gsa-nav based pricing model 2013

REIT ValuationThe NAV-based Pricing Model

Important disclosure on pages 36-37660 Newport Center Drive, Suite 800, Newport Beach, CA 92660, USA+1 949 640 8780 2013, Green Street Advisors, Inc.

An Impressive Track RecordIts All Relative

Our NAV-based Pricing Model has served as the backbone of our stock selection process for over twenty years. The model is designed to assess relative valuations; i.e., it identifies the REITs that are most/least attractively valued.

The model combines NAV a great starting point and high quality estimates are essential with the factors that impact the premiums at which REITs should trade: franchise value, balance sheet risk, corporate governance, and overhead. The compartmentalized nature of the model forces discipline to consider all relevant valuation issues.

20-Year Annualized Total Return of Green Street's Stock Recommendations*

25%

12%

-1%

Buy Universe Sell

* Past performance can not be used to predict future performance. Please see disclosure on page 37

The NAV-based Pricing Model 2

Table of Contents SectionsI. Executive Summary 3

II. Overview 4-14

III. NAV 15-17

IV. Overhead 18-22

V. Franchise Value 23-29

VI. Balance Sheet Risk 30-33

VII. Corporate Governance 34-35

www.greenstreetadvisors.com 2013, Green Street Advisors, Inc.Use of this report is subject to the Terms of Use listed at the end of the report


Executive Summary

Overview Our NAV-based pricing model has been a driver of our stock reccomendations for > twenty years It has played an instrumental role in our successful recommendation track record Compartmentalized nature of the model forces discipline to consider all relevant valuation issues

The Basics Warranted share price = NAV plus or minus a premium for future value added by management G&A, franchise value, balance sheet risk and corporate governance impact the size of the premium It is a relative valuation model: roughly equal number of Buys and Sells at all times Relative approach anchors around average sector premiums at which REITs trade

The Components The impact of G&A is readily quantified and is dealt with apart from the other factors Differences in G&A are large; they warrant large differences in unlevered asset value premiums

G&A appears to be poorly understood by REIT investors - pricing inefficiencies abound

Franchise values are inherently subjective, but objective inputs help Management Value Added (MVA) shines a bright light on performance attributable to mgm't

Total returns relative to peers are also important

Balance sheet acumen scores give credit for broad financing menus and low debt costs

Comprehensive Leverage Ratio is a better gauge of balance sheet risk Employs leverage ratio and coverage ratio concepts

Adjusts for unfunded development, maturity schedules, secured v. unsecured

Corporate Governance scoring system ranks the REITs in a systematic fashion



II. OverviewOur model assesses relative valuations: equal number of Buys and Sells

It has been instrumental in establishing a great twenty-year recommendation track record

Compartmentalized nature of the model forces discipline to consider all factors that matter

NAV is a great starting point, and high-quality estimates of NAV are essential

A variety of other factors cause big differences in premiums to NAV ascribed by the market

G&A is a critical factor that is not well understood by the market Franchise value: how much value will management add (or detract) in the future? Balance sheet risk has played a huge role in past performanceit has a big impact on pricing

The model assesses those factors and ascribes warranted premiums/discounts to NAV

That output translates into warranted share prices, our proxy for relative intrinsic value



Overview: A Disciplined Approach Toward Stock Selection

Company Research Macro Research

* Please see recommendation track record disclosure on page 37


A Key Driver of Success: The Green Street NAV-based pricing model is designed to assess the valuation of any REIT relative to sector-level peers. The discipline and rigor the model embodies have played a pivotal role in the two-decade-long success of our recommendation track record. While the model is designed to be neutral with regard to whether REITs in aggregate are cheap or expensive, investors can employ other Green Street analytic tools to help assess overall valuation and/or sector allocation issues.

Stock Recomendations

The NAV-based Pricing Model, coupled with heavy analyst input, drives our stock recommendations. The recommendations are always market and sector neutral.

20-Year Annualized Returns of Green St Recs*

12%

25%

-1%

Buy

Universe

Sell

Overall REIT Valuation

The RMZ Forecast Tool , published monthly, assesses overall REIT valuation vs. bonds and stocks. Has proven very helpful in identifying periods when REITs are badly mis-priced.

Property Sector Allocation

The Commercial Property Outlook , published quarterly, addresses sector-level valuation questions with a focus on the long term. It is based on extensive research we've published on long-term sector performance and cap-ex requirements.

NAV-Based Pricing Model

NAV + Warranted Premium to NAV= Warranted Share Price


Overview: Why Use NAV?

Too Simplistic Far Better There is More to it Than Just NAVCompartmentalized Analysis Looks at All Relevant Factors


Because We Can: Most equity investors focus a great deal of attention on P/E multiples and/or yields, so it is fair to question why NAV should be the primary valuation benchmark for REITs. The short answer is that investors elsewhere would use NAV if they could, but the concept doesn't translate well to companies that are not in the business of owning hard assets. Because the value of a REIT is, first and foremost, a function of the value of the assets it owns, NAV is a great starting point for a valuation analysis.

Dividend Yield

FFO Yield or Multiple

AFFO Yield or Multiple

Discounted Cash Flow"DCF"

We use DCF internally to double-check results

Net Asset Value"NAV"

Good NAV estimates are critical and they require

serious resources

NAV: The Starting Point

The Warranted Premium to NAVWarranted premiums are a function of: Premiums Ascribed by the Market to Other REITs Franchise Value Balance Sheet Risk Overhead (G&A expenses) Corporate Governance

Warranted Share PriceUsed to compare valuations relative to those of other REITs. It's fair to call it "relative intrinsic value."


