PROCEED WITH CAUTION
January 2016 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
2 Stifel REIT Team
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
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. Pricing as of December 30, 2015 unless otherwise noted. All relevant disclosures and certifications appear on pages 133-135 of this report. 3 REITs Up Modestly In 2015
Source: FactSet Research Systems, Stifel 4 2015 Relative Performance
15.0% 2.8%
10.0% 2.5%
5.0% 10
- Year Treasury Yield Treasury Year 2.3%
0.0%
Performance 2.0% -5.0%
1.8% -10.0%
-15.0% 1.5%
RMZ 10-Year Treasury Yield
Source: SNL Financial 5 Storage Led The Way In 2015
Source: FactSet Research Systems, NAREIT, Stifel 6 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
7 Stifel’s 2015 Best Ideas
Total 2015 Stifel Best Ideas Total Returns Sector Stock Return 40.0% Data Centers QTS* 38.1% Industrial TRNO 14.3% 30.0% Triple-Net STOR 13.2% Shopping Center EQY 11.3% 20.0% Industrial DRE 9.8% Multi-Family CPT 8.8% 10.0% Malls GGP 0.0% Office SLG -2.1% 0.0% Office VNO -2.7% Healthcare NHI -7.0% -10.0% Lodging CLDT -24.8% Healthcare SBRA -27.7% -20.0% Weighted Avg. Weighted Avg. 1.8% RMS REIT Index RMS REIT Index3.4% -30.0% Alpha -1.6%
Source: FactSet Research Systems Best Ideas from 2015 Stifel Rollout, January 2015 *QTS was not in the 2015 Rollout
8 M&A Activity – Mostly Public To Private
REIT M&A Activity 2004-2015
$100 25 2015 M&A Participants: Buyer Seller $90 Blackstone Group Excel Trust Inc. (EXL) Brookfield Asset Management Associated Estates Realty Corp. (AEC) $80 20 Lone Star Investment Advisors Home Properties Inc. (HME) CyrusOne (CONE) Cervalis $70
QTS Realty (QTS) Carpathia Transactions Digital Realty (DLR) Telx $60 15 Equinix (EQIX) Bit-isle $50 Announced: Chambers Street Properties (CSG) Gramercy Property Trust (GPT) $40 10
Blackstone Group Strategic Hotels & Resorts (BEE) (in billions) (in Blackstone Group BioMed Realty Trust (BMR) $30 Harrison Street Real Estate Capital Campus Crest Communities (CCG) Weyerhauser Company (WY) Plum Creek Timber Co. (PCL) $20 5 American Homes 4 Rent (AMH) American Residential Properties Inc. (ARPI) Equinix (EQIX) Telecity $10
$0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Equity Value Total Value
Source: SNL Financial, Stifel estimates Updated through 12/30/15 9 Interest Rates Important – But Not the Whole Story
10-Year Treasury Yield vs NAREIT FTSE All Equity Price Index and S&P 500 12.0% 800 6/30/2006 12/31/13 9/30/1987 5/31/2000 10-Yr. 5.14% 10-Yr. 3.04% 10-Yr. 9.59% 10-Yr. 6.44% NAREIT Index 511.55 NAREIT Index 510.33 NAREIT Index 219.59 11/30/1994 NAREIT Index 243.55 REITs +71.1% REITS 12.9% REITs -0.6% 10-Yr. 7.96% REITs -7.8% 700 NAREIT Index 204.46 10.0% REITs -15.5%
600
8.0% 500
9/30/1986 6.0% 10-Yr. 6.92% 400 NAREIT Index 220.86
4/30/13 Index Price 10-Yr. 1.67% NAREIT Index 585.66 300 10/31/1993 4.0% 10-Yr. 5.33% NAREIT Index 241.95 10/31/1998 6/30/2003 200 10-Yr. 4.53% 10-Yr. 3.28% NAREIT Index 264.26 NAREIT Index 298.98 2.0% 100
0.0% -
Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
10 Yr Treasury Yield NAREIT FTSE All Equity Index
Source: FactSet Research Systems, Stifel 10 Outlook & Recommendations
2016
11 Proceed With Caution
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
12 Where are REITs and Real Estate?
January 2015 January 2016 January 2017
10-year Treasury at +/- 10-year Treasury at 2.20% 10-year Treasury at 2.40% 2.10% with range bound with modest upward with modest upward forecast incremental movements incremental movement
Private Investors have cost Private market has Private market still has a cost of capital advantage significant cost of capital of capital advantage advantage
Cap rates declining; all asset Cap rates have bottomed, Cap rates expected to quality levels but with fewer bidders increase slightly
Spread investing perceived Spread investing limited to Spread investing still limited as ‘difficult’ select REITs
Risk-off trade globally; yield Real estate is late in its cycle Late in the real estate cycle matters for most property types
Generalists involved, but Generalist investors are the Generalist investors are still reluctant incremental investor the incremental investor
Source: Stifel Research 13 Broader Markets – The REIT Fit?
