S&P-REITs-May 11

Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 14

Industry Trends ................................................................................................... 14

How the Industry Operates ............................................................................... 21

Key Industry Ratios and Statistics................................................................... 25

How to Analyze a REIT....................................................................................... 27

Glossary................................................................................................................ 32

Industry References........................................................................................... 34

Comparative Company Analysis ......................................................... Appendix

This issue updates the one dated December 16, 2010. The next update of this Survey is scheduled for November 2011.

Industry Surveys Real Estate Investment Trusts Robert McMillan and Royal Shepard, CFA REIT Analysts

May 19, 2011

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Topics Covered by Industry Surveys

Aerospace & Defense

Airlines

Alcoholic Beverages & Tobacco

Apparel & Footwear: Retailers & Brands

Autos & Auto Parts

Banking

Biotechnology

Broadcasting, Cable & Satellite

Chemicals

Communications Equipment

Computers: Commercial Services

Computers: Consumer Services & the Internet

Computers: Hardware

Computers: Software

Computers: Storage & Peripherals

Electric Utilities

Environmental & Waste Management

Financial Services: Diversified

Foods & Nonalcoholic Beverages

Healthcare: Facilities

Healthcare: Managed Care

Healthcare: Products & Supplies

Heavy Equipment & Trucks

Homebuilding

Household Durables

Household Nondurables

Industrial Machinery

Insurance: Life & Health

Insurance: Property-Casualty

Investment Services

Lodging & Gaming

Metals: Industrial

Movies & Entertainment

Natural Gas Distribution

Oil & Gas: Equipment & Services

Oil & Gas: Production & Marketing

Paper & Forest Products

Pharmaceuticals

Publishing & Advertising

Real Estate Investment Trusts

Restaurants

Retailing: General

Retailing: Specialty

Savings & Loans

Semiconductor Equipment

Semiconductors

Supermarkets & Drugstores

Telecommunications: Wireless

Telecommunications: Wireline

Transportation: Commercial

Global Industry Surveys

Airlines: Asia

Autos & Auto Parts: Europe

Banking: Europe

Food Retail: Europe

Foods & Beverages: Europe

Media: Europe

Oil & Gas: Europe

Pharmaceuticals: Europe

Telecommunications: Asia

Telecommunications: Europe

Tobacco: Europe

Standard & Poors Industry Surveys 55 Water Street, New York, NY 10041

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INDUSTRY SURVEYS REAL ESTATE INVESTMENT TRUSTS / MAY 19, 2011 1

CURRENT ENVIRONMENT

REITs make up lost ground

Real estate investment trusts (REITs) have continued to regain the ground lost following the financial crisis that erupted in 2008, when the FTSE NAREIT All REIT Index fell 37.3% on fears that many REITs would eventually fall into default. At that time, concerns mounted about the typically large debt burden of REITs in an environment of tighter lending conditions and less readily available capital, as well as fears that many commercial customers would simply abandon their leases. As investors gradually realized that these fears were overblown, REIT shares bounced back. The FTSE NAREIT All REIT Index advanced 27.5% in 2009 and 27.95% in 2010. Through the first quarter of 2011, the index advanced 7.5%.

We think the continued interest from investors reflects, in part, an anticipated improvement in economic conditions, and the success of REITs in managing the 2008 financial meltdown and demonstrating that

commercial property ownership is less cyclical than many had feared. In addition, new and continuing access to capital has given REITs a competitive advantage, in our view, over many privately held real estate investment vehicles. Many REITs also offer an attractive yield in a low interest rate environment. As the economic recovery takes hold, we think REITs will focus on stabilizing balance sheets, increasing property-level cash flow, and eventually increasing the payout to investors.

We think the operating fundamentals for many property sectors bottomed in 2010, setting the stagein a more favorable economic environmentfor a rebound in 2011 earnings.

The apartment and retail sectors have been among the first, in our view, to benefit from higher tenant demand. Rental demand for apartments has strengthened as potential homebuyers defer purchases. A slowdown in multi-family construction starts should also limit competitive supply. We see retail REITs benefitting from better retailer sentiment, while industrial REITs will likely see improvements over the course of 2011 as excess space falls and demand for warehouse and distribution facilities picks up on a rebound in industrial activity. Hotel REITs, one of the hardest hit sectors during the economic downturn, are also beginning to experience a higher level of travel by core corporate clients. We think hotels could gain traction on room rates in 2011. The office sector, in our view, found its bottom in the fourth quarter of 2010. Leasing volumes have stabilized while rents on new office leases are still beginning to rise in some markets. Finally, healthcare REITs should continue to feel the positive effects of an aging population.

THE ECONOMYS HALO EFFECT: NO DOUBLE-DIP RECESSION

As late as September 2010, fears were rampant that the US would experience a double-dip recession as manufacturing activity and hiring remained lethargic. In fact, the US has continued to show greater momentum than many expected, despite significant increases in oil prices which have fluctuated near multi-year highs on concerns about supply disruptions in Libya and the rest of the Middle East and North Africa. According to Bloomberg News, crude for May delivery on the New York Mercantile Exchange had touched $108.78, the highest level since September 24, 2008; prices are up 27% from a year ago. Although Standard & Poors expects higher crude prices to slow economic growth, we think the damage seems manageable.

Standard & Poors economic forecast is muted, but still suggests growth in employment and gross domestic product (GDP) through 2015. After declining 2.6% in 2009 and advancing 2.9% in 2010, we look for real

Chart H02: REITs vs. S&P 500 COMPOSITE

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REITs vs. S&P 500 COMPOSITE INDEX (Cumulative total return from December 1999, in percent)

Sources: Standard & Poor's; NAREIT.

2 REAL ESTATE INVESTMENT TRUSTS / MAY 19, 2011 INDUSTRY SURVEYS

GDP to increase 2.9%, 2.6%, 2.7%, 3.6%, and 3.1% in 2011, 2012, 2013, 2014, and 2015, respectively. The housing market, which has remained the biggest problem in Standard & Poors view, appears poised for a rebound. After falling 23.2% and 3.3% in 2009 and 2010, Standard & Poors expects residential construction to decline 1.5% in 2011, before advancing 20.3% and 26.5%, respectively, in 2012 and 2013. We also see home prices gradually firming over the next 1218 months. We do not see nonresidential construction advancing until sometime in 2013.

Consumers are remaining much more cautious than usual in this recovery. We think households were caught out in this recession because of excessive debt and by the sharp drop in household wealth caused by falling home prices and declining stock prices. We look for consumers to continue to rebalance their personal balance sheets by cutting back on debt and increasing their savings. Standard & Poors expects consumer spending to increase 2.7% and 2.2%, respectively, in 2011 and 2012.

If the economy and commercial real estate are to sustain their rebound, generating more jobs will be imperative. We look for the labor market to show rising strength over the next 1218 months, after languishing for some time. In March 2011, the US labor Department released its March payroll report, which indicated that US nonfarm payrolls gained 216,000 new jobs in March, much stronger than the 185,000 expected by consensus and after February payrolls were tweaked up to 194,000 new job gains (previously up 192,000). The unemployment rate edged down to 8.8% from 8.9% in February, better than many expected. Average hourly earnings were flat in March, the same as the month before, while the workweek held at 34.3 hours, also the same as Februarys upwardly revised reading (previously 34.2). Private payrolls increased 230,000, while the government lost 14,000 jobs, solely in state and local positions. Manufacturing gained 17,000 jobs while construction lost 1,000 jobs. The service-producing sector gained the most, with a hefty 199,000 jobs added to the payrolls. Household employment was up 291,000, dwarfing the 160,000 new entries into the labor force. The employment outlook appears to be improving faster than we previously envisioned. Standard & Poors expects the unemployment rate to fall from 9.6% in 2010 and a projected 8.7% in 2011 to 7.0% in 2015.

REITS GET ACQUISITIVE AGAIN

After sitting on the sidelines for much of the past three years, it appears that REITs, like many other corporations in the US, are rediscovering their animal spirits. During the first three months of 2011, according to the Financial Times, total US merger and acquisition (M&A) activity jumped 84%, year to year, to $267 billion. With all the money that REITs raised in 2009 to purchase distressed real estate at once-in-a-lifetime prices, it was just a matter of time before they started putting this money to work. Well before the start of the financial crisis, many equity REITs had curtailed their acquisitions because high prices for properties threatened to hurt investment returns. As the crisis unfolded, distressed commercial real estate was expected to flood the market and offer REITs and other institutional investors opportunities to acquire attractive properties at attractive yields. However, there was often a wide gulf between what sellers wanted and what many REIT buyers would pay, which stymied investment activity. In fact, many REITs took to disposing of non-core/non-strategic real estate assets.