Overview: What is NAV?

REIT Balance Sheet

Book Value of Assets Book Value of Liabilities

Market Value of Assets Market Value of Liabilities


Mark It to Market: An NAV-based valuation methodology is only as good as the underlying estimate of NAV. High-quality estimates of marked-to-market asset value require a great deal of effort and resources, but the estimate can be reasonably precise when done properly. It is also important to mark-to-market the right-hand side of the balance sheet, as the cost of in-place debt can stray substantially from prevailing market. Many market participants skip this important step.

Replace With

Replace With

Results In...

NAVThe marked-to-market equity value per share

Common Question: Many REIT investors and analysts do not mark debt to maket. Is it really necessary?

Imagine: Two identical office buildings, except that one is encumbered by a 60% LTV mortgage carrying a 7% interest rate with another five years to run, while the other has an identical loan at a 5% rate. Which building will command the higher price?

5% 7%

The answer is obvious to any real estate market practitioner. Building prices are profoundly impacted by assumed debt, and a high-cost mortgage negatively impacts pricing. The same holds true when those buildings are held by a REIT and if the debt is unsecured rather than secured. Marking assets to market without doing the same for liabilities yields the wrong answer.

5%


Overview: Warranted Premiums to NAV


NAV Plus or Minus? Prospective future total returns for any REIT are a function of how its real estate portfolio is likely to perform, as well as the value that its management team is likely to add or detract. Our Pricing Model provides a systematic assessment of the four key variables - franchise value, corporate governance, balance sheet risk, and overhead - that typically distinguish REITs that deliver "real estate plus" returns from those in the "real estate minus" camp.

Warranted Premium to NAV for a REIT is a Function of...

Prevailing Premiums for Sector Peers Based on Prevailing Share Prices

The net value that a management team is likely to add or detract in the future

Franchise ValueA gauge of management's propensity to add or detract value

Capitalized Value of Unusual G&AThis can be readily quantified and is dealt with apart from the other factors that impactpremiums

Corporate GovernanceOur governance scoring system provides an annual review

Balance Sheet RiskCapital Structure plays a big role in how REITs are valued

Our Pricing Model tallies up a total score on the variables below and ranks each REIT relative to sector peers

Which is it, NAV or UAV? The investment world focuses on premiums to NAV , which are impacted by leverage, but the mechanics of our model strip out the distortions leverage can cause by focusing on premiums to unlevered asset value (UAV) . Even though the model is UAV-centric, the many references herein to NAV are employed to better speak the language most commonly used in our industry.


Overview: The Influence of Property Sectors

Each sector tends to march to its own drummer on average premiums ...to which the dispersion of premiums for all REITs can be applied


A Normal World: The starting point in calculating the warranted premium for any REIT is the sector-average premium ascribed by the market at current share prices. An assumption is made that the dispersion of observed premiums for the entirety of our coverage universe serves as a good indicator of how premiums should be dispersed in any given sector. REITs that stack up better in the Pricing Model relative to their sector peers are then ascribed better-than-average warranted premiums, and vice versa.

Dispersion of Observed Premiums - All REITs

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Premium to Asset Value vs. Sector-Peers

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Observed Average Premium to Asset Value

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Apts Office Mall Industrial Strip Health Care

Dispersion of Warranted Premiums Across Sectors

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Premium to Asset Value

Apts Office Mall Industrial Strip Health Care

Relative Model: Avg Obs Premium =Avg Warr Premium Why Sector Premiums Vary

There are three primary reasons: 1) REIT investors often disagree with private-market valuations 2) Some sectors may offer more lucrative growth opportunities. 3) A sector full of "A-students" should trade better

The model is neutral with regard to sector valuations.


Overview: The Drivers of Asset Value Premiums


Ranking the REITs: The warranted premiums emanating from our Pricing Model are a function of four key inputs: franchise value, balance sheet risk, corporate governance, and overhead. The impact that overhead should have on the asset value premium is readily quantified, while the other three variables are scored independent of each other. The aggregate score is then compared to scores of sector peers to translate it into a premium to unlevered asset value.

Warranted Premiums to Unlevered Asset Value in the Office Sector as of December 2012

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BPO OFC BDN SLG VNO KRC DEI CLI CUZ WRE PDM HIW BXP

Franchise Value - 60 PointsObjective Inputs + Subjective Control

Balance Sheet Risk30 Points

Measured by Comprehensive Leverage

Ratio (see page 32)

Corporate Governance10 Points

Based on Green Street's annually updated corporate governance

score (see page 35)

- MVA Score (see page 25)- Relative Total Returns- Balance Sheet Acumen Score (see page 29)

OverheadThe warranted premium to UAV

emanating from G&A =

Variance between a company's G&A ratio and the sector avg

All-REIT cap rate

Analysts have the final say on the biggest question: How much shareholder value is this company likely to create?


Overview: The Output


It's All Relative: The output of the model consists of warranted premiums to unlevered asset value (UAV). This output can be translated into warranted premiums to NAV and/or warranted share prices. Alternatively, mis-priced stocks can be readily identified by comparing warranted premiums to UAV with observed premiums (based on current share prices) to UAV. The model is a RELATIVE valuation model and answers the question: "Which REITs in a given property sector offer the most/least attractive valuations?"

Warranted vs. Observed UAV Premiums

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Warranted UAV Premium vs. Property-Sector Peers

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Cheap REITs

Expensive REITs

and low-quality REITs can be cheap...

Translating the Model's Output into Recommendations

The Model helps identify mis-priced stocks...