All about growth Equity Markets Risk on/off trade constantly changing Multiple expansion likely finished
Projected earnings growth: 3% - 5% S&P 500 Average dividend: 2% Total annual return: 5% - 7%
Interest rate overhang Bond Market Sub-3% income Principal risk
Investors want equity-like returns REIT Fit Interest rate overhang Top-down fundamentals
Source: Stifel estimates 14 Funds Flows Overview
Domestic REIT Dedicated Inflows Thru Nov. ($ in Billions) 2010 2011 2012 2013 2014 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 ($2.1) Assumes 50% of global funds flows invested domestically Source: Morningstar, Stifel estimates
Domestic Institutional – REIT interest modest due to late real estate cycle and rising interest rate perceptions
Global Institutional – flight to safety and principal protection-oriented
Global Individual – Japanese funds flows constant while flows from other nations remain minor
*Data above may not sum exactly due to rounding 15 Funds Flows – Absolute & Percentage
1/29/10 12/31/10 12/30/11 12/31/12 12/31/13 12/31/14 11/30/15 RMZ Equity Market Capitalization ($ Billions) $212 $317 $363 $449 $531 $727 $757 Japan-Domiciled U.S. REIT AUM as a % of the RMZ Mkt. Cap 6.9% 8.4% 11.3% 10.3% 8.2% 7.3% 6.7% U.S. MF/ETF AUM as a % of the RMZ Mkt. Cap 24.4% 23.2% 23.1% 25.0% 19.2% 21.4% 20.2% Combined 31.3% 31.6% 34.4% 35.3% 27.4% 28.7% 26.9%
Source: Morningstar 16 Debt Market Conditions
Spreads have widened CMBS market is functioning properly and lenders are providing appropriate capital to markets BBB Index Yield Spread to 10 Year Treasury Yield CMBS Issuance ($B) 2.5%
2.3%
2.1%
1.9%
1.7%
1.5%
Source: Commercial Mortgage Alert, Stifel estimates Source: FactSet
17 Investment Sales Market & Net Asset Value
Perceived late cycle risk Private market has cost of capital advantage: Fewer real bidders
Cap rates have bottomed Public REIT Private Investor Leverage Level +/- 40% > 70% Debt costs on upward Term 7 years (+/-) < 5 years trajectory Debt Cost 3.4% < 4.0% (weighted avg.) Equity Invested 60% < 30% Still strength in core asset sales Initial Equity Return 6% – 8% 8% – 10% Estimated Cost of Capital 5.0% – 6.2% 4.8% – 5.4% Public leads private market (70% LTV, Private) valuations
Source: Stifel Research 18 Private Markets & Public REITs: Similar Attributes
Capitalization Rates explicitly underwrite growth and value creation
Cap Rate Range Investment Attributes Private Investors 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
Source: Stifel estimates 19 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
20 Sector Growth Drivers
Internal Growth External Growth Cost of Capital Advantage Accretive Capital Spread Rental Rate Annual/periodic Operating Cost Premiums to Sector development/ recycling that investing, Growth rent bumps Savings NAV redevelopment improves NAV acquisitions 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
Source: Stifel Research 21 Projected REIT Growth by Sector
Stifel Projected Growth by Sector 2014-2015E Growth Data Office Retail Centers & Multifamily Storage Lodging Gateway Suburban Industrial Malls Strips Towers 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%
Stifel Projected Growth by Sector 2015E-2016E Growth Data Office Retail Centers & Multifamily Storage Lodging Gateway Suburban Industrial Malls Strips Towers Healthcare Triple-Net 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% Normalized FFO/sh 5.3% 12.9% 11.4% 5.2% 3.8% 6.6% 6.0% 5.0% 15.5% 6.9% 5.0% FAD/sh 5.1% 13.0% 13.9% 8.9% 4.7% 4.7% 8.8% 5.6% 12.8% 8.1% 5.0%
Stifel Projected Growth by Sector 2016E-2017E Growth Data Office Retail Centers & Multifamily Storage Lodging Gateway Suburban Industrial Malls Strips Towers Healthcare Triple-Net 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% Normalized FFO/sh 5.5% 8.2% 7.5% 7.6% 4.9% 6.9% 10.0% 6.6% 13.0% 4.3% 4.5% FAD/sh 6.5% 8.0% 8.6% 12.7% 8.2% 10.5% 11.9% 7.4% 13.4% 5.5% 4.5%
Stifel NAV and Estimated 2016E FAD Multiples by Sector Priced 12/30/15 Data Office Retail Centers & Multifamily Storage Lodging Gateway Suburban Industrial Malls Strips Towers Healthcare Triple-Net 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 22 Dividend Increase Deceleration Expected
2006 – 2015 Average growth: 2.7% 2010 – 2015 Average Growth: 10% 2016 – 2017 Estimated Average Growth: 7% - 9%
REITs Annual Dividend Increase / (Decrease) 15%
10%
5%
0%
-5%
-10%
-15% -43% -20% 2009 2010 2011 2012 2013 2014 2015 2016E 2017E
Source: FactSet Research Systems, SNL Financial, Stifel estimates 23 Target Growth & Value Creation
Office Industrial Malls Strip Centers Apartments Lodging Healthcare Triple-Net Data Centers Other Green Light BXP KRC DRE TRNO SPG FRT REG AVB HPT DOC HCN NNN O EQIX DLR PSA CUBE SLG VNO DCT PLD GGP EQY EQR HR HTA STOR EPR CONE QTS FPI HIW MAC ESS LTC OHI
Yellow Light BDN CUZ FR EGP PEI BRX KIM CPT HST CLDT CTRE NHI GPT COR ACC CTT ESRT PKY REXR SKT KRG RPT UDR PEB VTR EDR AHH DEI RSE WRI OFC
Red Light LXP EQC LPT CBL CDR PPS DRH HT HCP MPW VER DFT WRE CLI SHO AHT SBRA SNR FPO FSP LHO PDM
Source: Stifel estimates 24 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
Source: Stifel estimates 25 2016 Sector Performance Predictions
Overweight Equal-Weight Underweight
Industrial Multifamily Lodging
Gateway Office Storage Suburban Office
Data Centers Triple-Net “B” Malls
“A” Malls Healthcare
Shopping Centers
26 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
27 M&A Candidates by Sector
Office Equity Commonwealth (EQC)
Industrial Liberty Property Trust (LPT)
Post (PPS), Apartment Investment & Apartment Management (AIV) Host Hotels & Resorts (HST), Chesapeake Hotel (CHSP), FelCor Lodging Trust (FCH)
Retail All Small-Cap Shopping Centers
Four Corners Property Trust (FCPT), Triple-Net Global Net Lease Inc. (GNL), Spirit Realty Capital (SRC)
Healthcare Healthcare Trust of America (HTA)
DuPont Fabros Technology (DFT), Data Centers CyrusOne (CONE)
Please note that we do not have any knowledge of any potential M&A activity or discussion. Source: Stifel estimates 28 Stifel REIT Income List
Stifel REIT Income List* Ticker Dividend Investment Price Current Yield (%) Rating 12/30/2015 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%
*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
29 Chad Vanacore [email protected] (518) 587-2581
30 2015 – What Went Wrong?
