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Pick Up StocksAnnual Real Estate Securities OutlookJanuary 2008
David M. Fick, CPA, [email protected] 443-224-1308
Rod Petrik, [email protected] 443-224-1306
John W. Guinee, [email protected] 443-224-1307
Jerry L. Doctrow, [email protected] 443-224-1309
Nathan Isbee, [email protected] 443-224-1346
Senior Real Estate Securities Analysts
David M. Fick, CPA REITs, Retail, Industrial, Commercial FinanceJerry L. Doctrow Health CareJohn W. Guinee OfficeRod Petrik Multifamily, Lodging
The Stifel Nicolaus Real Estate Securities Team
Nathan Isbee Analyst, Retail
Josh Barber Associate Analyst, Industrial, Commercial Finance
Dan Bernstein Associate Analyst, Health Care Real Estate
Gabe Buerkle, CFA Associate Analyst, Lodging
Simon Yarmak Associate Analyst, Multifamily
Erin Aslakson Associate Analyst, Office
Jennifer Hummert Associate Analyst, NNN, REITs
Deb Johnston Real Estate Group Administrator
Stifel REIT Team
Pick Up Stocks2008 Annual Real Estate Securities Outlook
Chicago 1/9
New York 1/7 Philadelphia 1/10
Baltimore 1/4 Boston 1/8
All relevant disclosures and certifications appear on pages 88-89 of this report.
REITs Suffer Debt Market Crisis in 2007
Source: FactSet Research Systems Inc., Stifel Nicolaus Research
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
To
talR
etu
rn
Office -20.6% 10.5% 19.8% 15.9%
Industrial -5.5% 10.8% 18.3% 16.0%
Regional Malls -14.4% 10.7% 24.0% 25.5%
Shopping Centers -14.0% 8.8% 20.7% 21.5%
Apartment -25.8% 5.5% 15.1% 11.1%
Hotel -24.8% 1.4% 11.9% 7.3%
Healthcare 3.6% 15.7% 25.8% 29.8%
Diversified -12.5% 12.1% 20.9% 17.7%
Equity REIT Total -16.8% 8.2% 17.9% 18.3%
1 Year 3 Year 5 Year 7 Year
Cumulative Annualized REIT Returns Through December 31, 2007
2007 – No Eight-Peat for REITs
• Down 16.8% in ’07 vs. up 35.9% in ’06, 12.1% in ’05; 17.9% 5 yr
• The entire story for REITs in 2007 was debt market liquidity implosion
• High volatility accelerated
• M&A ended
• Sector differentiation in 2007
– Stock picking was important – every major sector had outperformers
• 15 REITs had total returns above 0%
• 57 REITs had total returns below negative 20%
– Coastal, growth theme
– Big Caps underperformed – 30 large caps in RMP were down 18.0% vs
RMS down 16.8%.
2007 – REIT Reversal
• Unprecedented outflows from mutual funds and non-dedicated shops exited
• Average dividend yield increased from 3.7% to 4.9%
– 10-year went from 4.7% (1/1) to 5.3% (6/13) to 4.04% (12/31)
– Yield spread re-established, ended at 87 (192 bps reversal)
• Forward FFO multiples decreased from 17.9x to 13.3x
• Forward FAD multiples decreased from 21.9x to 16.2x
• Private market support disappeared — primary factor as REITs traded down
with liquidity crisis
• Dividend increasers outperformed again
Equity REIT M&A Activity ’04 – ’07 ($ millions)
Source: NAREIT, Stifel Nicolaus Research
Equity TotalAnnounced Ticker Type Target Acquiror Value* Value*
1/22/2004 GL Privatization Great Lakes REIT Aslan Realty Partners, LLC 241 241
5/3/2004 KTR Merger Keystone Property Trust Prologis 950 1,600
6/21/2004 CPG Merger Chelsea Property Group Simon Property Group 3,500 4,800
8/20/2004 RSE Merger The Rouse Company General Growth Properties, Inc. 7,200 12,600
8/24/2004 PLRE Merger Price Legacy Corporation Kimco Realty Corporation 696 1,200
10/4/2004 SMT Merger Summit Property Group Camden Property Trust 1,085 1,900
10/25/2004 TCR Merger Cornerstone Realty Income Trust Colonial Properties Trust 650 1,500
11/23/2004 PGE Privatization Prime Group Realty Trust The Lightstone Group 294 890
12/20/2004 KRT Privatization Kramont Realty Trust Centro Properties Limited 610 1,275
6/6/2005 CDX Merger Catellus Development Corporation ProLogis 3,900 4,900
6/7/2005 GBP Privatization Gables Residential Trust ING Clarion 1,800 3,000
6/17/2005 CRO Privatization CRT Properties, Inc. DRA Advisors LLC 937 1,700
9/2/2005 CARS Privatization Capital Automotive REIT DRA Advisors LLC 1,700 3,400
10/3/2005 PP Merger Prentiss Properties Trust Brandywine Realty Trust 1,900 3,300
10/24/2005 AML Privatization AMLI Residential Properties Morgan Stanley Real Estate Advisors 969 2,100
12/7/2005 CNT Privatization CenterPoint Properties Trust CalEast Industrial Investors 2,500 3,400
12/19/2005 TCT Privatization Town And Country Onex Real Estate 860 1,300
12/21/2005 ARI Privatization Arden Realty GE Real Estate 3,200 4,800
2/21/2006 MHX Privatization Meristar Hospitality Blackstone 1,300 2,600
2/23/2006 BED Privatization Bedford Properties LBA Realty LLC 450 900
3/6/2006 CRE Privatization CarrAmerica Blackstone 3,000 5,600
3/7/2006 SHU Merger Shurgard Storage Public Storage, Inc. 2,600 5,000
5/1/2005 CRP Merger CNL Retirement Properties Healthcare Property Trust (HCP) 3,600 5,300
5/22/2006 BOY Privatization Boykin Lodging Braveheart Holdings LP 274 416
5/22/2006 JAMS Privatization Jameson Inns JE Roberts & Co. 181 371
6/5/2006 TRZ Combination Trizec Brookfield/Blackstone 6,574 8,900
7/9/2006 HTG Privatization Heritage Property Investment Trust Centro/Watts 1,773 3,200
7/10/2006 PNP Merger Pan Pacific Retail Properties Kimco Realty Corporation 2,900 4,000
7/23/2006 NKT Merger Newkirk Realty Trust Lexington Corporate Properties Trust 1,081 4,600
8/3/2006 RA Merger Reckson Associates Realty Corp. SL Green Realty Corp. 4,000 6,000
8/7/2006 SIZ Merger Sizeler Property Morguard Corp. (MRC) 324 409
8/21/2006 GLB Privatization Glenborough Realty Trust Morgan Stanley Real Estate Advisors 926 1,900
8/31/2006 BNP Privatization BNP Residential Properties Inc. Babcock & Brown 316 766
9/13/2006 WRS Merger Windrose Medical Properties Health Care REIT 451 877
9/18/2006 TRA Merger TravelCenters of America Hospitality Property Trust (HPT) 950 1,900
9/22/2006 CPV Privatization CentraCore Properties Trust GEO Group 356 396
10/23/2006 GPT Merger Government Properties Trust Record Realty Trust 223 484
10/30/2006 TSY Privatization TrustStreet Properties GE Capital Solutions 1,145 3,000
11/6/2006 COE Privatization Columbia Equity Trust JP Morgan Asset Management 253 502
11/19/2006 EOP Privatization Equity Office Properties Blackstone 23,000 39,000
12/21/2006 NHR Merger National Healthcare Realty (NHR) National Healthcare Corp. (NHC) 225 253
1/19/2007 CHP Privatization CNL Hotels & Resorts Morgan Stanley Real Estate Advisors 3,200 6,600
2/16/2007 MLS Merger The Mills Corporation Simon Properties & Farallon Capital 1,640 7,900
2/21/2007 WXH Privatization Winston Hotels Inland American Real Estate 430 697
2/27/2007 NXL Privatization New Plan Exel Centro Properties Limited 3,400 6,200
3/13/2007 SFC Privatization Spirit Finance Macquarie Bank 1,640 3,200