...but Analysts, not the model, ascribe investment recommendations

Recommendations are market neutral - Equal number of Buys and Sells - Roughly 25% Buys and Sells - Roughly 50% Holds

Recommendations are Sector neutral - Balanced number of Buys/Sells in each sector - Each sector runs "its own" model

High-quality REITs can be over-priced...

Company QualityWeak Strong


Overview: Unlevered Asset Value is the Base


Dont be Fooled by Leverage: The factors that cause REITs to trade at premiums impact the value of the entire firm, not just the equity portion. Because of that, it is essential to ascribe warranted premiums to unlevered asset value (UAV) before factoring in leverage to derive the warranted share price.

The Impact of Leverage on Warranted Premiums to NAV

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Leverage magnifies the impact of the strengths and weaknesses that cause premiums to unlevered asset value. It is inappropriate to compare the NAV premiums of two REITs without considering their leverage profiles.

Miller and Modigliani's Proposition I:A firm's value is independent of its capital structure. Said differently, just as you can't make a pizza bigger by cutting it into more slices, adding leverage does nothing to increase firm value.

More from M&M: Capital structure can negatively impact firm value when potential costs of financial distress become material. This is the foundation for why Balance Sheet Risk is part of the model.


Overview: The Pricing of Risk


Risk On, Risk Off: The market constantly reassesses how it prices risk in both the bond and REIT markets. Our pricing model does the same. A tight dispersion of observed premiums to asset value in the REIT market beget a tight dispersion of warranted premiums.

The differential in observed premiums has shrunk a lot in the last year. This warrants a tightening of the output warranted premiums. Said differently, great REITs will not be ascribed quite as much credit, while lesser REITs will look better.

The Dispersion of Observed Premiums to UAV vsRisk Premia in the Bond Market

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REITs: St Dev of Observed Prem to UAV vs. Peers Bonds: High-Yield vs. BBB

Bond M

arket Spread

Fixed Income Risk Premium = Junk Yield less Invesment-Grade Yield

Dispersion of Warranted PremiumsPremium to asset value vs. sector-peers

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NewPrior


Overview: Investment Style


Are We Quality Snobs? Yes, but we try our best not to be. REITs with higher quality (i.e., low cap rate) properties and low leverage tend to screen as attractively valued in our model, and those tend to be REITs with low dividend yields. The model is designed not to have such a bias: that it does have a bias reflects a quirk about how REITs are priced in the marketplace. With many investors focusing undue attention on yields (regardless of whether they're based on dividends, FFO, or AFFO), quality, safety, and growth are usually on sale.

Composition of our Buy & Sell Portfolios

54%

43%

62%

43%30%

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Buys Sells

High Prop Quality Low Div Yld

Our model is explicitly designed to be neutral with regard to qualitative issues. REITs that own lesser quality assets can be cheap and vice versa. We defer to private-market pricing to help make that call.

But, our Buy portfolio is typically overweighted with REITs that have high property quality and low dividend yields. The opposite istrue for our Sells.

Annualized Ten-Year Returns

8.8%

13.4%12.4%

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HighDividend

Yield

LowDividend

Yield

Above-AvgPropertyQuality

Below-AvgPropertyQuality

A quality bias is okay, however, as many REIT investors "chase yield". High-yielding REITs are typically overpriced as a result, a phenomenon that has translated into lower total returns.

Quality Junk


III. NAVAn NAV-based valuation model is only as good as the underlying NAV estimates

Green Street devotes a great deal of resources toward producing high-quality NAV estimates

Caveat emptor with regard to other sources of NAV estimates Our US research team includes 25 full-time professionals

Mark debt to market - this is often overlooked in some estimates

Cap-ex complicates the analysis, but it must be considered



NAV: Where Do Green Street NAVs Come From?


Hard Work: There are plenty of providers of REIT NAVs, but no one takes it more seriously than Green Street. We devote a great deal of resources toward deriving the best possible estimates of NAV because it has always been the driver of our valuation conclusions.

A Large Research Team

Kicking the TiresExtensive property visitsDeep market contacts - public & privateLengthy coverage of most REITsStrategic partner: Eastdil Secured

Real Estate Data Sources

Cap-ex: the 500-Pound Gorilla

25 full-time research professionals in USWe take NAV seriouslyIt has always driven our Pricing Model

Green St's property databases are extensiveWe use other research vendors: RCA, REIS, CBRE, Axiometrics, RE Alert, etc.Local leasing and sales brokers

Capitalized costs are big and they need to be consideredThey vary a lot even among REITs in the same sectorCap-ex is broadly misunderstoodwe have studied extensivelyMarket participants universally underestimate cap-exNAVs need to be based on NOI after factoring in cap-ex


NAV - A Simplified Example

The Adjustments:A.

Balance Sheet for REIT XYZ (X's $1,000)

Book Value Current ValueReal Estate Assets

Operating Real Estate $8,500,000 $9,350,000$2,250,000 B.

Construction in Progress $500,000 $650,000

Land $200,000 $170,000 C.D.

Equity in Unconsolidated JVs $1,000,000 $0

Value of Fee Businesses $0 $800,000

Other Assets $100,000 $70,000E.

Total Assets $10,300,000 $13,290,000

Liabilities $5,000,000 $5,250,000$1,500,000

Preferred Stock $500,000 $500,000 F.

Shareholders Equity $4,800,000 $6,040,000 G.Fully Diluted Shares 200,000 204,750

NAV $24.00 $29.50 H.


