Post on 18-Nov-2014
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Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. Asa result, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision. See "Important Disclosures and Certifications" section at the end of this report forimportant disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risksto Price Target" sections at the end of this report, where applicable.
January 13, 2010
REITs/REAL ESTATE
Mark Biffert212 667-7062Mark.Biffert@opco.com
Samit Parikh212 667-6224Samit.Parikh@opco.com
2010 REITs/Real EstateIndustry OutlookOutlook for Slow Recovery and Higher Rates CauseREITs to Underperform in 2010
SUMMARY
With a challenging year for commercial real estate (CRE) and the global marketsnow behind us, we look to 2010 as a year of stabilization and recovery. In recentmonths, we have seen signs of improvement in consumer spending/sentiment,manufacturing output, and stabilization in unemployment; however, the economicrecovery still appears fragile as it tries to come off government life support in 2010.We expect the recovery for CRE fundamentals to take time, with trough NOI in theshorter lease-term sectors anticipated in the 2H10 (apartments, self-storage), whilelonger lease-term assets (office, retail, industrial) are projected to bottom in2011/2012. We believe the level of transaction activity in '10 will depend largely onlender willingness to sell non-performing assets and/or a greater reduction in thebid/ask spread (~100bps currently). We expect a rise in interest rates combinedwith declining cash flows to offset tightening credit spreads on asset pricing. Webelieve a disappointing NOI growth outlook by REITs in '10 could cause REIT riskyield premiums to widen, leading to a 25-50bps back-up in implied cap rates to7.25-7.5%. We expect REITs to underperform the broader markets in '10,delivering a total return in a range of -5.0% to +5.0% through a mix of animproving dividend yield (~4.5%) and a modest back-up in cap rates due torising interest rates. We expect volatility to remain, but at a lower beta than in '09.
KEY POINTS
■ Bull Case. If the economy recovered quicker than expected and the creditmarkets/transaction activity improved dramatically, we could see additional caprate compression (~75-100bps), partially offset by a rise in interest rates(25-50bps). In this scenario, we believe REITs could outperform the S&P 500,with a total return of 12.0-18.0%.
■ Bear Case. In this scenario we assume the economy dips back into negativegrowth, unemployment rises to ~11.0% and risk premiums rise by ~75-100bpsas fundamentals deteriorate reflecting reduced demand. Transaction activityimproves as lenders take back assets due to a lack of coverage. In this scenarioREITs underperform the S&P 500, with a total return of -8.0% to -12.0%.
■ Sector Calls and Top Ideas . We favor the Self-storage, Industrial, Health Care,Senior Housing Operators, and Brokers. The sectors less favored by us are theOffice and Regional Malls. Our top Outperform-rated ideas include AIV, CPT,HCN, PSA, SKT, BKD, ESC and FCE.A. Our top Underperform-rated ideas areAVB, CBL, MAC, and TCO.
■ Upgrades. As part of our outlook, we are upgrading Tanger Factory Outlets(SKT) and Public Storage (PSA) to Outperform from Perform. We are alsoupgrading Washington REIT (WRE), Weingarten Realty (WRI) and SovranSelf-Storage (SSS) to Perform from Underperform.
EQUITY RESEARCH
INDUSTRY UPDATE WITHCHANGES
Oppenheimer & Co Inc. 300 Madison Avenue 4th Floor New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229
2
2010 OPCO REIT/Real Estate Outlook:
Economic Outlook
With a challenging year for commercial real estate and the global markets now behind us,
we look to 2010 as a year of stabilization and recovery. In recent months, we have seen
signs of improvement in consumer spending, consumer sentiment, manufacturing output
and stabilization in unemployment; however, the economic recovery still appears fragile as
it tries to come off government life support in 2010.
Unemployment remained flat at 10.0% in December, with 85,000 job losses after a revised
4,000 job losses in November. Despite the recent decline, signs of stabilization in the
economy, rising part-time hires and hours worked suggest hiring could turn postive in
1H10. However, there appears to be a wide disparity among economists on where
unemployment will be by YE10 from a low of 8.5% to a high of 11.2%.
The residential housing market appears to be stabilizing, but it is still uncertain if pricing
will hold following the expiration of government tax credits in April 2010. In addition, the
government’s Home Affordable Modification Program (HAMP) has yet to prove it can stem
the rise in delinquencies.
With $525B in CRE (commercial real estate) loans maturing in 2010 and credit still
constrained, we anticipate that the “extend and pretend” theme of 2009 will likely continue
through 2010. However, banks with construction and other secured loans may need to
take back non-cash flowing properties, which could create distress opportunities. Also,
Fed funds futures are building in a ~90bps rise in interest rates by YE10 as increased
levels of government and business spending are expected to drive yields higher.
Inflation has become a point of greater concern given the amount of government stimulus
spending put into the market over the last 15 months. While initial estimates of 1.5-3.0%
are not threatening, any acceleration in inflation could push interest rates higher.
Despite some of these negative headwinds, we expect the economy to post positive GDP
growth in 2010 as the effects of government stimulus translate into increased investment
and growth.
2010 REIT Outlook
While a trough appears to be in sight for some CRE groups (apartments, hotels, self-
storage), we are maintaining a cautious view on the overall sector driven by our outlook
for declining property cash flows into 2011 and the risk of higher interest rates offsetting
any additional positive impact from compressing risk premiums on cap rates. We believe
that 2010 earnings guidance relative to what is being implied in current valuations could
disappoint investor expectations, causing REIT risk yield premiums to widen. As a result,
we expect REITs to underperform the broader markets, delivering a total return in a
range of -5.0% to 5.0% in 2010. We expect volatility to continue, but at a lower beta than
we witnessed in 2009.
In terms of stock selection, we favor companies with an improving outlook for cash flow
growth, an attractive yield, and manageable leverage. As such, we suggest investors
increase their exposure to Healthcare REIT (HCN: O, $49 price target); Camden Property
Trust (CPT: O, $48 price target); Public Storage (PSA: O - $85); Tanger Factory Outlets
(SKT: O, $43 price target); Brookdale Senior Living (BKD: O, $24 price target); and
Emeritus Corp. (ESC: O, $27 price target). Additionally, we believe there are several
REITs/REAL ESTATE
3
opportunistic investments that, while having greater risk profiles (debt refinancing or
interest coverage concerns), have aggressively moved to address investors’ concerns and
now offer substantial upside, in our view. These companies include: Forest City
Enterprises (FCE.A: O, $17 price target), Apartment Investment and Management Co.
(AIV: O, $19.50 price target). Alternatively, we suggest investors reduce their exposure to
companies with a deteriorating growth outlook into 2011 based on tenant quality, asset
location or oversupply, as well as those that trade at above average premium valuations
relative to their growth outlook. As such, we suggest investors reduce their exposure to
AvalonBay Communities (AVB: U, $65 price target); Macerich (MAC: U, $28 price target),
CBL Properties (CBL: U, $9 price target), EastGroup Properties, Inc. (EGP: U, $29 price
target) and Taubman Centers (TCO: U, $30 price target).
In terms of sectors, we suggest investors favor the self-storage, senior housing operators,
health care, industrial and commercial real estate brokers based on a mix of
stable/improving cash flow growth, increased transaction activity in their respective
sectors, and/or limited new supply. Alternatively, we expect the office and regional malls
sectors to be negatively impacted by falling asset values due to rising interest rates,
declining property cash flows and/or increased shadow supply.
Exhibit 1: Summary of Companies with Ratings, Earnings or Price Target Updates
Ticker Company Previous Rating Current rating FYE
2009E
FFO
Prev
2009E
FFO
Revised
2010E
FFO
Prev
2010E
FFO
Revised
2011E
FFO
Prev
2011E
FFO
Revised
Target
Price
Previous
Target
Price
Current
SKT Tanger Factory Outlet Perform Outperform Dec NC $2.67 NC $2.68 NC $2.71 NA $43.00
WRI Weingarten Realty Underperform Perform Dec NC $1.98 NC $1.64 NC $1.65 $16.00 NA
PSA Public Storage, Inc. Perform Outperform Dec NC $5.55 NC $4.92 NC $5.10 NA $85.00
SSS Sovran Self Storage Underperform Perform Dec NC $2.34 NC $2.45 NC $2.51 $25.00 NA
MAC Macerich Company NC Underperform Dec NC $3.68 NC $3.15 NC $3.06 $24.00 $28.00
CBL CBL & Associates NC Underperform Dec NC $2.39 NC $1.90 NC $1.85 $7.00 $9.00
BMR BioMed Realty Trust Inc. NC Perform Dec $1.67 $1.68 $1.34 $1.32 $1.44 $1.38 NC NA
VTR Ventas NC Perform Dec NC $2.65 $2.67 $2.69 $2.85 $2.87 NC NA
HCP HCP, Inc. NC Perform Dec $1.67 $1.48 NC $2.18 NC $2.37 NC NA
WRE Washington REIT Underperform Perform Dec NC $2.12 NC $1.86 NC $1.84 $22.00 NA
Source: Bloomberg, company data, Oppenheimer & Co. Inc. estimates Note: Please see Appendix for updated balance sheet and income statements for companies with estimates changes.
Basis for our Cautious View
Taking a Look at Yield Spreads
Considering that owning real estate for many is an income-based investment, we find it
pertinent to look at implied yields on REITs compared to alternative fixed income
investments. Historically, REIT implied cap rates have traded at a 68bp spread over the
Moody’s Baa bond rate, and at a 323bp spread over the 10-year US Treasury. At current
implied cap rate levels of 7.0%, REITs are trading in line with historicals at a 68bp spread
to the Moody’s Baa yield, and at a 315bp spread to the 10-year Treasury. We note yields
on both the 10-year US treasury and Moody’s Baa have risen considerably over the past
few weeks.
There are several scenarios that could play out, which would impact REITs assuming they
trade relative to alternative fixed income investments. We note that changes in the spread
between REIT implied cap rates and fixed income yields should be primarily a result of
same-store NOI growth projections.
REITs/REAL ESTATE
4
Scenario 1: Yields on the 10-year and corporate bonds continue to rise as demand
diminishes, but implied cap rates remain the same as real estate fundamentals appear
more positive, causing spreads to compress.
Scenario 2: Yields on the 10-year and corporate bonds decline, as a flight to safety
causes increased demand for US government bonds. The current implied cap rate spread
to both investments remains the same, as investors continue to feel the same about real
estate fundamentals, causing impled cap rates to decline further, pushing the rally in
REITs.
Scenario 3: Yields on the 10-year and corporate bonds increase, and disappointing
economic data causes investors to believe real estate fundamentals will suffer longer than
expected, causing spreads to widen. As a result, REIT implied cap rates rise, causing a
pullback in share prices.
While it is difficult to predict the direction of treasury yields and corporate bond
rates, we are certain that same-store NOI growth has not bottomed. Exhibits 3-6
below show that in the most recent downturn, spreads between implied cap rates and the
10-year US Treasury/Moody’s Baa yields did not compress to historical levels until same-
store NOI growth hit trough levels. We believe that spreads should be at above-average
levels for now, and that same-store NOI growth will not bottom until late 2010 at the
earliest.
In our view, a decline in corporate bond rates and Treasury yields could fuel a modest
REIT rally if investors continue to believe that the current implied cap rate spread is
appropriate; however, dissapointing 2010 earnings outlook could reverse this thought. The
risk premium on real estate yields could widen if earnings outlooks call for same-store NOI
to decline at a steeper rate, and as such REITs would appear to be overvalued at current
levels.
In our view, the REIT rally was largely fueled by a decline in bond yields combined with
some optimistic economic data. That said, real estate fundamentals are largely dependent
upon job creation, and the absence of job growth would translate into NOI growth
remaining at depressed levels for now. We believe investors should remain cautious on
REIT valuations, which appear to be pricing in a faster recovery in fundamentals than we
are projecting. Additionally, the possibility of rising interest rates absent job growth should
be a heavy concern, as such a scenario would mean a higher cost of capital, and
continued weak growth.
We note that at 7.32%, 10-year REIT unsecured debt spreads have narrowed dramatically
in the past year, currently at ~367 bps over Treasuries as of 1/11/2010 (see Exhibit 2),
further suggesting that REIT debt is pricing in greater risk than was seen in the 2002-2006
period.
REITs/REAL ESTATE
5
Exhibit 2: 10-yr REIT Bond Spreads vs US Treasury Bonds
0%
2%
4%
6%
8%
10%
12%
14%
Dec-0
2
Apr-
03
Aug-0
3
Dec-0
3
Apr-
04
Aug-0
4
Dec-0
4
Apr-
05
Aug-0
5
Dec-0
5
Apr-
06
Aug-0
6
Dec-0
6
Apr-
07
Aug-0
7
Dec-0
7
Apr-
08
Aug-0
8
Dec-0
8
Apr-
09
Aug-0
9
Dec-0
9
BBB 10- Yr REIT Spread to
Treasuries is currently 367bps, vs
the long term average of 269 bps
Source: Bloomberg index of BBB-, BBB and BBB+ rated REIT bonds, Federal Reserve.
Exhibit 3: Implied Nominal Cap Rates vs. Corporate Bond Yields (1998-Current)
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
02/19
98
10/19
98
06/19
99
02/20
00
10/2
000
06/20
01
02/2
002
10/20
02
06/20
03
02/2
004
10/20
04
06/2
005
02/20
06
10/20
06
06/2
007
02/20
08
10/2
008
06/20
09
Implied Nominal Cap Rate
Moody's Baa Corp Bond Yield
Source: Bloomberg, company data, Oppenheimer & Co.
REITs/REAL ESTATE
6
Exhibit 4: Implied Cap Rate Spread to Corporate Bonds (1998-Current)
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
02/1
998
10/19
98
06/19
99
02/20
00
10/20
00
06/20
01
02/20
02
10/2
002
06/2
003
02/2
004
10/2
004
06/2
005
02/20
06
10/20
06
06/20
07
02/20
08
10/20
08
06/20
09
Implied Cap Spread over Baa
Historical Avg. SpreadSpreads did not
compress until trough NOI
achieved
Source: Bloomberg, company data, Oppenheimer & Co.
Exhibit 5:. Implied Cap Rate Spread to Corporate Bonds (1998-Current)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
02/1
998
10/1
998
06/1
999
02/2
000
10/2
000
06/20
01
02/20
02
10/20
02
06/20
03
02/2
004
10/2
004
06/2
005
02/20
06
10/20
06
06/20
07
02/20
08
10/20
08
06/20
09
Implied Cap Spread over 10YY
Historical Avg. SpreadSpreads did not
compress until trough NOI
achieved
Source: Bloomberg, company data, Oppenheimer & Co.
REITs/REAL ESTATE
7
Exhibit 6: Same-Store NOI Growth (1998-Current)
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
3Q98
2Q99
1Q00
4Q00
3Q01
2Q02
1Q03
4Q03
3Q04
2Q05
1Q06
4Q06
3Q07
2Q08
1Q09
Trough NOI at
1Q03
Source: Company data, Oppenheimer & Co.
Lender Allocation to CRE Expected to Grow in 2010
Lender allocations to commercial real estate are expected to grow in 2010 over 2009 given improved liquidity and underwriting accounting for the expected decline in fundamentals. However, a large portion of the allocations will likely be targeted toward refinancing/extending existing performing loans. The GSE’s (government sponsored enterprises) increased their lending to the multi-family and senior housing sectors in 2009, making up almost 85% of all lending to the multi-family sector. This is expected to continue in 2010. Life insurance companies, which have been the largest source of lending to industrial, office and retail sectors, are expected to allocate ~$30B in capital in 2010. CMBS (commercial mortgage-backed securities) issuance in 2009 totaled $850M through two agency-backed deals (Fortress, Developers Diversified). While we expect CMBS issuance to improve in 2010 over 2009, several impediments remain from issuance returning to more substantial volumes including: 1) lack of infrastructure; 2) poor pricing given conservative ratings; and 3) unattractive returns on capital for banks given required
accounting treatment.