4/16/2007 KPA Privatization Innkeepers USA Apollo Investment Corp. (AINV) 800 1,500
4/24/2007 HIH Privatization Highland Hospitality JER Partners 1,210 2,000
4/30/2007 EHP Privatization Eagle Hospitality Apollo Investment Corp. (AINV) 319 668
5/22/2007 CEI Privatization Crescent Real Estate Morgan Stanley Real Estate Advisors 2,885 6,500
5/29/2007 ASN Privatization Archstone-Smith Tishman Speyer & Lehman Brothers 15,253 22,000
6/21/2007 ENN Privatization Equity Inns Goldman Sachs Whitehall Fund 1,287 2,200
6/25/2007 APRO Privatization America First Apartment Investors Sentinel Real Estate 281 532
7/3/2007 HLT Privatization Hilton Hotels Blackstone 20,546 26,000
7/25/2007 RPB Merger Republic Property Trust Liberty Property Trust (LRY) 485 900
11/5/2007 AFR Merger American Financial Realty Gramercy Capital (GKK) 1,100 3,400
2007 Total 54,476 90,297
* In Millions 2004-2007 Total 143,370 240,577
Fund Flows Still Track Performance
REIT Mutual Funds Flows vs. Sector Performance
$(2000)
$(1600)
$(1200)
$(800)
$(400)
$
$400
$800
$1200
$1600
$2000
$2400
$2800
De
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6
Ma
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7
Ju
n-9
7
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p-9
7
De
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7
Ma
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8
Ju
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8
Se
p-9
8
De
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8
Ma
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9
Ju
n-9
9
Se
p-9
9
De
c-9
9
Ma
r-0
0
Ju
n-0
0
Se
p-0
0
De
c-0
0
Ma
r-0
1
Ju
n-0
1
Se
p-0
1
De
c-0
1
Ma
r-0
2
Ju
n-0
2
Se
p-0
2
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c-0
2
Ma
r-0
3
Ju
n-0
3
Se
p-0
3
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3
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4
Ju
n-0
4
Se
p-0
4
De
c-0
4
Ma
r-0
5
Ju
n-0
5
Se
p-0
5
De
c-0
5
Ma
r-0
6
Ju
n-0
6
Se
p-0
6
De
c-0
6
Ma
r-0
7
Ju
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7
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p-0
7
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c-0
7
Fu
nd
Flo
ws
toD
ed
ica
ted
RE
ITM
utu
alF
un
ds
($M
illio
ns
)
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
RM
SR
EIT
Ind
ex
Monthly Net REIT Funds Flows RMS Index
Source: Stifel Nicolaus, AMG Data
As of 12/31/2007
RMS: 975.61
1996: $2,737 1997: $4,763 2003: $4,6132002: $3,4102001: $242000: $3191999: $(867)1998: $(493) 2004: $6,815 2005: $2,064Annual
Inflows:
2006: $6,479 2007: ($5,889)
Japanese Funds Flows Reverse
U.S./Global REIT Mutual Funds Trading in Japan
Funds Under Management as of November 30, 2007(based on 109.979 Yen/USD exchange rate)
0
5
10
15
20
25
30
Sep-0
3
Oct
-03
Nov
-03
Dec
-03
Jan-
04
Feb-0
4
Mar
-04
Apr-0
4
May
-04
Jun-
04
Jul-0
4
Aug-0
4
Sep-0
4
Oct
-04
Nov
-04
Dec
-04
Jan-
05
Feb-0
5
Mar
-05
Apr-0
5
May
-05
Jun-
05
Jul-0
5
Aug-0
5
Sep-0
5
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb-0
6
Mar
-06
Apr-0
6
May
-06
Jun-
06
Jul-0
6
Aug-0
6
Sep-0
6
Oct
-06
Nov
-06
Dec
-06
Jan-
07
Feb-0
7
Mar
-07
Apr-0
7
May
-07
Jun-
07
Jul-0
7
Aug-0
7
Sep-0
7
Oct
-07
US
$B
illio
ns
Source: Heitman International LLC, Stifel Nicolaus
Fund Balances:(billions)
12/31/03 $0.23312/31/04 $4.49112/31/05 $9.563
12/31/06 $20.15211/30/07 $18.143
REIT Dividend Yield Spread Reverts to Positive
REIT Dividend Yield vs. 10-Year Treasury Yield
vs. Corporate BBB 7-10 Year
Modern REIT Era 1991 - 2007
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
12/91 12/92 12/93 12/94 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07
REIT Dividend Yield 10-Year Treasury Yield SSB BBBSource: Bloomberg, ThomsonOne
As of 12/31/2007:
REIT Div. Yield 4.91%
10-Yr. Treas. Yield 4.04%
Corporate BBB Yield 6.11%
10-Yr. Treas. Spread to REIT Yield 0.87%
Dividend Increasers Outperformed Again
Source: SNL, FactSet Research Systems, Inc, Stifel Nicolaus Research
2007 Equity REIT Total Returns Grouped by Dividend Policy
-12.4%-16.8%
-25.2%
-53.4%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
Dividend Increase RMS Dividend Same Dividend Decrease
To
talR
etu
rn
75 Stocks
36 Stocks *
2 Stocks
(FMP, YSI)
* Includes stocks that maintained regular dividend but paid a special dividend (HR, CLP)
Things We Know
• Institutional real estate is being re-priced
• Fundamentals are deteriorating for all sub-sectors, except health care
• Real estate lending spreads are at unprecedented levels
• Capital is king:– Debt markets are historically tight
– Equity is cautious
• Investors are dealing with uncertainty– U.S. economy
– Interest rates
– Housing values
– Consumer credit and spending
– Jobs
• Short-term rates are trending down
• REIT investors get a dividend & dividend growth over the long term
• The unknowns will control the outcome
Things We Don’t Know
• Where are long-term rates headed?
• Will the weak dollar and overseas investors bail out U.S. real estate?
• Will there be a recession in ’08?
– If so, 2-3 quarters or 2-3 years?
• How much will the government intervene in the housing crisis?
– Will it be effective?
• What will the national election bring?
– Will the potential loss of 15% capital gain treatment pressure equities?
• How far will commercial real estate values decline?
– Will NAV drive investor decisions?
– Could there be a flight to quality?
How Far Will Real Estate Values Decline?
Long-term value support from:
• NOI growth on flat cap rates (from lease-up and positive mark-to-market rents)
• Low interest rates — Hard assets always benefit from cheap credit
• Huge demand backlog for institutional real estate
• Population & employment growth remains healthy
• Limited new construction & high replacement costs
But cap rates must adjust:
• Real estate is still a spread investment game
• Debt liquidity is gone and when it returns, the rules will likely be different
• More equity = lower prices
• The answer varies by property, but in general, we believe no movement for
trophies, 50 – 100 bps for “A” assets, 75 – 200 for “B”, and 200+ for “C” and
tertiary markets
Private Values/Cap Rates Reversing?
Source: Real Capital Analytics, Stifel Nicolaus Research
Real Estate Cap Rates, 2001 - 2008*
0%
2%
4%
6%
8%
10%
12%
Q1
'01
Q2
'01
Q3
'01
Q4
'01
Q1
'02
Q2
'02
Q3
'02
Q4
'02
Q1
'03
Q2
'03
Q3
'03
Q4
'03
Q1
'04
Q2
'04
Q3
'04
Q4
'04
Q1
'05
Q2
'05
Q3
'05
Q4
'05
Q1
'06
Q2
'06
Q3
'06
Q4
'06
Q1
'07
Q2
'07
Q3
'07
Q4
'07
Q1
'08E
Q2
'08E
Q3
'08E
Q4
'08E
Apartment Industrial Office Retail
Note: Real Capital Analytics' data include all U.S.
transactions, including non-institutional grade real
estate. Most transactions involving REITs occur at
lower yields - the point of this chart is the trend
line.
