REITs It is All Relevant

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					REITs 3.0: Rebooting
It’s All Relative




2010 Real Estate Securities Outlook
January 2010




David M. Fick, CPA   dfick@stifel.com       443-224-1308
Jerry L. Doctrow     jldoctrow@stifel.com   443-224-1309
John W. Guinee       jwguinee@stifel.com    443-224-1307
Nathan Isbee         nisbee@stifel.com      443-224-1346
Rod Petrik           rpetrik@stifel.com     443-224-1306
REITs 3.0
2010 Real Estate Securities Outlook



   Baltimore 1/5               Chicago 1/6                  Boston 1/7                  New York 1/8




 Philadelphia 1/11             London 1/13               Amsterdam 1/18




                                                                                                       2
           All relevant disclosures and certifications appear on pages 120-121 of this report.
Stifel REIT Research Team


    Senior Real Estate Securities Analysts

        David M. Fick, CPA     REITs, Retail, Industrial, Commercial Finance
        Jerry L. Doctrow       Healthcare
        John W. Guinee         Office
        Rod Petrik             Multifamily, Lodging
        Nathan Isbee           Retail


    The Stifel Nicolaus Real Estate Securities Team

        Josh Barber            Associate Analyst, Industrial, Commercial Finance
        Dan Bernstein, CFA     Associate Analyst, Healthcare Real Estate
        Simon Yarmak           Associate Analyst, Multifamily, Lodging
        Erin Aslakson          Associate Analyst, Office
        Jennifer Hummert       Associate Analyst, NNN, REITs
        Deb Johnston           Real Estate Group Administrator


                                                                                   3
REITs Rebound in 2009




                                                                              4
    Equity REIT Total represents returns from Stifel Nicolaus REIT Universe
    Source: Factset Research Systems Inc., Stifel Nicolaus Research
2009 – Crisis Victim to Crisis Beneficiary

   •   Two years of financial upheaval
        – Investors dusting off, trying to figure out what to do with remaining assets
        – We believe this is good for REITs, which have an answer
   •   REITs up 28.6% in ‟09 vs. down 38% in ‟08, down 16.8% in ‟07, up 35.9% in ‟06, up
       0.2% over 5 yrs
   •   Comparable to overall market gains for 2009:
        – S&P 500 up 23.5%
        – Dow industrials up 18.8%
        – NASDAQ up 43.9%
   •   Most volatile year in REIT history, down 32.7% through March, up 91.2% since then
        – Only four prior years with losses: 1998 (16.9%); 1999 (4.6%); 2007 (16.8%),
          2008 (38%)
   •   Stock picking beat sector allocation - every sector had outperformers
        – 8 REITs had total returns above 100%
        – 57 REITs gained more than 20%
        – Big caps underperformed – 30 large caps in RMP gained 24.9%

                                                                                           5
REITs Rebound – Over the Top

   •   2/5/07 – REITs top out at RMZ 1,212
   •   6/11/07 – Stifel publishes “Going to REIT Beach for the Summer” – RMZ 1,055
   •   Oct & Nov 2008 – REITs capitulate, bottom on 11/20/08 – RMZ 325 (intraday)
   •   11/26/08 – Stifel publishes “Reasonable Credit for Reasonable Borrowers...” – RMZ 419
   •   December 2008 – REITs rally – close at RMZ 509
   •   1/09 – Stifel predicts 20% up year for REITs in ‟09
   •   January & February ‟09 – REITs capitulate again, Simon announces stock dividend
   •   3/6/09 – RMZ bottoms at 272, down 47% ytd
   •   3/20/09 – Simon Property Group sells 15M shares @ $31.50, $650M bonds at 10.75%
   •   Spring 2009 - Shorts cover – many equity offers & dividend cuts ensue
   •   5/7/09 – Simon Property Group sells 20M shares @ $50.00
   •   6/8/09 – Stifel publishes “Dilution is Forever”
   •   8/6/09 – Simon Property Group issues $500M of bonds at 5.46%
   •   12/31/09 – RMZ closes at 616, up 126% since 3/6/09 and 21% for the year
   •   We believe REITs are fully valued – trading above NAV with a 4% average yield
                                                                                           6
Stifel‟s 2009 REIT Predictions Retrospective                   J
       J   Debt markets would show the way

               – Reasonable Credit for Reasonable
                 Borrowers on Reasonable Terms
       J   Predicted Total Return:
               – 20%
               – RMS 726 (605.17 at 2008 year-end)

       K   We thought Office, Industrial & Grocery-Anchored Shopping
             Centers would outperform
       J   Stock picking would beat sector allocation
       K   Stocks with increasing dividends would outperform again