It seems that the gulf between buyers and sellers is narrowing (through the first quarter of 2011) as memory of the financial crisis recedes and investors increasingly appreciate the demonstrated earnings power of many of these assets. This is particularly true for healthcare real estate. The value of announced M&A deals by publicly traded US REITs jumped 69%, year over year, to $66.2 billion for the six months ending March 31, 2011. Standard & Poors Equity Research expects robust commercial real estate investment activity to continue over the course of 2011. Nevertheless, as prices trend upward and cap rates decline, we think publicly traded REITs will continue to remain somewhat cautious with their investment dollars.

Healthcare REITs. On the healthcare front, Standard & Poors Equity Research thinks that healthcare REITs are poised to continue to increase their portfolios in 2011 and 2012 through major portfolio and company acquisitions, property purchases, and partnerships. According to Capital IQ, which provides web-based financial information services and is a unit of Standard & Poors, the value of announced M&A deals for healthcare REITs surged from about $1.5 billion in the six months ending March 31, 2010, to $22.5

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billion for the six months ending March 31, 2011. Several healthcare REITs, flush with cash following equity offerings and other capital-raising transactions, have announced and/or completed several large portfolio acquisitions over the past six months.

In April 2011, Health Care REIT Inc. completed its $2.4 billion acquisition of substantially all of the real estate assets of privately owned Genesis HealthCare; the acquired portfolio consisted of 147 post-acute, skilled nursing, and assisted living facilities in 11 states with long-term, triple net leases. In addition, in March 2011, Health Care completed the formation of an $890 million partnership with Benchmark Senior Living; the partnership includes 34 private-pay senior housing communities in six New England states.

In January 2011, HCP Inc. acquired its partners 65% interest in an $860 million senior housing joint venture, consisting of 25 senior housing assets, for $137 million and assumed its partners share of $650 million of debt. In December 2010, HCP agreed to acquire 338 post-acute, skilled nursing, and assisted living facilities of privately held HCR ManorCare for $6.1 billion in stock, debt, and cash.

In February 2011, Ventas Inc. agreed to acquire Nationwide Health Properties Inc. in a $7.4 billion all-stock transaction. Nationwide, another large publicly traded REIT, had a portfolio of 667 healthcare properties.

Although Health Care, HCP, and Ventas are the dominant healthcare REITs, they account for only a relatively small portion of the highly fragmented healthcare real estate market, even after their recent acquisitions. In an April 2011 interview with the Financial Times, Debra Cafaro, chairman and CEO of Ventas, noted that all REITs probably owned less than 8% of the $1 trillion US healthcare real estate market. Given the highly fragmented nature of the industry and plethora of properties, we look for the larger healthcare REITs to remain active on the acquisition path, even as they integrate recent purchases. We think this tend will be helped by a desire of owner/operators, private equity, and pension funds to monetize their investments. In February 2011, Health Cares management indicated that its 2011 pipeline would be about $5 billion, compared with $3.2 billion in 2010. We expect many of the new transactions will be off-market, non-brokered opportunities derived primarily from the existing industry relationships that the top three healthcare REITs have developed. We also expect these acquirers to maintain their focus on broadening the geographic diversity of their portfolios and attempting to restrict their portfolios reliance on government reimbursements.

Industrial REITs. Even though many owners of industrial space continue to struggle with weak pricing, demand for industrial properties has improved considerably. According to Real Capital Analytics, a commercial real estate market research firm, transaction volume jumped from $2.5 billion in the fourth quarter of 2009 to $6.7 billion in the fourth quarter of 2010, sending the cap rate from 8.7% to 8.1%. Most of the transactions have been relatively small, with many REITs continuing to dispose of non-core properties and opportunistically acquiring new properties. In February 2011, Liberty Property Trust noted that it had sold five operating properties for $11.5 million and purchased two multi-tenant properties in the fourth quarter of 2010. The current yield on these acquisitions was 4.9%, and Liberty expects to achieve an 8.4% return upon stabilization. First Industrial Realty Trust Inc., which was squeezed hard during the financial downturn and has struggled to deleverage its balance sheet, sold four industrial properties and two land parcels for $8.2 million in the 2010 fourth quarter.

As we noted earlier, many companies had raised capital during the financial crisis with the hope of making deep discount acquisitions. However, a few companies, which had been very aggressive in making acquisitions and had leveraged up prior to the financial crisis, were hobbled during the crisis and have continued to see their companies garner discounts well after the financial crisis has ended as investors remain wary of leverage. In late January 2011, AMB Property Corp. and ProLogis agreed to combine through a merger of equals in which each ProLogis common share would be converted into 0.4464 of a newly issued AMB common share. Upon completion of the merger, the company would be named ProLogis. We believe that the new company, with projected gross assets owned and managed of about $46 billion, would have a very strong portfolio of industrial properties around the world. In our view, the planned

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merger of AMB and ProLogis appears to be a good match, in that it will allow AMB to use its capital to address ProLogis leveraged balance sheet.

Retail REITs. In the shopping center space, we believe the price appreciation trend, especially for high-quality properties with resilient cash flows, will continue to drive cap rates lower and lead to a lower rate of return on shopping mall investments. Real Capital Analytics indicated in January 2011 that the volume of transactions advanced from $6.4 billion in the fourth quarter of 2009 to $7.8 billion in the same period of 2010, while cap rates dropped from 8.3% to 7.7%. We expect cap rates for high quality properties to fall further over the course of 2011; lesser quality properties, which many publicly traded REITs try to avoid, will, in our view, see a wide range of cap rates, though mostly higher.

We do not expect significant M&A activity in this area. We think retail landlords are more likely to grow their portfolios through small property purchases as well as development and redevelopment programs. Many retail REITs also continue to dispose of non-core properties at attractive prices. In the fourth quarter of 2010, Regency Centers Corp. purchased one property for $64.0 million and a cap rate of 6.5%, while it sold one wholly owned operating property at a gross sales price of $9.9 million and a cap rate of 7.9%. Regency also sold three co-investment operating properties at a gross sales price of $56.6 million and a weighted average cap rate of 7.7%. In January 2011, Equity One Inc. agreed to acquire three shopping centers in California for $72.0 million. The company also completed its acquisition of Capital and Counties USA Inc. through a joint venture with Capital Shopping Centres Group PLC in which it acquired a portfolio of 13 properties in California. Meanwhile, for all of 2010, National Retail Properties Inc., which was somewhat aggressive in acquiring properties during the downturn, invested $256.6 million in 194 properties (including 159 properties acquired in the fourth quarter) and sold 18 properties for $58.8 million.

Far fewer retailers went bankrupt than had been previously forecast during the recession, which has attracted attention from investors desiring stable cash flows. Some retail REITs, such as National Retail Properties Inc., Simon Property Group Inc., Equity One Inc., Macerich, and Federal Realty Investment Trust, have indicated that they are continuing to look for acquisitions, but only at the right price, which we think will restrict their overall activity. Nevertheless, there has been activity. In August 2010, Simon Property Group completed its $2.3 billion acquisition of 21 outlet centers, totaling 8.0 million square feet, from Prime Outlets Inc.

Office REITs. Amid an improving economy and better jobs environment, demand for office properties has surged. According to Real Capital Analytics, transaction volume for office properties surged from $4.6 billion in the fourth quarter of 2009 to $18.4 billion in the fourth quarter of 2010, with the cap rate going from 8.9% to 6.9%. In December 2010, Boston Properties Inc., purchased the John Hancock Tower, Bostons tallest building, for an aggregate purchase price of approximately $930.0 million. The purchase price consisted of approximately $289.5 million of cash and the assumption of approximately $640.5 million of debt. In March 2011, Vornado Realty Trust (in a co-investment with its real estate fund) acquired an office building at One Park Avenue in Manhattan. The purchase price for the 95% interest in the building was about $374 million, consisting of $137 million of cash and Vornados 95% share of a new $250 million 5-year mortgage. Vornados aggregate ownership interest in the building (including its 25% ownership of the fund) is 46.5%.

Joint ventures are another option We also note that in lieu of making outright purchases of other REITs or real estate companies, we think many REITs will continue to use joint ventures. During the financial crisis, many equity REITs sold some of their properties to joint ventures. With prices firming, we think equity REITs may increasingly pursue a reverse strategy and focus on partnering with other investors to acquire attractive properties. For example, Kimco Realty Corp. announced in May 2010 that it had formed a new joint venture with BIG Shopping Centers, an Israel-based publicly traded company, to acquire high-quality neighborhood and community shopping centers throughout the United States. The initial investment of $68.8 million included two properties that Kimco purchased during the fourth quarter of 2009. As noted above, a January 2011 acquisition by Equity One was effected through a joint venture.