* 2001-2007 is RCA data; 2008 is Stifel estimate
Unprecedented Real Estate Debt Spreads
10-Year Conduit CMBS Spreads to Treasuries, 1997-2007
0
100
200
300
400
500
600
700
800
900
1000
1100
1/97 7/97 1/98 7/98 1/99 7/99 1/00 7/00 1/01 7/01 1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06 7/06 1/07 7/07
Bas
isP
oin
ts
AAA A BBB BBB- BBSource: Bloomberg, Morgan Stanley, Stifel Nicloaus Research
As of 12/21/07
AAA: 165 bps
A: 459 bpsBBB: 789 bps
BBB-: 964 bps
BB: 1000 bps
Our 2008 REIT Sector Predictions
• Total Sector Return:
– 0% to negative 5%
– RMS 951
– Multiple contraction
• We think Health Care, Industrial, & Community Shopping Centers
(non-developer) will outperform
• Stock picking will beat sector allocation
• Negative money flows – continued rotation away from real estate
• Stocks with increasing dividends will outperform again
• Average FFO growth will be 6.3%, down from 7.8% in ’07
• A few dividend cuts for equity REITs, but more focus on coverage
• Liquidity may return cautiously late in the year
S&P 500 REITs - 2007 Performance Disparity
Stifel Nicolaus ’08 REIT Sector Analysis & Weighting Recommendations
Stifel Sector Weight – 07
-16.8%17.9%
3.6%25.8%
-24.8%11.9%
-25.8%15.1%
-14.2%22.4%
-5.5%20.3%
-20.6%19.8%
2007 Total Return
5 Yr Total Return
Stock Pick Keys = Operating leverage, earnings drivers, growthKey Variable = Interest rates, yield alternatives
0.0%
5.4%
6.1%
3.4%5.2%
Jobs, HousingCrisis
Multi-Family
Property Values
0%-(5.0%)10.0%-5.0%2.5%5.0%-5.0%Est. Total Return – ’08
8.9%7.3%8.0%9.6%8.1%14.2%FFO Growth – ’09E
6.3%8.5%10.1%7.8%9.9%1.9%FFO Growth – ’08E
Expected ’08 FFO Multiple Direction
Expected Div Yield Direction
3.7%4.9%
4.7%5.5%
4.5%7.6%
3.6%4.8%
3.7%4.6%
4.0%4.5%
12/31/06 Div. Yield
12/31/07 Div. Yield
NAV Direction – ’08
Fundamentals Demand/Supply
Debt MarketHCSpending
GDP & Corp.Earnings
ConsumersGDPJobsNew Supply
Key Drivers
Strips
MallsStifel Sector Weight – 08
REITSector
HealthCareLodgingRetailIndustrialOffice
Source: SNL, Stifel Nicolaus Research19
Things We Know
Health Care REITs:
• Health care seen as defensive sector
• Slowing economy makes stable income/yield moreattractive
• Improved growth from acquisitions likely with leveragedbuyers out of the market
• Potential M&A
But Less Attractive Relative Value
Averages are market-weighted based upon fully diluted equity market capitalizations
FAD figures are Stifel Nicolaus estimates for companies under coverage
Sources: Thomson One, SNL, Stifel Nicolaus Research
Price To 2008 FAD
Stifel Nicolaus REIT Coverage as of 12-31-07
10.6
15.2 14.8
17.7
20.2
17.3
15.415.5
0.0
5.0
10.0
15.0
20.0
25.0
Health Care Lodging Retail Industrial Diversified &
Specialty
Storage Office Multifamily
P/FAD
Mkt Weighted Average
16.2x as of 12/31/07
Less Attractive Yield Spread
HC REIT Dividend Yields to Equity REIT Yields and Treasury Yields - 5 Years
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Dec-
02
Jun-
03
Dec-
03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec-
06
Jun-
07
Dec-
07
HC REIT to Treasury Spread
HC REIT to Equity REIT Spread
REIT to Equity REIT Yield Spread
5yr Average = +159 bps
REIT to Treasury Spread
5yr Average = +216 bps
Source: NAREIT, Bloomberg, ILX
12/31/07
+142 bps to Treas.
+177 bps w /o Ventas
HC REIT Dividend Yield - 5.45%
Equity REIT Yield - 4.91%
10-Year Treasury Yield - 4.04%
12/31/07
+54 bps to Equity REITs
+89 bps w /o Ventas
See disclosure tab of spreadsheet for details and important disclosures and certifications
Things We Don’t Know
• Could senior housing pricing/occupancy erode?
• Could the economy turn positive, prompting rotation intocommercial property sectors?
• Could politics heighten perceived risk?
• Will increased equity issuance lessen investor interest?
Ratings Going Into 2008
Buy-Rated
• Health Care REIT (HCN)
• Healthcare Realty Trust(HR)
• LTC Properties (LTC)
• Omega Healthcare (OHI)
• Ventas (VTR)
Income List
• Senior HousingProperties Trust(SNH)
Health Care REITs – 2008 Best Ideas
Healthcare Realty Trust (HR)
– Focused $1B + Medical Office REIT
– Unique development strategy with substantial pipeline
– Trading at 18% discount to NAV (as of 12/31/07)
– Negative 2008 FAD growth because of asset sale but double-digit FADgrowth in 2009
– Potential acquisition candidate
LTC Properties (LTC)
– $750M + market cap senior housing & skilled nursing REIT
– Under 10% debt to book
– Ability to grow FAD/dividend with modest level of investments
– Has increased business development efforts
– Potential acquisition candidate
Office REITsSub-Sector Review
John W. Guinee, III
2007 Office Sector Summary
• What we know:– 2007 (21.5%) Total Return for office REITs versus (16.8%) for RMS
– BUT, excluding BXP and DEI, Total Return falls to (28.3%)
– Office REITs are at 17%-28% discounts to our NAV estimate range
– Weighted Average dividend yield of 4.9%
– Weighted Average 2007-2009 FFO growth of 6.6%
– Little new development expected after 2008 by merchant builders
– Embedded positive roll ups in key markets
– New supply should exceed absorption; declining occupancy in 2008
– Little net rent traction except in West LA, DC CBD, SoFL, Boston CBDand San Francisco CBD
• What we don’t know:– Will Midtown fundamentals weaken appreciably?
– Will any M&A activity occur?
– Will managements focus on FFO & FAD again?