       J   More dividend cuts for equity REITs – at least 10

                                                                       7
S&P 500 REIT Performance Tightened in „09




  DDR was removed
  from the S&P 500 on
  3/27/09.
  HCN was added to
  the S&P 500 on
  1/30/09.
  VTR was added to
  the S&P 500 on
  3/4/09.
    Source: SNL Financial
                                            8
Equity REIT M&A Activity ‟04-‟09




                                   9
Sector Funds Flows Don‟t Tell the Story




      Source: Stifel Nicolaus, LIPPER
                                          10
REIT Volatility Moderates




    Source: SNL Financial, Stifel Nicolaus




                                             11
REIT Volatility Levels Out




     Last day with a 5% movement was 9/1/09
     Sources: SNL Financial, Stifel Nicolaus


                                               12
When Dividend Spreads Don‟t Make Sense… They Will




                                                    13
Dividend Increasers Equal the Market




    *Includes stocks that maintained regular dividend and paid a special dividend (NHI)
    Dividend decreasers include companies that paid their dividends as a portion of cash and stock.
    Source: Factset Research Systems Inc., SNL Financial, Stifel Nicolaus

                                                                                                      14
Liquidity Pressures Drive Equity REIT Dividend Cuts




                                                      15
2009 REIT Dividend Cuts




                          16
Stock Dividends – Never Caught On




                                    17
CMBS Struggled But Cap Rates Only Inched Up




                                              18
The Most Amazing Chart in Business History




                                             19
REITs Recapitalize Equity in 2009




                                    20
REITs Recapitalize Debt in 2009




                                  21
How Much Will Dilution Weigh on Growth?
               REIT Equity Offerings ’04-’09




                                               22
Lending Remains Sluggish




                           23
Ramifications of Saving–What is the New Normal?




                                                  24
Can REITs Take Advantage of CRE Debt Maturities?




                                               25
Debt Levels Not Sustainable




                              26
Things We Know
   •   For now, “land is worth zero” and will be a drag on rents
   •   REITs trade at cap rates that imply something more than NAV:
        –   Average implied cap rate at 12/31/09 for SF coverage is 7.2%
        –   Implied cap rate at zero equity is 20.3%
        –   Shares trade at a 17.5% premium to our NAVs
              •   But real estate is being re-priced

   •   Debt markets are finding a „new normal‟
        –   Index interest rates are at historically low levels
        –   Spreads are in, but still wide
        –   Stability may take a long time

   •   Fundamentals are deteriorating for all sub-sectors, except maybe hotels
   •   Investors are still dealing with recession, housing values dropping, curtailed
       consumer credit and spending, jobs evaporating
   •   REIT investors get a dividend & dividend growth over the long term
   •   Recession duration, debt markets will control the outcome

                                                                                        27
Things We Don‟t Know
    •   How much more liquidity will flood into the debt markets?
    •   How bad will the recession be?
         – 3-4 quarters or 3-4 years?
         – 10% unemployment or worse?
    •   What else will the government pull out of its sleeve?
    •   Will the Obama agenda be enacted?
    •   How far will commercial real estate values recover?
    •   Will NAVs drive investor decisions or will growth outweigh value?
    •   Are the hedge funds losing interest in a $190 billion sector? (will there be hedge
        funds?)
    •   How many blind pool REITs will get priced?




                                                                                             28
2010 Stifel REIT Theme

    Be Happy
    •   Virtuous Cycle
         –   Optimism begets success, begetting more optimism & success
         –   Opposite of death spiral & frozen markets

    •   REITs 3.0
         –   REITs 1.0 - Pre-1991 – Who cares about an $8 billion sector?
         –   REITs 2.0 – 1991 to 2009 - Crisis to Growth to Consolidation and Crisis – Lessons Learned
         –   REITs 3.0 – 2010 to ?
                •   Stability,
                •   Low leverage,
                •   Simplicity – the basics,
                •   External growth through spread investing (forget value creation, growth buckets),
                •   Blind Pools & Returning Heroes



    Be Careful
    •   No one knows what it means to have a recovery based on government spending
    •   The search for yield may push values ahead of fundamentals
    •   REITs may retrench in 2010 when economic reality and fundamentals combine with rising interest rates




                                                                                                               29
                              Stifel Nicolaus 2010 REIT Sector Analysis & Weighting Recommendations
                                                                                             Multi-                   Health      REIT
                                            Office             Industrial       Retail       Family         Lodging    Care      Sector
2009 Total Return                             44.3%                   11.2%      84.7%         30.8%         68.1%     26.3%      46.9%
5 Yr Total Return                             0.5%                   -10.6%      1.0%          4.0%          -4.8%     11.5%       3.0%