Exhibit 7: Life Insurer Mortgage Commitments likely declined to ~$15B in 2009 ($ in
billions)
14
.1
6.3
9.4
10
.7 13
.6
21
.4
19
.0
20
.7
24
.8
22
.3
21
.5
26
.9
28
.1
32
.7
39
.2 43
.2
44
.1
42
.7
26
.7
15
.6
7.3
$0
$10
$20
$30
$40
$50
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1H
2008
1H
2009
1998-2008 ~$350B
S&L
Collapse
Mortgage
Meltdow n
Long Term
Credit Capital
9/11& Corporate
Credit Squeeze
Source: American Council of Life Insurers, HFF
REITs/REAL ESTATE
8
Exhibit 8: Fannie Mae and Freddie Mac remain active lenders to the multi-family and
senior housing sectors ($ in billions)
$15.5 $12.4 $13.5
$22.8 $22.0
$36.0
$21.2$25.6
$34.3
$60.0
$35.5$6.6 $7.8 $7.1
$12.3 $14.3
$22.6
$23.8$26.2
$28.8
$44.7
$9.5
$10.1$7.8$7.9
$24.3
$2.7$2.3
$0
$25
$50
$75
$100
$125
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Fannie Mae Freddie Mac
9/11& Corporate
Credit Squeeze
1998-2008 >$500B
Source: Fannie Mae, Freddie Mac, HFF
Exhibit 9: U.S. CMBS Issuance still constrained – Annual volumes in billions
0
50
100
150
200
250
300
350
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
CM
BS
Issu
an
ce (
$B
)
0%
1%
2%
3%
4%
5%
6%
7%
Global US 10-yr Yield
Source: Commercial Mortgage Alert; Oppenheimer & Co. Inc.
REIT Dividend Yields Need to Grow
The average REIT dividend yield is now 3.64% 21bps below the 10-year U.S. Treasury at
3.85%. We believe this negative spread will need to become positive and widen in order
for the group to become more attractive to investors, given the outlook for declining NOI
growth. While REITs have the ability to continue paying out up to 90% of their dividends in
stock, we believe many will shift back to an all-cash dividend now that access to capital
has improved. In addition, we note that a number of REITs cut their dividend to conserve
capital in 2009, and as a result, now have a median FAD (funds available for distribution)
payout ratio of 84%, implying room to raise the dividend in 2010. See Exhibit 10 for a list
of potential REITs to raise their dividend. The following chart includes stock dividends
from companies like SPG, VNO and MAC; some companies which pay partial stock
dividends are more likely to increase the portion of cash paid (as Kimco recently did),
rather than make a cut.
REITs/REAL ESTATE
9
Exhibit 10: Potential for Dividend Increases Based on Projected Payout Ratios
REIT Ticker
Current
Dividend
Payout Ratio
(2010E FAD)
Annual
Dividend
(Cash &
Stock)
Potential Increase/
Decrease to Achieve
Optimal 85% Payout
Ratio
Implied % Change
in Dividend
First Ind. Realty FR 0% $0.00 $0.47 NA
Forest City Enterprises FCEA 0% $0.00 $1.01 NA
Maguire Properties MPG 0% $0.00 ($0.61) NA
Developers Diversified DDR 8% $0.08 $0.74 931%
CBL & Associates CBL 15% $0.20 $0.92 458%
SL Green SLG 15% $0.40 $1.80 450%
U-Store-It Trust YSI 22% $0.10 $0.28 281%
Apartment Investment & Mgmt. AIV 39% $0.40 $0.48 119%
Pennsylvania REIT PEI 42% $0.60 $0.62 104%
BioMed Realty Trust Inc. BMR 45% $0.44 $0.40 91%
Alexandria Real Estate ARE 45% $1.40 $1.23 88%
Douglas Emmett DEI 45% $0.40 $0.35 87%
Brandywine Realty Trust BDN 45% $0.40 $0.35 87%
Public Storage PSA 48% $2.20 $1.69 77%
Simon Property Group SPG 49% $2.40 $1.78 74%
PS Business Parks PSB 61% $1.76 $0.70 40%
Brookfield Properties BPO 67% $0.56 $0.15 27%
Kite Realty Group KRG 69% $0.24 $0.06 24%
Glimcher Realty Trust GRT 69% $0.40 $0.09 23%
Saul Centers Inc. BFS 71% $1.44 $0.29 20%
Tanger Factory Outlet Centers SKT 72% $1.53 $0.27 18% Greater Likelihood of a
HRPT Properties Trust HRP 72% $0.48 $0.08 17% Dividend Increase in 2010
Kimco Realty Corp. KIM 75% $0.64 $0.08 13%
Entertainment Properties EPR 76% $2.60 $0.32 12%
Taubman Centers, Inc. TCO 76% $1.66 $0.21 12%
Nationwide Health Prop. NHP 76% $1.76 $0.20 11%
Equity Residential EQR 77% $1.35 $0.14 10%
Extra Space Storage Inc. EXR 78% $0.52 $0.05 9%
Ventas VTR 80% $2.05 $0.13 6%
LTC Properties LTC 82% $1.56 $0.06 4%
Mack Cali Corporation CLI 82% $1.80 $0.06 3%
Senior Housing Properties Trust SNH 83% $1.44 $0.04 3%
Sovran Self Storage SSS 83% $1.80 $0.05 3%
Federal Realty Investment Group FRT 84% $2.64 $0.04 1%
BRE Properties BRE 84% $1.50 $0.01 1%
Weingarten Realty WRI 85% $1.00 $0.00 0%
Boston Properties BXP 85% $2.00 ($0.00) 0%
Mid-America Apt. MAA 87% $2.46 ($0.05) -2%
Corporate Office Properties OFC 88% $1.57 ($0.05) -3%
Duke Realty DRE 88% $0.68 ($0.03) -4%
Camden Properties CPT 88% $1.80 ($0.07) -4%
Health Care REIT Inc. HCN 89% $2.72 ($0.13) -5%
Kilroy Properties KRC 89% $1.40 ($0.07) -5%
DCT Industrial DCT 90% $0.28 ($0.02) -6%
UDR, Inc. UDR 91% $0.72 ($0.05) -7%
Highwoods Properties HIW 91% $1.70 ($0.12) -7%
Realty Income Corp. O 92% $1.71 ($0.13) -8%
Commercial Net Lease NNN 92% $1.50 ($0.11) -8%
Healthcare Realty Trust HR 93% $1.20 ($0.10) -9%
HCP, Inc. HCP 93% $1.84 ($0.16) -9%
Parkway Properties PKY 94% $1.30 ($0.12) -9%
Vornado Realty VNO 94% $2.60 ($0.25) -9%
EastGroup Properties, Inc. EGP 95% $2.08 ($0.22) -11%
Colonial Properties Trust CLP 95% $0.60 ($0.06) -11%
Getty Realty Corp. GTY 95% $1.90 ($0.21) -11%
Liberty Property LRY 96% $1.90 ($0.23) -12%
Urstadt Biddle Properties UBA 101% $0.96 ($0.15) -16%
Post Properties PPS 105% $0.80 ($0.15) -19%
Essex Property Trust ESS 106% $4.12 ($0.83) -20%
The Macerich Co. MAC 109% $2.40 ($0.52) -22%
Home Properties of NY HME 109% $2.68 ($0.60) -22%
Regency Centers REG 110% $1.85 ($0.42) -22%
Prologis PLD 112% $0.60 ($0.14) -24% Greater Potential for a
Washington REIT WRE 112% $1.73 ($0.41) -24% Dividend Cut in 2010
Mission West Properties MSW 113% $0.60 ($0.15) -25%
AMB Property AMB 115% $1.12 ($0.30) -26%
AvalonBay Communities AVB 124% $3.57 ($1.13) -32%
Equity One Inc EQY 129% $1.20 ($0.41) -34%
Cousins Properties Inc. CUZ 154% $0.20 ($0.09) -45%
Median 84%
Note: Cash and stock dividends included where applicable. Source: Factset, Bloomberg, SNL, Oppenheimer, Inc. estimates
REITs/REAL ESTATE
10
Exhibit 11: Equity REIT yields vs. 10-year U.S. Treasury yields
0
2
4
6
8
10
12
Sep
-92
Sep
-93
Sep
-94
Sep
-95
Sep
-96
Sep
-97
Sep
-98
Sep
-99
Sep
-00
Sep
-01
Sep
-02
Sep
-03
Sep
-04
Sep
-05
Sep
-06
Sep
-07
Sep
-08
Sep
-09
yie
ld (
%)
The 3.74% REIT Dividend Yield is 11
bps below the 10 year Treasury Yield
of 3.85% .
Source: SNL, U.S. Federal Reserve
Delinquencies Will Continue to Rise as Cash Flows Deteriorate
We expect deliquencies to rise further in 2010 as property cash flows continue to deteriorate below required coverage levels. While the “Extend and Pretend” trend works for cash-flowing properties, we believe lenders will start to take back assets or owners will start to send back the keys should the properties cost more money than they make to maintain. In addition, we expect to see greater IPO and joint venture activity between lenders and opportunistic investors as banks look for ways to raise capital without booking
losses.
We note in Exhibit 12, that CMBS delinquency rates have risen signficantly over the last
year to 6.5% from less than 1.0% a year ago. Hotels and multi-family showed the greatest
increase reflecting their short leases, which reset to market rents more quickly, and we
would expect them to be among the first sectors to offer acquisition opportunities for
REITs. Rating agency Fitch expects delinquency rates for the 2005-2007 vintages of
CMBS to rise close to 12% in 2010 as overleveraged private buyers have difficulty
refinancing debt maturities and/or property cash flows decline below required interest
coverage levels.
REITs/REAL ESTATE
11
Exhibit 12: CMBS Delinquency Rates
0%
2%
4%
6%
8%
10%
12%
14%
16%
Sep-9
8
Sep-9
9
Sep-0
0
Sep-0
1
Sep-0
2
Sep- 0
3
Sep- 0
4
Sep-0
5
Sep-0
6
Sep-0
7
Sep-0
8
Sep-0
9
Jan- 1
0
Deli
nq
uen
cy R
ate
(%
)
Industrial Lodging Multi-Family Office Retail All
Source: Trepp, Bloomberg, Oppenheimer & Co.
Lack of New Supply Positive for CRE, but Shadow Market Remains a Threat
While new supply as a percentage of stock remains at historically low levels across the
major property types, the shadow market continues to be a threat given weak demand for
space. Sectors with the greatest threat of shadow supply include: office, industrial, and
apartments. Tenants continue to have leverage over landlords in markets where shadow
supply inventory is high, resulting in landlords offering greater concessions and reduced
rents. In addition, existing tenants coming up for renewal are now trying to lock-in long-
term leases at today’s lower rates based on the expectations that market rents are at or
near trough levels. We continue to believe that location and the quality of the asset is very
important as landlords with strong producing assets should be able to push back on
tenants seeking concessions with greater success than those with assets in fringe or
secondary markets that may have a lot of competitive stock. For apartments, operators
are already reducing concessions in some of the stronger rental markets, such as New
York, the DC metro, and Boston.
Exhibit 13: Vacant home levels have begun to tick down Exhibit 14: Limited new Industrial development should
increase pricing power for landlords as absorption grows
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
0
500
1,000
1,500
2,000
2,500
Renter Occupied Homes (000s) For Sale Vacant Homes (000s)
0
25
50
75
100
125
150
2001 2002 2003 2004 2005 2006 2007 2008 2009
Mil
lio
n S
F
Build-to-Suit Speculative
Source: US Census Bureau Source: Grubb & Ellis Co
REITs/REAL ESTATE
12
Exhibit 15: Office space available for sublease rising sharply as job losses continue
0
20
40
60
80
100
120
140
160
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Mil
lio
n S
F
CBD Suburban
Source: Grubb & Ellis Co.
Valuation
REITs currently trade at an average premium to NAV of ~18% and at an implied cap rate
of ~7.0%. On an FAD basis, REITs trade at 18.0x 2010 estimates of $2.33/sh. We note
that on a FW FFO basis, the group trades at 14.2x 2010 estimates of $2.94/sh., a 16.4%
premium to their long-term average of 12.2x NTM FFO, which we feel is fair given the
outlook for a diminishing rate of decline in cash flows that REITs are experiencing.
Exhibit 16: REIT sector average LTM FFO multiple, 1997-2009
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
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
Jan-0
8
Jan-0
9
Forward FFO M ult ip le
N TM Hist o r ical A verage
C urrent NTM FFO M ult ip le o f
14 .2 x compares wit h 12 .2 X
N TM average
Source: Factset, company data, Oppenheimer & Co.
REITs/REAL ESTATE
13
Exhibit 17: REIT Valuation Metrics by Sector
Implied Premium Implied OPCO Est. Implied
Dividend Price/FAD Price per (Disc) to Return to Nominal Nominal
Property Type Yield 10E 10E Unit/SF NAV NAV Cap Rate Cap Rate
Shopping Centers - Retail 4.4% 13.9x 17.88x $93 16.6% -13.8% 8.0% 7.2%
Regional Malls 1.19% 12.4x 14.91x $186 28.5% -21.8% 8.0% 7.1%
Factory Outlet Centers 3.88% 14.7x 18.61x $256 13.3% -11.7% 8.0% 7.3%
Apartments 4.35% 16.8x 21.08x $122,274 18.2% -14.3% 6.6% 6.1%
Industrial Properties 4.30% 16.1x 23.57x $27 19.0% -15.3% 8.3% 7.5%
Office Properties 3.64% 13.2x 19.93x $269 15.1% -12.6% 7.7% 7.0%
Diversified Properties 3.83% 13.2x 22.38x $267 17.3% -7.2% 8.0% 8.4%
Self-Storage 2.94% 15.9x 17.26x $109 14.0% -11.8% 8.0% 7.2%
Net Lease 6.84% 12.2x 13.12x $289 27.3% -20.6% 0.0% 0.0%
Health Care 5.62% 14.5x 15.41x $9,733 14.5% -12.1% 8.2% 7.3%
Weighted Average / Total 3.81% 14.2x 18.78x NA 18.4% -13.8% 7.6% 7.0%
Price/FFO
Source: Factset, company data, Oppenheimer & Co.
Earnings Expectations by Sector
We expect another year of earnings decline in most sectors for 2010, with the exception of
the healthcare REITs (where we project 18.5% blended internal/external growth) and
senior housing operators (4-6% internal growth), which will likely benefit from improving
market fundamentals and/or based on their use of long-term leases with built-in rent
escalators. We expect earnings in the other major property types to be negatively
impacted by declining NOI and asset sales (see Exhibit 18). As in 2009, we expect REITs
to continue to solve for occupancy (targeting 95%) by reducing rents until the market
clearing prices are met. We expect demand for space to remain weak in most sectors as
sub-let/shadow space remains a threat. We expect operating fundamentals to begin
stabilizing throughout the year as market conditions continue to improve. That said, we
would expect any kind of economic shock related to unemployment, housing, the credit
markets or interest rates to have a negative impact on the pace of the recovery.
Exhibit 18: Sector and sub-sector FFO growth expectations for 2009, 2010 & 2011
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Shopping
Centers
Self-Storage Regional
Malls
Office Industrial Health Care Diversified
Properties
Apartments
08A-09E 09E - 10E 10E-11E
Source: SNL, First Call, Oppenheimer & Co. estimates
REITs/REAL ESTATE
14
2010 Sector Outlook and Stock Recommendations: Grow exposure to Self-Storage, Industrial, Healthcare, Brokers & Senior Housing and reduce exposure to Office and Regional Malls.
Top Buys: FCEA, HCN, CPT, AIV, BKD, ESC, YSI
Top Sell: CBL, EGP, AVB, MAC
Healthcare Sector (Favored Sector)
We recommend investors favor healthcare real estate based on the sector’s stable cash
flows and outlook for greater transaction activity following the finalization of healthcare
reform. The long lease structures of the companies’ assets with built-in rent escalators
should provide stable internal growth (2.0-3.0%). While the sector’s premium valuation
largely reflects this stable internal growth profile, we believe the outlook for improved
transaction volumes could provide for additional upside. We believe that healthcare reform
will have neutral impact on the group, resulting in improved utilization for some of
companies’ tenants partially offset by RUG reimbursement reductions for its skilled
nursing facility operators. We also favor healthcare REITs for their strong balance sheets,
improved liquidity and attractive dividend yields (5.6%) relative to the REIT sector.