Office REITs –Investment Strategy
Source:Company Data, SNL, Stifel Nicolaus Estimates
CORE
Company / 2007 Trailing 3-Year
Index 1Q07 12/31/07 Total Return* Total Return*
US REIT (RMS) N/A N/A -17% 27%
BPO N/A 5.9% -25% 24%
BXP 4.4% 5.6% -10% 80%
SLG 3.6% 4.8% -28% 67%
DEI 4.0% 4.9% -12% N/A
OFC 5.3% 7.4% -35% 18%
KRC N/A 6.7% -27% 43%
MPG 5.7% 5.6% -22% 25%
HIW 7.1% 9.3% -25% 24%
CLI 6.8% 9.2% -30% -13%
BDN 6.5% 8.3% -43% -28%
SPECIALIZED
Implied Cap Rate 2007 Trailing 3-Year
Company 1Q07 12/31/07 Total Return Total Return*
HRP 8.3% 10.1% -34% -25%
LXP 7.1% 10.0% -20% -7%
FPO 6.6% 8.2% -37% -12%
BMR 6.8% 7.7% -15% 20%
WRE 5.7% 6.9% -17% 7%
* Total Return figures as of 12/31/07
Implied Cap Rate
Stifel’s Office Replacement Cost Study
Goals:
• Complement NAV estimate
• Provide key private market investment metric
• Indicate potential rent spikes
• Understand office and residential trade-off
• Quantify functional obsolescence
• Estimate downside protection
Replacement Cost Breakdown & Comparison
Source:Company Data, Stifel Nicolaus Estimates
High Rise Mid Rise w/Structured Pkg
High Rise w/Structured Pkg
Low Rise w/Surface Pkg
Low Rise w/Surface Pkg
Mid Rise w/Structured Pkg
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
Midtown Wash DC CBD SoCal Suburban Tysons Corner BWI Corridor Atlanta
Re
pla
ce
me
nt
Co
st
($)
Land Shell TI Parking Soft Costs
$-
$50
$100
$150
$200
$250
$300
MP
G
HR
P
SL
G
BD
N
HIW
KR
C
CL
I
BP
O
LX
P
DE
I
OF
C
BX
P
FP
O
BM
R
$/P
er
Share
Share Price Gross RC/share Adjusted RC/share
Office Replacement Cost Study – Per Share
Source:Company Data, Stifel Nicolaus Estimates
$93
$179
$262
$19
$39$30
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
HIW
HR
P
SL
G
KR
C
CL
I
BD
N
MP
G
BP
O
LX
P
DE
I
OF
C
BX
P
FP
O
BM
R
$/P
er
Square
FootValue/ SF Gross RC/SF Adjusted RC/SF
Office REIT Replacement Cost Study – Per SF
*SLG – Manhattan only
Source: Company Data, Stifel Nicolaus Estimates
$859
$557
$1,152
$404$518
$617
*
Perspective
• Leasing Market Dynamics
– Landlords have: (1) pricing power in a 7% vacant market, (2) pricingpower in Class A properties in 10% vacant markets, and (3) virtually nopricing power when a market is 15%+ vacant.
– A tenants pay A rental rates for A product; Employee driven
– Leasing is cyclical in nature
– Leasing decisions are location first and price/product second
• Investment Sale Markets
– Most institutional markets are dominated by merchant builders.
– Development at a 100-200 basis point profit, should continue.
– Negative Leverage for Institutional Quality assets expected to continue
– Aggressive underwriting occurs where (1) investing below ReplacementCost, (2) equilibrium will occur, and (3) rent spike potential
Comparatively Shallow Office Recovery
Source: Property & Portfolio Research, Stifel Nicolaus
• The economy added an average of 500k office jobs per year in the late 1990’s recovery• Since 2004, on average, 355k office jobs were added per year• PPR reduced 2008 job growth expectations from approximately 340k to 210k• 2004-2012, PPR forecasts an average of 332k office jobs will be created• Vacancy hit 10% in last recovery, 14.8% at 3Q07 and is expected to rise to 15%+ in ‘08-’09
-600
-400
-200
0
200
400
600
800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Off
ice
-Us
ing
Jo
bG
row
th('
00
0's
)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Va
ca
nc
ya
s%
Office Using Job Grow th Vacancy
Office Market Fundamentals
Source: CBRE and Grubb & Ellis
Stock Under Construction Vacancy + Avg. AnnualMetro (MM) SF Const. (MMSF) 3Q06 3Q07 Chg %of Stock Construction Absorp. (MMSF)
1 Detroit, MI 72 0.19 23.4% 25.1% 1.7% 0.3% 25.4% 0.09
2 Dallas-Ft. Worth, TX 184 4.85 21.7% 22.3% 0.6% 2.6% 24.9% 2.80
3 Charlotte, NC 34 3.75 14.8% 11.6% -3.2% 11.2% 22.8% 1.40
4 Atlanta, GA 127 5.09 19.4% 18.5% -0.9% 4.0% 22.5% 2.94
5 Las Vegas, NV 30 2.71 9.7% 12.4% 2.7% 9.2% 21.6% 1.20
6 Austin, TX 35 2.21 15.4% 15.3% -0.1% 6.2% 21.5% 0.96
7 Raleigh-Durham, NC 41 2.95 15.6% 14.2% -1.4% 7.2% 21.4% 1.63
8 Cincinnati, OH 35 1.17 18.8% 17.5% -1.3% 3.3% 20.8% 0.46
9 Phoenix, AZ 67 3.55 10.9% 14.3% 3.4% 5.3% 19.6% 2.00
10 Chicago, IL - Suburban 105 2.07 18.3% 17.6% -0.7% 2.0% 19.6% 1.00
11 Indianapolis, IN 31 0.87 15.7% 15.9% 0.2% 2.8% 18.7% 0.58
12 Nashville, TN 29 2.52 10.3% 9.7% -0.6% 8.7% 18.4% 0.75
13 Cleveland, IN 35 0.05 18.2% 17.7% -0.5% 0.1% 17.8% 0.07
14 Suburban Boston, MA 101 1.32 15.7% 15.3% -0.4% 1.3% 16.6% 0.83
15 PalmBeach, FL 22 1.01 8.5% 11.9% 3.4% 4.7% 16.6% N/A
16 BWI - Columbia Corridor, MD 20 1.19 - 10.6% N/A 5.8% 16.5% N/A
17 San Diego County, CA 54 2.36 9.7% 12.0% 2.3% 4.4% 16.4% 0.94
18 Chicago, IL - CBD 120 4.35 16.6% 12.7% -3.9% 3.6% 16.3% 2.10
19 Miami, FL 39 3.32 8.1% 7.7% -0.4% 8.6% 16.3% 1.20
20 Baltimore City, MD 20 0.55 13.9% 12.9% -1.0% 2.8% 15.7% N/A
Vacancy
20 markets with20 markets with largestlargest total Vacancy + Construction %total Vacancy + Construction %
Office Market Fundamentals
20 markets with20 markets with smallestsmallest total Vacancy + Construction %total Vacancy + Construction %
Stock Under Construction Vacancy+ Avg. AnnualMetro (MM) SF Const. (MMSF) 3Q06 3Q07 Chg %of Stock Construction Absorp. (MMSF)
1 Midtown South, NY 75 0.00 7.5% 4.0% -3.5% 0.0% 4.0% 0.30
2 Midtown, NY 201 3.55 5.3% 4.6% -0.7% 1.8% 6.4% 0.10
3 West LA&H&WCorridor, CA 66 0.59 7.1% 6.6% -0.4% 0.9% 7.5% N/A