Key Drivers                                    Jobs                   GDP,      Consumers   Jobs, Housing     GDP       HC         Debt
                                                                    Cap Rates                                         Spending    Markets,
                                                                                                                                 Cap Rates
Fundamentals
Demand/Supply
                                                                                                                              
NAV Direction – ’10
                                                                                                                              
12/31/08 Div. Yield                           7.8%                    7.1%        8.2%         7.3%           7.7%     6.7%        8.6%
12/31/09 Div. Yield                           4.0%                    4.8%        2.6%         4.4%           1.6%     5.8%        4.0%

Expected Dividend Direction
                                                                                                                              
Expected ’10 FFO Multiple
Direction
                                                                                                                              
FFO Growth – ’10E                             -9.7%                   1.0%        2.0%         -10.8%        -35.3%    3.3%       -3.5%

FFO Growth – ’11E                             3.6%                    3.0%        1.3%         3.5%          33.9%     7.3%        7.4%

Est. Total Return – ’10                       0.0%                   -7.5%        5.0%         5.0%          15.0%     12.0%       5.0%

Stifel Sector Weight – '09
                                                                                                                              

Stifel Sector Weight – ‘10                                                                                                   
Stock Pick Keys = Liquidity, earnings drivers, value
Key Variable = Interest rates, cap rates, debt markets
REIT Sector returns are returns for Stifel Nicolaus REIT Universe




Source: SNL, Stifel Nicolaus Research                                                                                                   30
Our 2010 REIT Sector Predictions


    •   Debt markets will continue to show the way

         – Reasonable Credit for Reasonable Borrowers on Reasonable Terms

    •   Total Sector Return:
         – 10% up to June 30; 5% for the year (essentially dividend only)

         – RMS 817 (12/31/09 = 778)

         – We think Healthcare and Hotels will outperform and Industrial and
            Office will underperform

    •   Stock picking will beat sector allocation

    •   Stocks with increasing dividends will outperform

    •   Many more dividend increases than cuts for equity REITs
         – Starting with SPG in 1Q10 – will alone move the sector yield 40 bps

                                                                                 31
It‟s All Relative – Stifel Nicolaus REIT Portfolio

      •   REITs are expensive and we are cautious for 2010
      •   Stifel Nicolaus‟ current three-tiered rating system (Buy, Hold, Sell) is based on
          performance compared to the S&P 500
           – As such, REITs are rated ‘Hold’ when their valuations are full
      •   Some Hold-rated REITs are likely to outperform the REIT index, while other Hold-rated
          REITs are likely to under-perform the REIT index (without warranting „Buys‟ or „Sells‟
          under Stifel‟s current three-tiered rating system)
      •   Stifel introduces a new REIT Portfolio with Weightings within the Hold-rated group of
          REITs
           – Over-Weight, Equal-Weight, Under-Weight
           – Relative to the RMZ/RMS index
           – Roughly equal market-cap-weights for Over-Weight, Equal-Weight, &
              Under-Weight
      •   Attempts to answer the question – “If you are going to own a REIT portfolio, which
          Hold-rated REITs would you over-weight or under-weight now?”
           – WRI example: We think WRI is expensive at $20 and would prefer buying at
             $17. We don’t see WRI outperforming the S&P by 20% but think it will beat
             our 5% return prediction for REITs. Therefore, we rank WRI Over-Weight.
                                                                                                  32
It‟s All Relative – Stifel Nicolaus REIT Portfolio – Over-Weight




        Source: Factset Research Systems, SNL Financial, Stifel Nicolaus

                                                                           33
It‟s All Relative – Stifel Nicolaus REIT Portfolio – Equal-Weight




     Source: Factset Research Systems, SNL Financial, Stifel Nicolaus   34
It‟s All Relative – Stifel Nicolaus REIT Portfolio – Under-Weight




       Source: Factset Research Systems, SNL Financial, Stifel Nicolaus
                                                                          35
It‟s About Income – Stifel Nicolaus REIT Income List




                                                       36
 Industrial REIT
Sub-Sector Review
        David Fick
     dfick@stifel.com
      443-224-1308
Domestic Port Volumes Decline




    Source: American Association of Port Authorities, TTX, and Stifel Nicolaus Transportation Research estimates