Calculating NAV - A Simplified Example

Analyze Market Value and Replace

Fee Income: Some REITs generate asset management/property management fees associated with JV structures. This fee income can be lucrative, and the range of appropriate multiples to apply is dependent on the quality of the fee stream. This value is not reflected on GAAP balance sheets. Other Assets: REITs often have a material amount of intangible assets, which are deducted for this exercise.

Construction in Progress: Adjustments to the book value of CIP reflect the extent to which stabilized yields are likely to exceed an appropriately high risk-adjusted return bogey.

Fully Diluted Shares: Ensure that all in-the-money options, converts, etc. are included in the share count.

JV Accounting is a Mess: Because of that, we present a pro-rata allocation of assets and liabilities. There is no reliable way to otherwise value JV interests, as leverage within the JV typically renders more simplified approaches useless. A pro-rata allocation also does a much better job of showing leverage that may be embedded, but otherwise hidden, in JV investments.

Operating Real Estate: Usually the most important part of an NAV analysis. A 12-month look-forward estimate of NOI is calculated, the magnitude of an appropriate cap-ex reserve is determined, and an appropriate cap rate is applied to economic NOI (NOI less cap-ex). The quality of the analysis rests on an in-depth knowledge of prevailing cap rates, the appropriate cap-ex treatment for each REIT, and other required industry- and company-specific adjustments (e.g. seasonality, one-time items, etc.).

Liabilities: Mark-to-market adjustments are necessary where: subsidized financing is present, or market interest rates are materially higher or lower than contract rates on the REIT's debt.

Land: Land values can be much higher or lower than book.

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IV. OverheadThe impact that G&A should have on the premium to unlevered asset value can be readily quantified

Unusually high or low G&A (as a % of assets) should be capped

G&A is a big deal: It warrants premiums to UAV of 5% or more for quite a few REITs

The market appears to put too little weight on G&A. Do NAV-centric investors stop at NAV?

G&A is strongly connected with company size, although exceptions certainly exist



Overhead: Translating into Warranted Share Price

How G&A translates to Warranted An example for two mall REITsShare Price Sector average G&A Ratio = 0.50%

Observed Avg Prem to Asset Value = 6%


A Big Deal: A dollar of cash flow devoted to G&A is worth the same as a dollar of cash flow at the property level, and efficiency differences between REITs can have a profound impact on share valuation. The impact on appropriate unlevered valuations can be calculated by capping those differences at the all-REIT cap rate and adding or subtracing that figure directly as a warranted premium to unlevered asset value. G&A differentials can easily warrant double-digit percentage differences in share prices.

Extent to which normalized (G&A/Asset Value) is lower or

higher than peer average

Avg Nominal All-REIT Cap RateA standardized cap rate is appropriate, as

there is no reason why G&A should be valued differently across REITs

Warranted Premium to Asset Value from G&A

Efficient CoBloated Co

Efficient CoWarranted UAV Premium from

G&A = 3.3%(i.e., -20 bps/6% cap rate X -1)

Warranted UAV Prem Prior to Considering Other Model

Variables = 9.3%

Bloated CoWarranted UAV Premium from

G&A = -5.0%(i.e., 30 bps/6% cap rate X -1)

Warranted UAV Prem Prior to Considering Other Model

Variables = 1.0%

G&A Ratio = 0.30%- Sector Avg = 0.50%= Excess G&A = -20 bps

G&A Ratio = 0.80%- Sector Avg = 0.50%= Excess G&A = 30 bps

6%Currently 6%

Share Price Differentialat 50% Leverage 17%


Overhead: Does the Market Get it Right?


A Flimsy Connection: The impact that G&A would be expected to have on premiums to asset value is as large as 5-10% for outliers. It is, therefore, reasonable to expect a strong link between G&A ratios (G&A/Asset Value) and observed premiums to unlevered asset value. In reality, however, the link between the two is surprisingly weak. It appears that the market doesn't do a particularly good job taking G&A into account.

Warranted Premiums to Asset Value from G&A vs. Observed Premiums

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Warranted Premium (vs. Peers) Due to Unusually High/Low G&A

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This is a surprisingly weak relationship. There are a lot of high-cost providers that trade at premiums and vice versa.

R2 = 0.13

Low OverheadHigh Overhead


Overhead: Misunderstood by the Market


Efficient = Cheap? The connection between G&A and share valuation is not as strong as it should be. Because of that, a disproportionate number of efficient REITs stack up as cheap (i.e., they trade at smaller premiums to UAV than our model says is appropriate) and vice versa. It could well be the case that some NAV-centric investors effectively "stop at NAV." That is a mistake.

Warranted Premiums from G&A vs. Attractiveness of Current Valuation

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Buy Hold Sell

...And a disproportionate number of the REITs with high G&A are Sells

A disproportionate number of the REITs with low G&A are Buys

High G&A Low G&A

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Overhead: A Strong Connection with Size


Big is Betterat Least When it Comes to G&A: Not surprisingly, big REITs are more efficient when it comes to overhead, and this efficiency should translate into higher relative valuations. By contrast, small REITs, particularly those with less than, say, $3 billion in assets, face a daunting challenge in spreading overhead over a smaller asset base.

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Company Size and Warranted Premiums Attributable to G&A

Yeah, but High G&A may ensue from a dynamic business model, but this math counts only the costs. The Response: Benefits derived from dynamic business models are captured in Franchise Value

$10


V. Franchise ValueFranchise value: How much value will management create in the future?

Objective inputs serve as guides:

MVA is a tool designed to directly gauge the franchise component of past performance Total returns relative to peers are also important Access to a variety of capital sources at low costs begets higher UAV premiums

Subjective inputs are also critical. Does a mangement team "get it"?