4 CBDBoston, MA 68 1.22 8.2% 6.1% -2.1% 1.8% 7.9% 0.55
5 Downtown, NY 81 2.60 12.1% 6.5% -5.6% 3.2% 9.7% 1.11
6 Cambridge, MA(Off. &Lab) 20 0.42 9.0% 7.8% -1.2% 2.1% 9.9% 0.32
7 Suburban LA, CA 97 (1.57) 9.7% 8.4% -1.3% -1.6% 6.8% 2.00
8 Suburban Maryland (DC) 81 0.61 8.5% 9.2% 0.7% 0.8% 9.9% 0.88
9 Oakland, CA 27 0.22 12.5% 9.8% -2.7% 0.8% 10.6% 0.78
10 San Francisco CBD, CA 79 2.15 10.7% 8.5% -2.2% 2.7% 11.2% 1.42
11 San Francisco Peninsula, CA 43 0.98 13.8% 9.0% -4.8% 2.3% 11.3% 1.28
12 San Jose, CA(off) 60 1.18 12.7% 10.1% -2.6% 2.0% 12.1% 1.26
13 Broward County, FL 24 0.68 8.3% 9.5% 1.2% 2.9% 12.3% 0.19
14 N. NewJersey 151 0.68 13.5% 12.2% -1.3% 0.4% 12.6% 1.50
15 Fairfield, County, CT 44 0.49 - 11.7% N/A 1.1% 12.8% 0.16
16 CBDLos Angeles, CA 31 0.00 13.6% 13.4% -0.2% 0.0% 13.4% 0.08
17 Portland, OR 40 1.05 11.5% 10.9% -0.6% 2.6% 13.5% 0.80
18 Orlando, FL 34 1.58 7.6% 8.9% 1.3% 4.7% 13.6% 0.93
19 Northern Virginia 171 6.23 8.6% 10.0% 1.4% 3.7% 13.7% 3.50
20 Westchester, NY 32 0.00 12.2% 13.7% 1.5% 0.0% 13.7% 0.09
Vacancy
Source: CBRE and Grubb & Ellis
2008 Office REIT FFO Projections
Source:Company Data, Stifel Nicolaus Estimates
Normalized FFO Growth & 2009 Estimates
Annualized 12/31/07
Growth Price/FFOTicker Rating 2006 2007E 2008E 2009E 2007-09E 2008E
Core Office REITs
SLG H 4.61$ 5.76$ 5.24$ 5.87$ 1.0% 17.8x
SLG Ex * H 3.94$ 4.02$ 4.74$ 5.38$ 15.7% 19.7x
BPO B 1.25$ 1.57$ 1.71$ 2.17$ 17.6% 11.3x
BPO Ex ** B 0.83$ 0.99$ 1.34$ 1.78$ 34.1% 14.4x
BXP H 4.25$ 4.63$ 4.67$ 5.16$ 5.6% 19.7x
DEI H 0.98$ 1.16$ 1.36$ 1.68$ 20.1% 16.6x
OFC H 1.91$ 2.24$ 2.42$ 2.74$ 10.6% 13.0x
KRC H 3.48$ 3.16$ 3.58$ 4.03$ 12.9% 15.4x
MPG B 1.96$ 0.75$ 0.81$ N/A N/A 36.4x
HIW H 2.37$ 2.74$ 2.44$ 2.58$ -3.0% 12.0x
CLI H 3.73$ 3.53$ 3.46$ 3.54$ 0.1% 9.6x
BDN H 2.49$ 2.58$ 2.56$ 2.76$ 3.4% 6.8x
Specialized REITs
HRP H 1.19$ 1.14$ 1.12$ 1.12$ -0.9% 6.9x
LXP B 1.28$ 1.84$ 1.52$ 1.46$ -10.9% 9.6x
FPO H 1.62$ 1.65$ 1.79$ 1.97$ 9.3% 9.7x
BMR H 1.74$ 1.90$ 1.94$ 1.94$ 1.0% 11.9x
WRE H 2.12$ 2.30$ 2.40$ 2.57$ 5.7% 13.1x
* These FFO estimates for SLG are adjusted to exclude misc. incentive fees and other income
** These FFO estimates for Brookfield are adjusted to exclude BPO's homebuilding operations
Ratings Key: B - Buy; H - Hold; S - Sell
Normalized FFO
Earnings Drivers
Source:Company Data, Stifel Nicolaus Estimates
Earnings Drivers Overview
Impact Immediate Medium Term
GAAPContract to
Mkt >5%/2009
OccupancyGains>1%/yr Rent Spikes Low Leverage
PositiveSpread Acq.
DevelopmentPipeline
Franchise/Dominant
MktPosition
Value inLand
Above MktDebt
Rolling
BXP YYY N Y Y N YY YY Y Y
BPO YYYY N Y N N YY Y YY Y
MPG YY YY Y N N YY YY Y N
OFC Y N N Y N YY YY YY Y
DEI YYYY N YY Y N N YY N N
KRC Y N N Y N YY YY YY N
SLG YYYY N N Y N N YY N N
BMR Y YY N N N Y YY Y N
HIW N Y N N N YY N Y Y
FPO N YY N N N N Y Y N
BDN N N N N N YY Y Y N
WRE Y N N N N Y Y N N
CLI N N N Y N N Y Y N
LXP N N N N N N Y N Y
HRP N N N N N N N N Y
Forget FFO for Office REITs – Focus on FAD
FFO
– Adjustments:
1. Straight Line Rents
2. Tenant Improvements
3. Leasing Commissions
4. Base Building CapitalCosts
5. Non-Cash Financing Costs
= FAD
Source:Company Data, Stifel Nicolaus Estimates
Ticker Rating 2008E FFO 2008E FAD Ratio
Core Office REITs
SLG H 5.24$ 3.27$ 62%
BPO B 1.71$ 1.31$ 77%
BXP H 4.67$ 3.75$ 80%
DEI H 1.36$ 0.86$ 63%
KRC H 3.58$ 2.82$ 79%
MPG B 0.81$ (0.79)$ -98%
OFC H 2.42$ 1.68$ 69%
BDN H 2.56$ 1.54$ 60%
HIW H 2.44$ 1.66$ 68%
CLI H 3.46$ 2.44$ 71%
Specialized REITs
BMR H 1.94$ 1.67$ 86%
FPO H 1.79$ 1.29$ 72%
WRE H 2.40$ 1.85$ 77%
LXP B 1.52$ 1.49$ 98%
HRP H 1.12$ 0.64$ 57%
Ratings Key: B - Buy; H - Hold; S - Sell
Valuation vs. Growth – Implied Cap Rate
Source:Company Data, Stifel Nicolaus Estimates
Implied Cap Rate Pricing to Growth
DEI
WRE
SLG
OFC
LXP
HRP
HIW
FPO
BPO
CLI
BXP
BMRBDN
KRC
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5%
Implied Nominal NOI Cap Rate
Cu
mA
nn
2007-2
009E
FF
OG
row
thFair Valuation
Good Grow th
Expensive
Good Grow th
Expensive
Low Grow th
Fair Valuation
Low Grow th
Valuation vs. Growth – Replacement Cost
Source:Company Data, Stifel Nicolaus Estimates
Replacement Cost Pricing to Growth
DEI
SLG
OFC
LXP
HRP
HIW
FPO
BPO
CLI
BXPBMR
BDN
KRC
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
-20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
(Premium)/Discount of Market Capitalization/SF to Adjusted Replacement Cost
Cu
mA
nn
2007-2
009E
FF
OG
row
th
Fair Valuation
Good Grow th
Expensive
Good Grow th
Expensive
Low Grow th
Fair Valuation
Low Grow th
Office REITs – 2008 Best Ideas
1. Brookfield Properties (BPO)
– Discount to Immediate Peer Group
– Excellent Real Estate Metrics
– Merrill Issues not critical (~ 9% of NOI)
– Residential ~ 8% of Book Value
2. Maguire Properties (MPG)
– Take-out likely
– Private Institutional Sale Market Holding
– Near-term Bridge of NAV Discount
3. Douglas Emmett (DEI)
– Best Market in the Country
– Embedded Mark-to-Market
– Overhang is Overblown
2008 Multifamily Sector Things We Know
• Fundamentals are stable
• Length of stay is up
• Turnover is down
• Housing market is sloppy
• Supply growth is declining
• But excess housing inventory impacting demand
• Pressure on occupancy
• Rent growth is moderating
2008 Multifamily Things We Don’t Know
• What will Fannie and Freddie do?
• Where will cap rates land?
• How long to absorb excess housing?