                                                                                                                   38
West Coast Ports Continue to Feel the Impact….




    Sources: Port of Long Beach, Port of L.A., Port of Oakland, Port of Portland, Port of Tacoma, Port of Seattle, Stifel Transportation research estimates
    YTD through September 2009
                                                                                                                                                              39
…And East Coast Ports are No Longer Immune




   Source: American Association of Port Authorities, Georgia Port Authority, Port of NY & NJ, South Carolina Port Authority, Sti fel Transportation Research Estimates
   YTD through October 2009
                                                                                                                                                                         40
Warehouse Vacancies Continue to Increase




                                           41
Warehouse Landlords Lose Pricing Power




                                         42
Warehouse Rents Under Pressure




                                 43
Warehouse Net Absorption Goes Negative




                                         44
Industrial REITs: Challenging Fundamentals
   • Focus is now on development pipelines
       – AMB‟s 16.8 million sf pipeline (in-progress and completed) is 37.3% leased
       – PLD‟s 55.3 million sf pipeline (in-progress and completed) is 58.3% leased

   • Land remains a big value overhang
       – AMB has 2,515 acres valued at $575 million
       – PLD has 10,417 acres valued at $2.7 billion

   • Leasing activity has increased, but rents remain under pressure
       – 2Q rents down 2.5%-12.6%; 3Q rents down 10.3%-14.7% (AMB/PLD)
       – ~12% of leases expire in 2010

   • We remain skeptical of “hockey stick” rent spikes in the future
       – U.S. “B/C” product viable at the right price; functional obsolescence is overrated
       – Despite little new construction, vacancy is high, and absorption is negative
       – Reduced consumer spending and better supply chains keep inventories low



                                                                                         45
Industrial & NNN REIT NAV Sensitivity




Sources: Factset Research Systems, SNL Financial, Stifel Nicolaus estimates




                                                                              46
Underweight Industrial REITs in 2010

•   AMB and PLD re-built their balance sheets in 2009
    – Large & dilutive equity offerings

    – Accessed the unsecured debt markets at sub-8% pricing

•   Debt maturity worries have dissipated

•   Expect some positive news as the pipelines lease up, albeit at low rents

•   Both are expensive and ahead of fundamentals
    – AMB trades at a 7.1% cap rate, PLD at a 7.7%, assuming 10%-15% loss on
       development and 30% loss on land

    – PLD trades at 17.3x „10 FFO, 4.4% dividend yield

    – AMB trades at 19.1x „10 FFO, 4.4% post-cut yield




                                                                               47
 Lodging REITs
Sub-Sector Review
        Rod Petrik
    rpetrik@stifel.com
      443-224-1306
Lodging – Things We Think We Think

    • Supply peaked in 2009 but in check through 2015
    • Demand fell 10%, should be up in 2010
    • Occupancy stabilized
    • Rate declines slowing
    • Asset values down 35%-50% since 2007
    • Balance sheets recapitalized
    • Lodging REITs have access to capital
    • Premium placed on REIT structure


                                                        49
Annual Supply Growth Down




      Source: Smith Travel Research, Stifel Nicolaus Estimates

                                                                 50
Occupancy Trends Stabilizing




    Source: Smith Travel Research, SNL, Stifel Nicolaus Estimates

                                                                    51
Room Rate Declines Slowing




     Source: Smith Travel Research, SNL, Stifel Nicolaus Estimates

                                                                     52
RevPAR Declines Decelerating




     Source: Smith Travel Research, SNL, Stifel Nicolaus Estimates


                                                                     53
$13 Billion Could Chase Hotel Assets




     Source: FactSet Research Systems Inc., Company Reports, Stifel Nicolaus Estimates

                                                                                         54
Net Debt to 2010 EBITDA




    Source: Stifel Nicolaus Estimates, FactSet Research Systems Inc.


                                                                       55
Lodging – 2010 Best Ideas

    DiamondRock Hospitality (DRH)
      •   Trades $175K per room
      •   Well below replacement $275K
      •   5 gateway markets 61% of EBITDA
      •   No near-term maturities
      •   Simple structure – no preferred, minority interest, JV‟s.
      •   $370 million of liquidity and 10 out of 20 hotels unencumbered
      •   Positioned to take advantage of distressed asset opportunities
    Host Hotels & Resort (HST)
      • Trades at $192K per room
      •   Well below replacement $325K
      •   $1.8 billion of liquidity and 101 hotels unencumbered
      •   Sound management team
      •   Positioned to take advantage of distressed asset opportunities


                                                                           56
 Multifamily REITs
Sub-Sector Review
        Rod Petrik
    rpetrik@stifel.com
      443-224-1306
Multifamily - Things We Think We Think