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REITS ACCESS PUBLIC EQUITY AND DEBT MARKETS

Since the end of 2008, REITs have looked to public markets as a means of raising capital to address retiring debt maturities, improve balance sheet metrics and, more recently, fund renewed acquisition and project development activity. Generally, investors have responded enthusiastically by purchasing near-record amounts of newly issued stock and unsecured debt. In addition, despite some isolated instances, we think most equity REITs have emerged from the financial crisis in stronger financial condition. According to data published by the National Association of Real Estate Investment Trusts (NAREIT), an industry trade group, the debt ratio (total debt to enterprise value) for equity REITs had improved to 41.1%, as of September 30, 2010, versus 57.7% at the end of 2008.

In 2010, REITs raised $26.2 billion from 108 secondary common and preferred stock offerings, the highest total since the $26.4 billion raised in 1997. During the first quarter of 2011, REITs were issuing stock at an even more torrid pace, raising $16.6 billion in just three months. We note that several REITs have returned to the equity markets a second time since early 2010, including retail REIT Developers Diversified Realty Corp., Health Care REIT Inc., and lodging REIT LaSalle Hotel Properties.

Due to tightened underlying standards by traditional real estate lenders, such as banks and insurance companies, many REITs have also turned to public debt markets as a source of capital. According to NAREIT, a total of 56 unsecured debt offerings were completed in 2010 and raised $19.3 billion. During the first quarter of 2011, another 13 deals have come to market and added gross proceeds of $5.7 billion. The consolidating healthcare sector has accounted for much the recent activity. In January 2011, HCP Inc. issued $2.4 billion in senior unsecured notes. In March 2011, Health Care REIT priced $1.4 billion in senior unsecured notes.

Many REITs have used proceeds from new equity and debt offerings to pay down revolving credit lines or buy back existing debt at a discount to par. These transactions can lower interest expense and overall financial leverage. Going forward, we think access to relatively low-cost capital will provide public REITs with a competitive advantage in seeking new investment opportunities. As discussed in the Industry Trends section of this Survey (see REIT IPOs manage a modest comeback), the IPO market has languished over the last two years and, therefore, has not provided a good alternative for monetizing investments by private holders of commercial real estate. The issuance of shares by public REITs also provides a vehicle for completing purchase transactions.

RESURGENT CMBS MARKET MAY ADD TO LIQUIIDITY

The strong up cycle in the commercial real estate market from 2004 through 2008 couldnt have happened without ample access to credit. The commercial mortgage-backed securities (CMBS) market was ideal for meeting this need. It allowed acquisitions to be financed by pooling together newly issued mortgages for re-sale to investors anxious to get in on the action. During the period from 2000 through 2009, $954 billion in new US CMBS were issued, including $230 billion during 2007 alone. Due to the ensuing financial crisis, however, issuance then dropped considerably, and $12 billion of CMBS were issued for all of 2008. In 2009, only $3 billion of CMBS were offered.

The year 2010 saw the CMBS market come slowly back to life, finishing the year with about $12 in new issuances. We think that the US Treasury Departments Term Asset-Backed Securities Loan Facility (TALF), initiated in March 2009, played a role in encouraging investment in a variety of asset-backed securities. The costs and restrictions related to TALF deals, including a lengthy approval process, may have discouraged some potential new issuers. In November 2009, REIT Developers Diversified Realty Corp. closed on a $400 million loan as the only US CMBS transaction to use TALF. However, Standard & Poors believes it paved the way for several non-TALF deals, which further promoted CMBS liquidity. In October 2010, JPMorgan Chase & Co. completed a $1.1 billion CMBS offering, the first sponsored by multiple borrowers, the largest of which was retail REIT Simon Property Group.

Standard & Poors Credit Market Services believes that the CMBS market is gaining momentum in early 2011. During the first quarter, eight deals were completed for a total issuance volume of $8.7 billion. Of the


total, five of the offerings were multiborrower transactions raising about $7.9 billion and secured by well diversified pools of assets. For the remainder of 2011, Standard & Poors believes tighter credit spreads (i.e., more attractive pricing) and a slowdown in CMBS delinquency rates could accelerate new issuance volume. In February 2011, 9.07% of existing CMBS loans were delinquent, a small 9-basis-point increase from January and a marked slowdown in growth trends recorded during 2010. For the full year, we estimate that $35 billion in new issuances will come to market, well above the $12 billion priced in 2010.

In 2011, Standard & Poors notes several emerging trends apparent in the CMBS market. First, transaction structures are becoming more complex and underwriting standards are loosening somewhat. Second, multi-borrower deal volume is easily outpacing single-borrower volume and providing more liquidity to the CMBS market. Finally, competition among loan originators is intensifying. Standard & Poors estimates that there are now about 25 active loan originators, compared with a small handful in 2009.

The CMBS market is a potentially attractive market for REITs to finance acquisitions or re-finance maturing obligations. In our view, this could contribute to renewed transaction activity in the commercial real estate sector.

RETAIL REITS ENJOY BETTER DEMAND FOR THEIR SPACE

The recession hit department stores harder than discounters, as consumers made mostly need-based purchases. Most consumers can live without new fashion apparel and accessories, fine jewelry, and home furnishings during an economic downturn, in our view. Since fall 2009, however, same-store sales have rebounded at department stores, with a few chains actually outperforming discounters. In addition, sales at apparel chains and luxury retailers have been very healthy.

Nevertheless, we believe that retailers face headwinds that will likely impact their businesses, both in the short term and long term. During the first quarter, cotton prices rose 38%, year over year, following their

sharp 90% rise in 2010. In the short term, we see rising commodity prices forcing retailers to either increase prices and possibly risk a drop in consumer demand for their products, or to eat the costs of rising commodity prices and risk their margins. With the crises in the Middle East and North Africa, the tsunami and nuclear disaster in Japan, and the ever-present global thirst for energy, gasoline and home heating oil prices are surging to multiyear highs. The hike in energy prices will not only impact the entire supply chain for retailers, but may also affect consumer spending power and sentiment, by our analysis. Although Standard & Poors sees higher oil prices squeezing consumers, we expect consumers to keep spending even as many

households work to increase their savings and decrease their debt burdens. In early April 2011, several retailers reported March 2011 sales that exceeded expectations. Standard & Poors expects consumer spending to rise 2.7% in 2011 and 2.2% in 2012, following a 1.7% advance in 2010 and a 1.2% drop in 2009.

We think the rising short-term costs, pressures stemming from increasing labor costs in Asia, as well as higher freight expenses, will present longer-term structural challenges that will likely cause retailers to rethink their business plans. However, despite these expected headwinds and the recent bankruptcy filings by several retailers such as Blockbuster Inc. and Borders Group Inc., we believe that major retailers will continue to open new stores in 2011 and 2012, although these plans will likely remain well below pre-recession levels due to companies being more conservative as well as a sharp drop-off in new retail space being developed. We also think that a heightened supply of cheap retail space in strip malls will allow room for retailer expansion, especially among the dollar stores. In early April 2011, Standard & Poors Equity Research was expecting Target Corp. to open 21 new stores in fiscal year 2012 (ending January 2012), up

Chart H10: VALUE OF SHOPPING MALL CONSTRUCTION

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from 13 in fiscal 2011. At 99 Cents Only Stores, we forecast 16 net new stores in fiscal year 2012 (ending March 2012) versus nine in fiscal 2011; and at Family Dollar Stores Inc., we look for 300 new stores in fiscal year 2011 (ending August 2011) compared with 200 in fiscal 2010.

We believe that well-located owners of shopping centers will continue to attract consumers to their centers and, thus, retailers. While retailer sales can be volatile (and were particularly so during the financial downturn), sales at many of the better centers have rebounded sharply. At Taubman Centers Inc., whose regional malls cater to more affluent consumers, sales per square feet jumped to $564 in 2010, after falling to $502 in 2009, from $533 in 2008 and $555 in 2007. We continue to see highly productive regional malls faring better than strip shopping centers, which generally lack the same barriers to entry that the large regional malls possess.