Our top idea in the Healthcare sector is Outperform-rated Health Care REIT (HCN:
PT$49) given its solid internal growth profile (estimated 3.0-4.0% NOI growth),
incremental growth from expected development deliveries ($469M in 2010), the
potential for greater transaction activity given the company’s strong balance sheet
and its high-quality list of tenants.
Valuation: The Healthcare sector trades at 15.4x 2010 FW FAD estimates, a 14.4%
discount to the REIT sector average of 18.0x. In addition, the sector trades at an average
14.5% premium to our average forward NAV estimates vs. the REIT sector average of
17.9%.
REITs/REAL ESTATE
15
Exhibit 19: Medical Office Building Construction
350
375
400
425
450
475
500
525
550
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
New SF Constructed (millions) Existing SF (millions)
% Construction of Total Inventory
Source: Costar
Senior Housing Sector (Favored Sector)
We suggest investors favor the senior housing sector given its discounted
valuation relative to our outlook for improving operating fundamentals and greater
transaction activity. We note several positive trends, which should support improved
demand for services including: 1) limited new supply (~7,500 private pay units in 2010); 2)
positive long-term demographics (200,000 seniors turning 80 years old every year with a
5.0-6.0% penetration rate); 3) stabilizing housing/employment markets; 4) greater need
for healthcare services (Alzheimer’s and other dementia care) with the potential of
increasing the penetration rate by ~15.0+% per year over the next ten years; and 5) the
greater use of long-term care insurance to fund future retirement services is growing in
popularity. Risks to the sector include greater regulations on a state and local level, rising
labor costs, a challenged residential market and caps on Medicare reimbursements for
therapy services.
Our favored ideas in the sector are Brookdale Senior Living (BKD: PT $24) and
Emeritus Corp. (ESC: PT $27) given their growing exposure to need-driven Assisted
Living, Alzheimer Care and Skilled Nursing segments of senior housing, the outlook
for greater transactions and discounted valuations.
Valuation. The senior housing sector currently trades at 13.3x 2010 estimated CFFO
estimates vs. the historical average of 11.5x and at 4.5x 2010 estimated EBITDAR.
REITs/REAL ESTATE
16
Exhibit 20: Net Growth in Private-Pay Senior Housing Units (in thousands, excluding Senior Apartments)
0
10
20
30
40
50
60
70
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
E
Th
ou
san
ds o
f U
nit
s
Source: National Investment Center, American Seniors Housing Association
Self-Storage Sector (Favored Sector)
We favor the self-storage space as an early recovery cycle play, and believe that space
should experience above-average same-store NOI growth in the near-to-mid term as the
economic landscape improves. Given the sector is defined by monthly leases, and space
demand is mostly impacted by population movement, life events, and the labor markets,
self-storage operators should be able to regain pricing power in late 2010 as the economy
recovers. In addition, operators aggressively discounted asking rents and increased
incentives in 2009, causing above-average same-store NOI declines. The result of this
was a decline in net-move-outs, which should allow operators to push rates in mid-2010,
giving the possibility for same-store NOI growth late next year. The space has also been
plagued by the weak Florida market, which has shown signs of stabilization. While we
don’t expect Florida to be a growth driver in 2010, we believe the state’s drag effect on
revenue growth will mitigate.
We believe the sector’s valuation is attractive, and given our expectations for above-
average same-store NOI growth, lower cap rates for storage properties can still produce
required unlevered IRR’s for real estate investors. As such, we’ve reduced our assumed
nominal cap rate on PSA and EXR to 8%, and to 8.5% for YSI and SSS. Our best ideas
in the space are Outperform-rated Public Storage (PSA – O: PT $85) and U-Store-It
(YSI – O: PT $8.50). We favor PSA as a premier operator of self-storage properties, with
enough purchasing power to be the main consolidator in a space that is prime for
consolidation. In addition, we prefer YSI in the small cap storage REITs, as we believe its
lower occupancy base could result in above average same-store NOI growth in later 2010-
2011 versus its storage peers.
Valuation: The self-storage sector trades at 15.9X 12-month forward FFO, 17.3X 12-
month forward FAD, and at a 14% premium to our 12-month forward NAV, or a 7.2%
implied nominal cap rate.
REITs/REAL ESTATE
17
Exhibit 21: Self-Storage Same-Store NOI Declines are Nearing Bottoms
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Self Storage Tot/Wtd. Avg.
Source: Company Reports, Oppenheimer & Co.
Exhibit 22: Rental Declines Have Stabilized, Paving the Way for NOI Growth In Late
2010
-6%
-4%
-2%
0%
2%
4%
6%
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Self Storage Average
Source: Company Reports, Oppenheimer & Co.
Industrial Sector (Favored Sector)
We are maintaining our positive view of the industrial sector as fundamentals for the
sector tend to benefit earlier from a recovery in the broader economy. Manufacturing and
inventory levels started to show signs of improvement beginning mid-2009, which is
typically followed by positive absorption within 6-12 months and ultimately rent growth (12-
18 months). Thus, we expect vacancies to trough in 2010, followed by a trough in NOI in
1H11. Limited new supply should allow the industrial REITs to push rents as economic
growth and absorption levels improve quicker than in previous cycles. We expect the
industrial REITs to outperform market peers based on the companies’ high-quality assets
in core markets, management and tenant relationships.
REITs/REAL ESTATE
18
Our favored stock within industrials is Perform-rated ProLogis (PLD), as the
company continues to execute on stabilizing it development pipeline, building out its $2.7B
land bank, and using its improved liquidity position to pay down debt and target
opportunistic acquisitions.
Valuation: The industrial sector trades at 23.6x 2010 FAD estimates, a 31.1% premium to
the REIT sector average of 18.0x. Based on NAV, we note that industrial REITs now trade
at an average 19.0% premium and at an implied 7.5% cap rate. The industrial REIT sector
offers an avg. dividend yield of 4.3x%, which is currently above the REIT average of 3.6%.
Exhibit 23:. Industrial REIT NOI Growth Relative to Market NOI Growth Estimates
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
PPR 54 REITS
Source: PPR, SNL
Exhibit 24: Industrial Completion, Absorption, Vacancy Exhibit 25: Industrial Effective Rent and % change
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
200,000
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Un
its
0%
2%
4%
6%
8%
10%
12%
14%
Net Absorption Net Completions Vacancy
$2
$3
$4
$5
$6
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Asking Rent (Left Axis) Rent Growth
Source: PPR, Oppenheimer & Co. Inc. estimates Source: PPR, Oppenheimer & Co. Inc. estimates
REITs/REAL ESTATE
19
Exhibit 26: Industrial Market Rankings, 2010
City
Capital
Value
Index NOI Index
Top Markets
Long Island -8.7% -4.0%
New York -9.7% -6.3%
Pittsburgh -11.3% -6.6%
Philadelphia -11.8% -8.0%
Denver -11.8% -5.2%Bottom Markets
San Jose -22.7% -12.0%
Austin -23.0% -16.0%
Miami -24.1% -13.3%
Orlando -26.7% -17.3%Inland Empire -27.6% -11.9%
Source: PPR, Oppenheimer & Co. Inc.
The ISM Is a Leading Indicator of Manufacturing Output
Exhibit 27: Institute of Supply Management Index Vs the Index of Manufacturing
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
ISM PMI Index (left) Total index
Source: ISM, Federal Reserve Board, Oppenheimer, Inc. estimates
REITs/REAL ESTATE
20
Retail: Regional Malls (Less Favored Sector)
We’re revising our neutral stance on the Regional Mall group to less favored. According to
NAREIT data, the Regional mall sector produced a 63% total return in 2009 compared to
a 28% return for the REITs overall, the strongest performing group outside of the Lodging
sector. While we recognize that several of the highly leveraged names were unfairly
discounted early in the year (MAC, CBL), the steep rally has pushed the group to
expensive levels, in our view. The regional mall group currently trades at an implied 7.1%
cap rate, which according to recent comparable sales, tells us that the mall REITs are
trading in line with class A mall valuations. While REITs have been trading at premiums to
private market valuations based on their access to capital and external growth capabilities,
the Regional Mall REITs are now trading at a 28.5% premium to our 12-month forward
NAV estimates, compared to a 17.9% premium for the REITs overall.
In addition, our cautious stance on the Regional Mall group is a result of our preference
toward early cycle recovery sectors. While malls withstood the fundamental downturn in
2009 as a result of long-term leases and healthy tenants, we expect the group’s same-
store NOI growth to lag as the economy recovers. In 2011-2015, regional malls will be
faced with expiring leases signed during more prosperous times, and market rents are not
likely to recover quickly as retail sales growth remains tepid, the consumer savings rate
continues to rise, and retailer expansion plans continue at modest levels. In our view,
investors should pare their exposure to the regional malls until valuation becomes more in
line with modest near-to-mid term same-store NOI growth expectations.
On the other hand, we continue to favor outlet centers as a niche defensive play in an
uncertain consumer environment. The sector continues to outperform the regional malls
on same-store growth, a trend we expect to continue in 2010. Traditional mall tenants
continue to show interest toward creating an outlet concept, as outlets are a low cost,
highly profitable distribution channel for retailers. With the consumer expected to remain
budget-oriented for the near term, we expect outlet centers to remain a bright spot in retail
real estate.
Our best ideas in the sectors are Underperform-rated Macerich (MAC – U: PT $28),
CBL & Associates (CBL – U: PT $9), and Taubman Centers (TCO – UP: PT $30). We
recommend investors accrue shares of our only Outperform- rated stock in the
sector, Tanger Outlet Centers (SKT – O: PT $43).
Lastly, the largest issue surrounding the group is the ultimate fate of General Growth
Properties (GGP, not covered). At this point, it appears that the company will be able to
emerge from bankruptcy in some form, as lenders have agreed on extensions for a
considerable amount of the company’s debt. Only Simon Property (SPG, P), in our view,
can be a major player toward acquiring a significant chunk of the company’s properties,
should an asset sale happen. As such, external growth expectations for the remaining
mall REITs should be low, and premium valuations based on potential growth are not
warranted.
Valuation: The regional mall sector trades at 14.9x our 12-month forward FAD estimates,
at 12.4X FFO and at a 28.5% premium to our 12-month forward NAV, or a 7.1% implied
nominal cap rate.
REITs/REAL ESTATE
21
Exhibit 28: Regional Malls Weighted Avg. Same-Store NOI Growth
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Source: Company Reports, Oppenheimer & Co.
Exhibit 29: Regional Mall Last 12 Months Tenant Sales PSF
$350
$370
$390
$410
$430
$450
$470
$490
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Source: Company Reports, Oppenheimer & Co.
Exhibit 30: Retail REIT NOI Growth Relative to Market NOI Growth Estimates
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
PPR 54 REITS
Source: PPR, SNL
REITs/REAL ESTATE
22
Exhibit 31: Retail Market Rankings, 2010
City
Capital
Value
Index NOI Index
Top Markets
Cleveland -5.7% -2.7%
Cincinnati -6.2% -2.7%
Wash DC/ NoVA/MD -8.2% -4.0%
Long Island -8.7% -4.6%
Pittsburgh -9.1% -3.4%Bottom Markets
St. Louis -20.1% -9.9%
Inland Empire -20.1% -10.3%
Charlotte -21.4% -11.8%
Fort Lauderdale -23.3% -12.2%Palm Beach County -23.5% -15.3%
Source: PPR, Oppenheimer & Co. Inc.
Exhibit 32: Retail Completion, Absorption, Vacancy Exhibit 33: Retail Effective Rent and % change
-300,000
-200,000
-100,000
0
100,000
200,000
300,000
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Un
its
0%
5%
10%
15%
20%
25%
Net Absorption Net Completions Vacancy
$10
$12
$14
$16
$18
$20
$22
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Asking Rent (Left Axis) Rent Growth
Source: PPR, Oppenheimer & Co. Inc. estimates Source: PPR, Oppenheimer & Co. Inc. estimates
Office Sector (Less Favored Sector)
We expect the office sector to relatively underperform in 2010 based on our expectations
for anemic job growth (0.1%) in 2010 and new deliveries (~27.2M SF). As a result,
vacancy rates are expected to rise by ~100bps to ~21.2% in 2010 as net absorption
declines by ~38M SF, not including potential sub-leased space. We also expect asking
rents to decline (~9.2%) and concession packages to grow as tenants maintain leverage
in renegotiating leases. While the economic slowdown appears to be broad-based, we
note that some CBD markets should fare better including: Washington DC; Los Angeles,
CA; San Francisco, CA; Boston, MA; Dallas-Ft. Worth, TX; and Houston, TX. Therefore,
we suggest investors reduce their exposure to companies with large suburban office
market exposure and equal weight companies with large CBD (central business district)
exposures in the previously mentioned markets.
Our top idea in the office sector is Perform-rated Boston Properties (BXP), given the
company’s high-quality, well-located portfolio; long-term leases to investment grade
tenants; clean balance sheet with low effective leverage (41.4% including preferreds) and
a strong liquidity (~$1.3B in cash estimated at YE2009). While we currently rate the
shares as Perform based on BXP’s premium valuation (20.3% premium to our FW NAV
estimate of $56.68), we would look to grow more positive on the shares as we hear of
greater high-quality office assets coming to market in BXP’s core markets.
REITs/REAL ESTATE
23
Valuation: The office sector trades at 19.9x FW FAD, a 10.5% premium to the REIT
industry average of 18.0x. Based on NAV, office REITs trade at an average 14.6%
premium, reflecting investor expectations for slower internal growth and modestly higher
cap rates. We also note that office REITs have a dividend yield of 3.60%, roughly in line
with the REIT industry average of 3.64%.
Exhibit 34: Office REIT NOI Growth Relative to Market NOI Growth Estimates
-15%
-10%
-5%
0%
5%
10%
15%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
PPR 54 REITS
Source: PPR, SNL
Exhibit 35: Office Completion, Absorption, Vacancy Exhibit 36: Office Effective Rent and % change
-200,000
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
200,000
250,000
300,000
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Un
its
0%
5%
10%
15%
20%
25%
Net Absorption Net Completions Vacancy
$10
$12
$14
$16
$18
$20
$22
$24
$26
$28
$30
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
-15%
-10%
-5%
0%
5%
10%
Asking Rent (Left Axis) Rent Growth
Source: PPR, Oppenheimer & Co. Inc. estimates Source: PPR, Oppenheimer & Co. Inc. estimates
Exhibit 37: Office Market Rankings, 2010
City
Capital
Value
Index NOI Index
Top Markets
Austin -7.6% -4.4%Kansas City -8.4% -4.6%
Memphis -8.7% -4.8%
Pittsburgh -8.9% -5.6%
Columbus -9.5% -6.1%Bottom Markets
Orange County -22.7% -13.3%
Los Angeles -23.7% -15.9%
Boston -23.9% -13.8%San Francisco -32.1% -19.1%New York -33.5% -18.7%
Source: PPR, Oppenheimer & Co. Inc.
REITs/REAL ESTATE
24
Retail: Shopping Centers (Neutral Sector)
We’re revising our less favorable stance on the shopping center group to neutral, as the
group had a -2% total return in 2009 compared to a 28% total return for the REITs overall.
Our cautious view on fundamentals remains in tact; however, we believe the sector’s
underperformance in 2009 has brought valuations to levels that more appropriately reflect
internal growth expectations. We remain in favor of companies with demographically
superior assets in high barrier to entry markets that will face less pricing competition and
oversupply issues compared to their peers in low barrier to entry markets. While the third
quarter saw an uptick in leasing velocity, albeit in combination with reduced market rents,
our expectation is that leasing spreads will remain under pressure through at least 2011.