    • Occupancy is high despite job losses
    • Street rents could be stabilizing
    • New construction has come to a screeching halt
    • Fannie & Freddie are still very active
    • Cap rates have backed up since September
    • Property values are down 30%-40% from 2007
    • Recovery will depend on jobs
    • 2011 at best, 2012 on West Coast
    • Demographics should be strong


                                                       58
New Multifamily Supply In Check




     Source: Property & Portfolio Research Estimates, Stifel Nicolaus Estimates

                                                                                  59
But Housing Inventories Still High




     Source: Census Bureau, U.S. Department of Commerce, Stifel Nicolaus Estimates

                                                                                     60
Housing Becoming More Affordable




     Source: Census Bureau, U.S. Department of Commerce, Stifel Nicolaus Estimates

                                                                                     61
Rent Growth Negative Again in 2010




      Source: Property & Portfolio Research Estimates, Stifel Nicolaus Estimates
                                                                                   62
Recovery Depends on Jobs




      Source: BLS, Stifel Nicolaus Estimates
                                               63
Demographics Favorable




      Source: BLS, Stifel Nicolaus Estimates
                                               64
Multifamily Multiples vs. REIT Average




    Source: SNL, Company Reports, Stifel Nicolaus Estimates


                                                              65
Apartment REITs Implied Cap Rates




    Source: FactSet Research Systems Inc., Stifel Nicolaus Estimates


                                                                       66
Upper-End NAV Ranges of Apartment REITs




    Source: FactSet Research Systems Inc., Stifel Nicolaus Estimates


                                                                       67
Multifamily – Equal-Weight in 2010

    Over-Weight Essex Property Trust (ESS)
      • West Coast real estate portfolio characterized by limited new supply
        and low single-family affordability
      • California continues to be out of favor with investors
      • Underperformed sector average (1570 bps) in 2009 with a total
        return of 15.6%
      • 6.1% implied cap rate, in-line with recent property sales in its
        markets, well above AVB
      • Prudent capital allocators
      • Debt/EV of 40.0% is 2nd lowest in group
      • Dividend yield of 4.9%, 60 bps above the group average
      • Good management team




                                                                               68
Healthcare Real Estate
 Sub-Sector Review
       Jerry L. Doctrow
    jldoctrow@stifel.com
        443-224-1309
Healthcare Real Estate - Things We Know

    • HC real estate fundamentals better than commercial

    • $38.0B mkt. cap HC real estate sector (REITs + Sr. Hsg
      Operators) could double in size in 2-3 years

    • Potential go-public, M&A transactions
       – OpCo/PropCos/REIT TRS - Manor Care, Golden Living, Sava,
          Formation/Genesis, NorthStar Healthcare Investors

       – REITs – Phase 2&3 OHI/Capital Source, Healthcare Trust of
          America, Aviv, Lillibridge

       – Opcos/Management – Emeritus/Sunwest, Sunrise, Atria




                                                                     70
Factors Driving HC Capital Markets Activity

    • Clarity on healthcare reform

    • Much improved equity valuations/lower interest rates

    • Better multiples for HCREITs than OpCos with real
      estate

    • Plentiful access to capital for HCREITs

    • Looming debt maturities 2 – 5 years out for 2004 –
      2007 go private transactions



                                                             71
HC Real Estate - Things We Don‟t Know

    • How Sr. Housing performs in protracted downturn?

    • How healthcare reform plays out?

    • How aggressively HCREITs step up investment?

    • Will market accept OpCo in REIT/TRS format?




                                                         72
HC REITs - Attractive Relative Yield




          Sources: Factset Research Systems, Stifel Nicolaus Research
                                                                        73
HC REITs - Low Debt Levels




     Sources: Factset Research Systems, Stifel Nicolaus Research

                                                                   74
HC REITs - Competitive Growth Rates




      Sources: Factset Research Systems, Stifel Nicolaus Research
                                                                    75
HC REITs - Attractive Relative Value




         Sources: Factset Research Systems, Stifel Nicolaus Research
                                                                       76
HC REITs – Shares Trade At Highest NAV Premium




      Sources: Factset Research Systems, Stifel Nicolaus Research   77
SH Operators – Strong CFFO Per Share Growth




    Source: Stifel Nicolaus Research
                                              78
Overweight Healthcare Real Estate In 2010