The national vacancy rate (i.e., for the top 80 US markets) for large regional malls rose to 9.1% in the 2011 first quarter from 8.7% in the 2010 fourth quarter, and reversed the 2010 fourth quarters improvement, which was the first quarter-to-quarter decline since the third quarter of 2007. Asking rents in regional malls dipped 0.1% in the fourth quarter to $38.75 per square foot. According to Reis Inc., a commercial real estate research firm, vacancies in shopping centers held steady at 10.9% in the 2011 first quarter, unchanged over the 2010 fourth and third quarters, while asking rents fell 0.1% to $19.03. We continue to believe that overall trends for shopping center owners are stabilizing.

We think the publicly traded REITs (many of which do not provide portfolio data to third-party research providers) will continue to be early beneficiaries of improvements in retailer sentiment. Although some of the pressure may be easing on smaller and more localized developers, especially as retailers seek out retail space amid a lack of new developments, we still believe that many of these developers, which tend to lack the diversification and strong retail relationships of their publicly traded counterparts, will feel more of the pain.

Portfolio occupancy at CBL & Associates Properties Inc., which operates a portfolio of regional malls in secondary markets, rose to 92.4% at the end of the 2010 fourth quarter, from 90.4% in the year-earlier period, while re-leasing spreads fell 8% in the fourth quarter of 2010. At Macerich, another mall operator, occupancy rose to 93.1% from 91.3% and re-leasing spreads jumped 13.7%. The US operating portfolio (consisting of regional mall and premium outlet centers) of Simon Property Group showed an occupancy increase to 94.2% from 93.4%, while re-leasing spreads jumped 3.0%. Occupancy in the US portfolio at Kimco Realty rose to 92.7% from 92.2%, while re-leasing spreads fell 2.8%.

Overall, we look for occupancies for publicly traded REITs to continue increasing over the course of 2011 and 2012. However, occupancies may dip for some landlords, in our view, as retailers normally close underperforming stores or declare bankruptcy in the first quarter after the all-important holiday season is over. Moreover, we note that in some cases, improvements in occupancy have been restricted by management decisions to hold back space in order to obtain higher rents once pricing is firmer.

Several of the S&P sub-industry indices have shown gains, outpacing the broader market year to date through March 31, 2011: apparel retail (+5.4%), general merchandise stores (-9.9%), home furnishings (+7.2%), food retail (+9.8%), home improvement retail (+5.6%) and restaurants (+4.9%). Not surprisingly, retail REITs have benefited from the improved retail sentiment. The S&P retail REIT sub-index gained 4.6% through March 31, 2011, after a 25.1% gain in 2010.

OFFICE REITS: A TALE OF TWO MARKETS

Nationally, Standard & Poors believes a slow recovery is underway for office demand, driven by renewed job creation. In March 2011, the unemployment rate fell to 8.8%, well below 9.7% in March 2010. Although discouraged workers have accounted for some of the drop in the unemployment rate, we expect further gains in payroll employment to push the rate of unemployed workers down to 8.5% by the fourth quarter of 2011.

We think office-leasing volumes stabilized during the fourth quarter of 2010, and are poised for a modest rebound nationally in 2011. In our view, a lack of new supply may be helping the market come back into


better balance. Development pipelines, as reported by public REITs, were scaled back dramatically during 2009 and 2010 due to a challenging economic environment and tight credit market conditions.

Our view is supported by data published by Colliers International, a leading provider of real estate services. Colliers estimates that fourth-quarter 2010 office vacancy fell 29 basis points, to 16.11%, the first drop after 12 quarters of rising vacancy. During the quarter, 14.8 million square feet of office space were absorbed and demand benefited from only 3.8 million square feet in completed new construction.

Moreover, at year-end 2010, just 22.3 million square feet in multi-year construction projects were underway, down from 46.0 million square feet at the end of 2009. Reis Inc., a leading provider of commercial real estate data, puts year-end office vacancy at a somewhat higher 17.6%. However, Reis also reports that initial leasing data for the first quarter of 2011 show a decline in the national vacancy rate by 0.1%, to 17.5%. In addition, Reis reports that average effective rents (after landlord concessions) rose 0.5% in the first quarter, the second consecutive quarter of improvement.

Despite the generally positive news, we believe fortunes have diverged for

landlords, depending on the primary location of their properties. Central business districts (CBDs) are experiencing more vibrant job markets and limited competition from new supply due to a lack of available building sites. New York City, for example, has seen renewed hiring in the financial sector and a vibrant local tourism economy. According to the New York State Department of Labor, the February 2011 unemployment rate in New York City was 9.2%, a full 100 basis points lower than February 2010.

Suburban office markets, on the other hand, are struggling from local job losses and relatively low barriers to entry. Our observations are supported by data from Colliers that shows a 2010 year-end vacancy rate of 14.8% for office properties in downtown locations compared with 16.7% for suburban markets. Colliers estimates that 3.1 million square feet of newly constructed space were added to suburban markets during the fourth quarter, versus only 693,000 square feet in downtown markets.

Standard & Poors is also observing a similar dichotomy in the fortunes of public REITs. Boston Properties is a leading office REIT focused almost exclusively on CBDs in Boston, New York, San Francisco, and Washington, D.C. It ended 2010 with an overall occupancy level of 93.2%, well above national averages. SL Green Realty Corp., a REIT focused on the recovering New York market, reported December 31, 2010 occupancy for its Manhattan portfolio of 94.6%. On the other hand, Brandywine Realty Trust and Duke Realty Corp., two REITs focused on suburban office markets, have reported less robust leasing statistics. Brandywine, with extensive suburban office holdings in Mid-Atlantic markets, reported year-end occupancy of only 85.6%. Duke Realty, a diversified REIT with significant suburban office holdings in Midwestern markets, ended 2010 with an office occupancy rate of 85.7%.

Standard & Poors thinks 2010 may prove to be a turning point for office property investment activity, particularly by REITs with strong balance sheets and access to credit. We see, in particular, renewed interest in high-quality properties located in central business districts. According to information published by the Mortgage Bankers Association (based on data from Real Capital Analytics), about $40.3 billion in office real estate transactions were completed in 2010, up from $16.0 billion in 2009. Among the largest transactions completed by REITs was Boston Properties $930 million purchase in December of the John Hancock Tower in Boston. In the second quarter, SL Green sold its 45% interest in New Yorks McGraw-Hill Building in a total transaction valued at $1.28 billion. In view of steadily improving operating

Chart H04: VACANCY RATES

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VACANCY RATES (In percent)

Sources: National Association of Realtors; *US Department of Commerce.


fundamentals, primarily in CBDs, Standard & Poors anticipates that 2011 will again show a significant step-up in transaction activity.

During the recession, most office REITs sharply curtailed new development plans, waiting for demand to stabilize and credit market conditions to improve. Typically, new projects are going forward only on a build-to-suit basis for specific tenants or for buildings that have been substantially subleased. Some potential new projects, though, may move off the drawing board. We believe Vornado Realty, a leading office REIT, is activity seeking potential tenants for a proposed new, 1,190-foot tower near Pennsylvania Station in New York. Also in the New York City market, Boston Properties in early 2011 was discussing restarting a long-stalled office project on West 55th street. Although we dont expect either project to go forward without firm tenant commitments, it could signal that REITs are getting ready to build as demand regains momentum.

INDUSTRIAL REITS: STILL WAITING FOR A REBOUND

Demand for space at industrial properties generally contracts in tandem with a recession, while the recovery in demand is typically a long drawn-out process as users of industrial facilities try to ascertain the direction of the economy and their businesses. The recovery from the 2001 recession was a multi-year process for industrial landlords who at that time also had to contend with an increasing supply of industrial space that was pressuring rents. With little new supply being added to the market as smaller developers have been squeezed out of the market by stricter lending conditions, we believe that the recovery from the 2008-2009 recession for industrial REITs is approaching.

There are already signs that trends have started to stabilize, in our view, and this suggests to us that operating trends in 2011 could improve meaningfully. In January 2011, CBRE Econometric Advisors (part of CB Richard Ellis, a commercial real estate broker), commenting on the fourth quarter, observed that national availability in US industrial markets declined to 14.3%, marking the second consecutive quarterly decline. The decrease in availability, combined with a sharp gain in leasing activity at several of the industrial REITs we follow, suggests to us that industrial users are looking to lock in low rents before they start to rise again. CBRE noted that during the 2010 fourth quarter, 39 markets reported falling availability rates, four saw no change, while the remaining 15 reported increases.

