and Regional Planning) and MIT’s Sloan School (M.B.A.). or 617-261-9577 [email protected] or 617-261-9336

64 AEW Research Conference Call: Holiday Retail Outlook