    • Only sector that may see rent growth in 2010

    • Better yields/balance sheets/lower valuation

    • Capital markets activity will create interest

    • Healthcare will likely continue to grow share of GDP

    • HC REITs should be able to increase investments

    • SH Supply/Demand Fundamentals Much Improved




                                                             79
Two Strategies for HC Real Estate Investors


 Defensive                    Offensive
 • Buy HCREITs                •   Buy SH Operators / TRS
 • 3-9 month holding period       REITs
 • Consider IPOs              •   12 month + holding
 • Rotate out if economic         period
   recovery strengthens       •   Invest for an economic
                                  recovery, improved
                                  supply/demand in 2H10


                                                           80
HC Real Estate – 2010 Best Ideas
      HC REITs:
         Ventas Inc. (VTR) $43.74 - Buy
         – Best growth among Big 4
         – Potential upside from senior housing operating assets
         – Potential consolidator


      SH Operators:
        Emeritus (ESC) $18.75 - Buy
         – Need-driven assisted living (AL) provider
         – Attractive supply/demand fundamentals
         – Benefits from consolidation


                                                                   81
  Retail REITs
Sub-Sector Review
     Nathan Isbee
  nisbee@stifel.com
    443-224-1346

     David Fick
   dfick@stifel.com
    443-224-1308
U.S. Consumer Remains Under Pressure

  • Economy losing jobs
  • Headline unemployment 10%
     – Real unemployment above 17%

  • Home foreclosures rising
  • Personal savings rate rising
  • Household debt near all-time highs
  • Home equity cash-out minimal




                                         83
Consumer Weighed Down By Housing




                                   84
And Credit Card Debt




           Source: Company Reports, Stifel Nicolaus


                                                      85
Mall REITs – Things We Know

    • Low retailer bankruptcies
    • Mall fundamentals better than expected
    • Well-capitalized retailers
    • Consumers don‟t need mall products
    • Sales comps leveling out
    • Job market affects discretionary spending first
    • Long-term leases buffer REITs - third derivative
    • Limited supply; No spec construction



                                                         86
Mall REITs – Things We Don‟t Know

    • Will bankruptcies pick up?
    • Will REITs maintain pricing power?
    • How far will SPG‟s rent spreads decline?
    • Will department stores contract units?
    • When will the consumer economy rebound?
    • Is consumer spending cyclical or secular?
    • Are Internet sales bigger than we think?
    • How will major transactions play out – especially GGP?


                                                          87
Limited & Declining Mall Supply


   • 2,400 regional malls built from 1954 to early 2000s

   • About 1,200 regional malls still exist

   • No new regional malls planned (Xanadu?)




                                                           88
Retailer Bankruptcies Cyclically Low




    Source: ICSC, Retail Maxim, Stifel Nicolaus Research
                                                           89
Dept. Stores Biggest Unknown




Source: Company Reports




                               90
Higher Quality Mall Sales Decline More


                 3Q09 Sales PSF   3Q09 Same Store Sales Growth




   Source: Company Reports




                                                                 91
 Who Can Go On Offense? – Regional Malls




Source: SNL Financial, Stifel Nicolaus Research




                                                  92
Regional Mall Outlook/Thesis

    • Moderate occupancy loss, rent pressure

    • High quality, low occupancy costs = best positioned

    • Outlet center cross-marketing = leasing leverage

    • GGP situation setting up as positive for mall sector

    • Reasonably priced secured debt will remain available
      on viable assets

    • High Quality Names Expensive



                                                             93
Equal-Weight Mall REITs

    –   Highest Quality Mall REITs – Paying A Price For Stability
        – SPG 6.5% Implied cap rate
        – MAC 6.9% Implied cap rate

    –   2nd/3rd Tier Mall REITs – Cheaper With More Risk
        – CBL 9.2% Implied cap rate
        – PEI 9.6% Implied cap rate
        – GRT 9.8% Implied Cap rate
        – GGWPQ 8.1% Implied Cap Rate




                                                                    94
Shopping Center REITs – Things We Know


    • Grocery centers not defended as in prior cycles

    • Mid/junior box space battling oversupply

    • Leasing rebounding – flight to quality

    • Rents under pressure

    • Weakness concentrated in bad housing markets

    • Development is dead for a long time

    • Discount retailers benefiting


                                                        95
Shopping Center REITs – Things We Don‟t Know


     • Will small shop vacancies level out soon?
     • Which big/mid box retailers will go bankrupt?
     • Will DIP financing allow retailers to avoid liquidation?
     • Will there be replacement big box retailer demand?
     • Can REITs put capital to work?
     • Will cap rates contract further?
     • More development write-downs?