1 Interest rate panic (initial rise January 30th, jobs report February 6th) 2 NIC MAP data shows supply exceed absorption for first time this cycle (April 8th) 3 Beginning of S&P pullback (August) 4 3Q HCREIT earnings (October): managements indicate pull back in acquisitions, clarify extent of seniors housing oversupply exposure
Increased cost of capital and reduced …Turned into a vicious cycle growth expectations… for some (red light stocks)
1 2 3 4 3.5% HR YTD Price 15.0% 2.2% DOC Performance LTC 10.0% 1.0% 0.6% HTA 5.0% (9.2%) CTRE 0.0% (9.7%) HCN (9.8%) OHI (5.0%) (9.8%) VTR (10.0%) (11.9%) NHI (12.2%) HCP (15.0%) (15.5%) MPW (20.0%) (32.2%) SBRA YTD Index Price Performance (25.0%) (39.9%) SNR For others, the story has not changed much – but valuations have become more SNL U.S. REIT Healthcare SNL U.S. REIT Equity S&P 500 attractive (yellow and green light stocks) Source: SNL Financial and FactSet 31 2016 Healthcare REITs Equal-Weight with Selective Picks
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
Source: Stifel Research 32 Divergent Asset Class Fundamentals
Medical Office Skilled Nursing / Post-Acute Demand driven development, virtually no spec Fragmented market ripe for consolidation Higher healthcare utilization driving demand for space Risks related to evolving healthcare payment system No direct exposure to government reimbursement Overall stable supply Stable cap rates – 5.5% - 7.5%
>80% of NOI: DOC, HR, HTA >50% of NOI: CTRE, LTC, OHI, SBRA 15% - 30% of NOI: HCN, HCP, VTR 20% - 35% of NOI: HCN, HCP, NHI
23.3% 19.4% 2016E FAD Growth
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 Hospital Seniors Housing Growth (FAD per share) Growth (FAD Hospitals have benefited from healthcare reform Expect 3%-4% SS NOI growth in 2016 via higher volumes and better payor mix Increasing risk of oversupply – adverse impact to New patient criteria will put pressure on LTACHs occupancy and rate growth could slow 2017 growth Signs of slowing volume growth and unfavorable Lease coverages thinner than we would like mix shift going into 2016 Long term (7-10 year), demographics highly favorable 100% of NOI: MPW >50% of NOI: HCN, NHI, VTR 5% - 20% of NOI: DOC, HCP, HR, HTA, SBRA, VTR 30% - 50% of NOI: HCP, LTC, SBRA
Risk (supply growth / healthcare demand / cap rate stability / reimbursement) 33 Source: Company reports and Stifel estimates Valuation – Depressed vs Historical
Undervalued vs historical multiples and interest rates HCREITs Implied Yield Spread to – Price / 2016 FAD more than 1x below historical - we 10 Year Treasury and BBB Index Yields believe the market is overestimating earnings growth 8.0% deceleration in 2016 3.6% Historical 12/30/15 HCREIT to 10Y Tsy: 4.4% – Implied yield spread to 10-year treasury is 50bps 6.0%
wide of historical. Even after adjusting for 25-50bps 4.0% rate increase, still looks cheap – HCREIT vs Equity REIT dividend yield spread 20bps 2.0%
wide of historical 0.0% HCREITs trading at 3.5% median discount to NAV 1.4% Historical Avg (2.0%) …but all of this could reverse if interest rate fears and fundamentals concerns prove overblown BBB Spread 10yr Tr Spread HCREITs – P/FAD – 12 Month Fwd 10-year Avg Time Period: 3Q05 - 3Q15 Source: FactSet and Stifel estimates 20x 19x HCREIT 5-yr Wtd Avg - 16.0x HCREIT 5-yr Median - 15.4x Div Yld Spread: Healthcare REITs vs Equity REITs 18x 17x 3.5% 16x 2.5% 15x 14x 1.5% 13x HCREIT Current Wtd Avg- 14.9x HCREIT Current Median - 14.8x 12x 0.5%
(0.5%) Mean - 156 bps Current Spread - 178 bps HCREIT 5 yr Average P/FAD - 12 mth fwd (1.5%) Source: Company reports and Factset
Mean Spread 34 Source: SNL Financial Risks
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
Leverage – 2016 Debt / Adj. EBITDA SNF EBITDAR Lease Coverage Srs Hsg EBITDAR Lease Coverage
9.5x 2.2x 1.4x 1.4x 1.3x 1.8x 1.1x 1.1x 1.1x 1.1x 6.9x 1.7x 1.6x 1.1x 6.2x 6.3x 6.3x 6.3x 6.3x 5.8x 6.0x 1.4x 1.4x 1.3x 4.6x 4.8x 4.9x 5.0x 0.9x
3 2 3 1 2 3 3 1 NHI CTRE LTC VTR HCN OHI SBRA HCP OHI LTC SBRA SNR VTR HCN NHI HCP
Source: ______Source: Company filings Source: Company filings Source: Company filings 1 Includes HCR ManorCare; ex-HCR SNR EBITDAR coverage is 1.48x, EBITDARM coverage is 1.95x 2 Same-store 3 Estimate; assumes 5% management fee; operating margin of 35% for AL/IL, 20% for SNF, 15% for hospital 35 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:
Clarity to Resolution
SBRA – Come to a reasonable resolution with its Forest Park issues High
– See seniors housing supply growth moderate SNR Medium – Delever
HCP – See improvement in HCR operations that would aid lease coverage – SHOP operator Brookdale shows sustainable operational improvement Low
MPW – Eliminate capital overhang by terming out the credit facility – Implement capital recycling program of size Low
Source: Stifel Research 36 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
Source: Stifel Research 37 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
Source: Stifel Research 38 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)
Source: Stifel Research 39 Nate Isbee [email protected] 443-224-1346
40 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
41 2015 Mall Performance
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40% SPG SRG MAC TCO RMS GGP PEI SKT RSE CBL WPG
Source: SNL Financial, Stifel
42 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)
43 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
18% $160