Franchise Value - What is it?

Lessons from REIT HistorySimplicity is a virtueActivity Value AddedDevelopment is a tough businessCapital allocation skills are critical

Other Factors to ConsiderWill past performance recur?Has there been a strategy change?Has management learned lessons?

Past Performance Balance Sheet Management

Management Value Added (MVA) Balance Sheet Acumen Score

Total Returns to Shareholders Full Menu of Options is good

Cheap debt UAV Premium


An Important Assessment: Franchise value and G&A are the most important drivers of UAV premiums. Franchise value pertains to the value that a management team is likely to create in the future, which is a question best addressed by combining objective tools with subjective input from experienced analysts.

Subjective Factors

Objective Metrics

Franchise Score

Franchise Value: a Forward-Looking ConceptFranchise value is an estimate of the relative value thata management team is likely to add or detract in coming years. Our analysts determine franchise value based on a wide variety of objective inputs and subjective assessments.

The objective metrics help guide the analyst, but the ultimate score is entirely at his/her discretion.


Franchise Value: What Does MVA Measure?

Key Drivers of REIT NAV Growth


MVA = Management Value Added: The big differences in NAV growth rates across the REIT industry are attributable to two factors (balance sheet management and capital allocation) over which management has a great deal of control, as well as one (how properties in a given sector or locale are priced) that is largely out of its control. Management does, of course, exercise some influence over the value of the portfolio through operational skills, but even though operations are the focus of a lot of managerial and analytical attention, they are far from the most important driver of NAV/sh growth. Management performance is best assessed after backing out NAV/sh growth derived from the property portfolio.

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Annualized Property Appreciation (levered)

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Property price appreciation is a key driver of NAV growth, but NAV growth has parted ways with appreciation for many REITs. Other factors clearly play a big role.

Property Portfolio Performance Dependent on sector, quality, & locale Operating prowess also matters but not as much as portfolio make-up Most REITs are good operators differences across companies are small

Balance Sheet Management Low leverage has won Forced recaps hurt...a lot Some REITs derive a cost of capital advantage here

Capital Allocation Acumen Two ways to create NAV: Grow when NAV premiums persist Buy back stock when discounts exist Development is a tough business

Management Value Added (MVA) What does it Measure? MVA measures value added or subtracted via balance sheet management, capital-allocation or other factors not related to the performance of the real estate portfolio. How is it Calculated? MVA is the difference between NAV/sh growth and the leveraged growth in same-store portfolio value over any time period.


Franchise Value: MVA & Total Returns

Total ReturnMVA is superior when it comes to factors that matter most MVA Relative Absolute

Measures an objective important to shareholders

Isolates variables where management has control (balance sheet & capital allocation)

Backs out portfolio effects due to sector, location, quality, etc.

Adjusts for capital market changes beyond management control

But it's not perfect

Gives credit for superior real estate operational skills

Benchmark is precise and easy to calculate


MVA is a Great Tool: Most assessments of REIT managerial performance rely on total returns to shareholders - either on an absolute basis or relative to a chosen REIT peer group. While total returns are certainly important, they can be profoundly impacted by factors beyond which REIT managers typically exercise much control. MVA, by contrast, backs out the influence of some of those variables, including the type and location of the real estate a REIT owns.

Assigning the GradesWe blend the MVA and relative total return signals in assessing past performancePrimary focus is on full-cycle returns - 5-yrs or soPast returns don't necessarily predict the future. Analysts have full override authority


Franchise Value: The MVA Report Card


Some Tough Grades: MVA affords comparisons of management performance across the various property sectors, although some sectors (e.g. Health Care) have presented bigger opportunities for lucrative expansion. Most REITs have failed to deliver NAV/sh growth commensurate with the leveraged appreciation that has taken place in their property portfolios, resulting in negative MVA.

MVA

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Things to keep in mind about MVA:- Forced recaps in '09 & '10 explain the worst grades- Development was a drag for many REITs- This 6-year period was: 1) highly volatile; and 2) chosen due to data availability- REITs that report inflated same-store NOI growth may wind up with lower MVA- Past does not always predict the future: some REITs have changed


Franchise Value: The Insight MVA Adds


Different Grading Scale Different Grades: Total shareholder returns convey a lot of information about managerial performance, but returns are heavily influenced by whether a given REIT happened to own the right type of real estate in the right location. MVA explicitly adjusts for that factor, and it helps differentiate track records that are a function of good management vs. those that involve a dose of good fortune. It is important to heed signals from both performance metrics.

Annualized Total Return vs. Peers

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and gives management teams of these REITs too much credit

A focus on total shareholder returns fails to give management teams on this side of the line enough credit...

Total Returns & MVAJune '06 - June '12


Franchise Value: Balance Sheet Management Acumen

The Balance Sheet Management Acumen ScorecardThe Front Nine: How Deep is the Financing Menu? The Back Nine: What is the Cost of Debt?

Access to a variety of financing options is desirable Some REITs can access debt more cheaply than their peers

Unsecured Debt: Best gauged after adjusting for term and overall leverage Has gained a cost advantage in recent years Companies get credit for having accessed this market Big REITs tend to have an advantage here More credit given for high ratings

Example: an advantage on this front of 50 basis pointsPreferred Stock Should directly translate into a 20 bp lower WACC Virtues have become more obvious That boosts warranted asset value premium by 3% REITs with access to this market get credit which equates to a 5% increase in share price

The overall impact is probably even bigger it also enhances the external growth story


The Other Objective Input to Franchise Value: Some REITs do a much better job than others in maximizing the financing opportunities that are available to successful public companies. Differences in balance sheet management skills across REITs can have a meaningful impact on the Weighted Average Cost of Capital and, therefore, the share price. Our Balance Sheet Management Acumen Score attempts to capture those differences.