Oversupply remains an issue for the strip center space, which we expect will struggle to
post positive same-store NOI growth until mid to late 2011.
Two themes that we believe will revolve around the sector for the foreseeable future are
credit availability to small business owners and the acquisition market. While the
government extended guarantees for SBA loans until February, credit availability remains
tight and banks continue to be reluctant to provide new loans. Additionally, we have some
concerns on retailer consolidation, and whether some large names in sectors such as
office supplies, electronics, sporting goods and book stores will survive the year. We do
remain bias toward grocery anchored centers in markets less exposed to the housing
bubble. While we have no Outperform-rated names, we would prefer Federal Realty
(FRT- P) should the sector experience a pullback and valuation becomes more
attractive.
While fundamentals are likely to suffer in 2010 for the shopping center space, the
acquisition market should pick up, in our view. The shopping center REITs are well
positioned to grow externally, with both access to the unsecured bond and equity markets
at attractive prices. We see distress emerging from both private real estate managers and
overleveraged joint-venture partners, who should be willing to sell stakes to REITs at
attractive pricing. That said, there is plenty of investment capital on the sidelines, and fire
price sales are unlikely.
Valuation: The shopping center space trades at 13.9X 12-month forward FFO, at 17.9X
12-month forward FAD estimates, and a 16.6% premium to 12-month forward NAV
estimates, or a 7.2% implied cap rate.
Exhibit 38: Strip Center Occupancy Rates Appear to Have Stabilized, Supported by
More Attractive Rents
91.0%
91.5%
92.0%
92.5%
93.0%
93.5%
94.0%
94.5%
95.0%
95.5%
96.0%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
Occu
pan
cy (
%)
Strip Center Average Occupancy
Source: Company Reports, Oppenheimer & Co.
REITs/REAL ESTATE
25
Apartment Sector (Neutral Sector)
While we are taking a near-term cautious view on the Apartment sector, given our
outlook for anemic job growth, higher borrowing costs (+50-75bps) and premium valuation
relative to our outlook for declining cash flows into 2011 (18.2% average NAV premium),
signs of a recovery lead us to take a Neutral stance as we expect NOI to trough in
2H10. We expect new demand to be driven by a mix of job creation and improved
household formations driven by favorable demographics. We expect graduating “echo-
boomers” to drive demand for rentals as they enter the workforce. Until job growth
improves, we expect these potential renters to take on roommates and/or move-in with
parents, which could limit apartment REIT’s ability to push rents. Lastly, we expect greater
transaction activity in 2010 given the outlook for troughing NOI and compressing debt and
bid/ask spreads. That said, we expect pricing to be highly competitive for institutional
quality assets in the core coastal markets. We expect same-store NOI to decline ~4.0-
6.0% on average driven by a continued roll-down in rents as leases turnover, flat
occupancy and modest expense growth. As a result, we expect apartment earnings to
decline by 6.9% in 2010.
Our top ideas in the apartment sector are Camden Property Trust (CPT, O) and
Apartment Investment & Management Co. (AIV, O). We favor Camden for its improving
market outlook in 2010/2011, strong liquidity, acquisitive nature and discounted valuation.
We favor AIV as we believe the company’s recent asset sales, cost cutting and other
restructuring efforts to translate into improved portfolio quality, operating margins and
earnings growth. Alternatively, we rate the shares of AvalonBay Communities (AVB) as
Underperform as we believe the company’s current implied nominal cap rate (5.2%) is
largely undeserved given our growth outlook for the company markets over the next three
years (-3%/yr), continued development dilution, and the significant competition for assets
in AVB’s markets.
Valuation: The apartment sector trades at 21.1x FW FAD, a 17% premium to the REIT
industry average of 18.0x. We believe the current premium reflects the markets outlook for
a trough in NOI, improving transaction activity and compressing debt yields/risk premiums.
That said, we expect the outlook for rising interest rates and anemic job growth to
negatively impact asset pricing and the ability to push rents. Based on NAV, we note that
apartment REITs currently trade at an average 18.2% premium, and an implied nominal
cap rate of 6.1%. We also note that the Apartment sector dividend yield of 4.3% is at a
modest premium to the REIT industry average of 3.6%.
Exhibit 39: Unemployment
0
2
4
6
8
10
12
1990
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2001
2002
2003
2004
2005
2006
2007
2008
2009
Un
em
plo
ym
en
t R
ate
(%
)
Source: Oppenheimer & Co. Inc., Co-Star, company reports
REITs/REAL ESTATE
26
Exhibit 40: Average Annual Forecast Growth in Households (2010-2014)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%Atla
nta
Aus
tinBal
timor
eBos
ton
Char
lotte
Chicag
oDalla
s/ F
WDenv
er
Eas
t Bay
For
t Lau
derd
ale
Hous
ton
Inla
nd E
mpi
reLa
s Vega
sLo
ng Is
land
Los
Ange
les
Mia
mi
New Y
ork
N. Cen
tral N
J
Ora
nge
Coun
tyO
rland
o
Phi
lade
lphi
aPho
enix
Rale
igh
Ric
hmon
dSan
Die
go
San
Fra
ncisc
oSan
Jose
Sea
ttle
Sta
mfo
rdTam
paDC
Met
ro
Unite
d S
tate
s
Source: PPR
Exhibit 41: Apartment REIT NOI Growth Relative to Market NOI Growth Estimates
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
PPR 54 REITS
Source: PPR, SNL
REITs/REAL ESTATE
27
Exhibit 42: Apartment Market Rankings, 2010
City
Capital
Value
Index NOI Index
Top Markets
Baltimore -9.3% -7.3%
Pittsburgh -10.6% -7.1%
Wash DC/ NoVA/MD -10.7% -9.0%
Boston -11.9% -11.1%
Honolulu -12.9% -9.6%Bottom Markets
Fort Lauderdale -27.7% -20.6%
Orange County -28.4% -18.7%
Orlando -28.6% -19.7%
San Jose -28.9% -18.5%Miami -31.4% -22.7%
Source: PPR, Oppenheimer & Co. Inc.
Exhibit 43: Apartment Completion, Absorption, Vacancy Exhibit 44: Apartment Effective Rent and % change
-2,000
48,000
98,000
148,000
198,000
248,000
298,000
348,000
398,000
448,000
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Un
its
0%
2%
4%
6%
8%
10%
12%
Net Absorption Net Completions Vacancy
$600
$700
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Asking Rent (Left Axis) Rent Growth
Source: PPR, Oppenheimer & Co. Inc. estimates Source: PPR, Oppenheimer & Co. Inc. estimates
Upgrades/Downgrades
We are making a number of changes based on our revised sector views and our outlook for growth in 2010. See Exhibit 52 for a review of our revised stock calls.
Also, with this report we are transferring coverage of PSA and KIM from Mark Biffert to Samit Parikh.
Public Storage – (PSA: Moving to Outperform from Perform)
We are upgrading the shares of Public Storage to Outperform from Perform, and establishing an $85 price target. While the shares may appear expensive, trading at an implied cap rate of 7%, we feel that PSA’s valuation cannot be judged solely based on the value of its real estate. Given the company’s pristine balance sheet, tested and highly regarded management team, and scale of operations, we believe the shares deserve to be trading at a considerable premium to underlying asset valuation. We also see the next 2-3 years as an unprecedented opportunity for PSA to consolidate the self-storage industry by its own choosing. While we realize that given PSA’s $15B asset base, it would need several sizable acquisitions to move the needle, and believe the company will see several large opportunities both in the private and public arena.
Our upgrade also coincides with moving our opinion on the self-storage space to favored, as we believe the sector will produce above-average internal growth in late 2010-2011, and owning the strongest operator logically makes sense. We also believe that valuation is attractive at current levels on a multiple basis, which appears to be the more proper way
REITs/REAL ESTATE
28
to assess PSA’s shares given its low leverage and strong cash flow growth. Shares of PSA trade at 17X our 12-month-forward FAD and at 15.8X 12-month forward FFO estimates, both in line with the storage sector and modestly below the REITs overall. In our view, PSA deserves a more significant premium. Our $85 price objective is based on our multiple and NAV valuations, placing more emphasis on NAV. We believe PSA should trade at 18.8X 12-month forward FAD, a ~25% premium to our 15X target multiple for the storage sector, and at a 25% premium to our 12-month forward NAV of $68, resulting in a
price target of $85.
Valuation: The shares of PSA currently trade at 17X 12-month-forward FAD estimate, 15.8X 12-month forward FFO projection, and at a 25% premium to our 12-month forward
NAV estimate of $68.
Exhibit 45: Public Storage NAV analysis
(in $ thousands, except per share data) 3Q09A 3Q09A 3Q09A
Total Annualizedl Net Operating Income $973,985 $973,985 $973,985
Cap-ex adjustment ($58,650) ($58,650) ($58,650)
12-Month Forward Economic NOI $915,335 $915,335 $915,335
Assumed Economic Capitalization Rate 7.00% 7.50% 8.00%
Resulting Nominal Cap Rate 7.45% 7.98% 8.51%
Private Market Value of Consolidated Prop $13,076,216 $12,204,468 $11,441,689
NOI from ancillary businesses $100,533 $100,533 $100,533
Assumed Capitalization Rate 10.00% 10.00% 10.00%
Private Market Value of Consolidated Prop $1,005,333 $1,005,333 $1,005,333
NOI from Unconsolidated Partnerships $2,346 $2,346 $2,346
Cap-ex adjustment ($141) ($141) ($141)
Assumed Capitalization Rate 7.00% 7.50% 8.00%
Market Value of Unconsolidated Prop $31,507 $29,406 $27,568
NOI from Shurguard Europe $49,172 $49,172 $49,172
Cap-ex Adjustment ($2,950) ($2,950) ($2,950)
Assumed Capitalization Rate 7.0% 7.5% 8.0%
Market Value of Shurguard Europe $660,312 $616,291 $577,773
Fair market value of PSB interest 636,867 636,867 636,867
Properties Not Yet Operational 17,735 17,735 17,735
Incremental Value of Completed Development in Lease-up 0 0 0
Total Cash and Equivalents 887,719 887,719 887,719
Notes Receivable 571,783 571,783 571,783
Other Assets 104,892 104,892 104,892
Market Value of Other Assets $1,582,129 $1,582,129 $1,582,129
Private Market Value of Assets $16,992,363 $16,074,494 $15,271,359
Total Liabilities $1,205,135 $1,205,135 $1,205,135
Perpetual Preferred Stock $3,399,777 $3,399,777 $3,399,777
Private Net Market Value of Assets $12,387,451 $11,469,582 $10,666,447
Diluted Shares and OP Units Outstanding 169,293 169,293 169,293
Net Asset Value per Share $73.17 $67.75 $63.01
Share Price (current): 1/8/10 $78.57 $78.57 $78.57
Premium/Discount to NAV 7% 16% 25% Source: Oppenheimer & Co. estimates
Key risks: Risks to our view include rising unemployment and declining migration trends, resulting in reduced demand for self-storage units.
Tanger Outlet Centers – (SKT: Moving to Outperform from Perform)
We are upgrading shares of Tanger Outlet Centers to Outperform from Perform, and establishing a $43 price target. Tanger has been a favored company in the retail sector during the turmoil of the past two years, delivering a 20% total return while the Mall REITs retrenched 18% and SPG grew only 2%. In our view, the company’s relative outperformance will continue in 2010 as concerns over the health of the consumer will persist. We favor the outlet center space as a niche defensive play in retail real estate that will continue to capitalize on retailers’ preference to expand operations into lower cost, higher margin distribution centers with high traffic counts. We’re not expecting the return of the affluent consumer in 2010, and believe frugality among society will continue
to benefit sales and traffic in Tanger’s centers.
REITs/REAL ESTATE
29
We also favor SKT’s superior balance sheet, with nearly all assets unencumbered, and only 32% leverage. SKT has access both to the equity and unsecured markets to fund acquisitions, as well as over $250M of availability on its line of credit. Tanger’s external growth options became more limited following SPG’s acquisition of Prime Outlets;
however, the company has broken ground on its development in Mebane, North Carolina.
In our view, the company deserves a considerable premium valuation, as a result of its stellar balance sheet, ability to raise its dividend (73% payout ratio for 2010), and defensive qualities in a weak consumer environment. Lastly, the company’s modest ~$2B asset base and strong operating platform makes SKT an attractive acquisition target for
companies sitting on large piles of dry powder.
Our $43 price target is based on a weighted average of our multiple and NAV valuation, placing more emphasis on NAV. We assign considerable premiums to both valuation metrics for SKT relative to its peers. Our $43 price target assumes SKT trades at ~20X
12-month forward FAD, and at a 25% premium to our 12-month forward NAV.
Valuation: The shares of SKT currently trade at 18.5X 12-month forward FAD estimate, 14.6X 12-month forward FFO forecast, and at a 10% premium to our 12-month forward
NAV projection of $35.
Exhibit 46: Tanger Outlet Centers NAV analysis
(in $ thousands, except per share data) 3Q09A 3Q09A 3Q09A
Rental revenues 183,230 183,230 183,230
Tenant reimbursements 78,473 78,473 78,473
Operating expenses (89,971) (89,971) (89,971)
Straight-line rent/FAS 141 (3,469) (3,469) (3,469)
Net incremental NOI - - -
Net Operating Income 168,264 168,264 168,264
Cap-ex Adjustment (21,494) (21,494) (21,494)
Net Operating Income $146,770 $146,770 $146,770
Assumed Economic Capitalization Rate 6.75% 7.00% 7.25%
Resulting Nominal Cap Rate 7.69% 7.98% 8.26%
Private Market value of Consolidated Properties $2,174,368 $2,096,712 $2,024,412
Joint-Venture NOI 7,385 7,385 7,385
Straight-line/FAS 141 (152) (152) (152)
JV Economic NOI $7,233 $7,233 $7,233
Assumed Economic Capitalization Rate 6.75% 7.00% 7.25%
Private Market value of Unconsolidated Properties $107,161 $103,334 $99,771
Other Income 8,224 8,224 8,224
Assumed Capitalization Rate 10.00% 10.00% 10.00%
Value of Other Income 82,242 82,242 82,242
Properties Not Yet Operational $74,250 $74,250 $74,250
Cash & Cash Equivalents 7,764 7,764 7,764
Other Assets 77,950 77,950 77,950
Total Market Value of Assets $2,523,736 $2,442,252 $2,366,389
Debt (593,690) (593,690) (593,690)
SKT's share of unconsolidated debt (103,608) (103,608) (103,608)
Accounts payable (63,099) (63,099) (63,099)
Other current liabilities (7,957) (7,957) (7,957)
Preferred Stock (75,000) (75,000) (75,000)
Total Liabilities + Preferred Stock (843,354) (843,354) (843,354)
Private Net Market Value of Assets 1,680,381 1,598,898 1,523,035
Common Shares and OP Units Outstanding 45,937 45,937 45,937
NAV per share $36.58 $34.81 $33.15 Source: Oppenheimer & Co. estimates
Key risks: Risks to our view is a weakening consumer environment and rising retailer bankruptcies.
Weingarten Realty – (WRI: Moving to Perform from Underperform)
We are upgrading shares of Weingarten Realty to Perform from Underperform. The shares have experienced relative underperformance to the REIT universe, with a -6% total return since 9/22/09 compared to a +5% total return for the REITs overall during the same period. Our previous thesis had called for write-offs in the company’s development pipeline and weak same-store performance to cause shares of WRI to underperform, and those scenarios have played out.
REITs/REAL ESTATE
30
We are upgrading shares in conjunction with moving our opinion on the strip center space to neutral from less favored, a move based on relative underperformance and more appropriate valuation. We are reducing our assumed economic cap rate on WRI to 7.5% from 8% as a result of reduced IRR expectations based on more attractive cost of capital. Our new 12-month forward NAV of $19 assumes a 7.5% economic cap rate, or 8.4% nominal cap rate, which provides a 9.5% 10-year unleveraged IRR based on our same-
store NOI growth projections.
