National Association of Real Estate Investment Trusts®

REITs: Building Dividends & Diversification®

1875 I St, NW Suite 600, Washington, DC 20006 • 202-739-9400

January 10

Outlook for the Economy and

Commercial Real Estate

2014 Calvin Schnure

Vice President, Research and Industry

Information

1

Macroeconomic Outlook

Positive Signs for the Year Ahead

• GDP growth accelerated in 2013:H2 – 4.1% growth in Q3 had large inventory contribution

– But final demand firmed in Q4

• Auto sales are strongest since 2007 – Aging vehicles on the road translate into pent-up demand

• Job market continues to gain strength – Trend growth now 200K/ month

• Housing market – In full recovery mode, finally!

2

-10

-8

-6

-4

-2

0

2

4

6

8

2000 2003 2006 2009 2012

GDP growth accelerated in 2013

3

Percent change, annual rate

Source: Bureau of Economic Analysis, Haver Analytics

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 20124

Robust auto sales reflect rising incomes, confidence… and pent-up demand

Million units, seasonally adjusted annual rate

-1000

-800

-600

-400

-200

0

200

400

600

2000 2002 2004 2006 2008 2010 2012

5

Job growth continues to gain momentum

Monthly change in nonfarm payrolls

(Red line is 6-month average)

Source: Bureau of Labor Statistics, Haver Analytics

6

Rising house prices help household net worth and consumer spending, confidence, real estate markets

Source: S&P/Case-Shiller, Haver Analytics

Index 2000 = 100

But how do we know this isn’t another false start?

• GDP growth and the job market have faltered several times in this recovery

– External events: European debt crisis, Japanese earthquake, debt ceiling and govt shutdown

• On the plus side going ahead:

– Consumer deleveraging has reduced debt burden

– Housing markets are showing greater demand

– Drag from government spending is fading

7

14

15

16

17

18

19

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 8

Consumer debt burdens are at decades-low levels

Financial obligations as percent of disposable income

Source: Federal Reserve Board

0

3

6

9

12

15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20129

Builders are selling homes as fast as they can put them up

Median months for sale of new homes

Source: U.S. Census Bureau, Haver Analytics

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

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

State and Local

Federal

10

The drag from government cutbacks is fading

Source: Bureau of Economic Analysis, Haver Analytics

Percentage point contribution to real GDP growth, annual rate

11

Real Estate Outlook

12 0

4

8

12

16

20

2008 2009 2010 2011 2012 2013

Percent Vacancy Rates

Apartment

Office

Retail

Commercial vacancy rates remain high, but trending down

13 -12

-9

-6

-3

0

3

6

2008 2009 2010 2011 2012 2013

Perc

ent,

Annu

alize

d

Rent Growth

Apartment

Office

Retail

Rent growth slowly rising; more recent figures show retail, office accelerating, apartment still solid

0

20

40

60

80

100

120

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

All Properties

Apartment

Retail

Commercial

Office

14

Commercial property prices are recovering.

Commercial property price index, Dec 2007 = 100

Source: Real Capital Analytics, Bloomberg

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Hotel

Industrial

Retail

Office

Apartment

15

Sales activity is rising steadily

Transactions volumes, millions of dollars

Source: Real Capital Analytics, Bloomberg

16

0

10

20

30

40

50

60

70

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Office

Multifamily

Retail

Recent increases in construction still leave activity well below historical trends… supply concerns are overblown

Construction put-in-place, billions of dollars, annual rate

Source: U.S. Census Bureau, Haver Analytics

17

REITs

• A REIT must be a company in the real estate business

• REITs own and, in most cases, manage and lease income-producing real

estate, including office buildings, apartments, shopping centers and health

care properties. Some REITs engage in the financing of residential or

commercial real estate.

• Operating a real estate company as a REIT is a voluntary election under the

Internal Revenue Code

– A company declares its intention to operate as a REIT under the Internal

Revenue Code by filing income tax Form 1120-REIT.