• Secondary market deterioration
• Fear of lower mortgage rates
New Supply Expected to Decline
Source: Census Bureau, U.S. Department of Commerce
600
800
1,000
1,200
1,400
1,600
1,800
Jan-9
0
Jan-9
1
Jan-9
2
Jan-9
3
Jan-9
4
Jan-9
5
Jan-9
6
Jan-9
7
Jan-9
8
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
New
Sin
gle
-Fam
ily
Un
its
Housing Permits Housing Starts
Multifamily Starts
Source: Census Bureau, U.S. Department of Commerce
0
50
100
150
200
250
300
350
1996Q
1
1996Q
4
1997Q
3
1998Q
2
1999Q
1
1999Q
4
2000Q
3
2001Q
2
2002Q
1
2002Q
4
2003Q
3
2004Q
2
2005Q
1
2005Q
4
2006Q
3
2007Q
2
New
Mu
ltif
am
ily
Un
its
(Tra
iling
12-m
onth
tota
l,000)
Sale Rent
Single-Family Rental Inventories Still High
Source: Census Bureau, U.S. Department of Commerce
Single-Family Rental Vacancy Rate
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1970Q
1
1972Q
1
1974Q
1
1976Q
1
1978Q
1
1980Q
1
1982Q
1
1984Q
1
1986Q
1
1988Q
1
1990Q
1
1992Q
1
1994Q
1
1996Q
1
1998Q
1
2000Q
1
2002Q
1
2004Q
1
2006Q
1
Single-Family Homeowner Vacancy Rate
Source: Census Bureau, U.S. Department of Commerce
Single-Family Homeowner Vacancy Rate
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1970Q
1
1972Q
1
1974Q
1
1976Q
1
1978Q
1
1980Q
1
1982Q
1
1984Q
1
1986Q
1
1988Q
1
1990Q
1
1992Q
1
1994Q
1
1996Q
1
1998Q
1
2000Q
1
2002Q
1
2004Q
1
2006Q
1
P&I Payments Should Continue to Decline
Source: National Association of Realtors Actual, Stifel Nicolaus Estimates
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1990Q
2
1991Q
2
1992Q
2
1993Q
2
1994Q
2
1995Q
2
1996Q
2
1997Q
2
1998Q
2
1999Q
2
2000Q
2
2001Q
2
2002Q
2
2003Q
2
2004Q
2
2005Q
2
2006Q
2
2007Q
2
2008Q
2
2009Q
2
2010Q
2
Year-
Year
%C
han
ge
inP
&I
Paym
en
t
on
Med
ian
-Pri
ced
ho
use
Home Ownership Costs and Rents
Source: Property & Portfolio Research Estimates, National Association of Realtors Actual, Stifel Nicolaus Estimates
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1991Q
1
1992Q
1
1993Q
1
1994Q
1
1995Q
1
1996Q
1
1997Q
1
1998Q
1
1999Q
1
2000Q
1
2001Q
1
2002Q
1
2003Q
1
2004Q
1
2005Q
1
2006Q
1
2007Q
1
2008Q
1
2009Q
1
2010Q
1
-3.00%
0.00%
3.00%
6.00%
Principal & Interest Payment for Median Home
Rent Grow th
Rent Growth continued to slow in 3Q
Source: Property & Portfolio Research Estimates
90.0%
91.0%
92.0%
93.0%
94.0%
95.0%
96.0%
97.0%
98.0%
1992Q
3
1994Q
3
1996Q
3
1998Q
3
2000Q
3
2002Q
3
2004Q
3
2006Q
3
2008Q
3
2010Q
3
Occu
pan
cy
-2.00%
1.00%
4.00%
7.00%
An
nu
al
Eff
ecti
ve
Ren
tG
row
th
Occupancy Rent Growth
Apt. REIT FFO and Same-Store NOI Growth
Source: Company reports, SNL Securities
3Q07 FFO - 8.9%
-9.0%
11.0%
11.6%
5.2%
-13.9%
3Q07 NOI - 5.5%
7.4%
6.6%
3.8%
-6.6%
-15.0%
-12.0%
-9.0%
-6.0%
-3.0%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
2Q
96
4Q
96
2Q
97
4Q
97
2Q
98
4Q
98
2Q
99
4Q
99
2Q
00
4Q
00
2Q
01
4Q
01
2Q
02
4Q
02
2Q
03
4Q
03
2Q
04
4Q
04
2Q
05
4Q
05
2Q
06
4Q
06
2Q
07
Sector FFO Sector Same-Store NOI
Projected Annual Household Growth (5-Year CAGR)
Source: SNL Estimates, ESRI Estimates, Stifel Nicolaus Estimates
Household Formation Growth
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Bosto
n,M
A
SanFra
ncisc
o,CA
Los
Angel
es, C
A
SanJo
se, C
A
SanDie
go, C
A
NewYor
k,NY
Seattl
e,W
A
Nat
iona
l Ave
rage
Fort L
aude
rdal
e,FL
Palm
Beach
Count
y,FL
Was
hing
ton,
DC
Dalla
s- For
t Wor
th, T
X
Inla
ndEm
pire
, CA
Orla
ndo,
FL
Phoen
ix, A
Z
Las
Vegas
, NV
Apartment Prices to NAV (12-31-07)
Stifel Nicolaus NAV Analysis - Price/NAV
44.3%
62.0%
62.5%
63.0%
65.4%
66.6%
66.8%
68.8%
70.5%
71.3%
71.7%
77.1%
77.9%
35% 45% 55% 65% 75% 85% 95% 105% 115%
Associated Estates
United Dominion Realty Trust
Camden Property Trust
AIMCO
BRE Properties
Colonial Properties Trust
Average
Equity Residential Properties
Mid-America Apt. Communities
AvalonBay Communities
Post Properties
Home Properties of New York
Essex Property Trust
$49
$132
$61
$53
$34
$77
$32
$21
$62
$58
$125
$55
Source: Stifel Nicolaus estimates except for Home Properties, Associated Estates, Mid-America, Essex, and AIMCO, which are from
SNL
Multifamily REITs – Best Ideas
AvalonBay (AVB)
• Blue Chip apartment REIT name
• Strong balance sheet, 29% D/EV
• Portfolio concentrated in DC, NY, BOS, & CA
• 37.2% below 52-week high
• 28.7% below $132 NAV
BRE Properties (BRE)
• 34.6% discount to $62 NAV
• 44.4% below 52-week high
• >80% NOI from California
• Large development pipeline
• Increased management ownership
Camden Property Trust (CPT)
• Continued portfolio recycling
• Younger assets, better geographic dispersion
• Increased concentration in DC, SoCal, South Florida
• Strong management team
• Solid development pipeline
• 39.8% off 52-week high
• 37.5% discount to $77 NAV
Lodging REITsSub-Sector Review
Rod Petrik
Things We Know
• Supply growth is below long-term average
• Group & special corporate demand still strong
• RevPAR and margin growth are decelerating
• Peak multiples are behind us
• Equity remains on the sidelines with no debt
• Lodging REIT yields average 7.4%,
• +340 bps over the 10-year and
• +250 bps over the RMZ
Things We Don’t Know
• The reliability of transient demand forecasts
• When the credit market will open
• Where cap rates / multiples settle
• If anyone buys lodging stocks for yield
• The catalyst to invest before the next cycle
Annual Supply Growth Percentage Change
Source: Smith Travel Research, Stifel Nicolaus
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
E
2008
E
Long-Term Average
2.0%
Lodging Demand Less Predictable
Source: Smith Travel Research, Economic History Services, Stifel Nicolaus
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
E
2008
E
Dem
an
dG
row
th
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
GD
PG
row
th
Demand GDP
Long-Term Average
2.1%
Historical RevPAR Growth
Source: Smith Travel Research, Stifel Nicolaus
Change in U.S. Hotel RevPAR
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%Jan-9
0
Jul-90
Jan-9
1
Jul-91
Jan-9
2
Jul-92
Jan-9
3
Jul-93
Jan-9
4
Jul-94
Jan-9
5
Jul-95
Jan-9
6
Jul-96
Jan-9
7
Jul-97
Jan-9
8
Jul-98
Jan-9
9
Jul-99
Jan-0
0
Jul-00
Jan-0
1
Jul-01
Jan-0
2
Jul-02
Jan-0
3
Jul-03
Jan-0
4
Jul-04
Jan-0
5
Jul-05
Jan-0
6
Jul-06
Jan-0
7
Jul-07
RevPAR decelerating.
2007 YTD RevPAR is +5.9%, with
100% driven by rate
Multiple and RevPAR Growth Past Peak
8x
10x
12x
14x
Jun-0
4
Sep-0
4
Dec
-04
Mar
-05
Jun-0
5
Sep-0
5
Dec
-05
Mar
-06
Jun-0
6
Sep-0
6
Dec
-06
Mar
-07
Jun-0
7
Sep-0
7
Dec
-07
Fw
dE
BIT
DA
Mu
ltip
le
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Re
vP
AR
Gro
wth
EBITDA Multiple RevPAR Growth
Source: Smith Travel Research, Stifel Nicolaus
LTM Lodging Share Price Returns
Source: SNL Financial Research, Thomson One
-42%
-32%
-32%
-31%
-30%
-30%
-29%
-28%
-23%
-17%
-17%
-16%
22%
-50% -35% -20% -5% 10% 25% 40%
Ashford Hospitality Trust
Hospitality Properties Trust
Sunstone Hotel Investors
Host Hotels & Resorts
LaSalle Hotel Properties
Starwood Hotels & Resorts
Felcor Lodging Trust
Marriott International
Strategic Hotels & Resorts
Lodgian Inc
Diamondrock Hospitality
Hersha Hospitality
Orient-Express Hotels Ltd.