                                                                  96
Big/Mid Box Oversupply


  • Weakest tenants drive first closure wave

  • REITs “work” with viable tenants

  • Kmart, Wards, etc. closures quickly re-filled as Wal-
    Mart, Target, Lowe‟s, Home Depot expanded

  • Too few replacement tenants for too many spaces




                                                            97
Every Category Has a Winner And ………

 Retail Category                        Winner                   Loser

 Books                                  Barnes & Noble/Amazon    Borders

 Consumer Electronics                   Best Buy, hhgregg        Circuit City

 Discounters                            Wal-Mart, Target         Kmart, Sears

 Home Furnishings                       Bed Bath & Beyond        Linens„n Things, Pier 1

 Office Supplies                        Staples                  Office Depot, Office Max

 Sporting Goods                         Dick's                   Sports Authority

 Video Rental                           Netflix/Red Box          Blockbuster

 Food                                   QSR,Specialty, Grocery   Full Service, Gourmet


                                                                                      98
     Source: Stifel Nicolaus Research
Shopping Center Outlook/Thesis

    • Occupancy losses will stabilize by mid-year

    • Few bad debt surprises

    • Rents will continue declining

    • REITs will benefit from best-in-market assets

    • Small wave of external acquisitions

    • Lower cap rate transactions


                                                      99
Who Can Go On Offense – Shopping Centers




Source: SNL Financial, Stifel Nicolaus Research




                                                  100
Shopping Center REITs


    Over-weight: Weingarten Realty (WRI)

    – Minimal development risk

    – Balance sheet primed for acquisitions

    – Stabilizing fundamentals

    – Well-covered 5.1% dividend yield




                                              101
  Retail REIT NAV Sensitivity




Sources: Factset Research Systems, SNL Financial, Stifel Nicolaus Estimates




                                                                              102
  Office REITs
Sub-Sector Review
   John W. Guinee, III
  jwguinee@stifel.com
     443-224-1307
What We Know
   • What we know:
     – 2009 44.3% return for office REITs vs 28.6% for the RMS
     – Volatile returns; 118%-(40%) vs 2008 at 2%-(95%)
     – For FFO growth – Flat is the new Up
     – Little development after 2009 deliveries
     – Vacancy nationally will top 21% by late 2010 (source:
       PPR 3Q09)
     – Embedded roll ups disappeared
     – We expect no rent traction in 2010-2012; slow
       concession burn-off
     – Landlords are ‘buying occupancy’ with sizeable
       concession packages




                                                             104
What We Don‟t Know

    • What we don‟t know:
       – When will Midtown Manhattan reach equilibrium?
       – Will job growth return, halting carnage?
       – Will property-level NOI decline substantially over time?




                                                                    105
Office REITs – NAV Sensitivity




                                 106
Office REITs –Implied Capitalization Rates




                                             107
2010 Office REIT FFO/FAD Projections




                                       108
Stifel‟s Office Replacement Cost Study

       Goals:
       • Complement Net Asset Value estimate
       • Provide key private market investment metric
       • Indicate potential rent spikes
       • Understand office and residential trade-off
       • Quantify functional obsolescence
       • Estimate downside protection




                                                        109
Replacement Cost Breakdown & Comparison



                   $1,264




                                         $845




                                                    $450

                                                                   $293
                                                                            $230           $230




                                   High Rise                Mid Rise w/            Low Rise w/
                                                           Structured Pkg          Surf ace Pkg


   Source:Company Data, Stifel Nicolaus Estimates

                                                                                                  110
Office REIT Replacement Cost – Per SF




                                        111
Leasing Market Dynamics

   •   REITs fare well relative to private owners as
          1.   Portfolios are generally A quality,
          2.   Local leasing teams are good, assessing every deal
          3.   Have re-leasing capital, and
          4.   Landlords of choice in their core markets
          5.   HOWEVER, buying occupancy and face rate roll-
               downs are now real
   •   Landlords have:
          1. Pricing power in a 7% vacant market,
          2. Pricing power in Class A properties in 10% vacant
             markets, and
          3. Virtually no pricing power when a market is 15%+
             vacant.
          4. Carnage at over 20% vacant

                                                                    112
Long, Slow Office Recovery




     •   Vacancy hit 18% in 2003, 20% at 3Q09 and is expected to rise to 21%+ in 2010
     •   PPR projects 2009/2010 office using job losses will total 1mm and 109k, respectively
     •   PPR forecasts an average of 417k office jobs will be created annually 2010-2014
     •   Order of operations: office using job growth turns positive, occupancy firms, concessions
         fall, occupancy rises, rental rates increase, NOI increases
                                                                                                     113
Office Market Fundamentals