16% $140 14% $120 12% $100 10% $80 8% $60 6% $40 4%
2% $20
0% $- E-commerce growth In-store growth E-commerce growth In-store growth
Dollars in billions. Source: U.S. Census Bureau, ICSC, Stifel
44 Consumers Spending Less on Apparel
$800 (1.9)% $42,000
$750 2.9%
$37,000 Disposable Income per Capita perIncome Disposable $700
$32,000 $650
$600 $27,000
$550 Apparel Apparel Spending per Capita $22,000 $500
$450 $17,000
Apparel Spending per Capita Disposable Income per Capita
Source: Bureau of Economic Analysis, U.S. Census Bureau, Stifel
45 Attitudes Shifting on Apparel
Apparel Spending by Age as a % of Total Expenditures 7%
6%
5%
4%
3%
2%
1% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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
Source: Bureau of Labor Statistics, Stifel
46 Expanding Retailers Outweigh Closings
Retailers Closing Stores Expanding Retailers − Abercrombie & Fitch − & Other Stories − Lush − Aeropostale − Art of Shaving − Mac Cosmetics − Apple − Mango − American Eagle − Arhaus Furniture − Merle Norman − Chico’s − Brio Tuscan Grille − Michael Kors − Christopher & Banks − Carter’s − Microsoft − Children’s Place − Cheesecake Factory − New Balance − Claire’s − Clarks − The North Face − COS − Primark − Coach − Crate & Barrel − Seasons 52 − Express − Dick’s Sporting Goods − Sephora − FYE − F&F − Skechers − GAP − Foot Locker − Starbucks − IZOD − Forever 21 − TopShop − Fossil − TUMI − JC Penney − Francesca’s − Under Armour − Kmart/Sears − Free People − Urban Outfitters − Macy’s − H&M − Vinyard Vines − Wolverine World Wide (Stride − Johnston & Murphy − Williams Sonoma Rite & Keds) − Kiehl’s − White Barn Candle − Lovesac − Yellow Box Footwear − Lululemon Athletica − Zara
Source: Stifel Research 47
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 48 Source: Company reports, Stifel Store Closures, Re-tenanting Activity Driving Sales Growth
Y/Y Sales Growth 14%
12%
10%
8%
6%
4%
2%
0% SPG TCO GGP CBL WPG RSE MAC PEI
Source: Company reports, Stifel
49 Anchor Concerns Could Weigh in 2016
2011 Dick's Burlington Sporting Lord & Neiman Von # of Belk Bon Ton Coat Goods Dillards JC Penney Kohls Taylor Macy's Marcus Nordstrom Saks Sears Target Maur 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
2015 Dick's Burlington Sporting Lord & Neiman Von # of Belk Bon Ton Coat Goods Dillards JC Penney Kohls Taylor Macy's Marcus Nordstrom Saks Sears Target Maur 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
Data is as of 12/31 for both years. Includes outlet centers. Source: Company reports, Stifel
50 Regional Mall Best Idea
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.
51 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
52 2015 Shopping Center Performance
15%
10%
5%
0%
-5%
-10% FRT ROIC EQY REG KIM BRX AKR WRI IRC RMS UE CDR DDR KRG BFS RPT UBA RPAI
Source: SNL Financial, Stifel
53 How High Can Occupancy Go?
98.0%
97.5%
97.0%
96.5%
96.0%
95.5%
95.0%
94.5%
94.0%
93.5%
93.0%
92.5% FRT DDR KIM REG KRG WRI EQY RPT
Pre-recession Occupancy High 3Q15 Portfolio Occupancy
Source: Company reports, Stifel
54 Limited Anchor Space Availability
100.0%
99.0%
98.0%
97.0%
96.0%
95.0%
94.0% EQY KRG REG FRT KIM WRI DDR RPT BRX RPAI
Anchor occupancy as of 9/30/15. Source: Company reports, Stifel
55 Small-Shops = Opportunity
100%
95%
90%
85%
80%
75% EQY REG WRI KIM RPT KRG
All-Time Small-Shop Occupancy High 3Q15 Small-Shop Occupancy
Source: Company reports, Stifel
56 Limited New Development
Shopping Center Supply vs. Demand
50,000
40,000
30,000
20,000
10,000 SF (in 000s) SF
0
-10,000
-20,000
-30,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E Completions Net Absorption
Source: REIS, Stifel estimates
57 Limited Supply + Healthy Demand = Accelerating Leasing Spreads
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD
Shopping Center REITs: BRX, CDR, DDR, EQY, EXL, FRT, KIM, KRG, REG, ROIC, RPAI, RPT, WRI Source: Company documents, Stifel
58 Upgrading Tenant Quality, Reducing Exposure to “at risk” Retailers
Number of Leases Number of Leases Retailer 2009 2012 2015 Retailer 2009 2012 2015 24 Hour Fitness 7 13 24 A&P Company 21 11 11 AMC Theatres 4 9 20 Barnes & Noble 72 50 55 AT&T 0 0 138 GameStop 0 109 102 Bed Bath & Beyond 166 229 265 Dick's Sporting Goods 40 55 76 Hallmark 51 40 45 DSW 20 49 69 Kmart/Sears 118 92 44 Five Below 0 0 53 Office Depot/Office Max 184 185 164 GAP 133 129 166 Rite Aid 100 62 33 Hobby Lobby 18 41 56 Sports Authority 40 61 65 Kohl's 71 81 77 Staples 137 129 117 LA Fitness 8 30 52 SuperValu 76 70 11 Mattress Firm 0 8 84 Tops Markets 24 16 12 Michael's 158 170 182 Nordstrom 0 13 35 Toys 'R' Us/Babies 'R' Us 71 68 59 Panera 0 0 68 Winn Dixie 9 8 7 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
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. Source: Company reports, Stifel 59 Bricks & Mortar Retailers Succeeding Online
Top 30 Retailers By Online Sales
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
Highlighted names operate “bricks & mortar” stores. Source: Internet Retailer, Stifel
60 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.
Source: Company reports, Stifel 61 Private Market Provides Favorable Valuations
Cap Rate Range 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 rates for grocery anchored centers the trailing twelve months. 62 Source: Marcus & Millichap, Real Capital Analytics, REIS, Stifel Shopping Center Best Idea
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.