Balance Sheet Management Acumen ScoreAscribes higher warranted premiums to asset value to REITs with access to multiple capital sources and/or a cost of capital advantage. Impact on warranted premiums currently ranges from -2% for REITs that rely exclusively on secured debt to +4% for REITs with a full menu of options and a demonstrably cheaper cost of debt.


VI. Balance Sheet RiskExcessive balance sheet risk has harmed performance of many REITs

REITs with lower leverage have long been rewarded with higher premiums to UAV by the market

Balance sheet risk has a bigger impact on pricing now than it used tono surprise

Our Comprehensive Leverage Ratio is a gauge of balance sheet risk

Employs leverage ratio and coverage ratio concepts Adjusts for unfunded development, maturity schedules, secured v. unsecured, etc.



Balance Sheet Risk: Balance Sheets Matter


Low Leverage is Better: Even though property prices have risen more than 50% over the last ten years, REITs that have employed less leverage have delivered far better returns over that time period than REITs with higher leverage. The same statement has held true over the vast majority of ten-year periods since the Modern REIT era commenced in the early-'90s. Not surprisingly, investors are willing to ascribe much higher NAV premiums to REITs with low leverage.

Leverage & Total Returns (past 10 years)

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Avg Leverage during Period vs. Property-Sector Peers

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More Leverage

Leverage & Premiums to Asset Value

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Leverage vs. Property-Sector Peers

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More Leverage

Leverage has a Big Impact on Pricing A 10% variance in the lev'g ratio currently equates to a 4%

variance in the UAV premiums at which REITs trade

Leverage has Impacted Total ReturnsA 10% variance in the lev'g ratio has been associated

with a 5% gap in total returns. Every year!


Balance Sheet Risk: Step One - Measuring Leverage


How Much Leverage? Balance sheet risk is, first and foremost, a function of how much debt a REIT has. Two equally valid ways to measure that are the traditional leverage ratio and an approach that converts the most widely used coverage metric (Debt/EBITDA) into a gauge of overall debt. Our Blended Leverage Ratio serves as a good starting point for assessing balance sheet risk.

Leverage Ratio(Mark-to-mkt Liabs + Preferreds)/Current Value Assets Counts preferreds as debtthey're senior to equity Counts full value of land and development in assets Based on marked-to-market value Easy to understand and compare across sectors Good for comparisons across REITs, but can send a false "all-clear" signal when cap rates are low Keep Debt/EBITDA handy to spot false signals

Debt to Operating AssetsBook Value Debt/(EBITDA/Cap Rate) Ignores preferredsthey're not debt Ascribes no value to non-earning assets Based on book valuethe amount that is owed Based on widely used Debt/EBITDA Dividing by cap rate is helpful for comparing REITs but it can flash a green light when cap rates are low so keep Debt/EBITDA handy

Blended Leverage Ratio A good starting point for balance sheet risk assessment A conservative, but not too conservative, gauge Treats preferreds as a debt/equity hybrid Counts 50% of the value of non-earning assets Counts pro rata share of JV debt

50/50 Weight


Balance Sheet Risk: Step Two - A Comprehensive View

Total Leverage is the Primary Driver

Qualitative & Structural Factors also Matter


Assessing Balance Sheet Risk: The amount of leverage a REIT employs is the key driver of balance sheet risk, but there are a number of structural and qualitative factors that can serve to increase or mitigate risk. By assessing all of these factors in a systematic fashion, our Comprehensive Leverage Ratio affords a better assessment of the relative riskiness of REIT balance sheets.

Leverage Ratio

Debt/Operating Assets

Blended Leverage Ratio

Near-Term Maturities

Non-Recourse Debt

Unfunded Development

Property Sector

Leverage ratio is adjusted up (down) on a sliding scale by as much as 10% (i.e., 1000 bps) for REITs with heavy (small) debt maturities in next 3 years.

Balance sheets comprised almost exclusively of secured debt have less entity-level risk. Where secured > 90% of all debt, total leverage is reduced by 10% (e.g., 50% becomes 45%).

Development that has commenced, but is unfinished, is treated as both a contingent liability and a contingent asset.

The leverage ratio is reduced for REITs in sectors that can support higher debt levels (e.g., apartments) and increased in those that can't (e.g., hotels).

Green Street's Comprehensive Leverage Ratio

50/50 Weight


VII. Corporate GovernanceREITs with good governance typically trade at higher premiums to unlevered asset value

Our Corporate Governance scoring system ranks the REITs in a systematic fashion

De-staggered boards are highly desirable

Other big factors include past behavior and disavowal of entrenchment devices



Corporate Governance

Category Max Points Ideal Structure

Board Rating:Non-staggered Board 20 YesIndependent Board 8 80+%Investment by Board Members 12 Large Investment by Numerous MembersPast Conduct/Reputation 15 No Blemishes, Fair Comp, Leadership

Total 55

Anti-Takeover Weapons:State Anti-takeover Provisions 9 Opt out/Shareholders Approve ChangeOwnership Limits from 5/50 Rule 9 Limit Waived for Ownership by other REITsVeto Powers by Insiders 9 No Veto powerShareholder Rights Plan 8 Shareholders Must Approve Implementation

Total 35

Potential Conflicts of Interest:Business Dealings with Mgmt. 6 No Business DealingsDivergent Tax Basis of Insiders 4 Basis Near Share Price

Total 10

Perfect Score 100


(1) Average premium to unleveraged asset value from '06 to present for companies under coverage during the entire period.