S&P 500 +3.5%
RMZ REIT INDEX -20.2%
DJ LODGING INDEX -16.0%
Hotel REITs & C-Corps: Price to NAV
Source: Stifel Nicolaus
60%
62%
63%
64%
68%
69%
69%
72%
74%
75%
76%
78%
55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
Starwood Hotels & Resorts
Felcor Lodging Trust
Ashford Hospitality Trust
Marriott International
Host Hotels & Resorts
Sunstone Hotel Investors
Average
Hospitality Properties Trust
LaSalle Hotel Properties
Lodgian Inc
Strategic Hotels & Resorts
Hersha Hospitality
Lodging – 2008 Best Ideas
Host Hotels & Resorts (HST)
– Exposure to group and business travel in major, urban markets– Recycling capital, investing in internal projects to drive returns– Joint venture platform offers international exposure– Strong management team– Trading at a 32% discount to $25 NAV
LaSalle Hotel Properties (LHO)
– Repositioning program continues to upgrade portfolio– High barrier-to-entry portfolio– Strong balance sheet– Proven management team– Trading at a 26% discount to $43 NAV
Marriott International (MAR)
– Fee-based business model makes the company a latter cycle pick– Incentive fees still provide operating leverage– Beneficiary of sector’s growing supply– Quality portfolio of brands, balanced across all segments– Growing international exposure– Trading at a 36% discount to $53 NAV
Retail REITs; What We Know
• Equity REIT market understands asset quality better
• Home values declining, energy & food costs are up
– Less money in U.S. consumer pocketbooks
• Weak dollar helps U.S. retail
• Long-term leases make retail REITs second derivative of
consumer slowdown
• Shopping centers perform well in a down economy
• Consumers don’t need the products sold at regional malls
• Limited new supply; No spec construction
Retail REITs; What We Don’t Know
• Will U.S. economy slip into recession?
• Will negative consumer headlines affect retail REITs?
• Will job growth offset energy and housing pressures?
• Will big box retailers pull back development even more?
• Will REITs benefit from small developer challenges?
• Will retail bankruptcies pick up?
• Will institutional JV capital come back?
• Where will cap rates top out?
U.S. Retailer Bankruptcies; 2000 - 2007
Source: ICSC, Retail Maxim
2000 2001 2002 2003 2004 2005 2006 2007Blue Fish American Appliance Bisou Bisou Big Bear stores A.L. Damman Co. Amazing Savings; Odd Jobs; Mazel 2nd Swing 99 Cent Stuff
Bookland of Maine Ames Department Stores Museum Company Bill's Dollar Stores, Etc. Athlete's Foot Buehler Foods American Outfitters Appliance Depot
BV Supermarket Bill's Dollar Stores Jacobson Stores Bob's Stores BestPrice!, BestPrice Fashions!, Etc. Christopher's Men's Stores April Cornell stores Bombay Company
Carmike Britches of Georgetowne Country Road Clothing CD World Crescent Jewelers Friedman's Jewelers Brook Mays Music Co. Burlington Food; Save-On Foods
Cherry & Webb Bugle Boy Kmart Chiasso Factory 2-U Levitz Copeland Sports Dick Bruhn
Eagle Food Casual Male Corp. Family Toy Clothestime Stores Inc. Fannie May; Fanny Farmer Candy Organized Living Harrow's Stores Drug Emporium / Big A
Edwards Theaters Cosmetics Plus Pennsylvania Fashions Drug Emporium; F&M Footstar Inc. Plej's Linen Supermarket National Book Warehouse Fashion Shop
Einstein & Noah Crown Books Pennsylvania Fashions (Rue 21) Eagle Food Frank's Nursery Sea Dream Leather Rogers Jewelers; Starr's Jewelers Hancock Fabrics
Family Golf Centers Dairy Mart Kasper, Anne Klein Eddie Bauer; Spiegel Outlets Gadzooks Ultimate Electronics; SoundTrack Sam Goody; Suncoast Levitz Furniture Store
Fredericks Hollywood Drug Emporium Florsheim Stores FAO Schwarz, Zainy Brainy Garden Ridge Winn-Dixie Steve's Shoes, Overland Trading Co. Mattress Gallery
Fruit-of-Loom Frank's Nursery & Crafts World Kitchen Inc. Fieldcrest Cannon Outlets Git-n-Go Sole Outdoors Movie Gallery
Gantos (Hit & Miss) Furrs Supermarkets Archibald Candy Larry's Shoes Good's Furniture Stores, Etc. Storehouse Furniture Rag Shops
General Cinema Gerald Stevens Inc. CD Warehouse Mr. Rags Illuminations Tower Records Rockaway Bedding
Schwegmann’s Grand Union Homeland Stores, Inc. Paper Warehouse Just for Feet; Footaction Treasure Island Seasonal Concepts
Service Merchandise Heilig-Meyers HomeLife Furniture Corp. Penn Traffic KB Toys Sunny's Great Outdoors
Joan & David HomePlace Golf America Stores Peppermint Music, Etc. Kitchen Etc. Tweeter Home Entertainment
Lamonts Horizon Pharmacies Mars Music Chain Premier Concepts, Inc. Leather Limited
Montgomery Ward House2Home Inc. E-Z Serve, Swifty Serve, Etc. Rainbow Food Stores Rhodes Furniture
Natural Wonders Krause's Furniture Clark Retail Enterprises Reference Co. Shoe Zone
Paul Harris Lechters Mattress Discounters Samuels Jewelers Inc. Tower Records
Pic N’ Pay Lids J. Harris San Francisco Music Box Vision Plaza
Regal Theaters Lilly's Jewelers Moto Photo Inc. Snyder's Drug Stores Weathervane
Roberds McCrory; Dollar Zone, Etc. MJDesigns Strouds
Specialty Foods National Record Mart Emporium Dept. Store The Wiz
Stage Stores Payless Cashways Lilly's Jewelers Today's Man
Strouds Pergament Home Centers Top-Flite Golf Co.
Tops Appliances Phar-Mor Drug Store Value Music
United Artists Play Co. Vista Optical
Video Update Quality Stores Walking Company Stores
Sam & Libby WestPoint Stevens
Store of Knowledge Wherehouse Entertainment
Sweet Factory Woodworkers Warehouse
Tandycrafts Workbench Furniture
Track 'N Trail
Trees 'N' Trends
Warnaco Group
Wolf Camera Inc.
Zany Brainy
71
Never Bet Against U.S. Consumer?
• Housing Boom is OVER! Home values are declining
• Home foreclosures spiking
• Energy/Food costs rising
• Personal Savings Rate Continues To Fall
• Borrowing Sources No Longer Readily Available
– Household debt at all-time highs
– Home equity cash-out issuances slowing to trickle
Household Debt Obligations Continue To Rise
Source: Federal Reserve Bank
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
130%
135%
140%
145%
150%
1970
1971
1972
1973
1975
1976
1977
1978
1980
1981
1982
1983
1985
1986
1987
1988
1990
1991
1992
1993
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
Household Debt As a Percentage of Disposable Income
While Consumers Are Spending More
Source: Federal Reserve
55%
60%
65%
70%
75%
1970
1971
1972
1973
1975
1976
1977
1978
1980
1981
1982
1983
1985
1986
1987
1988
1990
1991
1992
1993
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
Consumer spending as a percentage of GDP
Cash-Out Refinancing Slowed in 2H07……
Source: Freddie Mac
U.S. Homeowner Cash-Out Refinancing
$20$14 $11
$17 $21
$37$26
$83
$111
$147
$318
$261
$40
$143
$262
$0
$50
$100
$150
$200
$250
$300
$350
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E
Billi
on
s
Freddie Mac ExpectsCash-Out RefinancingsWill Slow To About $40
Billion in 4Q
Source: Stifel Nicolaus Research, Company Reports
Consumers Are Turning To Credit Card Debt
Outstanding Credit Card Balances; Nine Biggest Issuers
$500
$520
$540
$560
$580
$600
$620
$640
$660
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07
InB
illi
on
s
Can Economy Create Enough Jobs?