63 Rod Petrik [email protected] 443-224-1306
64 Apartment Overview
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)
65 Supply Rising But Sustainable
Multifamily Permits (5+ Units Not-Seasonally Adjusted) 700 617
600
500 450 430 425 389 400 359 384 382 346 359 341
300 295 285
200 177 Number ofUnits (000s) 135 121 100
0
1983 1996 2007 1981 1982 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014
2015E 2016E 2017E
Source US Census Bureau, Stifel estimates
66 Homeownership Falls as Renter Population Rises
Renter Households vs. Homeownership 70.0% 46 69.0% 44 68.0% 42 67.0% 40 66.0% 38 65.0% 64.0% 36 63.0%
34 HomeownershipRate 62.0%
Million Million ofRenter Households 32 61.0%
30 60.0%
1997 1990 1991 1992 1993 1994 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2016E 2017E
Renter Households Homeownership Rate
Source: US Census Bureau, Stifel estimates
67 Occupancies Could Tick Down Next Year
Trailing 12-Month Apartment REITs Historical Occupancy 96.5%
96.0%
95.5%
95.0%
94.5%
94.0%
93.5%
4Q06 2Q07 4Q07 4Q08 2Q09 2Q10 4Q10 2Q11 2Q12 4Q12 2Q13 2Q14 4Q14 2Q08 4Q09 4Q11 4Q13 2Q15
4Q15E 2Q16E 4Q16E
Source: Company reports, Stifel estimates
68 Apartments Tend to Outperform REITs During Acceleration
Apartment Sector Y/Yr S-S Revenue Growth vs. Apartment Spread over REIT Returns 7.0% 25.00% +6.6% +6.4%
6.0% 20.00% +5.6% 5.0%
15.00% 4.0%
3.0% 10.00%
2.0%
5.00% 1.0%
0.0% 0.00%
-1.0% -5.00%
-2.0%
-10.00% -3.0%
-4.0% -15.00% -3.2% -4.1% -5.0%
-20.00% -6.0%
-7.0% Stifel Estimates -25.00%
1Q99 3Q99 3Q01 1Q02 1Q04 3Q06 1Q09 1Q11 3Q11 3Q13 1Q14 1Q98 3Q98 1Q00 3Q00 1Q01 3Q02 1Q03 3Q03 3Q04 1Q05 3Q05 1Q06 1Q07 3Q07 1Q08 3Q08 3Q09 1Q10 3Q10 1Q12 3Q12 1Q13 3Q14 1Q15 3Q15 Total Return Spread Same Store Revenue Growth Source: SNL Financial, Company reports
69 Trading Above Historical Multiples
Apartment REIT Relative FFO Multiple Premium/Discount 135.0%
Avg. Apartment REIT Multiple Relative to Equity REIT Multiple Avg. 109.7%109.9% 125.0% Average since 3Q99: 113.8%
115.0%
105.0%
95.0% Current Level: 107.2%123.3%
85.0%
3Q98 3Q94 1Q95 3Q95 1Q96 3Q96 1Q97 3Q97 1Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15
Source: Factset, SNL Financial, Stifel estimates
70 Apartment Best Idea
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.
*Relative to enterprise value
71 Rod Petrik [email protected] 443-224-1306
72 Student Housing Overview
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
73 Student Housing vs. Conventional Multifamily
Same-Store Revenue Growth: Student Housing vs. Conventional Multifamily
7.0% 10-Year Avg. Apartments: 3.44%
10-Year Avg. Student 5.0% Housing: 2.77%
3.0%
1.0%
-1.0%
-3.0%
-5.0%
2Q05 1Q06 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 1Q05 3Q05 4Q05 3Q06 4Q06 2Q07 3Q07 1Q08 2Q08 4Q08 1Q09 3Q09 4Q09 2Q10 3Q10 2Q11 3Q11 1Q12 2Q12 4Q12 1Q13 3Q13 4Q13 2Q14 3Q14 1Q15 2Q15
Conventional Multifamily Student Housing
Source: SNL Financial, Company reports
74 Valuation Appears Favorable
2016E P/FFO Multiple Student Housing & Conventional Multifamily
25.0
20.0
15.0
10.0
5.0
0.0
Source: SNL Financial, Stifel estimates
75 Student Housing Best Idea
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.
76
Rod Petrik [email protected] 443-224-1306
77 Self-Storage Overview
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
78 Occupancy At All Time Highs
REIT vs. National Occupancy 92.5% 90.0% 10-Yr Avg Premium: 3.5% 2015E Premium 1.7% 87.5% 85.0% 82.5% 80.0% 77.5% 75.0% 72.5% 70.0% 67.5% 65.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
National Occupancy REIT Occupancy Premium
Source: REIS, Company reports, Stifel estimates
79 Sector Valuation Steep
Storage REIT Relative Historical FFO Multiple Premium/Discount
170.0%
150.0%
Avg. Storage REIT Multiple Relative to Equity REIT Multiple Avg. 112.6% 130.0%
110.0%
90.0%
70.0%
Source: SNL Financial, Stifel estimates
80 Rod Petrik [email protected] 443-224-1306
81 Lodging REIT Overview
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
82 Where are We in the Cycle?
National Y/Y RevPAR % Change 15.0% 10.0% 5.0% 0.0% -5.0% 121 Months 56 Months 69 Months -10.0% -15.0% -20.0% -25.0% 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 SNL Hotel REIT Index - Price Change 100
80 64 Months 50 Months 73 Months
60
40
20
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
Source: SNL Financial, STR Research
83 Supply Accelerating
Source: STR Research
84 International Visitation Suffering
Y/Y Growth of International Arrivals vs. EUR/USD 15.0% 1.4 12.5% 1.35 1.3 10.0% 1.25 7.5% 1.2 5.0% 1.15 1.1 2.5% 1.05 0.0% 1
Y/Y Growth of International Arrivals EUR/USD Y/Y Growth of International Arrivals vs. USD/JPY 15.0% 125
12.5% 120 10.0% 115 7.5% 110 5.0% 2.5% 105 0.0% 100
Source: Office of Tourism and Travel, Bloomberg Y/Y Growth of International Arrivals USD/JPY
85 RevPAR Continues Strength, Decelerating
Industry RevPAR vs. Share Price Performance 15.0% 500
450 10.0% 8.6% 400 5.0% 350 0.0% 300
-5.0% 250
RevPAR RevPAR November RevPAR +4.3% 200 (Y/Y (Y/Y Change) % -10.0% 150
-15.0% SNL US REIT Hotel Index 100 -20.0% 50 -20.4%
-25.0% 0
Jun-07 Mar-08 Jun-09 Mar-10 Jun-10 Jun-12 Mar-13 Jun-14 Mar-15 Mar-07 Jun-08 Mar-09 Mar-11 Jun-11 Mar-12 Jun-13 Mar-14 Jun-15
Dec-06 Dec-08 Sep-09 Dec-10 Sep-11 Dec-12 Sep-13 Dec-14 Sep-07 Dec-07 Sep-08 Dec-09 Sep-10 Dec-11 Sep-12 Sep-14 Dec-14 Sep-15
RevPAR SNL US REIT Hotel Index
Source: STR Research
86 Lodging REIT Best Idea
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.