We do remain cautious on the company’s operating performance overall in 2010; however, as oversupply in some of the company’s key markets (AZ, TX), and a generally weak consumer could keep leasing spreads and occupancy under pressure. That said, we do favor the company’s grocery anchored portfolio, which in our view will outperform big-box anchored shopping centers in 2010 as big-box anchor store closings accelerate.
Valuation: WRI’s valuation has dropped to more appropriate levels, with the shares now trading at 18.1X 12-month-forward FAD estimate, 13X 12-month forward FFO and a 11% premium to our 12-month forward NAV projection of $19.
Exhibit 47: Weingarten Realty NAV analysis
(in $ thousands except per share data) 2Q08A 3Q09A 3Q09A 3Q09A
Economic NOI $315,287 $315,287 $315,287
Assumed Economic Cap Rate 7.25% 7.50% 7.75%
Resulting Nominal Cap Rate 8.01% 8.28% 8.56%
Private Market value of consolidated props. $4,348,788 $4,203,828 $4,068,221
Fee Income $3,307 $3,307 $3,307
Multiple 10.0x 10.0x 10.0x
Value of Fee Income $33,067 $33,067 $33,067
Other Income $16,341 $16,341 $16,341
Assumed Capitalization Rate 20.00% 20.00% 20.00%
Value of Other Income $81,706 $81,706 $81,706
Developmental Properties Not Yet Operational 193,482 193,482 193,482
Land held for development 140,282 140,282 140,282
Cash & cash equivalents 121,167 121,167 121,167
Receivables 218,598 218,598 218,598
Other assets 107,380 107,380 107,380
Private market value of assets $5,674,381 $5,515,091 $5,366,078
Debt outstanding (2,563,813) (2,563,813) (2,563,813)
Accounts payable (152,022) (152,022) (152,022)
Other current liabilities (98,791) (98,791) (98,791)
Perpetual preferred stock (497,500) (497,500) (497,500)
Total liabilities + preferred stock (3,254,948) (3,254,948) (3,254,948)
Private Net Market Value of Assets $2,419,433 $2,260,143 $2,111,130
Common shares + units outstanding 119,384 119,384 119,384
NAV per share $20.27 $18.93 $17.68
WRI common share price (current) $20.09 $20.09 $20.09
Premium/(Discount) to NAV (1%) 6% 14% Source: Oppenheimer & Co. estimates
Key risks: Risks to our view is a weakening consumer environment and rising retailer bankruptcies.
Sovran Self-Storage – (SSS: Moving to Perform from Underperform)
We are upgrading the shares of Sovran Self Storage to Perform from Underperform as we have adjusted cap rates lower on self-storage properties to reflect a stronger same-store NOI growth outlook and lower required returns in the midst of more attractive cost of capital. We are reducing our assumed economic cap rate on Sovran to 8%, resulting in a nominal cap rate of 8.6%, and a 12-month forward NAV of $32. In addition, the shares appear appropriately valued on a multiple basis, trading at 16.7X 12-
REITs/REAL ESTATE
31
month forward FAD estimate, versus the storage average of 17.3X. Sovran also has the most attractive and well-covered dividend yield in the sector, currently at 5.0%, and our estimates call for an FAD payout ratio of 83% in 2010.
Our more positive rating on Sovran comes in conjunction with our now favorable stance on the self-storage sector in 2010, as we believe the sector will produce above-average same-store NOI growth in late 2010-2011. Operating performance in Sovran’s portfolio has proven to be relatively healthy versus its storage peers through 3Q09, despite our original view that the company’s exposure to secondary markets would pressure unit demand. Additionally, Florida has remained a drag on SSS’s portfolio for over two years now as oversupply and heated pricing competition has produced weak results. Stabilization has been noted by management teams in Florida, and while the state’s performance won’t likely push NOI growth higher, it’s unlikely to have the same negative
impact.
Valuation: The shares of Sovran trade at 16.7X 12-month-forward FAD estimate and at a 13% premium to its 12-month forward NAV projection of $32.
Exhibit 48: Sovran Self Storage NAV analysis
S ens itiv ity An alysis(in $thousands except per share data) 3Q09A 3Q09A 3Q09A
Quarterly Net Operating Income $113,603 $113,603 113,603
Net Incremental NOI ($2,381) ($2,381) (2,381)
Cap-ex adjustment ($7,786) ($7,786) (7,786)
Net Operating Income $103,437 $103,437 $103,437
Assumed Economic Capitalization Rate 7.75% 8.00% 8.25%
Resulting Nominal Capitalization Rate 8.33% 8.60% 8.87%
Private Market Value of Consolidated Prop $1,334,670 $1,292,961 $1,253,781
NOI from Ancillary Businesses $7,859 $7,859 7,859
Assumed Capitalization Rate 12.5% 12.5% 12.5%
Market Value of Ancillary Income $62,875 $62,875 $62,875
NOI from unconsolidated JV's $2,315 $2,315 2,315
Cap-ex Adjustment ($162) ($162) (162)
Assumed Capitalization Rate 7.8% 8.0% 8.3%
Private Market Value of unconsolidated Prop $27,783 $26,915 $26,099
Developmental Properties Not Yet Operational $0 $0 0
Total Cash and Equivalents $41,396 $41,396 41,396
Other Assets $2,473 $2,473 2,473
Private Market Value of Assets $1,469,196 $1,426,620 $1,386,623
Total Liabilities $528,407 $528,407 528,407
Share of unconsolidated debt $16,405 $16,405 16,405
Perpetual Preferred Stock $0 $0 0
Private Net Market Value of Assets $924,384 $881,807 $841,811
Diluted Shares and OP Units Outstanding 27,449 27,449 27,449
Net Asset Value per Share $33.68 $32.12 $30.67
Most Recent Share Price $35.00 $35.00 35.00
Premium/(discount) to NAV 4% 9% 14% Source: Oppenheimer & Co. estimates, company reports
Key risks: Risks to our view is a weakening consumer environment and rising retailer bankruptcies.
Upgrading Washington REIT (WRE) to Perform from Underperform
We are upgrading the shares of Washington REIT to Perform from Underpeform as we see limited operating downside in the company’s DC metro markets in 2010, given the outlook for improved employment growth and limited new supply. We believe this should translate into stabilizing/expanding rents and occupancy growth in the company’s office, apartment and retail portfolios in 2010, while the industrial assets could remain weak into 2011. The company’s largest rollover comes in the office portfolio with
REITs/REAL ESTATE
32
616,723 SF expiring. While we expect some modest rent roll downs, we note the market is expected to post rent growth over 2009, potentially limiting the downside in the roll down of rents for office. Also, the recent compression in debt spreads and the significant amount of capital looking to do acquisitions in the D.C. market has caused cap rates to compress by ~50bps over the last 60-90 days, improving our view on valuation as we now estimate FW NAV of $25, utilizing a 7.7% nominal cap rate (previous FW NAV of $22 at an 8.2% nominal cap). That said, the shares now trade at a more modest premium (11.5%) to our forward NAV estimate, which we believe justifies a Perform rating. Lastly, we believe the shares offer an attractive dividend yield of 6.3%, relative to the REIT average of 3.6%.
Valuation. We are raising our 12-month forward NAV estimate to $25 from $22, based on lower cap rate assumptions (-50bps) for Washington REIT’s portfolio. Our model assumes a blended economic cap rate of 6.9%, and we note the shares trade at an 11.5% premium to NAV. Our cap rate is determined utilizing a 10-year unlevered IRR analysis, where we conclude that investing in WRE at a 6.9% economic cap rate would result in an 8.4% 10- year unlevered IRR, appropriate in our view considering the risk profile and growth expectations of WRE's assets. Alternatively, we note that the shares trade at 14.7x our 2010 FFO estimate of $1.86, an 11.4% premium to the diversified sector’s 13.2x; and on an FAD basis, the shares trade at 17.7x our 2010 FAD/share estimates of $1.55 per
share, a 20.9% discount to its peers.
Exhibit 49: Washington REIT NAV analysis
Sensitivity Analysis
3Q09A 3Q09A 3Q09A
Multifamily NOI 27,283 27,283 27,283
Economic Cap Rate 6.0% 6.3% 6.8%
Office NOI 83,119 83,119 83,119
Economic Cap Rate 6.5% 6.8% 7.3%
Medical Office NOI 30,084 30,084 30,084
Economic Cap Rate 6.5% 6.8% 7.3%
Retail NOI 29,132 29,132 29,132
Economic Cap Rate 6.8% 7.0% 7.5%
Industrial NOI 26,227 26,227 26,227
Economic Cap Rate 7.5% 7.8% 8.3%
Net Incremental NOI 361 361 361
Total NOI 196,206 196,206 196,206
Straight Line Adjustment (2,304) (2,304) (2,304)
Recurrig Cap Ex/Re-leasing costs (20,883) (20,883) (20,883)
Total Economic NOI 173,019 173,019 173,019
Blended Economic Cap Rate 6.6% 6.9% 7.4%
Resulting Nominal Cap Rate 7.4% 7.7% 8.2%Annualization factor - -
Market value of owned properties $2,620,932 $2,525,298 $2,353,542
Other Income 1,200 1,200 1,200
Multiple 7.0x 7.0x 7.0x
Value of Other Income $8,400 $8,400 $8,400
Property under development 24,611 24,611 24,611
Development return factor 1.00 1.00 1.00
Properties Not Yet Operational $24,611 $24,611 $24,611
Cash & Cash Equivalents 7,119 7,119 7,119
Other Assets 178,432 178,432 178,432
Total market value of assets $2,839,494 $2,743,860 $2,572,104
Debt (1,220,635) (1,220,635) (1,220,635)
Accounts payable (64,462) (64,462) (64,462)
Other current liabilities (19,925) (19,925) (19,925)
Total Liabilities (1,305,022) (1,305,022) (1,305,022)
Private Net Market Value of Assets 1,534,472 1,438,838 1,267,083
Common shares + units outstanding 58,556 58,556 58,556
NAV per share $26.21 $24.57 $21.64
WRE common share price at most recent close $27.39 $27.39 $27.39
Premium/(Discount) to NAV 5% 11% 27%
Implied economic cap rate 15.95%
Implied nominal cap rate 17.85% Source: Oppenheimer & Co. estimates, company reports
Key risks: Risks to the upside include better than expected operating fundamentals related to an increase in leasing activity and lower interest rates reflected in a lower
REITs/REAL ESTATE
33
implied cap rate. Alternatively, risks to the downside include greater economic contraction in the DC metro resulting in greater tenant bankruptcies, lower market rents and reduced demand. Also, higher interest rates would have converse impact on property cap rates.
Estimates Changes
HCP, Inc. (HCP: Perform)
We are adjusting our 4Q09/FY09 FFOPS estimates to $0.33/$1.48 from $0.52/$1.67 based on the company’s recent announcement that they plan to take $52M of non-cash charges in 4Q09. This is made up of $48M in non-cash impairment charges tied to the company’s three direct financing leases and a $10M participation in a senior construction loan connected with properties operated by Erickson Retirement Communities representing almost all of HCP’s carrying value in the assets. While these charges are disappointing, they are not surprising given the previous bankruptcy announcement by Erickson Retirement. In addition, HCP recorded $4.0M in non-cash impairment charges tied to a senior secured term loan of an affiliate of the Cirrus Group, which had a carrying value of $85M including $3.0M of accrued interest. Like the Erickson DFL’s, the company established its relationship with The Cirrus Group, a medical office building developer, through its acquisition of CNL Retirement Properties in 2006. HCP is
currently negotiating to restructure the loan.
BioMed Realty (BMR: Perform)
We are raising our FY09/10/11 FFOPS estimates for BioMed Realty to $1.68/$1.32/$1.38 from $1.67/$1.34/$1.44, reflecting the company’s 4Q09 tender offer for $61.27M of its 4.5% Exchangeable Senior Notes due 2026, leaving $46.15M of notes outstanding, its issuance of $180M in 3.75% Exchangeable Senior Notes due 2030 in 1Q10 generating proceeds of $174M, and our outlook for improved leasing in 2010. We maintain our Perform rating, but are growing more positive on the lab/office space given increased investment in the life science industry, potentially driving demand for greater R&D space. However, the company’s current valuation premium to FW NAV (18.0%) and sizeable overall vacancy (27.5%) remain risks.
Ventas, Inc. (VTR: Perform)
We are raising our 2010/11 FFOPS estimates to $2.69/$2.87 from $2.67/$2.85 based on the company’s recent acquisition activity. In December 2009, the company acquired 3 medical office buildings from NexCore totaling 239,000SF for a total purchase price of $62.5M. The assets are 99% leased and earn an 8.2% yield on in-place operating income. Ventas has an existing partnership with NexCore to develop, lease and manage MOB properties. We view this as an attractive growth area for the company over the next several years as the company seeks to diversify its platform to other property types outside of senior housing and skilled nursing. We maintain our Perform rating as we believe the shares currently premium (17.3%) to our FW NAV estimate of $37.45 is fair given out outlook for stable internal growth in the triple-net portfolio (2.0-3.0% NOI growth) and solid growth in the senior housing operating portfolio (4.0-5.0%), as well incremental transaction activity.
Price Target Changes
Raising Price Target for CBL & Associates (CBL – Underperform) to $9 from $7
CBL – We are increasing our price target on CBL to $9 from $7, and maintaining our Underperform rating. The price target revision was primarily driven by an increase in our estimated 12-month forward to ~$9 from ~$7 previously, as we reduced our assumed nominal cap rate to 8.25% (9.2% nominal), from 8.5% (9.5% nominal) previously. Our cap rate reduction is based on an environment of lower required returns, and according to our 10-year unlevered IRR model, an 8.25% economic cap rate on CBL’s properties would provide a 10.25% 10-year unlevered IRR, appropriate in our view, given CBL’s exposure to middle markets and lower sales productivity than its peers. Our $9 price target is based on a weighted average of our FAD multiple and NAV valuations, placing more emphasis on NAV. We assume shares of CBL trade at 8.3X 12-month forward FAD of $1.32, a 45%
discount to our 15X mall target multiple, and in line with our 12-month forward NAV of ~$9.
REITs/REAL ESTATE
34
Exhibit 50: CBL & Associates NAV analysis
(in $thousands except per share data) 3Q09A 3Q09A 3Q09A
Economic NOI 611,552 611,552 611,552
Assumed Economic Cap Rate 8.50% 8.25% 8.00%
Resulting Nominal NOI 9.47% 9.19% 8.91%
Private Market Value of Consolidated Props $7,194,732 $7,412,754 $7,644,403
Net Management Fees & Other Income 10,747 $10,747 10,747
Assumed Capitalization Rate 15.0% 15.0% 15.0%
Value of Management Income & Other Income $71,649 $71,649 $71,649
NOI from Unconsolidated JVs $62,267 $62,267 $62,267
Assumed Capitalization Rate 8.50% 8.25% 8.00%
Market value of Unconsolidated Properties $732,549 $754,748 $778,333
Properties Not Yet Operational 154,898 $154,898 154,898
Total Cash & Equivalents 63,502 63,502 63,502
Other Assets 338,250 338,250 338,250
Private Market Value of Assets $8,555,581 $8,795,801 $9,051,036
Debt ($5,555,782) ($5,555,782) ($5,555,782)
Pro-rata Share of Unconsol. Debt ($599,308) (599,308) ($599,308)
Accounts Payable ($288,206) (288,206) ($288,206)
Preferred Stock ($711,514) (711,514) ($711,514)
Total Liabilities + Prefered Stock ($7,154,810) ($7,154,810) ($7,154,810)
Private Net Market Value of Assets $1,400,771 $1,640,992 $1,896,226
Common Shares + Units Outstanding 189,848 189,848 189,848
NAV per share $7.38 $8.64 $9.99
Price at last close $10.22 $10.22 $10.22
Premium/(Discount) to NAV 39% 18% 2% Source: Oppenheimer & Co. estimates, company reports
Raising Price Target for Macerich Company (MAC - Underperform) to $28 from $24
MAC – We are increasing our price target on Macerich to $28 from $24, and maintaining our Underperform rating. We’re reducing our assumed economic cap rate on MAC’s 12-month forward NAV to 7.25% (8% nominal) from 7.5% (8.3% nominal) to reflect an environment of reduced required returns. According to our 10-year unlevered IRR model, a 7.25% economic cap rate on MAC’s assets would provide a 10-year unlevered IRR of 10%, appropriate in our view, given MAC’s high quality assets and exposure to the Southwest markets. Our new $28 price target is based on a weighted average of our FAD multiple and NAV analysis. Our $28 price target assumes shares of MAC trade at 15.8X 12-month forward FAD of $2.17, and at a modest premium to our 12-
month forward NAV of ~$23.