100
110
120
130
140
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Non-Farm Payroll Employment 1990 - 11/2007 (In Millions)
Source: Bureau Of Labor Statistics
Even If Sales Slow, National Retailers Must Grow
Source: Stifel Nicolaus Research
Estimated Net New Store Openings Through 2009
Stifel Softline Retail Coverage List
0
50
100
150
200
250
300
Amer
ican
Eagle
Outfi
tters
Gap
Twee
nBra
nds
TJXCom
panies
Talbots
Kohls
Urban
Outfi
tters
Coldwat
erCre
ek
RossSto
res
Jose
phA. B
anks
JCre
w
Limite
dBra
nds
Men
sW
earh
ouse
Nordstro
ms
Casual
Mal
e
2008 Retail Sector Outlook
Flight To Quality/Safety
Shopping Center REITs
• Strong Balance Sheets/Liquidity
• High Quality Portfolios
• Strong Internal Growth
• Limited Ground Up Development
• High Grocer Concentration
• Opportunistic
• Consistent Dividend Growth
2008 Retail Sector Outlook
Flight To Quality/Safety
Regional Mall REITs
• Strong Balance Sheet/Liquidity
• High Quality/Trophy Malls Near High DemographicMarkets & Tourist Destinations
• Significant Redevelopment
• Consistent Dividend Growth
Strong Balance Sheets Are Defensive
Kimco Realty Corporation KIM 3.4x
Urstadt Biddle Properties Inc. UBA 2.8x
AmREIT AMY 2.8xKite Realty Group Trust KRG 2.8x
Federal Realty Investment Trust FRT 2.7xInland Real Estate Corporation IRC 2.6x
Regency Centers Corporation REG 2.6xAcadia Realty Trust AKR 2.6x
Saul Centers, Inc. BFS 2.5xWeingarten Realty Investors WRI 2.5x
Equity One, Inc. EQY 2.5x
Cedar Shopping Centers, Inc. CDR 2.2xDevelopers Diversified Realty Corporation DDR 2.0x
Ramco-Gershenson Properties Trust RPT 1.9x
Taubman Centers, Inc. TCO 2.6xSimon Property Group, Inc. SPG 2.4x
Pennsylvania Real Estate Investment Trust PEI 2.3xCBL & Associates Properties, Inc. CBL 2.2x
Macerich Company MAC 2.1x
Glimcher Realty Trust GRT 1.7xGeneral Growth Properties, Inc. GGP 1.7x
Alexander's, Inc. ALX 1.0x
Source: SNL Real Estate
Retail REIT Fixed Charge Coverage Ratios
Retail REITs – 2008 Best Ideas
Shopping Center REIT – Federal Realty (FRT)
– Best demographics in already-defensive asset class
– Strong Internal Growth
– Solid Balance Sheet
– No Ground Up Development
Regional Mall REIT - Simon Property Group (SPG)
– Nationwide franchise of market-dominant malls
– Double-digit rent spreads by leveraging its size and quality
– Highest credit rating of all U.S. REITs
– Development pipeline continues to grow
– Should increase dividend 7% - 9% annually
– Just starting to scrape mall marketing medium potential
Industrial REITs: What We Know, and What We Don’t
• What we know:
– Industrial outperformed in 2007 (-5.5% vs. -16.8% RMS)
– Global trade is growing
– Capital is chasing industrial properties
– Pre-leasing is strong on development pipelines
– Occupancy is high
– Landlords have pricing power
• What we don’t know:
– Does U.S. weakness spread overseas?
– When does high land cost make merchant building unprofitable?
– How quickly can the development spigot be shut off?
– What are the G&A and FFO consequences of slimmed-down merchantbuilding?
Global Trade Should Remain Healthy
Sources: Containerisation International. Stifel Nicolaus Estimates
TEUs= Twenty foot equivalent units
Projected Annual Container Growth
0
100
200
300
400
500
600
700
800
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
TE
Us
(mil.
)
2006 TEUs: 429 million
2015 Projected TEUs:725 million, 69% growthHistorical
2008 Industrial Sector Overweight Reflects Players
• We think there are only 3 serious public industrial companies: AMB,
FR, & PLD, and two mixed asset companies, DRE & LRY
• We believe that global trade will remain strong as domestic
conditions weaken
• This will continue to widen the gap between PLD/AMB and the other
industrial players
• Merchant building risk is high across the sector, mitigated by take-
out fund structures
Our Best Industrial REIT Ideas are AMB Property Corporation (AMB)
and ProLogis (PLD):
– Both have best-in-class business models that leverage global trade:
• Merchant building
• Fund structures
• International exposure
– Top-tier management teams
– Strong earnings growth
– Significant in-place fund capacity
– Merchant building will eventually slow, but will be offset somewhat by
the funds business
Industrial REITs – 2008 Best Ideas
Important Disclosures and Certifications
We, David Fick, Rod Petrik, John Guinee, Jerry Doctrow and Nate Isbee, certify that the views expressed in this research reportaccurately reflect our personal views about the subject securities or issuers; and we, David Fick, Rod Petrik, John Guinee, JerryDoctrow and Nate Isbee, certify that no part of our compensation was, is, or will be directly or indirectly related to the specificrecommendation 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 StifelNicolaus Research Department at the following address.
Stifel Nicolaus Research DepartmentStifel, Nicolaus & Company, Inc.One South Street16th FloorBaltimore, Md. 21202
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-yieldingequities 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 isalso used for those higher-yielding securities where we are comfortable with the safety of the dividend, but believe thatupside 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 stockcould decline in value.
Of the securities we rate, 39% are rated Buy, 59% are rated Hold, and 2% are rated Sell.
Within the last 12 months, Stifel, Nicolaus & Company, Inc. or an affiliate has provided investment banking services for 13%, 17% and6% of the companies whose shares are rated Buy, Hold and Sell, respectively.
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Additional Disclosures
Past results should not and cannot be viewed as an indicator of future performance.
All information prior to December 2005 reflects the data published and the research analysts’ views when they were employed by LeggMason Wood Walker Incorporated, the prior owner of part of the Stifel Nicolaus Capital Markets business.
Please visit the research page of www.stifel.com for the current research disclosures applicable to the companies mentioned in thispublication that are within Stifel Nicolaus’ coverage universe.
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not acomplete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred toherein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives,financial situation or needs of individual investors. Employees of Stifel, Nicolaus & Company, Inc. or its affiliates may, at times, releasewritten or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within.
Stifel, Nicolaus & Company, Inc. is a multi-disciplined financial services firm that regularly seeks investment banking assignments andcompensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in amerger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel Nicolaus, its shareholders, directors,officers and/or employees, may from time to time have long or short positions in such securities or in options or other derivativeinstruments based thereon.
These materials have been approved by Stifel Nicolaus Limited, authorized and regulated by the Financial Services Authority (UK), inconnection with its distribution to professional clients and eligible counterparties in the European Economic Area. (Stifel NicolausLimited home office: London +44 20 7557 6030.) No investments or services mentioned are available in the European Economic Area toretail clients or to anyone in Canada other than a Designated Institution. This investment research report is classified as objective for thepurposes of the FSA rules. Please contact a Stifel Nicolaus entity in your jurisdiction if you require additional information.
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