87 Simon Yarmak [email protected] 443-224-1345
88 2016 Lodging C-Corps – Underweight
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
89 2015 C-Corps Performance
Lodging C-Corps 2015 Performance
10.0% 2.4% 0.0%
-10.0%
-20.0%
-30.0%
-40.0%
H
LQ
HLT
SPX
HOT VAC
CHH
MAR
WYN STAY
Source: FactSet, SNL, Stifel
90 Sector Has Lost Multiple, Not Coming Back
NTM EV/EBITDA Multiples 18.0x 0.0x
16.0x -3.5x 14.0x -2.5x
12.0x -2.5x
10.0x
Change MultipleIn NTM EV/EBITDA NTM EV/EBITDA Multiple 8.0x
6.0x -5.0x
H
LQ
HLT
HOT VAC
CHH
MAR
WYN
STAY
REITs
C-Corps Average Average
YE2014 YE2015 Multiple Change
Source: FactSet, SNL, Company reports, Stifel estimates
91 Short Interest Relatively High
Lodging C-Corps Short Interest as % of Float Short Interest as % of Float, 2015 20.0% 20.0%
15.0% 15.0%
10.0% 10.0%
5.0% 5.0%
0.0%
0.0%
H
H
LQ
HLT
LQ
HOT VAC
CHH
MAR
WYN
HLT
STAY
VAC HOT
CHH
MAR
WYN STAY 1Q15 2Q15 3Q15 4QTD
Source: FactSet, Company reports, Stifel estimates
92 Airbnb
Interest In Short-Term Rentals Airbnb Rooms as % of Hotel Rooms, Markets > 5.0% 120 25.0% 100 20.0% 80
60 15.0% 40
20 10.0% SearchVolume Index 0
5.0%
Jan-08 Jan-10 Jan-11 Jan-13 Jan-15 Jan-07 Jan-09 Jan-12 Jan-14
Airbnb VRBO HomeAway FlipKey
Austin, TX
Seattle, WA
Boston,MA
LongIsland
Oakland, CA
Portland,OR
Nashville, TN
New York, NY
San Diego, CA
Charleston, SC
Oahu Island, HI
Sacramento, CA
Philadelphia, PA
New Orleans, LA
Ft. Lauderdale, FL
Miami, Hialeah, FL
San Francisco/San…
San Jose/SantaCruz, CA LosAngeles, Long Beach
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
93 EBITDA/RevPAR Growth
EBITDA Growth RevPAR Growth 20.0% 10.0%
8.0% 15.0%
6.0% 10.0% 4.0%
5.0% 2.0%
0.0% 0.0% MAR VAC H HLT CHH STAY HOT WYN LQ STAY CHH MAR H HOT LQ WYN
2015E 2016E 2017E 2014-2017E CAGR 2015E 2016E 2017E 2014-2017E CAGR
Note: Company RevPAR adjusted for FX Source: SNL, Company reports, Stifel estimates
94 Room Growth, Relative Pipelines
Room Growth Pipeline By % Of Existing Rooms 10.0% 40.0%
30.0% 5.0% 20.0%
0.0% 10.0%
0.0%
-5.0% H
H HLT MAR LQ HOT WYN CHH STAY LQ
IHG
HLT
HOT
CHH
MAR
WYN
STAY AC.PA
2013 2014 2015 YTD 2012-2015 CAGR Carlson MAR-HOT
Note: YTD room growth and pipeline figures as of 9/30/2015 Source: Company reports, FactSet, Stifel estimates
95 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.
Source: FactSet, Company reports, Stifel estimates
96 Lodging C-Corps 2016 Yellow Light Best Idea
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.
Note: We do not have any knowledge of any potential M&A activity or discussions Source: FactSet, Company reports, Stifel estimates
97 Simon Yarmak [email protected] 443-224-1345
98 2016 Triple-Net – Equal-weight
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
99 Bifurcated Performance Last Year
Triple-Net REITs 2015 Performance
20.0%
10.0%
3.4% 2.4% 0.0%
-10.0%
-20.0%
O
SIR
SPX
GTY VER GPT EPR
SRC
ADC NNN
RMS
WPC STOR
Source: FactSet, Stifel estimates
100 Sector Trading Above NAV Large Disparity Between “Haves” And “Have-Nots”
Stifel NAV Analysis - Premium (Discount) to NAV
Realty Income $42.00 23.6%
National Retail Properties $35.00 14.7%
STORE Capital Corporation $22.00 6.0%
EPR Properties $57.00 3.2%
NNN Weighted Average 2.5%
Agree Realty Corp. -8.4% $37.50
Gramercy Property Trust -8.7% $8.50
VEREIT -9.0% $8.75
W.P. Carey & Co. -11.2% $67.25
Spirit Realty -12.2% $11.50
Select Income REIT -37.1% $32.00
-45% -35% -25% -15% -5% 5% 15% 25% 35%
Source: Stifel estimates for EPR, GPT, NNN, O, STOR, VER; rest of sector from SNL
101 Cost Of Capital Remains Important
Initial Nominal Cost Of Capital Price/Next Year AFFO Multiple 15.0% 20.0x 1.5x
-0.8x 15.0x 10.0% 0.0x
10.0x
5.0% -1.5x
5.0x Change MultipleIn
0.0% Price/NTM AFFO Multiple 0.0x -3.0x
O
O
SIR
VER GPT EPR
SRC
SIR
ADC NNN
WPC
GPT EPR VER
SRC
NNN ADC
STOR
WPC
STOR Average Cost of Equity Cost of Debt WACC YE2015 YE2016 Multiple Change
Note: WACC assumes 65% equity and 35% debt structure; GPT AFFO is adjusted to account for capital expenditures Source: Company reports, Stifel estimates
102
Prudent Portfolio Growth Results In AFFO Growth
2015 Acquisitions vs. Dispositions (% Of Asset Base) AFFO Growth 30.0% 125.0% 45.0% 24.8%
100.0% 20.0% 30.0% 8.9% 75.0% 10.0% 7.2% 6.4% 5.9% 5.6% 4.1% 3.6% 1.8% 50.0% 15.0% 0.0%
25.0% Total Return 0.0% -10.0%
Acquisitions/Dispositions 0.0% -7.4%
-25.0% -15.0% -20.0%
GPT STOR ADC EPR NNN SIR O WPC SRC VER O
SIR
GPT EPR VER
SRC