Green Street's Governance Scoring System: Our governance ranking system, which is published annually, differs in two key respects from those provided by other evaluators: 1) our familiarity with the companies allows for subjective input; and 2) issues unique to REITs (e.g., the 5 or fewer rule) are ignored by others. Scoring is on a 100-point basis with the key inputs highlighted below. REITs with higher governance scores typically trade at larger premiums to asset value

Governance Score vs. Observed Premium to Unleveraged Asset Value (UAV)

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Above Avg Score Below Avg Score

36

www.greenstreetadvisors.com 2013, Green Street Advisors, Inc. Use of this report is subject to the Terms of Use listed at the end of the report

Issuers of this Report: U.S. and EEA: This report has been prepared by analysts working for Green Street Advisors (GSA (U.S.)) and/or Green Street Advisors (U.K.) Limited (GSA (UK)), both of which are subsidiaries of Green Street Holdings, Inc.

This report is issued in the U.S.A by GSA (U.S.). GSA (UK) accepts no responsibility for this report to the extent that it is relied upon by persons based in the U.S.A. GSA (U.S.) is regulated by FINRA and the United States Securities and Exchange Commission, and its headquarters is located at 660 Newport Center Drive, Suite 800, Newport Beach, CA 92660.

This report is issued in the European Economic Area (EEA) by GSA (UK). GSA (U.S.) accepts no responsibility for this report to the extent that it is relied upon by persons based in the EEA. GSA (UK) is registered in England, (Company number. 6471304), and its registered office is 22 Grosvenor Square, 3rd Floor, London, W1K 6LF. GSA (UK) is authorized and regulated by the Financial Services Authority in the United Kingdom and is entered on the FSAs register (no. 482269]).

References to Green Street in Disclosures in this section and in the Other Important Information section apply to: GSA (U.S.) to the extent that this report has been disseminated in the U.S.A; or GSA (UK) to the extent that this report has been disseminated in the EEA.

Green Street Advisors U.S. is exempt from the requirement to hold an Australian financial services license under the Act in respect of the financial services; and is regulated by the SEC under U.S. laws, which differ from Australian laws.

Green Street Advisors UK Ltd. is exempt from the requirement to hold an Australian financial services license under the Act in respect of the financial services; and is regulated by the FSA under UK laws, which differ from Australian laws.

Green Street reserves the right to update the disclosures and policies set out in this document at any time. We encourage a careful comparison of these disclosures and policies with those of other research providers, and welcome the opportunity to discuss them.

For Green Streets advisory customers, this research report is for informational purposes only and the firm is not responsible for implementation. Nor can the firm be liable for suitability obligations.

Affiliate Disclosures: Green Street does not directly engage in investment banking, underwriting or advisory work with any of the companies in our coverage universe. However, the following are potential conflicts regarding our affiliates that should be considered:

Green Street is affiliated with, and at times assists, Eastdil Secured, a real estate brokerage and investment bank, when Eastdil Secured provides investment banking services to companies in Green Streets coverage universe. Green Street is never part of the underwriting syndicate, selling group or marketing effort but Green Street may receive compensation from Eastdil Secured for consulting services that Green Street provides to Eastdil Secured related to Eastdil Secured's investment banking services. Green Street does not control, have ownership in, or make any business or investment decisions for, Eastdil Secured.

Green Street has an advisory practice servicing investors seeking to acquire interests in publicly-traded companies. Green Street may provide such valuation services to prospective acquirers of companies which are the subject(s) of Green Streets research reports. Green Street may receive fees that are contingent upon the successful completion of a transaction or other fees for its work on behalf of prospective acquirers

An affiliate of Green Street is the investment manager of an equity securities portfolio on behalf of a single client. The portfolio contains securities of issuers covered by Green Streets research department. The affiliate also acts as a sub-adviser to an outside Investment Management firm. The sub-advisor will develop and provide a suggested asset allocation model based on published research that is received from the research department. The affiliate is located in a separate office, employs an investment strategy based on Green Streets published research, and does not trade with Green Streets trading desk.

Analyst Certification The research analysts listed below hereby certify that all of the views expressed in this research report accurately reflect their personal views about any and all of the subject companies or securities. They also certify that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analysts: Mike Kirby, Peter Rothemund.

Other Important Information

Management of Conflicts of Interest: Conflicts of interest can seriously impinge the ability of analysts to do their job, and investors should demand unbiased research. In that spirit, Green Street adheres to the following policies regarding conflicts of interest:

Green Street employees are prohibited from owning the shares of any company in our coverage universe. Green Street employees do not serve as officers or directors of any of our subject companies. Green Street does not commit capital or make markets in any securities. Neither Green Street nor its employees/analysts receives any compensation from subject companies for inclusion in our research. Green Street does not directly engage in investment banking or underwriting work with any subject companies.

Please also have regard to the Affiliate Disclosures listed above when considering the extent to which you place reliance on this research presentation and any research recommendations made herein.

A number of companies covered by Green Street research reports pay an annual fee to receive Green Streets research reports. Green Street may periodically solicit this business from the subject companies. In the aggregate, annual fees for GSA (U.S.) and GSA (UK) research reports received from subject companies represent approximately 3% of each of GSA (U.S.)s and GSA (UK)'s respective total revenues.