REITs/REAL ESTATE
35
Exhibit 51: Macerich Company NAV analysis
Sensitivity Analysis
(in $ thousands, except per share data) 3Q09A 3Q09A 3Q09A
Rental revenues 479,877 479,877 479,877
Tenant reimbursements 227,269 227,269 227,269
Operating expenses (251,720) (251,720) (251,720)
Mgmt Co. Operating Expenses (34,061) (34,061) (34,061)
FAS 141 Revenue / SL Rent (20,900) (20,900) (20,900)
Net incremental NOI (50,977) (50,977) (50,977)
Cap-ex adjustment (61,190) (61,190) (61,190)
Net Operating Income 288,297 288,297 288,297
Annualization factor 1 1.0 1.0
Economic 'Net Operating Income 288,297 288,297 288,297
Assumed Economic Capitalization Rate 7.00% 7.25% 7.50%
Resulting Nominal Cap Rate 7.74% 8.02% 8.29%
Market value of consolidated props. $4,118,524 $3,976,506 $3,843,956
Other income/Management Fee Income 53,732 53,732 53,732
Adjustment factor 1.0 1.0 1.0
Other income/Management Fee Income 53,732 53,732 53,732
Assumed capitalization rate 10.0% 10.0% 10.0%
Value of Other Income $537,324 $537,324 $537,324
NOI from unconsolidated Joint Ventures 290,934 290,934 290,934
Cap-ex Adjustment - - -
Adjustment factor 1.0 1.0 1.0
NOI from Joint Ventures 290,934 290,934 290,934
Assumed Capitalization Rate 7.00% 7.25% 7.50%
Market value of unconsolidated properties $4,156,205 $4,012,887 $3,879,125
Property under development 549,355 549,355 549,355
Development return factor 1.00 1.00 1.00
Development properties not yet operational $549,355 $549,355 $549,355
Land held for investment - - -
Cash & cash equivalents 217,102 217,102 217,102
Other assets 37,409 37,409 37,409
Total market value of assets $9,615,919 $9,330,583 $9,064,270
Debt outstanding (4,450,726) (4,450,726) (4,450,726)Add-back of convertible debt
Joint venture debt (pro-rata share) (2,256,383) (2,256,383) (2,256,383)
Preferred stock - -
Accounts payable (79,763) (79,763) (79,763)
Other current liabilities
Total liabilities+pref ($6,786,872) ($6,786,872) ($6,786,872)
NET ASSET VALUE $2,829,047 $2,543,711 $2,277,398
Common shares + units outstanding 108,960 108,960 108,960
NAV per share $25.96 $23.35 $20.90
MAC common share price at most recent close $29.99 $29.99 $29.99
Premium/(Discount) to NAV 16% 28% 43% Source: Oppenheimer & Co. estimates, company reports
REITs/REAL ESTATE
36
Exhibit 52: OPCO Coverage Summary by Sector
Ticker Company Current rating
Share
Price
2009E
FFO Prev
2010E
FFO Prev
2011E
FFO Prev
2009E
FFO
Revised
2010E
FFO
Revised
2011E
FFO
Revised
Forward
NAV
Previous
Forward
NAV
Revised
Econ.
Cap
Rate
Previous
Econ.
Cap
Rate
Revised
Nom.
Cap
Rate
Previous
Shopping Centers
UBA Urstadt Biddle Properties Perform $14.93 NC NC NC $1.22 $1.15 $1.22 NC $15.27 NC 8.5% 9.6%
SKT Tanger Factory Outlet Outperform $39.42 NC NC NC $2.67 $2.68 $2.71 $31.61 $34.81 7.5% 7.0% 8.5%
REG Regency Centers Perform $35.81 NC NC NC $1.05 $2.24 $2.36 $29.49 $30.91 7.7% 7.5% 8.3%
KIM Kimco Realty Perform $14.13 NC NC NC $0.80 $1.15 $1.16 $11.58 $11.81 7.5% 7.4% 8.5%
FRT Federal Realty Perform $67.16 NC NC NC $3.43 $3.81 $3.93 $49.75 $52.66 6.8% 6.5% 7.4%
WRI Weingarten Realty Perform $21.34 NC NC NC $1.98 $1.64 $1.65 $16.07 $18.93 8.0% 7.5% 8.9%
Self-Storage
YSI U-Store-It Trust Outperform $7.30 NC NC NC $0.74 $0.54 $0.60 NC $8.38 NC 8.0% 8.6%
PSA Public Storage, Inc. Outperform $79.27 NC NC NC $5.55 $4.92 $5.10 $63.01 $67.75 8.0% 7.5% 8.5%
EXR Extra Space Storage Inc. Perform $11.59 NC NC NC $0.97 $0.77 $0.83 $11.57 $12.17 8.0% 7.5% 8.5%
SSS Sovran Self Storage Perform $36.34 NC NC NC $2.34 $2.45 $2.51 $27.96 $32.12 8.5% 8.0% 9.1%
Regional Malls
SPG Simon Property Group Perform $76.70 NC NC NC $5.47 $5.79 $6.01 NC $59.52 NC 7.5% 8.0%
TCO Taubman Centers Underperform $34.28 NC NC NC $0.88 $2.67 $2.71 NC $27.20 NC 7.2% 7.7%
MAC Macerich Company Underperform $32.93 NC NC NC $3.68 $3.15 $3.06 $20.90 $23.35 7.5% 7.3% 8.3%
CBL CBL & Associates Underperform $10.44 NC NC NC $2.39 $1.90 $1.85 $7.38 $8.64 8.5% 8.3% 9.5%
Office Properties
HRP HRPT Properties Trust Perform $6.53 NC NC NC $1.09 $1.11 $1.11 $5.78 $6.79 9.4% 8.8% 11.0%
BXP Boston Properties Perform $68.17 NC NC NC $4.61 $4.13 $4.09 NC $56.68 NC 6.3% 7.1%
Biotech Properties
BMR BioMed Realty Trust Inc. Perform $15.43 $1.67 $1.34 $1.44 $1.68 $1.32 $1.38 $13.68 $13.08 8.5% 8.3% 9.1%
ARE Alexandria Real Estate Perform $63.25 NC NC NC $5.52 $4.28 $4.46 NC $53.69 NC 8.0% 8.1%
Industrial Properties
PLD ProLogis Perform $14.09 NC NC NC $1.34 $0.86 $1.06 $9.71 $11.54 8.0% 7.3% 8.8%
EGP EastGroup Properties, Inc. Underperform $37.45 NC NC NC $3.14 $2.99 $3.02 NC $26.53 NC 8.0% 9.4%
Health Care Properties
HCN Health Care REIT Inc. Outperform $44.17 NC NC NC $3.12 $3.22 $3.41 NC $43.47 NC 8.0% 8.2%
VTR Ventas Perform $43.94 $2.65 $2.67 $2.85 $2.65 $2.69 $2.87 $32.55 $37.45 NC 8.0% 8.0%
SNH Senior Housing Properties TrustPerform $21.90 NC NC NC $1.73 $1.76 $1.85 NC $21.91 NC 9.3% 9.3%
NHP Nationwide Health Prop. Perform $35.03 NC NC NC $2.23 $2.34 $2.43 NC $28.60 NC 8.0% 8.1%
HR Healthcare Realty Trust Perform $21.35 NC NC NC $1.66 $1.42 $1.50 NC $18.82 NC 8.3% 8.3%
HCP HCP, Inc. Perform $30.76 $1.67 $2.18 $2.37 $1.48 $2.18 $2.37 $25.59 $25.65 NC 7.5% 7.9%
Diversified Properties
FCEA Forest City Enterprises Outperform $11.73 NC NC NC $2.15 $2.43 $2.13 NC $16.72 NC 7.9% 8.4%
WRE Washington REIT Perform $27.39 NC NC NC $2.12 $1.86 $1.84 $21.78 $24.57 7.3% 6.9% 8.2%
Apartments
CPT Camden Property Trust Outperform $40.32 NC NC NC $2.97 $2.65 $2.60 NC $42.54 NC 6.1% 6.8%
AIV Apartment Inv & Mgmt Outperform $16.99 NC NC NC $1.34 $1.39 $1.46 NC $17.63 NC 6.3% 7.3%
UDR UDR, Inc. Perform $15.99 NC NC NC $1.15 $1.07 $1.03 NC $13.59 NC 6.3% 6.8%
ESS Essex Property Trust Perform $83.76 NC NC NC $6.81 $4.61 $4.55 NC $73.84 NC 6.0% 6.5%
EQR Equity Residential Perform $33.25 NC NC NC $2.14 $2.07 $2.07 NC $27.78 NC 6.2% 6.5%
AVB AvalonBay Communities Underperform $80.48 NC NC NC $3.89 $3.75 $3.71 NC $58.14 NC 6.2% 6.4%
Senior Housing
Ticker Company Current Rating
Share
Price
2009E
CFFO
Prev
2010E
CFFO
Prev
2011E
CFFO
Prev
2009E
CFFO
Curr
2010E
CFFO
Curr
2011E
CFFO
Curr
Implied
Share
Price
Previous
Implied
Share
Price
Revised
CFFO
Target
Multiple
Previous
CFFO
Target
Multiple
Revised
ESC Emeritus Corp. Outperform $19.44 NC NC NC 1.05$ 2.01$ 2.83$ NC 24.85$ NC 19.66x
BKD Brookdale Senior Living Inc. Outperform $18.58 NC NC NC 1.28$ 2.11$ 2.91$ NC 23.79$ NC 11.30x
Ticker Company Current Rating
Share
Price
2009E
EPS Prev
2010E
EPS Prev
2011E
EPS Prev
2009E
EPS Cur
2010E
EPS Cur
2011E
EPS Cur
DCF
Previous
DCF
Revised
WACC%
Previous WACC%
JLL Jones Lang LaSalle Perform $62.85 NC NC NC $ (0.03) $ 3.12 $ 4.09 NC $46.03 NC 9% Source: SNL, First Call, Oppenheimer & Co. estimates, company reports
REITs/REAL ESTATE
37
Appendix
Exhibit 53: Ventas Income Statement 2007A – 2011E ($ in thousands, except per share data)
2008A $2.74 2009E $2.65 2010E $2.69
(in $ thousands, except per share data) 2007A 2008A 2009E 2010E 2011E 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
FFO: $2.69 $2.74 $2.65 $2.69 $2.87 $0.68 $0.71 $0.69 $0.66 $0.67 $0.68 $0.66 $0.64 $0.65 $0.67 $0.68 $0.69
Operating Income & Expenses
Rental revenues 486,610 495,354 501,497 510,981 523,213 122,707 123,889 124,581 124,177 124,345 125,148 126,002 126,002 126,317 127,264 128,219 129,181
Resident fees & services 282,226 429,257 417,748 430,846 450,846 107,726 107,312 108,610 105,609 102,939 103,399 106,515 104,895 105,779 107,021 108,545 109,501
Operating expenses (198,127) (306,944) (302,875) (310,166) (316,569) (76,957) (71,842) (81,698) (76,447) (75,468) (72,564) (76,338) (78,505) (78,332) (77,314) (76,948) (77,572)
New acq & dev NOI - - 164 6,789 6,857 164 1,691 1,695 1,699 1,704
Net Operating Income $570,709 $617,667 $616,534 $638,450 $664,348 $153,476 $159,359 $151,493 $153,339 $151,816 $155,983 $156,179 $152,556 $155,455 $158,666 $161,515 $162,814
Non-operating Income & Expenses - - - -
General & administrative expense (36,427) (40,651) (40,653) (43,278) (48,710) (8,257) (9,610) (11,626) (11,158) (10,598) (10,355) (9,657) (10,043) (10,345) (10,655) (10,975) (11,304)
Interest income from loans receivable 2,587 8,847 13,343 14,774 16,090 467 1,480 3,426 3,474 3,281 3,333 3,214 3,515 3,599 3,655 3,725 3,795
Professional fees - - - -
EBITDA 536,869 585,863 589,224 609,946 631,728 145,686 151,229 143,293 145,655 144,499 148,961 149,736 146,028 148,709 151,666 154,266 155,305
Interest and other income 2,994 4,330 596 455 532 864 832 1,937 697 286 108 99 103 107 111 116 120
Interest expense (205,256) (206,905) (178,681) (180,396) (180,292) (52,864) (52,444) (51,344) (50,253) (46,613) (44,171) (43,660) (44,237) (45,050) (44,876) (45,185) (45,284)
Depreciation and amortization (total) (234,688) (234,813) (199,559) (202,959) (202,959) (71,660) (57,975) (50,969) (54,209) (49,885) (48,847) (50,349) (50,478) (50,740) (50,740) (50,740) (50,740)
Minority Interest (1,693) (2,684) (2,793) (2,500) (2,500) (478) (545) (1,040) (621) (741) (802) (625) (625) (625) (625) (625) (625)
Preferred stock dividends (5,199) - - - - - - - - - - - - - - -
Income tax benefit, net or minority interest - 1,720 1,762 - - - - 1,720 547 395 410 410 - - - -
Net Income From Continuing Operations 93,027 147,511 210,548 224,546 246,508 21,548 41,097 41,877 42,989 48,093 55,644 55,611 51,200 52,401 55,537 57,831 58,776
Discontinued operations 5,183 17,315 3,616 (480) (480) 954 1,790 622 13,949 417 3,199 120 (120) (120) (120) (120) (120)
Extraordinary Items/Non-recurring 49,343 35,709 (17,529) - - 9,471 2,505 22,196 1,537 (2,153) (9,482) (5,894) - - - -
Gain (loss) on sale 129,566 25,753 66,859 - - 79 25,674 - - 27,871 39,020 (32) - - - -
Net Income to Common Shareholders $277,119 $226,288 $263,494 $224,066 $246,028 $32,052 $71,066 $64,695 $58,475 $74,228 $88,381 $49,805 $51,080 $52,281 $55,417 $57,711 $58,656
Common Shares Outstanding (basic) 122,492 139,559 152,508 156,250 156,250 136,381 138,133 140,759 142,963 143,091 154,441 156,250 156,250 156,250 156,250 156,250 156,250
Common Shares Outstanding (diluted) 122,947 139,900 152,672 156,516 156,516 136,673 138,737 141,141 143,047 143,145 154,510 156,516 156,516 156,516 156,516 156,516 156,516
EPS cont. ops. (basic) $0.76 $1.06 $1.38 $1.44 $1.58 $0.16 $0.30 $0.30 $0.30 $0.34 $0.36 $0.36 $0.33 $0.34 $0.36 $0.37 $0.38
EPS cont. ops. (diluted) $0.76 $1.05 $1.38 $1.43 $1.57 $0.16 $0.30 $0.30 $0.30 $0.34 $0.36 $0.36 $0.33 $0.33 $0.35 $0.37 $0.38
EPS (basic) $2.26 $1.62 $1.73 $1.43 $1.57 $0.24 $0.51 $0.46 $0.41 $0.52 $0.57 $0.32 $0.33 $0.33 $0.35 $0.37 $0.38
EPS (diluted) $2.25 $1.62 $1.73 $1.43 $1.57 $0.23 $0.51 $0.46 $0.41 $0.52 $0.57 $0.32 $0.33 $0.33 $0.35 $0.37 $0.37
Derivation of Funds From Operations (FFO)
Net Income to Common Shareholders 277,119 226,288 263,494 224,066 246,028 32,052 71,066 64,695 58,475 74,228 88,381 49,805 51,080 52,281 55,417 57,711 58,656
Real estate depreciation and amortization 230,015 230,362 199,138 202,959 202,959 70,155 56,213 49,193 54,801 49,738 48,738 50,184 50,478 50,740 50,740 50,740 50,740
Extraordinary Items/Non-recurring (46,994) (33,348) 15,657 - - (9,758) (2,937) (17,068) (3,585) 1,222 8,541 5,894 - - - - -
Minority Interest/OP/Convertible Unit Adjustment - (1,582) (6,276) (6,320) (1,582) (1,620) (1,496) (1,580) (1,580) (1,580) (1,580) (1,580) (1,580)