NNN ADC WPC Acquisitions Dispositions Net Acquisition Activity 2015 Total Return STOR 2016E 2017E 2014-2017E CAGR
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
103 Implied Prices at Historical Highs
Realty Implied 10-Yr National Retail Implied 10-Yr Income (O) Event Date Price Cap Rate Treasury Spread Properties (NNN) Event Date Price Cap Rate Treasury Spread
12/30/2015 Current Pricing $51.92 5.4% 2.3% 3.1% 12/30/2015 Current Pricing $40.15 5.9% 2.3% 3.6%
1/28/2015 All-Time Price High $55.54 5.0% 1.7% 3.3% 1/27/2015 All-Time High $44.43 5.3% 1.8% 3.5%
5/22/2013 Lowest Implied Cap Rate $55.48 4.7% 2.0% 2.7% 5/22/2013 Lowest Implied Cap Rate $41.98 5.3% 2.0% 3.3%
Based on 5/22/13 Implied Cap Rate $62.59 4.7% - - Based on 5/22/13 Implied Cap Rate $46.91 5.3% - - Based on 5/22/13 Spread $58.07 5.0% 2.3% 2.7% Based on 5/22/13 Spread $43.73 5.6% 2.3% 3.3%
$70.00 6.0% $50.00 7.00% $46.91 $62.59 $44.43 $43.73 $60.00 $58.07 $41.98 6.00% $55.54 $55.48 $40.15 5.0% $40.00 $51.92
$50.00 5.00%
Stock Stock Price
Stock Stock Price
ImpliedRateCap ImpliedRate Cap
$30.00 4.00% $40.00 4.0% Current NNN All- NNN Implied Implied Current O O All-Time O Lowest Implied O Implied O NNN Time Price Lowest NNN NNN Pricing Price High Implied Price, Price, Pricing High Implied Price, Price, Cap Rate Using Using Cap Rate Using Using Implied Lowest Implied Lowest Cap Implied Cap Implied Spread Cap Rate Spread Cap Rate
Source: FactSet, Company reports, Stifel estimates
104 Dividend Yield Spreads Above Historical Averages
Triple-Net Dividend Yields vs. 10-Year, Bond & REIT Yields
12.0
Spread to Triple-Net Dividend Yield
15-Year Average 12/30/15 10.0 REITs 1.64% 1.85%
BBB Bonds 1.02% 1.54%
8.0 10Y Treasury 2.96% 3.48%
Avg. Triple-Net Yield: 6.5%
6.0 Yield (%) 4.0
2.0
0.0
-2.0
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-09 Dec-10 Dec-11 Dec-12 Dec-08 Dec-13 Dec-14 Dec-15
US REIT Dividend Yield US 10-Year Treasury US Corp Bond BBB Yield
Source: SNL Financial, Bloomberg, Company Reports, Stifel
105 Historical Rate Impact On The Sector
10-Year Treasury Yield vs. FTSE NAREIT Free-Standing Retail Price Index
9.00% 800 11/30/1994 6/30/2006 10-Yr. 7.96% 10-Yr. 5.14% REITs -15.5% REITs +71.1% Triple-Net REITs -20.5% Triple-Net REITs +33.9% 8.00% 12/31/2013 1/31/2000 700 10-Yr. 3.04% 10-Yr. 6.66% REITs -13.4% REITs -14.0% Triple-Net REITs -19.0% 7.00% Triple-Net REITs -13.1% 600
6.00% 500
5.00% 400 4.00%
Year Treasury Yield 300 -
10 3.00% FTSE FTSE NAREIT PriceIndexes 200 2.00%
6/30/2003 4/30/2013 100 1.00% 10/31/1998 10-Yr. 3.28% 10/31/1993 NAREIT Index 298.98 10-Yr. 1.67% 10-Yr. 4.53% NAREIT Index 578.80 10-Yr. 5.33% Triple-Net REITs 171.20 NAREIT Index 241.95 NAREIT Index 264.26 Triple-Net REITs 385.40 Triple-Net REITs 118.64
0.00% Triple-Net REITs 100.00 -
Dec-94 Dec-95 Dec-96 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-14 Dec-15 Dec-97 Dec-98 Dec-05 Dec-12 Dec-13
10 Yr Treasury Yield FTSE NAREIT Free Standing Retail Price Index FTSE NAREIT All Equity REITs Price Index Source: Bloomberg, Stifel
106 Triple-Net Sector 2016 Green Light Best Idea
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.
Source: FactSet, Company reports, Stifel estimates
107 Triple-Net Sector 2016 Yellow Light Best Idea
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.
Source: FactSet, Company reports, Stifel estimates
108 Matthew Heinz, CFA [email protected] 443-224-1382
109 Investment Themes - 2016
Strong M&A appetite likely resumes Secondary markets continue to emerge following digestion of recent deals as customers seek lower power costs Continued migration of the enterprise Wider variety of power densities and data center to multi-tenant environments redundancy offerings as customers seek flexibility across different workloads Cloud provider and hyperscale demand continue to provide growth tailwinds The “edge” continues to move further away from traditional hubs due to Stable to increasing $/kW as market explosion in mobile, IoT, and M2M supply remains rational Focus on services, connectivity, and Data sovereignty concerns in Europe customer ecosystems to reduce churn create opportunity for providers with a and drive MRR/kW global footprint Wholesale continues to move downmarket Shift to distributed hybrid clouds makes interconnection a key differentiator Ongoing consolidation as market matures
110 Data Center Best Idea: QTS
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
111 2016: Can the Outperformance Continue?