• Listed REITs operate under the same rules for federal tax, regulatory and

financial reporting purposes as other publicly-traded companies

General Principles

18

• Distribution requirement

– Distribute at least 90% of “taxable income” annually to shareholders in the

form of dividends

– In practice, most REITs distribute 100% of their taxable

– All dividends are taxable at the shareholder level

– All distributions must be characterized in annual 1099-DIV statements

IRC Requirements for Being a REIT

19

Characteristics of REITs Listed REITs, non-listed REITs and private REITs

Source: NAREIT®

Characteristic Public Listed

REITs

Public Non-listed

REITs

Private

REITs

Overview SEC Registered

Shares listed

SEC Registered

Shares not listed

Not SEC registered

Shares not listed

Liquidity Most NYSE traded Limited redemption Limited redemption

Transaction Costs Typical trading costs Fees of 10% or more Varies by firm

Management Internally advised

Internally managed

Externally advised

Externally managed

Externally advised

Externally managed

Minimum Investment One share $1,000 - $2,500 $10,000 - $100,000

Independent Directors NYSE/NASDAQ Rules NASAA Rules Not required

Investor Control Investors re-elect directors

Governance NYSE/NASDAQ Rules State/NASAA Rules Not regulated

Disclosure SEC filings (GAAP) SEC filings (GAAP) Not regulated

Performance Measurement Market benchmarks

Analyst reports

Some independent

reporting No public data available

20

21

Listed Domestic Equity REIT Industry Broad Diversification by Property Type and Geography

Data as of October 31, 2013 Source: NAREIT®

Property locations by U.S. geographic coordinates

Most U.S. REIT owned properties are in the U.S. Some U.S. REITs also own properties outside the U.S.

Property Sector Percent

Regional Malls

Residential

Health Care

Office Buildings

Diversified

Shopping Centers

Lodging/Resorts

Self-Storage

Timber

Infrastructure

Industrial Facilities

Mixed Industrial/Office

Free Standing Retail

14

13

12

10

9

8

6

6

5

5

4

4

4

Total 100

Operating Attributes of Listed REITs

• Full-time professional management teams

• Investor-aligned corporate governance

• Transparency

− Registered with the Securities and Exchange Commission

− Standardized financial reporting (GAAP)

• Property Portfolios

– Mostly core properties (residential, retail, office or industrial)

– Non-core property sectors include hotel, self storage, manufactured housing, health care, entertainment properties, timber, infrastructure, etc.

• Moderate leverage for publicly traded equity REITs

– Historical debt-to-asset ratio of about 45 percent

– 32.8 percent as of June 30, 2013

– Public, non-listed REITs generally operate at same or lower levels

22

Investment Attributes of Listed REITs

• Dividend Income

– Distribution requirement provides high level of dividend income

– Dividend typically has provided 1/2 to 2/3 of total return to shareholders

– $19.4 billion of dividends paid in 2011

• Long-term total returns competitive with other investments

• Investment Diversification

– Moderate long-term correlation with other asset classes

– Typical allocations of between 5 percent and 15 percent

• Inflation Hedging Potential

– Real assets

– Rental income

23

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

$110,000

$120,000

12/89 12/91 12/93 12/95 12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11

Initial Investment Cumulative Dividends with Reinvestment Cumulative Capital Gains with Reinvestment

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

$110,000

$120,000

12/89 12/91 12/93 12/95 12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11

Initial Investment Cumulative Dividends with Reinvestment Cumulative Capital Gains with Reinvestment

Standard & Poor’s 500 Index

FTSE NAREIT All Equity REIT Index

Price Return

Note: Based on monthly total returns and price appreciation returns, January 1990 –October 2013

Sources: NAREIT® analysis of data from IDP accessed through FactSet.