Green Street publishes research reports covering issuers that may offer and sell securities in an initial or secondary offering. Broker-dealers involved with selling the issuers securities or their affiliates may pay compensation to GSA upon their own initiative, or at the request of Green Street's clients in the form of soft dollars, for receiving research reports published by Green Street.

The information contained in this presentation is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This presentation is produced solely for informational purposes and is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it is not, and it should not be construed as, advice designed to meet the particular investment needs of any investor. This presentation is not an offer or the solicitation of an offer to sell or buy any security.

Green Street Advisors is an accredited member of the Investorside Research Association, whose mission is to increase investor and pensioner trust in the U.S. capital markets system through the promotion and use of investment research that is financially aligned with investor interests.

Green Street generally prohibits research analysts from sending draft research reports to subject companies. However, it should be presumed that the analyst(s) who authored this presentation has(/have) had discussions with the subject company to ensure factual accuracy prior to publication, and has(/have) had assistance from the company in conducting due diligence, including visits to company sites and meetings with company management and other representatives.

Green Street Advisors Disclosure Statement

37

www.greenstreetadvisors.com 2013, Green Street Advisors, Inc. Use of this report is subject to the Terms of Use listed at the end of the report

Terms of Use

Protection of Proprietary Rights: To the extent that this presentation is issued by GSA (U.S.), this material is the proprietary and confidential information of Green Street Advisors, Inc., and is protected by copyright. To the extent that this presentation is issued by GSA (UK), this material is the proprietary and confidential information of Green Street Advisors (U.K.) Limited, and is protected by copyright.

This presentaion may be used solely for reference for internal business purposes. This presentation may not be reproduced, re-distributed, sold, lent, licensed or otherwise transferred without the prior consent of Green Street. All other rights with respect to this presentation are reserved by Green Street.

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Review of Recommendations: Unless otherwise indicated, Green Street reviews all investment recommendations on at least a monthly basis. The research recommendation contained in this report was first released for distribution on the date identified on the cover of this report. Green Street will furnish upon request available investment information supporting the recommendation(s) contained in this report.

At any given time, Green Street publishes roughly the same number of BUY recommendations that it does SELL recommendations.

Green Streets BUYs have historically achieved far higher total returns than its HOLDs, which, in turn, have outperformed its SELLs.

The results shown in the table in the upper right corner are hypothetical; they do not represent the actual trading of securities. Actual performance will vary from this hypothetical performance due to, but not limited to 1) advisory fees and other expenses that one would pay; 2) transaction costs; 3) the inability to execute trades at the last published price (the hypothetical returns assume execution at the last closing price); 4) the inability to maintain an equally-weighted portfolio in size (the hypothetical returns assume an equal weighting); and 5) market and economic factors will almost certainly cause one to invest differently than projected by the model that simulated the above returns. All returns include the reinvestment of dividends. Past performance, particularly hypothetical performance, can not be used to predict future performance.

(1) Results are for recommendations made by Green Streets North American Research Team only (includes securities in the US, Canada, and Australia). Uses recommendations given in Green Street's "Real Estate Securities Monthly" from January 28, 1993through January 2, 2013. Historical results from January 28, 1993 through October 1, 2012 were independently verified by an international "Big 4" accounting firm. The accounting firm did not verify the stated results subsequent to October 1, 2012.As of October 1, 2012, the annualized total return of Green Streets recommendations since January 28, 1993 was: Buy +25.2%, Hold +11.1%, Sell -0.8%, Universe +11.6%.

(2) Company inclusion in the calculation of total return has been based on whether the companies were listed in the primary exhibit of Green Streets "Real Estate Securities Monthly. Beginning April 28, 2000, Gaming C-Corps and Hotel C-Corps, with the exception of Starwood Hotels and Homestead Village, are not included in the primary exhibit and therefore not included in the calculation of total return. Beginning March 3, 2003, all Hotel companies are excluded.

(3) All securities covered by Green Street with a published rating that were included in the calculation of total return. Excludes not rated securities.

Per NASD rule 2711, Buy = Most attractively valued stocks. We recommend overweight position; Hold = Fairly valued stocks. We recommend market-weighting; Sell = Least attractively valued stocks. We recommend underweight position.

Green Street will furnish upon request available investment information regarding the recommendation

Green Street Advisors Disclosure Statement

Recommendation Distribution (as of 1/2/13)

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Total Return of Green Street's Recommendations1,2

Year Buy Hold Sell Universe3

2012 24.5% 24.7% 18.9% 23.0%2011 18.9% 7.6% -4.7% 7.6%2010 43.3% 32.8% 26.6% 33.8%2009 59.0% 47.7% 6.0% 37.9%2008 -28.1% -30.9% -52.6% -37.3%2007 -6.9% -22.4% -27.8% -19.7%2006 45.8% 29.6% 19.5% 31.6%2005 26.3% 18.5% -1.8% 15.9%2004 42.8% 28.7% 16.4% 29.4%2003 43.3% 37.4% 21.8% 34.8%2002 17.3% 2.8% 2.6% 5.4%2001 34.9% 19.1% 13.0% 21.1%2000 53.4% 28.9% 5.9% 29.6%1999 12.3% -9.0% -20.5% -6.9%1998 -1.6% -15.1% -15.5% -12.1%1997 36.7% 14.8% 7.2% 18.3%1996 47.6% 30.7% 18.9% 32.1%1995 22.9% 13.9% 0.5% 13.5%1994 20.8% -0.8% -8.7% 3.1%1993 27.3% 4.7% 8.1% 12.1%

Cumulative Total Return 8603.3% 729.4% -9.7% 807.9%Annualized 25.1% 11.2% -0.5% 11.5%

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