Retention at AMB Property rose to 69.6% for the four quarters ended December 31, 2010, from 61.2% in the same period last year, while occupancy rose to 93.7% at the end of the fourth quarter from 91.2% at the end of the 2009 third quarter. However, like other owners of industrial space, AMB has had to struggle to maintain occupancy by lowering rents. During the fourth quarter, AMBs re-leasing spread on new and renewal leases dropped 11.9% for the 12 months ended December 31, 2010. The situation was somewhat similar at ProLogis and First Industrial Realty Trust Inc., where re-leasing spreads fell 10.5% and 17.2%, respectively, in the fourth quarter. Spreads for the fourth quarter fell 22.1% at EastGroup Properties Inc. and 5.0% (averaged) at Liberty Property Trust.

We do not see market rents improving materially until later in 2011 or sometime in 2012, as landlords grapple with still-soft domestic demand for space due to a prolonged contraction in manufacturing and inventory levels. Landlords have adopted several strategies to restrict the long-term impact of soft rents on their portfolios. Some landlords, such as Liberty Property Trust, have sought to mitigate the weakness by pursuing a blend and extend strategy: they reduce rents in exchange for the tenant extending the lease beyond its stated expiration date. Managements at several industrial REITs also have indicated that they were restricting the duration of low-rent/uneconomic leases. Still, others are increasing the automatic rent bump-ups that are embedded in the leases. First Industrial indicated that it had been successful in raising the average annual rent step-up in leases, with bumps commencing in 2010 to about 6.7%, from the typical 2.5% to 3.0% range.

Recent economic indicators, although relatively modest, suggests that the economy is improving, which should help. We see economic growth driving demand for industrial space. As of April 2011, Standard & Poors was looking for real GDP to advance 2.9% in 2011 and 2.6% in 2012, after a 2.9% gain in 2010. In April, the Institute for Supply Chain Management said that its index of factory activity fell to 61.2% in


March 2011 from 61.4% in February (readings over 50 indicate more firms are expanding than contracting); the index remained near 12-month highs. Having depleted inventories during the recession, many manufacturers and retailers will likely need to continue rebuilding their inventories to satisfy rebounding demand. Standard & Poors is looking for net gains in business inventories of $73.8 billion in 2011 and $53.1 billion in 2012, compared with a net decline of $113.1 billion in 2009 and a projected net gain of $60.4 billion in 2010. We think that rising manufacturing activity will prompt demand for more space.

We think that AMB Property and ProLogis, which have sizable properties related to global trade, are particularly well positioned to benefit from a rebound in imports and exports. In contrast to the second quarter of 2010, both REITs reported year-over-year gains in third-quarter occupancy levels. Although the re-leasing spread at each firm declined, we believe that encouraging news from major customers, such as United Parcel Service Inc. and FedEx Corp. and the major trucking companies, suggest this area is improving. Standard & Poors expects the global trade situation to remain fairly healthy, with imports into the US projected to climb 6.1% in 2011 and 5.2% in 2012 (compared with a 12.7% gain in 2010) and exports expected to rise 9.6% in 2011 and 9.8% in 2012 (versus a decline of 11.8% in 2010). Moreover, we think the sharp drop in construction activity should lead to a more pronounced recovery in rent growth once demand for industrial space picks up.

The S&P industrial REIT sub-industry index gained 11.1% through the 2011 first quarter, after a 12.2% gain in 2010.

RESIDENTIAL REITS: APARTMENT OWNERS FILL VOID LEFT BY A SLUMPING HOUSING MARKET

The single-family housing market cant seem to break out of its slump. According to the US Commerce Department, new home sales in February 2011 were at an annual rate of 250,000, 28.0% below the level in February 2010, and at a 48-year record low. Existing home sales, as reported by the National Association of Realtors, werent any more encouraging. In February 2011, existing home sales of 4.9 million were down

9.6% from Januarys rate of 5.4 million.

Recent trends in home ownership rates also suggest many potential buyers remain on the sidelines. During the fourth quarter of 2010, the nations home ownership rate slipped to 66.6%, down from 67.3% in the fourth quarter of 2009, and the lowest level since 1998. According to data published by the US Census Bureau, we are also well below the peak ownership rate of 69.4 % (seasonally adjusted) reached in the second quarter of 2004.

The bad news for the for-sale housing market is translating into good news for the rental market. Young renters, in particular, are finding a greater level of security in

leasing rather than committing to a new home purchase. And, as the economy recovers, the number of potential renters continues to grow. S&P estimates 400,000 new households were formed in 2010 and we forecast that pace to accelerate, with 600,000 additional households forming in 2011 and 1.3 million new family units forming in 2012.

A review of the ten apartment REITs in our coverage universe shows average fourth-quarter 2010 occupancy of 95.4%, near full capacity and above 94.0% in the final period of 2009. According to national statistics published by Reis, average occupancy for full-year 2010 was 93.4%, an improvement from 92.0% in 2009. Initial numbers from Reis show first-quarter 2011 occupancy of 93.8%.

Chart H14: RENTAL VACANCIES VERSUS HOME OWNERSHIP

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Home ownership (left scale) Rental vacancies (right scale)

RENTAL VACANCIES VERSUS HOME OWNERSHIP RATES(Percent of total households) (Percent of total rental properties)

Source: US Census Bureau.


Moreover, we believe REITs are regaining pricing flexibility as available space becomes scarce. We estimate rents on new leases rose 3% to 5% during the fourth quarter of 2010. Average rents for our research universe, reflecting leases signed over the last twelve months, rose 0.8%.

In 2011, Standard & Poors believes that the multi-family housing market will also benefit from a lack of new supply. We believe many private developers have curtailed plans for new communities due to a lack of available financing. New multi-family construction starts fell about 63% in 2009, as reported by the US Census Bureau, before rebounding only 7% in 2010. This led to a sharp 44% drop in units actually completed in 2010. In our view, this will provide less competition for owners of established properties, including many REITs.

We expect some REITs in our coverage universe to fill the gap in new construction by expanding their own development pipelines in 2011. New activity, in our view, may be concentrated on the healthiest markets and particularly in supply-constrained metropolitan areas. We think Avalon Bay Communities could be a leader in pursuing new opportunities. As of December 31, 2010, it had 14 communities under construction with total construction costs estimated at $879.5 million. In addition, it has established development rights for over 7,300 new apartment units.

LODGING REITS: BUSINESS TRAVELERS HIT THE ROAD

The lodging industry began to rebound in 2010, following a difficult year in 2009. Based on statistics published by Smith Travel Research, we estimate total 2010 demand for hotel rooms rose 7.7%, after a 6.0% dip in 2009. In our evaluation, business clientele, including both transient and group travelers, accounted for most of the gain as economic conditions gradually improved. Domestic leisure travel did not decline nearly as much in 2009, but we believe high unemployment continued to crimp demand in 2010.

Despite a 260 basis point improvement in occupancy, to 57.3%, hoteliers still had difficulty gaining traction on pricing in 2010. We think many business travelers continued to comparison shop for the best deals. As a result, average daily rates actually slipped 0.1%. Total revenue per available room (RevPAR) rose 5.5%, driven by higher occupancy, after a decline of 16.7% in 2009.

The lodging industry slowdown in 2008 and 2009 resulted in a significant pullback in new construction activity that may begin to benefit existing operators in 2011. The number of available room nights in 2009 increased 3.0%, reflecting construction and redevelopment projects already financed before the financial crisis. For 2010, room night supply increased a lesser 2.0%. Moreover, in 2011, we forecast a further deceleration in growth of room supply to about 1%.

We expect better economic conditions, increased travel by both business and leisure customers, and more limited new competition to result in further expansion in industry revenue metrics in 2011. Our forecast calls for an increase in demand of about 2.5% and moderately higher room rates to drive total RevPAR up 6%7%.

In our estimation, REITs, many of which have significantly pared operating costs, will see much of the revenue improvement fall to their bottom lines in 2011. In addition, we expect fewer new debt and equity offerings that diluted results on a per-share basis in 2009 and 2010.

The investment transaction market also began to revive in 2010, as investors looked to capitalize on a recovery in industry operating conditions. Jones Lang LaSalle, a leading commercial real estate broker, estimates 2010 transactions in the Americas region of $11.9 billion, up more than five fold from 2009. Moreover, Jones Lang believes that improving fundamentals and more favorable credit market conditions will lead to at least $13 billion in 2011 transactions.

US REITs are active participants in pursuing new investment opportunities. Host Hotels, the largest lodging REIT as measured by market capitalization, completed four transactions in 2010 for an aggregate of $479 million. So far, in 2011, it has completed a $145 million purchase of properties in New Zealand and signed agreements to acquire hotels in New York City and San Diego for a combined $883.5 million.