Gain on sale/Other (129,566) (38,566) (67,808) - - (79) (25,674) 344 (13,157) (27,871) (39,020) (917) - - - - -
Normalized Funds From Operations $330,574 $383,154 $404,205 $420,705 $448,987 92,370 98,668 97,164 94,952 95,697 105,144 103,386 99,978 101,441 104,577 106,871 107,816
Recurring capital expenditures/Tis/LCs (6,371) (8,000) (6,000) (5,000) (4,500) (823) (1,133) (2,512) (3,660) (1,144) (632) (4,000) (5,000) (1,250) (1,250) (1,250) (1,250)
Straight-line rent adjustment (17,311) (14,652) (13,490) (14,000) (10,800) (3,759) (3,670) (3,786) (3,437) (2,938) (3,052) (3,500) (4,000) (3,800) (3,600) (3,400) (3,200)
Capitalized Interest - -
Other items (including FAS 141/142) - - - - - - - - - - - - - - - - -
Funds Available For Distribution (FAD) $306,892 $360,502 $384,715 $401,705 $433,687 $87,788 $93,865 $90,866 $87,855 $91,615 $101,460 $95,886 $90,978 $96,391 $99,727 $102,221 $103,366
Diluted avg shares outstanding (FFO) 122,947 139,900 152,672 156,516 156,516 136,673 138,737 141,141 143,047 143,145 154,510 156,516 156,516 156,516 156,516 156,516 156,516
FFO/share $2.69 $2.74 $2.65 $2.69 $2.87 $0.68 $0.71 $0.69 $0.66 $0.67 $0.68 $0.66 $0.64 $0.65 $0.67 $0.68 $0.69
FAD/share $2.50 $2.58 $2.52 $2.57 $2.77 $0.64 $0.68 $0.64 $0.61 $0.64 $0.66 $0.61 $0.58 $0.62 $0.64 $0.65 $0.66
Dividend/Share $1.90 $2.05 $2.05 $2.15 $2.24 $0.51 $0.51 $0.51 $0.51 $0.51 $0.51 $0.51 $0.51 $0.54 $0.54 $0.54 $0.54
FFO Growth (Y/Y) 0.0% 2.1% 3.6% 1.2% -1.1% -4.3% -4.0% -3.8% -3.1% -1.8% 3.4% 7.8%
FAD Growth (Y/Y) 1.1% 4.1% 4.7% 2.1% -0.4% -2.9% -4.8% -5.4% -3.8% -3.0% 6.6% 13.6%
Dividend Growth (Y/Y) 7.9% 7.9% 7.9% 7.9% 0.0% 0.0% 0.0% 0.0% 5.0% 5.0% 5.0% 5.0%
Payout Ratio (Dividend/FFO) 70.7% 74.9% 77.4% 80.1% 78.0% 75.8% 72.1% 74.4% 77.2% 76.7% 75.3% 77.6% 80.2% 83.0% 80.5% 78.8% 78.1%
Payout Ratio (Dividend/FAD) 76.1% 79.6% 81.4% 83.9% 80.8% 79.8% 75.7% 79.6% 83.4% 80.1% 78.0% 83.7% 88.2% 87.4% 84.5% 82.4% 81.5%
Payout Ratio (Dividend/Net Income) 84.3% 126.7% 118.8% 150.4% 142.4% 218.5% 100.1% 111.8% 125.4% 98.8% 89.6% 161.1% 157.0% 161.1% 152.0% 145.9% 143.6% Source: Oppenheimer & Co. Inc., Company Reports
REITs/REAL ESTATE
38
Exhibit 54: Ventas Balance Sheet 2008A – 2010E ($ in thousands, except per share data)
2008A 2009E 2010E
(in $ thousands) 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
ASSETS:
Real estate:
Land 567,523 569,711 567,474 555,015 554,286 552,712 557,123 558,979 562,735 562,735 562,735 562,735
Buildings and improvements 5,668,239 5,700,555 5,694,198 5,593,024 5,592,051 5,603,042 5,641,309 5,665,120 5,704,447 5,705,697 5,706,947 5,708,197
Depreciation & Amortization (855,148) (905,608) (951,523) (987,691) (1,036,617) (1,075,293) (1,126,516) (1,176,994) (1,227,734) (1,278,473) (1,329,213) (1,379,953)
Construction in Process 998 1,642 9,533 12,591 21,176 18,319 8,611 8,611 8,611 8,611 8,611 8,611
Loans receivables, net 19,945 118,565 113,606 123,289 130,076 125,106 125,410 125,410 125,410 125,410 125,410 125,410
Net Real Estate Investments $5,401,557 $5,484,865 $5,433,288 $5,296,228 $5,260,972 $5,223,886 $5,205,937 $5,181,126 $5,173,469 $5,123,980 $5,074,490 $5,025,000
Cash and cash equivalents 51,347 29,268 115,923 176,812 95,806 46,523 70,889 115,865 115,865 115,865 118,175 138,272
Escrow deposits and restricted cash 52,621 40,038 43,841 55,866 38,275 94,470 96,477 96,477 96,477 96,477 96,477 96,477
Deferred financing costs, net 21,978 20,742 19,292 20,598 29,935 29,569 27,804 27,804 27,804 27,804 27,804 27,804
Subscriptions receivable 2,109 1,752 1,769 - - - - - - - - -
Other assets $122,176 $140,396 $200,735 $220,480 $168,858 $176,413 $186,203 $196,610 $212,490 $214,956 $235,621 $239,445
TOTAL ASSETS $5,651,788 $5,717,061 $5,814,848 $5,769,984 $5,593,846 $5,570,861 $5,587,310 $5,617,882 $5,626,105 $5,579,081 $5,552,567 $5,526,998
LIABILITIES AND SHAREHOLDERS' EQUITY:
Senior notes payable and other debt 3,157,111 3,251,418 3,135,350 2,847,487 2,729,991 2,605,902 2,605,429 2,638,399 2,696,799 2,696,799 2,696,799 2,696,799
Line of Credit 300,207 212,410 10,402 9,713 36,449 18,216 - - -
Deferred revenue 8,700 8,050 7,564 7,057 6,307 5,305 4,628 4,628 4,628 4,628 4,628 4,628
Interest rate swap agreements - - - - - - - - - - - -
Accrued dividend - - - - - - - - - - - -
Accrued interest 46,748 20,261 46,255 21,931 42,121 16,952 35,481 35,481 35,481 35,481 35,481 35,481
Accounts payable and other accrued liabilities 142,386 142,399 152,666 168,198 161,775 164,659 175,125 175,125 175,125 175,125 175,125 175,125
Deferred income taxes 286,153 282,080 256,525 257,499 255,570 255,175 254,622 254,622 254,622 254,622 254,622 254,622
Other liabilities - - - - - - - - - - - -
Total Liabilities $3,641,098 $3,704,208 $3,598,360 $3,602,379 $3,408,174 $3,058,395 $3,084,998 $3,144,704 $3,184,871 $3,166,655 $3,166,655 $3,166,655
Minority interest 32,316 30,957 28,901 19,137 17,864 17,823 17,409 17,409 17,409 17,409 17,409 17,409
Preferred stock - - - - - - - - - - - -
Common stock 34,592 34,619 35,823 35,825 35,867 39,138 39,155 39,155 39,155 39,155 39,155 39,155
Capital in excess of par value 2,015,661 2,021,074 2,242,345 2,244,596 2,267,440 2,565,933 2,570,146 2,570,146 2,570,146 2,570,146 2,570,146 2,570,146
Unearned compensation on restricted stock - - - - - - - - - - - -
Accumulated other comprehensive income (loss) 14,819 12,831 4,835 (21,089) (18,322) (1,411) 15,080 15,080 15,080 15,080 15,080 15,080
Retained earnings (deficit) (86,698) (86,610) (95,414) (110,407) (117,124) (109,012) (139,478) (168,612) (200,556) (229,364) (255,878) (281,447)
Treasury stock - (18) (2) (457) (53) (5) - - - - - -
Total Stockholder's Equity 1,978,374 1,981,896 2,187,587 2,148,468 $2,185,672 $2,512,466 $2,502,312 $2,473,178 $2,441,234 $2,412,426 $2,385,912 $2,360,343
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,651,788 $5,717,061 $5,814,848 $5,769,984 $5,593,846 $5,570,861 $5,587,310 $5,617,882 $5,626,105 $5,579,081 $5,552,567 $5,526,998 Source: Oppenheimer & Co. Inc., Company Reports
REITs/REAL ESTATE
39
Exhibit 55: HCP Income Statement 2007A – 2011E ($ in thousands, except per share data)
2008A $2.25 2009E $1.48 2010E $2.18
(in $ thousands, except per share data) 2007A 2008E 2009E 2010E 2011E 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
FFO: $2.14 $2.25 $1.48 $2.18 $2.37 $0.56 $0.51 $0.71 $0.48 $0.50 $0.55 $0.11 $0.34 $0.52 $0.54 $0.55 $0.57
Operating Income & Expenses
Rental revenues 916,634 972,681 973,727 1,005,392 1,052,593 235,736 235,786 253,872 247,287 237,252 252,763 240,830 242,882 245,131 250,358 253,265 256,638
Operating expenses (186,895) (197,354) (185,978) (192,107) (199,872) (51,428) (47,580) (49,846) (48,500) (47,676) (45,205) (46,173) (46,924) (47,320) (47,788) (48,261) (48,738)
New acq & dev NOI 0 0 375 8,630 14,486 375 1,133 1,814 2,498 3,185
Net Operating Income $729,739 $775,327 $788,124 $821,914 $867,207 $184,308 $188,206 $204,026 $198,787 $189,576 $207,558 $194,657 $196,333 $198,944 $204,384 $207,501 $211,085
Non-operating Income & Expenses
Income from direct financing leases 63,852 58,149 52,779 53,910 53,910 14,974 14,129 14,543 14,503 12,925 13,204 13,173 13,477 13,477 13,477 13,477 13,477
Investment management fee income 13,669 5,922 5,474 5,363 5,363 1,467 1,457 1,523 1,475 1,438 1,369 1,326 1,341 1,341 1,341 1,341 1,341
Equity income (loss) from unconsolidated JVs 5,645 3,326 3,370 6,399 8,102 1,288 1,221 1,227 (410) (462) 1,127 1,328 1,377 1,468 1,555 1,644 1,732
General & administrative expense (72,906) (75,961) (80,943) (72,640) (74,939) (20,538) (18,840) (17,541) (19,042) (18,991) (20,932) (22,860) (18,160) (18,160) (18,160) (18,160) (18,160)
EBITDA 739,999 766,763 768,804 814,947 859,643 181,499 186,173 203,778 195,313 184,486 202,326 187,624 194,368 197,070 202,598 205,804 209,475
Interest Expense (356,883) (349,030) (303,471) (318,322) (329,287) (96,370) (85,509) (83,249) (83,902) (76,674) (75,340) (74,039) (77,418) (78,673) (78,973) (79,932) (80,744)
Interest and other income 77,331 156,750 130,975 159,325 178,798 35,326 30,739 62,312 28,373 24,333 28,732 39,962 37,948 39,023 39,023 40,098 41,180
Perpetual preferred dividends (21,130) (21,130) (21,131) (21,131) (21,131) (5,283) (5,283) (5,282) (5,282) (5,283) (5,283) (5,282) (5,283) (5,283) (5,283) (5,283) (5,283)
Depreciation and amortization (277,952) (316,535) (325,462) (338,098) (347,737) (79,276) (78,308) (77,659) (81,292) (80,537) (79,606) (82,301) (83,018) (83,621) (84,223) (84,826) (85,428)
Discontinued operations 17,151 15,170 1,628 (608) (608) 7,056 5,469 3,198 (553) 659 1,273 (152) (152) (152) (152) (152) (152)
Income taxes 0 (3,873) (1,434) 0 0 (2,245) (1,274) (866) 512 (915) (841) 322 0 0 0 0 0
One time charges 0 (27,451) (73,029) 0 0 0 (9,715) (3,710) (14,026) 0 (5,906) (15,123) (52,000) 0 0 0 0
Net Income Before Minority Interest $178,516 $220,664 $176,880 $296,113 $339,679 $40,707 $42,292 $98,522 $39,143 $46,069 $65,355 $51,011 $14,445 $68,365 $72,990 $75,710 $79,048
Minority interest (24,356) (21,903) (16,042) (15,580) (15,580) (5,716) (5,536) (5,803) (4,848) (4,141) (4,111) (3,895) (3,895) (3,895) (3,895) (3,895) (3,895)
Net Income Before Asset Sales $154,160 $198,761 $160,838 $280,533 $324,099 $34,991 $36,756 $92,719 $34,295 $41,928 $61,244 $47,116 $10,550 $64,470 $69,095 $71,815 $75,153
Extraordinary Items 0 0 (101,973) 0 0 0 0 0 0 0 0 (101,973) 0 0 0 0 0
Gain on sale 413,725 228,604 34,357 0 0 10,138 190,256 27,416 794 1,357 30,540 2,460 0 0 0 0 0
Net Income $567,885 $427,365 $93,222 $280,533 $324,099 $45,129 $227,012 $120,135 $35,089 $43,285 $91,784 ($52,397) $10,550 $64,470 $69,095 $71,815 $75,153
EPS $2.71 $1.79 $0.34 $0.96 $1.11 $0.21 $0.96 $0.49 $0.14 $0.17 $0.35 ($0.18) $0.04 $0.22 $0.24 $0.25 $0.26
Real estate depreciation and amortization 281,112 321,236 325,579 338,098 347,737 82,358 79,688 77,706 81,484 80,598 79,606 82,357 83,018 83,621 84,223 84,826 85,428
Gain on sale (413,658) (228,604) (34,357) 0 0 (10,138) (190,256) (27,416) (794) (1,357) (30,540) (2,460) 0 0 0 0 0
Joint venture FFO adjustments 13,752 18,279 20,052 18,676 18,676 4,684 3,243 4,638 5,714 5,493 5,221 4,669 4,669 4,669 4,669 4,669 4,669
Extraordinary Items 0 0 23 0 0 0 0 0 0 0 23 0 0 0 0 0
Dividends on convertible partnership units 14,933 12,974 4,561 0 0 4,767 2,396 3,992 1,819 1,620 2,941 0 0 0 0 0
Funds From Operations $464,024 $551,250 $409,081 $637,307 $690,512 $126,800 $122,083 $179,055 $123,312 $129,639 $149,035 $32,169 $98,238 $152,760 $157,987 $161,310 $165,250
Recurring capital expenditures, TI/LCs (26,000) (62,232) (38,480) (36,148) (36,148) (18,395) (14,766) (12,876) (16,195) (10,203) (10,203) (9,037) (9,037) (9,037) (9,037) (9,037) (9,037)
Straight-line rent adjustment (56,397) (35,000) (30,000) (25,000) (20,000) (10,968) (10,904) (10,440) (12,100) (12,461) (12,500) (14,321) (12,500) (12,500) (12,500) (12,500) (12,500)
Capitalized Interest (9,362) (7,538) (5,579) 0 (6,020) (6,327) (6,600) (6,500) (6,300) (6,000) (5,700) (5,500)
Other (incl. FAS 141/142) 19,226 29,051 123,449 0 0 1,200 9,715 3,710 14,426 0 5,906 117,543 0 0 0 0 0