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
COR 50.7% Data Center 32.9%
EQIX 42.0% Specialized (ex-DC) 12.1%
CONE 41.9% Residential 11.0%
QTS 38.1% Industrial 2.7%
DLR 22.0% Office 1.5%
INXN 10.5% Retail 0.1%
COMP 7.0% RMZ -0.2%
DFT 2.4% Health Care -6.3%
SPX 0.2% Diversified -6.9%
RMZ -0.2% Hotel & Resort -20.1%
-10% 0% 10% 20% 30% 40% 50% 60% -30% -20% -10% 0% 10% 20% 30% 40%
Percentages reflect total returns Source: FactSet and SNL data
112 AFFO Multiples Have Converged
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
Relative P/AFFO Multiples 22.0x 3.0x Hist. Avg. = -1.6x 21.0x 2.0x Discount vs. RMZ 20.0x 1.0x 19.0x 0.0x 18.0x -1.0x 17.0x -2.0x 16.0x -3.0x 15.0x -4.0x 14.0x
13.0x -5.0x DC-RMZ Spread DC REITS 5-yr DC Average
12.0x -6.0x
Jun-12 Jun-13 Jun-14 Jun-11 Jun-15
Oct-11 Oct-12 Oct-15 Oct-13 Oct-14
Apr-13 Apr-14 Apr-15 Apr-11 Apr-12
Feb-11 Feb-15 Feb-12 Feb-13 Feb-14
Dec-10 Dec-15 Dec-11 Dec-12 Dec-13 Dec-14
Aug-11 Aug-12 Aug-13 Aug-14 Aug-15
Source: FactSet and Stifel research
113 Growth & Value Creation Potential
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
External 2016E Cost of Capital Implied Internal Growth Growth/Development Rating AFFO Advantage Cap Rate 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. Source: Stifel Research
114 Net Asset Value
Implied Cap Rate Premium / Discount to NAV
10.0% 15% LQA NTM 11.8% 12.0% LQA NTM 9.2% 9.3% 10% 9.0% 8.7% 8.4% 8.2% 8.2% 4.6% 5% 8.0% 1.0% 1.0% 7.3% 7.2% 0% 7.0% 7.0% 6.9% 7.0% 6.5% -5% -3.4% 6.0% 6.0% -10% -8.3% -10.5% -11.3% -10.8% 5.0% -15%
-16.6% 4.0% -20% COR DLR CONE EQIX QTS DFT COR DLR CONE EQIX QTS DFT
Note: DLR, CONE, and QTS figures have been adjusted to reflect recent acquisitions Source: FactSet Research Systems and Stifel estimates
115 Dividend Yield vs. BBB Index
5.5 2.0
1.5 5.0 1.0 4.5 0.5
4.0 0.0 Yield (%) -0.5 Spread (%) 3.5 -1.0 3.0 -1.5
2.5 -2.0 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15
Spread vs. BBB (right) DC Yield (left) DC 5-YR Avg. Yield
Source: FactSet Research Systems and St. Louis Federal Reserve
116 Revenues by U.S. Metro
100% 4% 6% 10% 4% 90% 16% 7% 28% 38% 80% 10% 10% 27% 42% 70% 8% 13% 14% 60% 8% 3% 17% 4% 50% 24% 8% 11% 40% 28% 12% 66% 22% 12% 30% 4% 19% 7% 20% 12% (1,000) 27% 10% 21% 17% 22% 15% 0% QTS COR CONE DFT* EQIX* DLR (1,500)
NoVa NY Metro Silicon Valley Chicago LA Dallas Atlanta Houston Other
*451 Research estimates Source: 451 Research, company reports and Stifel Research
117 John W. Guinee, III [email protected] 443-224-1307
118 Typical CBD Office Bldg. Trophy Office Tower 750K SF Industrial Bldg. 400K SF Industrial Bldg.
768,000 SF Class A Industrial Warehouse 423,500 SF Class A Industrial Warehouse 534,918 SF Class A Office 1,561,277 SF Class A Office Office Industrial 200K SF Industrial Bldg.
350K SF+ 12-13 Story Office Office & 216,752 SF Class B Industrial Industrial Warehouse 655,000 SF Class A Office Flex 60K SF Flex Bldg. Continuum
150K SF 4-6 Story Office Bldg. with structured parking
63,263 SF Class B Flex
120K SF 4-Story Office Bldg. 60K SF 2-Story Office Bldg. with surface parking 40K SF 1-Story Office Bldg.
152,242 SF Class A Office
Source: CoStar data, Stifel estimates 60,000 SF Class B Office Bldg 120,000 SF Class A Office Bldg 38,618 SF Class B Office Bldg
119 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
120 2015 Office REITs – Total Returns
B B H H S B H H B S B B H B H H H S H
Gateway City Averages Low Barrier Overweight Underweight
Source: FactSet Research Systems, SNL Financial and Stifel B = Buy, H = Hold, S = Sell 121 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
Sources: Company data and Stifel estimates 122 Investment Rating: B -- Buy, H -- Hold, S -- Sell, NR -- Not Rated Gateway City – Market Fundamentals
Gateway Cities Office Markets Third Quarter 2015 - Class A & B Current Vacancy plus Construction in Progress Sort
Quarter/Quarter Vac. + Const. Change Stock Under Construction Yr/Yr Vacancy Change 2Q15 Vacancy 3Q15 Vacancy 1 2 2 Metro Companies (MM) SF Const. (MM SF) % of Stock 3Q14 3Q15 Chg + Construction + Construction Chg 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 123 Growth & Value Creation Potential
External Cost of Capital Implied 2016 FFO Internal Growth Rating Growth/Development Advantage Cap Rate 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 124 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
125 John W. Guinee, III [email protected] 443-224-1307
126 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
127 2015 Industrial REIT Total Returns
B B B B B B H S
Source: FactSet Research Systems, SNL Financial and Stifel B = Buy, H = Hold, S = Sell
128 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%
Sources: Company data and Stifel estimates
Investment Rating: B -- Buy, H -- Hold, S -- Sell, NR -- Not Rated
129 Industrial – Market Fundamentals
Primary Distribution Markets Third Quarter 2014 Third Quarter 2015
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%
Barrier to Entry Industrial Markets Third Quarter 2014 Third Quarter 2015
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% Totals / Weighted Averages 2,990 13.1 0.4% 7.4% 14.6 0.5% 6.6%
Energy Driven Secondary Markets Third Quarter 2014 Third Quarter 2015 Totals / Weighted Averages 1,413 13.8 1.0% 6.6% 19.3 1.4% 6.7%
Secondary Industrial Markets Third Quarter 2014 Third Quarter 2015 Totals / Weighted Averages 3,957 31.8 0.8% 9.0% 32.7 0.8% 8.1%
1 Cells highlighted: for Construction % of Stock > 1.2%; Q/Q Change in Vac. + Const. > 2% or >-2% Source: CoStar data
130 Growth & Value Creation Potential
External Cost of Capital Implied 2016 FFO Internal Growth Rating Growth/Development Advantage Cap Rate 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
Source: Stifel estimates
131 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
132 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
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133 Important Disclosures & Certifications
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