TIMBER REITS: NEW KID ON THE BLOCK

In September 2010, Weyerhaeuser Co. completed its conversion to a REIT by complying with IRS regulations that require an initial special dividend to common shareholders to cover taxable income. The conversion immediately propelled Timber REITs into the fifth largest REIT sector, as monitored by NAREIT and based on equity market capitalization. As of March 31, 2011, timber REITs had a market capitalization of $26.9 billion, about 49% of which comprised Weyerhaeuser. Other timber REITs include Plum Creek Timber Co. Inc., Potlatch Corp., and Rayonier Inc.

We believe Weyerhaeuser, now one of the largest publicly held REITs in any sector, was motivated primarily by the adoption of a more tax efficient structure. It expects the majority of its REIT income to come from investments in timberlands, including the sale of standing timber through pay-as-cut sales contracts. The trusts remaining assets will be held in a Taxable REIT Subsidiary (TRS), including manufacturing business and real estate development. However, in accordance with IRS regulations, no more than 25% of gross income may consist of dividends from the TRS or other non-real estate income.

Our fundamental outlook for the forest products industry is neutral over the next 12 months. Demand is highly dependent on the construction industry, especially the home construction and remodeling segment. Although there are some indications of improvement, the new home construction market remains well below prior peaks. However, we think even modest improvement in residential construction could lead to periods of stronger lumber and wood products prices over the coming year.

HEALTHCARE REITS: SLOW GROWTH AHEAD

The success of the Republican Party in the 2010 midterm elections has raised the hopesas well as fearsthat the Patient Protection and Affordable Care Act, signed into law by President Obama in March 2010, will be watered down or even repealed. With more than 59 million Americans without health insurance as of November 2010, according to the US Centers for Disease Control, and an aging population, we believe that there will continue to be a growing need for healthcare facilities, regardless of how the healthcare reform debate plays out. However, healthcare costs continue to rise well above inflation and we see efforts to restrict cost increases. In April 2011, Standard & Poors indicated that its Healthcare Economic Composite Index, which measures the average per capita cost of healthcare services covered by commercial insurance and Medicare programs, increased by 6.2% over the 12-month period ended February 2011.

Standard & Poors sees stable pricing among commercial insurers and favorable demographics, including a rapidly expanding senior population, which we think should sustain the demand for hospital services as positive industry trends. However, we see pressures on Medicare and Medicaid reimbursement amid federal and state budget deficits rising to worrisome levels and a lack of clarity over the timing of resumption of a positive turn in hospital admission trends. We see the same factors affecting the skilled nursing area to a lesser degree. We see senior housing, which does not rely on government reimbursements, benefiting from an aging population, while an increase in the number of insured people should expand demand for medical office buildings. (For a more detailed discussion of Medicare and Medicaid reimbursement rates, see the Healthcare: Facilities Survey.)

Since healthcare REITs own the space and do not operate the facilities, they will likely remain indirect beneficiaries of the demographic shift. However, we expect any benefits to be partially offset by continued cost containment efforts. Shifts in government reimbursement rates will weigh on the ability of hospital and skilled nursing home providers to pay rents and/or endure rent increases from their landlords (healthcare REITs). Senior housing relies on private pay, but sharp drops in equity and home prices can negatively affect the affordability of senior housing, which may reduce the ability of tenant/operators to pay rent or endure rent increases. Fourth-quarter 2010 results of several healthcare REITs indicate to us that trends remain healthy. In general, these companies showed improvements in coverage ratios, which measure the ability of the operators to cover their rents. Owners of medical office buildings have generally benefited from increasing demand for their space, which took occupancy levels and rents higher. Nevertheless, we


expect that organic growth in this needs-driven segment will continue to be slow; acquisitions of healthcare assets should continue to help overall growth.

Ventas reported that cash flow coverage ratios for its hospital facilities remained healthy, year over year, in the third quarter of 2010 as a decline in cash flow coverage (among its tenants) to 2.2X from 2.5X was offset by a fall in occupancy to 54.6% from 57.3%. The ratio dipped to 1.8X from 1.9X in the skilled nursing portfolio as occupancy slipped from 89.6% to 87.8%. In Ventas senior housing portfolio, the coverage ratio remained steady at 1.3X, while occupancy advanced from 87.9% to 90.4%. At Healthcare REIT, payment coverage and occupancy improved during the third quarter of 2010 in its same-store hospital portfolio (11 properties), as well as skilled nursing home portfolio (183 properties), but declined in the senior housing portfolio (146 properties). We look for most healthcare REITs to continue shifting their investments away from hospitals and other facilities that rely heavily on Medicare and Medicaid. (For a more detailed discussion of the impact of healthcare reform, see Healthcare reform could help healthcare REITs in the Industry Trends section of this Survey.)

While we believe that healthcare reform will drive substantial growth in demand for services provided by doctors, we also feel that payers will also be seeking ways to make the whole healthcare system more efficient. The growing use of hospitalists (physicians whose primary professional focus is hospital medicine) is one such measure, in our view. In addition, a growing number of retailers, such as CVS, Rite-Aid, Walgreens, Target, and Wal-Mart, now provide in-store clinics staffed with health professionals who can offer routine care. We see this affecting the overall demand for medical office buildings as well as easing the strain on hospital emergency rooms. Going forward, hospitals and other healthcare providers, we believe, will take a more varied approach in providing their services, which may increasingly include constructing doctors offices in hospitals and on hospital campuses. Moreover, as technology improves, remote healthcare monitoring may some day work as a means of providing efficient, effective, and reliable healthcare services.

The NAREIT healthcare subsector index advanced 7.3% during the first three months of 2011, after gaining 19.2% in 2010. Year to date through March 31, 2011, the S&P Health Care Facilities sub-industry index was up 12.5%; for 2010, the sub-index gained 22.9%.


INDUSTRY PROFILE

REITs renew focus on providing investors with total return

The US real estate investment trust (REIT) industry consisted of 144 publicly traded companies as of March 31, 2011. Total industry equity market capitalization was $427.1 billion, according to the National

Association of Real Estate Investment Trusts (NAREIT), an industry trade group.

As of March 31, 2011, retail REITs comprised 23.4% of the industrys market cap, followed by residential, at 13.9%; office, 11.2%; healthcare, 11.4%; and mortgage, 8.4%. (The remaining sectors are listed in the Retail REITs lead in Market Capitalization chart.) Most of these sectors are represented among the industrys 25 largest companies. (See the table 25 Largest US REITs on the next page for a listing of these companies.

INDUSTRY TRENDS

By law, US REITs are required to pay out at least 90% of taxable income to their shareholders in the form of dividends. During the recent economic recession, many REITs held their payouts to the bare minimum as a prudent means to conserve cash. Data published by the National Association of Real Estate Investment Trusts (NAREIT) shows that average dividend payouts fell in 2009. Since 1994, NAREIT estimates that the average payout ratio (as a percentage of funds from operations) has been 72.6%. However, that ratio was only 64% in 2009 (down from 67.8% in 2008), which represented the lowest payout level since at least 2000.

Traditionally, however, most REITs have paid in excess of 100% of taxable earnings in order to provide an attractive total

return to investors. With many sectors of commercial real estate beginning to stabilize, many REITs began the process of restoring higher payouts in 2010. NAREIT estimates the payout ratio rebounded to about 68.5% during 2010. We believe this positive trend continued into 2011 as operating fundamentals improve across industry sectors. Recent examples of dividend hikes include the following. Vornado Realty Trust, a diversified REIT, has increased its 2011 annual payout by $0.16 a share, to $2.76. Host Hotels & Resorts Inc., a REIT in the hard hit hotel sector, doubled its first-quarter dividend (paid April 15) to $0.02 a share, up from only $0.01 a share previously. Home Properties Inc., an apartment REIT, increased its first-quarter payout (paid March 4) by 6.9%, to $0.62 a share. Finally, in the retail sector, Developers Diversified Realty Corp. doubled its first-quarter 2011 dividend (paid April 5) to $0.04 a share.

Chart H01: The REIT Industry

Chart H13: RETAIL REITs LEAD IN MARKET CAP

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THE REIT INDUSTRY

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RETAIL REITS LEAD IN MARKET CAPITALIZATION(Percent of market capitalization of US publicly traded REITs, as of March 31, 2011)


In Standard & Poors view, a renewed focus on steady dividend payouts could help attract retail investors, a group that we think may have drifted away from REITs during the recession. Ironically, we think US government action may have inadvertently played a role in aggravating retail investors that are dependent on a cash return. A ruling by the Internal Revenue Service (IRS) in December 2008 allowed REITs to pay up to 90% of their dividends in the form of stock, instead of cash. (Previously, REITs could pay stock dividends only if they got a private ruling from the IRS). The IRS ruling (Revenue Procedure 2008-68) was subsequently extended to include tax years ending on or before December 31, 2011. The ruling states that the cash portion of declared distributions must be at least 10% of aggregate dividends, and each shareholder may elect to receive the entire dividend in either cash or stock. If too many shareholders elect the cash option, the cash payout may be prorated.