Dividends Drive Investment Performance One-half to two-thirds of REIT total returns

24

Competitive Long-Term Investment Performance Total returns in percent

Data as of September 30, 2013

Sources: NAREIT® analysis of data from IDC accessed through FactSet. 25

FTSE NAREIT U.S. Equity

REITs TR

FTSE EPRA/NAREIT Developed TR

S&P 500 TR MSCI EAFE TR Barclays Capital U.S. Aggregate

Bond1

Barclays Capital Global Aggregate

Bond1

1-Year 11.11 13.16 27.18 26.88 -1.08 -1.54

3-Year 12.65 10.02 16.56 8.38 3.02 1.99

5-Year 15.36 15.33 15.17 11.99 6.09 6.07

10-Year 9.94 10.04 7.46 7.71 4.78 5.08

15-Year 10.74 10.04 5.10 5.00 5.36 4.95

20-Year 10.25 8.78 8.93 5.45 5.77 5.71

25-Year 10.71 NA 10.04 5.11 6.82 NA

30-Year 11.39 NA 10.96 9.63 7.82 NA

35-Year 13.04 NA 11.92 9.15 8.07 NA

40-Year 12.45 NA 10.56 8.96 NA NA

Diversification U.S. equity REITs offer low to moderate correlation with stock and bond investments December 1992– December 2012

Source: Large-cap stocks – Standard & Poor’s 500®; Small-cap stocks – Russell 2000; International stocks – Morgan Stanley Capital International Europe, Australasia,

and Far East (EAFE®) Index; U.S. bonds - Barclays U.S. Aggregate Bond Index; Non-U.S. bonds – Citigroup Non-USD World GBI; U.S. REITs – FTSE NAREIT All Equity

REIT Index.

U.S. Equity REITs

Large Cap Stocks

Small Cap Stocks

International Stocks

U.S. Bonds

Non-U.S. Bonds

U.S. Equity REITs

1.00 0.56 0.65 0.55 0.13 0.26

Large Cap Stocks

1.00 0.81 0.80 0.05 0.17

Small Cap Stocks

1.00 0.74 -0.04 0.14

International Stocks

1.00 0.02 0.39

U.S. Bonds 1.00 0.44

Non-U.S. Bonds

1.00

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NAREIT is the worldwide representative voice for REITs and listed real estate companies with an interest in U.S. real estate and capital markets. Members are REITs and other businesses that own, operate and manage income-producing real estate, as well as those firms and individuals who advise, study and service those businesses. NAREIT is the exclusive registered trademark of the National Association of Real Estate Investment Trusts, Inc.®, 1875 I St., NW, Suite 600, Washington, DC 20006-5413. Follow us on REIT.com. Copyright© 2012 by the National Association of Real Estate Investment Trusts, Inc.® All rights reserved. This information is solely educational in nature and is not intended by NAREIT to serve as the primary basis for any investment decision. NAREIT is not acting as an investment adviser, investment fiduciary, broker, dealer or other market participant, and no offer or solicitation to buy or sell any security or real estate investment is being made. Investments and solicitations for investment must be made directly through an agent, employee or representative of a particular investment or fund and cannot be made through NAREIT. NAREIT does not allow any agent, employee or representative to personally solicit any investment or accept any monies to be invested in a particular security or real estate investment. All REIT data are derived from, and apply only to, publicly traded securities. While such data are believed to be reliable when prepared or provided, such data are subject to change or restatement. NAREIT does not warrant or guarantee such data for accuracy or completeness, and shall not be liable under any legal theory for such data or any errors or omissions therein. See http://reit.com/TermsofUse.aspx for important information regarding this data, the underlying assumptions and the limitations of NAREIT’s liability therefore, all of which are incorporated by reference herein. Performance results are provided only as a barometer or measure of past performance, and future values will fluctuate from those used in the underlying data. Any investment returns or performance data (past, hypothetical or otherwise) shown herein or in such data are not necessarily indicative of future returns or performance. Before an investment is made in any security, fund or investment, investors are strongly advised to request a copy of the prospectus or other disclosure or investment documentation and read it carefully. Such prospectus or other information contains important information about a security’s, fund’s or other investment’s objectives and strategies, risks and expenses. Investors should read all such information carefully before making an investment decision or investing any funds. Investors should consult with their investment fiduciary or other market professional before making any investment in any security, fund or other investment.

Disclaimer

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