    20 markets with largest total Vacancy + Construction %




                                                             114
Office Market Fundamentals

    20 markets with smallest total Vacancy + Construction %




                                                              115
Manhattan Market Overview

  Y-o-Y                                                                                         6-Month
 Trend Statistics                                     Nov. 2009       Oct. 2009   Nov. 2008     Outlook

 48%      Vacancy                                             9.3%        9.2%         6.8%      Increase

 47%      Availability                                       14.7%       14.6%        10.3% Increase/Flat

 37%      Sublease Space                                   16.0 MSF   16.1 MSF     10.1 MSF Increase/Flat

 23%      Class A Asking Rent                                $67.32      $70.03      $87.19     Decrease

 20%      Class A Sublet Asking Rent                         $50.75      $51.55      $63.46     Decrease

 33%      Class A Net Effective Rent                         $51.86      $52.54      $77.17     Decrease

 15%      Leasing Velocity                                 19.9M SF   18.7M SF     23.5M SF          Flat

 84%      Investment Volume                                   $2.4B      $2.3B       $15.1B          Flat
       Source: Grubb & Ellis; reprinted with permission.                                               116
Investment Sales Market

    •   Manhattan & Core Assets
         – More capital than deals

         – Sellers remember 4.5% cap rates and $1,000/SF deals (Midtown)

         – Buyers will stretch underwriting for low basis

         – No one selling stabilized at 6% and $600 (cap/SF) in Midtown

         – Distressed underwritten to +/- 7% stabilized (and under $600/SF)

    •   Stabilized Suburban
         – Income funds buy at 8.5%-9.0%, pay 6.5%-7.0% dividends

         – No Internal Rate of Return or per square foot concerns

    •   Distressed Suburban
         – Need 15%-20% Levered IRRs

         – Invest cash up front

         – Borrow re-leasing costs as income put in place
                                                                              117
Office REIT Coverage – One Liners

    •   DEI: Most urban portfolio

    •   BXP: 10% average rent roll downs, but low implied cap rates

    •   BPO: Red flags or opportunity

    •   SLG: Manhattan Investment Sales Catalyst

    •   OFC: Hide the pea on occupancy

    •   KRC: Value vs. management

    •   CUZ: Portfolio challenges and G&A outweigh perceived opportunity

    •   MPG: Option value $0.50-$2.00/sh; liquidating trust

    •   HIW: Well positioned, but fully priced

    •   LRY: Great run but believe too big to outperform

    •   CLI: Northern New Jersey and portfolio quality

    •   PKY: Sized to outperform

    •   BDN: Playing defense while IRS finishes
                                                                           118
    •   DRE: Strategy shift; will they execute?
Office REITs – 2010 Best Ideas

    I.   Urban Focus          I.   Urban
         – Job Market              – Brookfield (BPO)
            Recovery               – SL Green (SLG)
         – Net Asset Value         – Douglas Emmett (DEI)
            visibility
         – Global Trade

    II. Value Opportunities   II. Value
                                  – Parkway (PKY)
        – High Implied Cap
                                  – Brandywine (BDN)
           Rate
                                  – Lexington (LXP)
        – Low Multiple
        – High Leverage


                                                            119
                                                Important Disclosures and Certifications

We, David Fick, Rod Petrik, John Guinee, Jerry Doctrow, Nathan Isbee, and Todd Weller, certify that the views expressed in this
research report accurately reflect our personal views about the subject securities or issuers; and we, David Fick, Rod Petrik, John
Guinee, Jerry Doctrow, Nathan Isbee, and Todd Weller, certify that no part of our compensation was, is, or will be directly or
indirectly related to the specific recommendation or views contained in this research report.

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

Stifel Nicolaus Research Department
Stifel, Nicolaus & Company, Inc.
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16th Floor
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Stifel, Nicolaus & Company, Inc.'s research analysts receive compensation that is based upon (among other factors) Stifel Nicolaus'
overall investment banking revenues.
Our investment rating system is three tiered, defined as follows:
      BUY      - We expect this stock to outperform the S&P 500 by more than 10% over the next 12 months. For higher-yielding
                 equities such as REITs and Utilities, we expect a total return in excess of 12% over the next 12 months.
      HOLD - We expect this stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. A Hold rating is
             also used for those higher-yielding securities where we are comfortable with the safety of the dividend, but believe that
             upside in the share price is limited.
      SELL     - We expect this stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock
                 could decline in value.
Of the securities we rate, 37% are rated Buy, 59% are rated Hold, and 4% are rated Sell.
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                                                                                                                                   120
                                                                Additional Disclosures

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