During 2009, several REITs took advantage of the new IRS rules in order to preserve funds for debt reduction or potential future acquisitions. However, in 2010, we believe that only one REIT, Macerich Co., took advantage of the rule extension. Macerich, a leading retail REIT, paid a stock dividend in the first quarter of 2010 before returning to an all-cash payout during the second quarter. For 2011, we expect most, if not all REITs, to pay 100% of declared dividends in cash.

INVESTMENT CAPITAL FLOWS BACK INTO REITS

Historically, the investment performance of publicly traded REITs has followed a pattern that very much mirrors the economy, the underlying job market, and prevailing credit market conditions. The combination of low interest rates and vibrant economic growth sent investor dollars surging into US real estate investment trusts (REITs) from 2004 to early 2007. The steady flow of capital bred strong competition to

buy a limited supply of commercial property, pushing prices considerably higher. With property fundamentals lagging behind price increases, capitalization rates (cap rates)which measure a propertys initial yield, or the return it generates in the first yearwere low.

The shake-up in subprime lending markets created a more challenging environment for REITs in late 2007 that carried over into 2008. High property prices for assets, turmoil in the credit markets, and less readily available capital spawned a decline in sales of property portfolios that we think began to thaw in 2009. In addition, private equity firms, which have acquired numerous REITs since 2004, have shown less interest as of late. In general, cap rates climbed in 2009, but since then cap rates have stabilized and, in some sectors, they have started to fall again as investors gain increased confidence in the cash flows generated by certain properties in the currently low interest rate environment.

From 2008 to 2010, the equity market capitalization of REITs more than doubled, to $389 billion. In 2011, through March 31, the value of REITs trading in equity markets has increased another 9.8%, to $427 million. Although the number of publicly traded REITs has increased from 136 at the end of 2008 to 144 as of March 31, 2011, the majority of the gain in market value has been through an increase in the capitalization of existing trusts. Standard & Poors thinks there could be a number of

Table B01: 25 LARGEST US REITs, BY MARKET CAP

25 LARGEST US REITS, BY MARKET CAPITALIZATION*(As of March 31, 2011)

MARKETCAPITALIZATION

COMPANY SECTOR (MIL.$)1. Simon Property Group Retail 31,386.52. Public Storage Storage 18,874.03. Equity Residential Residential 16,583.54. Vornado Realty Trust Diversified 15,917.45. General Growth Properties Retail 14,825.46. HCP Healthcare 14,071.87. Boston Properties Office 13,455.88. Weyerhaeuser Specialty 13,184.29. Host Hotels & Resorts Hotel 11,982.3

10. AvalonBay Communities Residential 10,337.211. ProLogis Industrial 9,092.812. Health Care REIT Healthcare 9,024.813. Ventas Healthcare 8,846.614. Kimco Realty Corp. Retail 7,443.015. Plum Creek Timber Co. Specialty 7,100.016. Macerich Co. Retail 6,442.317. AMB Property Corp. Industrial 6,047.118. SL Green Realty Office 5,852.719. Nationwide Health Properties Healthcare 5,369.420. Digital Realty Trust Diversified 5,313.721. Rayonier REIT Specialty 5,020.022. Federal Realty Investment Retail 5,019.023. UDR Residential 4,433.124. Alexandria RE Equities Office 4,301.725. Realty Income Corp. Retail 4,092.5

*Excluding mortgage and hybrid REITS.Source: NAREIT.


factors at play, including a better economic environment and renewed job creation. In addition, we believe institutional investors have taken a greater interest in public REITs as a proxy for the commercial real estate markets. REITs offer a liquid trading vehicle for investors to increase exposure to the real estate market as

well as quickly rotate among individual sectors. Finally, during a time of economic uncertainty, REITs have offered a significant dividend component for investors seeking total return. Despite the appreciation in market values, equity REITs still yielded 3.5% on average, as of March 31, 2011, according to statistics published by NAREIT.

A surge in successful secondary stock offerings provides further evidence of the investor appetite for REITs. During 2010, based on data published by NAREIT, REITs sold $26.2 billion in 108 common and preferred transactions. This compares to $21.2 billion in total transactions in 2009, and is the highest total since the $26.4 billion raised in 1997. Moreover, since the beginning of 2010, many REITs have accessed the public equity markets more than once in order to fund the refinancing of outstanding debt and provide liquidity for acquisitions. These include retail REITs CBL & Associates and Developers Diversified Realty, health care REITs HCP and Health Care REIT, and hospitality REITs Hersha Hospitality Trust and LaSalle Hotel Properties.

The recent rise in market valuations for REITs may also reflect anticipated increases in market prices for commercial property. After two years of sharp declines, the NCREIF Property Index (NPI), as published by the National Council of Real Estate Investment Fiduciaries (NCREIF),

was up 12.6% in 2010. However, this gain still does not offset the 6.3% and 17.9% yearly declines in 2008 and 2009. (The NPI is a measurement of total rate of return on investments by financial institutions in private real estate markets. It includes both capital appreciation and income return components.)

REIT IPOS MANAGE A MODEST COMBACK

Despite the dramatic rebound in stock prices for many publicly traded REITs since 2008, the market for initial public stock offerings (IPOs) has languished. Standard & Poors believes that many owners of commercial real estate have been waiting for a sustained improvement in industry operating conditions that will present their companies in a better light. As the economy improves in 2011, we think the size and quantity of REIT IPOs could increase.

Over the last 10 years, the number of REIT IPOs peaked in 2004 with 29 public offerings raising $8.0 million. From 2005 to 2007, the wave of REIT privatizations was accompanied by a dramatic slowdown in IPOs. This trend continued after the financial crisis hit in 2008 as only two offerings hit the market that

Chart H08: CAPITALIZATION RATES

Chart H15: NCREIF PROPERTY INDEX RETURNS

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CAPITALIZATION RATES(In percent)

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NCREIF PROPERTY INDEX RETURNS (Quarter-to-quarter total return on investment, in percent)


year. As confidence in the economic recovery began to emerge, nine offerings hit the market in 2009. Interestingly, the majority of these deals were mortgage REITs formed to acquire distressed securities. During 2010, an additional nine IPOs priced, raising $2.0 billion. These transactions included several hotel REITs, such as Chesapeake Lodging Trust and Chatham Lodging Trust, which are targeting the acquisition of distressed hotel properties.

Through March, only two IPOs have priced in 2011, raising about $902 million. The largest transaction was Januarys offering of 24.6 million shares, raising $648 million for American Assets Trust, a diversified owner of retail, office,

apartment, and hotel properties. However, the pipeline of potential deals appears to be growing. In February, Inland Western Retail Real Estate Trust Inc. filed with the SEC for a potential IPO of up to $350 million. Also in February, Cole Corporate Income Trust, an owner of single-tenant office and industrial properties, filed for a public offering of up to 300 million common shares at an estimated price of $10 a share. In addition, it has been widely speculated in the financial press that Archstone-Smith, a large apartment REIT taken private in 2007, may be considering offering its shares to the public again.

FALLING NONRESIDENTIAL CONSTRUCTION ACTIVTY HAS A SILVER LINING

The 200809 commercial real estate downturn was different in some ways from the previous one that occurred in the early 1990s. In our view, overbuilding was at the core of the crisis at that time, while more recently a weak economy and high unemployment were the key culprits to depressing demand for commercial space. the value of US commercial construction plunged 20.4% in 2009 and fell another 13.7% in 2010, According to data from the US Census Bureau and S&P Economic Research. Commercial construction starts are on track to rise an estimated 14% this year, but total nonresidential spending will still decline an

estimated 2.7%.

Our view for a modest rebound in 2011 new construction starts is echoed by the Architectural Billings Index (ABI), a monthly survey by the American Institute of Architects (AIA) that serves as a nine- to 12-month leading indicator. As of February 2011, the ABI stood at 50.6, suggesting a slight improvement in demand for design services in coming periods. (The ABI is a diffusion index: a reading above 50 indicates a rise in billings.) The AIA reports a higher level of customer inquiries, suggesting that demand may increase in coming months.

The recent decline in new construction was perhaps most severe in the office sector, where activity slowed in 2010 to its lowest level in at least 50 years. In 2011, Standard

& Poors forecasts about a 12% gain in new office construction, to 58 million square feeta level well below

Chart H03: REITIPOs VERSUS ALL IPOs

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Sources: NAREIT; Thomson Reuters.

(Millions of dollars) (% of total)

Chart H16: NEW PRIVATE CONSTRUCTION

NEW PRIVATE CONSTRUCTION (Year-to-year percent change)

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Hotel OfficeShopping center/mall WarehouseHealthcare Apartment

Source: US Bureau of the Census.


the peak of 219 million square feet in 2007. In our view, the downturn could have been a lot worse if developers had overbuilt as much as in the past.

Hotel construction also declined sharply, falling 64% in 2009 and another 40% in 2010. However, we think a general upturn in occupancy and daily room rates will set the stage for about a 23% improvement in 2011 hotel construction starts.

For existing landlords, the decline in new construction supply has its advantages. In our view, owners of high quality, well located buildings could experience an increase in demand from tenants presented with a more limited selection. Of course, market conditions can vary significantly by local metropolitan areas. Even so, we think well financed REITs could seize on the change to take local market share through capital improvements or the pursuit of build-to-suit opportunities. Moreover, the value on current properties may begin to increase as investors look to capitalize on an eventual market recovery. In fact, owners of both office and hotel properties are experiencing renewed demand for available space (as discussed in the Current Environment section of this Survey).

LESS SPACE SHOULD HELP ABSORPTION TRENDS FOR RETAIL, INDUSTRIAL REITS

We think that falling supply of retail space will help the retail REIT group. Even before the latest recession began, shopping center development was stymied by rising construction costs as well as local opposition to the noise, traffic, and pollution associated with large shopping centers, especially regional malls. After September 2008, many shopping center REITs sharply curtailed their development in response to the financial crisis.

We believe that the annual growth in shopping center space in the US will continue to slow in 2011, before picking up sometime in 2012 or 2013. Marcus & Millichap, a commercial real estate firm, noted in its 2011 National Retail Report that it expected record-low retail completions in 2011. It projected that between 2010 and 2011, new supply will total just 85 million square feet, down from an annual average of 202 million square feet between 2004 and 2008. As new supply drops, existing shopping center owners should be able to generate higher returns as excess space is absorbed. However, we note that in markets with low barriers to entry or generic strip malls, we expect that rent rates will remain soft, while regional malls and shopping centers in high barrier to entry or affluent communities should enjoy pricing power.

Given the still-tight credit conditions and a desire by retailers for space in quality locations, we think that many shopping center REITs will attempt to grow their portfolios by redeveloping and adding space to existing properties or acquiring new properties. During the 2010 third quarter, Simon Property Group started construction on an outlet center in New Hampshire and another in Malaysia. During the 2010 third quarter, Simon Property Group started construction on an outlet center in New Hampshire and another in Malaysia. Simon also said that it was looking at 16 regional mall assets as potential transformational properties, where the scope of work would range from adding department stores, restaurants, or specialty store tenants, to the redevelopment of the entire asset. The company planned to start work on some of these properties in 2011. Although we feel that ground-up development will be restricted, we gradually expect to see an uptick in new shopping center development as the economy improves. At Regency Centers Corp., one project was started during the 2010 fourth quarter, with estimated net development costs of $6.1 million and a completion yield of 10.6%. Four projects were completed during the quarter, representing $62.3 million of net development costs. At December 31, 2010, Regency had 29 projects under development with estimated net development costs of $520.7 million. We are encouraged that retailers, in general, remain averse to opening new stores in immature markets.

We believe that the sharp downturn in new developments, as well as an uncertain economic situation and volatile sales and tight credit conditions, has caused many retailers (such as Wal-Mart) to re-think their space needs.

Developers of industrial space in the US have also curtailed their development activities, largely as a result of more stringent conditions and reduced demand. Even as the economy recovers, we look for the supply of new space to remain at subdued levels. Marcus & Millichap, in its midyear 2010 Industrial Research


Market Report, projected that industrial builders will deliver 25 million square feet of new space in 2010, down from nearly 75 million square feet in 2009 and 171 million square feet in 2008. It noted that the short development timeline for industrial construction could potentially lead to increased construction in 2012 if space demand improves rapidly.

APARTMENT DEMAND IS OUTPACING NEW SUPPLY

According to statistics compiled by the US Census Bureau, a total of 6.3 million new units were added to the nations housing stock from 2005 to 2010. This exceeded the number of new households formed over the same perioda general measure of demandby about 55%. As a result, the homeowner vacancy rate (empty homes on the for-sale market) reported by the Census Bureau for the fourth quarter of 2010 rose to 2.7%, close to record levels over the past two decades and up from 2.0% in 2005. During 2010, the Census Bureau put gross vacancy (including rental units) for the US at 14.1%, up from 12.7% in 2005.

However, we think the tide began to turn for landlords in 2010. During the fourth quarter of 2010, the homeowner vacancy rate held steady at 2.7% compared with the final period of 2009. Moreover, the vacancy rate for rental units was 9.4%, down from 10.7% in 2009s fourth quarter. In our view, an improving economy, higher employment levels, and a renewed level of household formations is driving demand, particularly for rental properties. Standard & Poors estimates a net gain of 700,000 new family units in 2011, up from only 400,000 new households in both 2009 and 2010.

Moreover, Americans appear to be showing an aversion to home ownership. In the wake of declining home prices and high default rates on residential mortgages, many young adults (the key renting demographic) now consider renting a more attractive alternative. During the fourth quarter of 2010, the Census Bureau put the US home ownership rate at 66.6%, the lowest level in more than 10 years.

Despite what we view as positive trends nationally, the recovery in local apartment markets varies widely across the country. In general, we think the weakest markets are those areas hit hardest by the recession as well as over-built local housing markets with an ample land supply. Not surprisingly, Census Bureau data for the fourth quarter of 2010 show high rental vacancy rates in such markets as Detroit (15.6% rental vacancy), Orlando (23.6%), Phoenix (15.5%), and Las Vegas (13.5%). This compares to a national rental vacancy rate of 9.4%. Conversely, many of the communities with the lowest vacancy rates are in the Northeast and coastal markets on the West Coast, where there is little space for new construction.

Investment demand in the apartment sector has begun to revive after virtually disappearing when the financial crisis began in late 2007. Default rates on loans made to finance transactions during 2006 and 2007 remain high. According to Standard & Poors Ratings Services, delinquency rates on mortgage-backed securities used to finance multi-family properties was 16.1% as of February 28, 2011. However, we think banks, insurance companies, and government-sponsored entities Fannie Mae and Freddie Mac, are now making capital available for conservatively underwritten transactions.

Real Capital Analytics, a leading provider of commercial real estate data, estimates that $33.7 billion in multi-family property transactions were completed in 2010, an increase of 96% from an inactive 2009. A number of recent transactions have been completed by REITs. During 2010, Equity Residential reports that it acquired 16 properties, with 4,445 apartment units, for an aggregate purchase price of $1.5 billion. UDR Inc. invested $505 million in new properties in 2010 and, in March 2011, announced the purchase of 10 Hanover Square in New York City for $261 million in one of the largest single-property transactions to date.

Standard & Poors thinks apartment valuations are also rising. During 2010, Marcus & Millichap, a commercial broker specializing in apartments, estimates that average cap rates were 7.2% and about 100 basis points below their peak in 2009. In our view, higher-quality properties in supply-constrained locations are getting the most attention from investors looking for stable investment returns.


HEALTHCARE REFORM COULD HELP HEALTHCARE REITS

In response to the rising numbers of uninsured Americans, as well as rising healthcare costs, the US Congress passed the Patient Protection and Affordable Care Act, which President Obama signed into law in March 2010. While the changes will gradually phase in over the next several years (assuming they are not watered down or even repealed), their effect on the healthcare system in the US promises to be dramatic and costly. The Congressional Budget Office estimated the cost of the bill at about $940 billion over the 10 years from 2010 to 2019, and they estimated that it would reduce deficits by $143 billion over that period. The Congressional Budget Office sees the bill reducing the deficit by $1.2 trillion in its second decade.

Certain elements of the bills (collectively referred to as the Acts) will become effective within six months of passage: insurance companies are barred from denying coverage to children with pre-existing conditions and prohibited from cancelling policies of people who get sick; children are permitted to stay on their parents insurance policies until their 26th birthday; and seniors will r

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