Funds Available For Distribution (FAD) $400,853 $483,069 $464,050 $576,159 $634,364 $89,275 $98,590 $153,870 $109,443 $100,955 $125,911 $119,754 $70,201 $124,923 $130,450 $134,073 $138,213
Diluted avg shares outstanding (EPS) 209,509 238,235 273,816 291,486 291,486 217,663 236,467 245,906 252,904 253,423 265,542 284,812 291,486 291,486 291,486 291,486 291,486
Diluted avg shares outstanding (FFO) 217,210 244,917 276,387 291,908 291,908 227,183 241,682 253,956 256,847 256,949 271,457 285,234 291,908 291,908 291,908 291,908 291,908
FFO per share $2.14 $2.25 $1.48 $2.18 $2.37 $0.56 $0.51 $0.71 $0.48 $0.50 $0.55 $0.11 $0.34 $0.52 $0.54 $0.55 $0.57
FAD per share $1.85 $1.97 $1.68 $1.97 $2.17 $0.39 $0.41 $0.61 $0.43 $0.39 $0.46 $0.42 $0.24 $0.43 $0.45 $0.46 $0.47
Dividend $1.78 $1.78 $1.84 $1.91 $1.97 $0.45 $0.45 $0.45 $0.45 $0.46 $0.46 $0.46 $0.46 $0.48 $0.48 $0.48 $0.48
FFO growth (YOY) 17.1% 5.4% -34.2% 47.5% 8.3% 12.5% -12.4% 34.5% -10.7% -9.6% 8.7% -84.0% -29.9% 3.7% -1.4% 390.0% 68.2%
FAD growth (YOY) 15.7% 6.9% -14.9% 17.6% 10.1% -11.6% -16.7% 52.1% 10.8% 0.0% 13.7% -30.7% -43.6% 8.9% -3.7% 9.4% 96.9%
Dividend growth (YOY) 4.7% 0.0% 3.4% 4.0% 3.0% 0.0% 0.0% 0.0% 0.0% 3.4% 3.4% 3.4% 3.4% 4.0% 4.0% 4.0% 4.0%
Payout Ratio (Dividend/FFO) 83.3% 79.1% 124.3% 87.6% 83.3% 79.7% 88.1% 63.1% 92.7% 91.2% 83.8% 407.9% 136.7% 91.4% 88.4% 86.6% 84.5%
Payout Ratio (Dividend/FAD) 96.5% 90.2% 109.6% 97.0% 90.7% 113.2% 109.1% 73.4% 104.4% 117.1% 99.2% 109.6% 191.3% 111.8% 107.1% 104.2% 101.0%
Payout Ratio (Dividend/Net Income) 65.7% 99.2% 540.5% 198.8% 177.3% 214.6% 46.4% 91.1% 320.7% 269.3% 133.1% -250.0% 1270.9% 216.3% 201.8% 194.2% 185.6% Source: Oppenheimer & Co. Inc., Company Reports
REITs/REAL ESTATE
40
Exhibit 56: HCP Balance Sheet 2008A – 2010E ($ in thousands, except per share data)
2007A 2008A 2009E 2010E
(in $ thousands) 1Q07A 2Q07A 3Q07A 4Q07A 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
ASSETS:
Real estate:
Land $868,486 $770,010 $1,601,529 $1,620,721 $1,593,350 $1,560,756 $1,563,167 $1,551,168 $1,550,286 $1,550,490 $1,548,845 $1,556,201 $1,562,056 $1,567,912 $1,573,767 $1,579,623
Buildings and improvements 6,992,649 6,205,698 8,017,019 7,984,935 7,738,776 7,626,209 7,733,690 7,762,217 7,758,432 $7,796,873 $7,804,118 $7,845,799 $7,878,981 $7,912,162 $7,945,344 $7,978,525
Developments in process 31,008 29,056 266,903 372,947 330,730 308,169 249,837 224,361 240,690 255,565 273,567 271,067 261,067 251,067 236,067 221,067
Depreciation & Amortization (628,977) (618,321) (672,401) (728,804) (722,224) (725,751) (781,903) (827,655) (880,881) (940,544) (1,003,177) (1,086,195) (1,169,816) (1,254,039) (1,338,865) (1,424,293)
Net Property & Equipment $7,263,166 $6,386,443 $9,213,050 $9,249,799 $8,940,632 $8,769,383 $8,764,791 $8,710,091 $8,668,527 $8,662,384 $8,623,353 $8,586,872 $8,532,288 $8,477,102 $8,416,313 $8,354,922
Investments in direct financing leases $679,956 $682,176 $637,742 $640,052 $642,572 $645,079 $647,429 $648,234 $648,411 $648,864 $634,233 $634,233 $634,233 $634,233 $634,233 $634,233
Loans receivable, net $199,303 $203,147 $159,879 $1,065,485 $1,068,093 $1,072,811 $1,068,240 $1,076,392 $1,074,874 $1,078,418 $1,674,329 $1,674,329 $1,674,329 $1,674,329 $1,674,329 $1,674,329
Investments in unconsolidated JVs 173,689 214,904 248,676 248,894 281,102 278,479 275,593 272,929 267,350 $264,346 $261,364 $261,364 $261,364 $261,364 $261,364 $261,364
Accounts receivable, net 33,960 33,652 34,403 44,892 32,849 31,920 30,011 34,211 29,046 29,535 36,824 36,824 36,824 36,824 36,824 36,824
Cash and cash equivalents 102,923 351,217 568,853 132,696 154,000 216,789 117,052 57,562 66,376 49,484 144,366 108,787 87,768 71,890 64,245 60,452
Other assets 938,089 1,007,787 1,233,530 1,139,954 1,380,816 1,209,269 1,128,288 1,050,407 1,046,705 1,052,819 963,741 963,741 963,741 963,741 963,741 963,741
TOTAL ASSETS $9,391,086 $8,879,326 $12,096,133 $12,521,772 $12,500,064 $12,223,730 $12,031,404 $11,849,826 $11,801,289 $11,785,850 $12,338,210 $12,266,150 $12,190,547 $12,119,482 $12,051,049 $11,985,865
LIABILITIES AND SHAREHOLDERS' EQUITY:
Bank line of credit $190,000 $0 $0 $951,700 $1,018,600 $0 $0 $150,000 $235,000 $100,000 $0 $0 $0 $0 $0 $0
Unsecured debt $3,232,630 $3,223,422 $3,224,215 $5,169,950 $5,170,868 $4,971,786 $4,042,689 $4,043,513 $4,044,338 $3,718,147 $3,720,577 $3,720,577 $3,720,577 $3,720,577 $3,720,577 $3,720,577
Mortgage debt $1,650,184 $1,369,382 $4,143,502 $1,389,257 $1,381,472 $1,621,644 $1,907,649 $1,743,943 $1,704,885 $1,691,696 $1,863,404 $1,863,404 $1,863,404 $1,863,404 $1,863,404 $1,863,404
Accounts payable and accrued expenses 166,661 166,648 214,809 233,342 249,714 223,389 224,680 211,691 190,100 197,295 310,493 310,493 310,493 310,493 310,493 310,493
Deferred revenue & Intangible Liabilities 189,492 174,685 330,724 334,543 338,025 326,221 314,806 292,839 296,054 287,287 394,259 394,259 394,259 394,259 394,259 394,259
Total Liabilities $5,428,967 $4,934,137 $7,913,250 $8,078,792 $8,158,679 $7,143,040 $6,489,824 $6,441,986 $6,470,377 $5,994,425 $6,288,733 $6,288,733 $6,288,733 $6,288,733 $6,288,733 $6,288,733
Minority Interest 341,731 340,802 339,027 339,271 313,738 273,036 248,241 206,569 201,650 180,029 179,673 179,673 179,673 179,673 179,673 179,673
Preferred stock 285,173 285,173 285,173 285,173 285,173 285,173 285,173 285,173 285,173 285,173 285,173 295,500 295,500 295,500 295,500 295,500
Common stock 205,987 206,379 207,277 216,819 217,816 236,512 251,926 253,601 253,975 275,253 293,145 293,145 293,145 293,145 293,145 293,145
Additional paid-in capital 3,378,858 3,392,612 3,413,124 3,724,739 3,755,433 4,349,399 4,835,014 4,873,727 4,870,942 5,298,213 5,708,534 5,708,534 5,708,534 5,708,534 5,708,534 5,708,534
Acccumulated other comprehensive income 18,512 14,318 7,718 (2,102) (55,897) (8,198) (28,881) (81,162) (77,469) (18,819) (9,838) 41,858 105,702 174,084 245,097 319,360
Cumulative dividends (2,352,123) (2,449,360) (69,436) (120,920) (174,878) (55,232) (49,893) (130,068) (203,359) (228,424) (407,210) (541,293) (680,740) (820,187) (959,634) (1,099,080)
Other equity 2,083,981 2,155,265 - - - - - - - - - - - - - -
Total Stockholder's Equity $3,620,388 $3,604,387 $3,843,856 $4,103,709 $4,027,647 $4,807,654 $5,293,339 $5,201,271 $5,129,262 $5,611,396 $5,869,804 $5,797,744 $5,722,141 $5,651,076 $5,582,643 $5,517,459
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,391,086 $8,879,326 $12,096,133 $12,521,772 $12,500,064 $12,223,730 $12,031,404 $11,849,826 $11,801,289 $11,785,850 $12,338,210 $12,266,150 $12,190,547 $12,119,482 $12,051,049 $11,985,865 Source: Oppenheimer & Co. Inc., Company Reports
REITs/REAL ESTATE
41
Exhibit 57: BioMed Properties, Inc. Income Statement 2007A – 2011E ($ in thousands, except per share data)
2008A $1.82 2009E $1.68 2010E $1.32
(in $ thousands except per share data) 2007A 2008E 2009E 2010E 2011E 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
FFO per share: $1.91 $1.82 $1.68 $1.32 $1.38 $0.46 $0.47 $0.48 $0.42 $0.56 $0.48 $0.35 $0.32 $0.33 $0.33 $0.33 $0.34
Operating Income and Expenses
Base Rent 195,995 227,464 270,539 279,545 290,736 $50,342 $54,223 $59,381 $63,518 $68,419 65,716 68,472 67,932 68,705 69,487 70,277 71,077
Recoveries from Tenants 61,735 72,166 77,270 76,496 79,294 $16,582 $15,804 $20,911 $18,869 21,081 17,189 19,240 19,760 19,160 18,891 19,111 19,334
Other Income 8,379 2,343 13,575 2,792 2,792 $434 $744 $519 $646 $4,451 $3,175 $5,251 $698 $698 $698 $698 $698
Total Revenue $266,109 $301,973 $361,383 $358,833 $372,821 $67,358 $70,771 $80,811 $83,033 $93,951 $86,080 $92,963 $88,389 $88,563 $89,075 $90,086 $91,109
Property Expenses (50,790) (61,601) (75,035) (73,369) (75,591) ($13,865) ($13,454) ($17,027) ($17,255) ($22,152) ($14,661) ($18,726) ($19,496) ($18,550) ($18,067) ($18,272) ($18,480)
Real Estate Taxes (20,354) (23,128) (31,413) (34,372) (36,090) ($5,269) ($4,915) ($6,763) ($6,181) (7,233) ($7,613) ($8,233) ($8,334) ($8,436) ($8,540) ($8,645) ($8,751)
Incremental NOI from Acq/Dis/Dev - - 1,655 9,740 14,285 - 1,655 2,233 2,268 2,438 2,802
Net Operating Income $194,965 $217,244 $256,590 $260,833 $275,425 $48,224 $52,402 $57,021 $59,597 $64,566 $63,806 $66,004 $62,214 $63,809 $64,736 $65,607 $66,680
NOI Growth Q/Q 22% 11% 18% 2% 6% 0% 9% 9% 5% 8% -1% 3% -6% 3% 1% 1% 2%
Equity in Earnings of Unconsolidated Entities (892) (1,199) (2,480) (2,325) (2,229) ($172) $43 ($208) ($862) (301) ($465) ($1,118) ($596) ($590) ($584) ($578) ($572)
G&A expense (21,870) (22,834) (22,503) (26,379) (29,545) ($6,194) ($5,645) ($4,589) ($6,406) (5,280) (5,126) (5,956) (6,141) (6,317) (6,499) (6,686) (6,878)
EBITDA $172,203 $193,211 $231,607 $232,129 $243,651 $41,858 $46,800 $52,224 $52,329 $58,985 $58,215 $58,930 $55,477 $56,902 $57,653 $58,343 $59,230
Depreciation and Amortization (72,201) (84,227) (108,972) (105,687) (107,027) ($17,687) ($19,331) ($21,506) ($25,703) (27,313) (24,501) (30,953) (26,205) (26,366) (26,366) (26,422) (26,533)
Interest Income and other non-rental income 990 486 288 248 248 $155 $106 $110 $115 63 101 62 62 62 62 62 62
Interest expense (inc. capitalized int. & amort of loan cost) (27,653) (39,613) (64,614) (84,241) (90,358) ($6,937) ($8,629) ($12,309) ($11,738) (12,080) (12,875) (19,614) (20,045) (20,054) (21,159) (21,405) (21,623)
Discontinued Operations 639 - - - - - - - - -
Net Income -- before Gains & Extr. Items $73,978 $69,857 $58,310 $42,449 $46,514 $17,389 $18,946 $18,519 $15,003 $19,655 $20,940 $8,425 $9,290 $10,544 $10,190 $10,579 $11,135
Extraordinary items 1,087 (2,882) 6,442 - - ($726) ($2,156) 4,315 2,141 (14)
Net Income before Minority Interest/Preferreds $75,065 $66,975 $64,752 $42,449 $46,514 $17,389 $18,946 $17,793 $12,847 $23,970 $23,081 $8,411 $9,290 $10,544 $10,190 $10,579 $11,135
Noncontrolling interests (2,530) (2,077) (1,566) (432) (432) ($581) ($620) ($570) ($306) (705) (645) (108) (108) (108) (108) (108) (108)
Preferred Dividend (16,870) (16,964) (16,911) (16,750) (16,750) ($4,241) ($4,241) ($4,241) ($4,241) (4,241) (4,241) (4,241) (4,188) (4,188) (4,188) (4,188) (4,188)
Net Income to Common $55,665 $47,934 $46,275 $25,266 $29,331 $12,567 $14,085 $12,982 $8,300 $19,024 $18,195 $4,062 $4,994 $6,249 $5,895 $6,283 $6,840
Earnings per share $0.85 $0.67 $0.50 $0.26 $0.30 $0.19 $0.20 $0.18 $0.10 $0.23 $0.20 $0.04 $0.05 $0.06 $0.06 $0.06 $0.07
Minority Interest 2,485 2,086 1,610 432 432 $589 $619 $559 $319 722 658 122 108 108 108 108 108
Total Depr & Amortization 73,054 86,274 111,543 108,264 109,604 18,130 19,773 22,022 26,349 27,955 25,144 31,595 26,849 27,010 27,010 27,066 27,178
Other (1,087) - - - -
Funds From Operations (Diluted) 130,117 136,294 159,429 133,962 139,368 31,286 34,477 35,563 34,968 47,701 43,997 35,779 31,952 33,367 33,013 33,457 34,126
Master lease receipts 928 103 - - - $103 $0
Second generation cap ex (1,518) (3,308) (3,058) (6,521) (6,886) ($702) ($464) ($1,037) ($1,105) ($1,285) ($256) ($273) ($1,244) ($1,595) ($1,618) ($1,640) ($1,667)
Tenant Improvement/Leasing Commissions - - (1,552) (5,299) (3,588) $0 $0 ($1,552) ($1,027) ($1,424) ($1,424) ($1,424)
Capitalized Interest - (27,257) (10,745) (800) (800) ($11,844) ($8,574) ($6,839) ($4,130) ($3,472) ($2,943) ($200) ($200) ($200) ($200) ($200)
Non cash equity compensation 5,528 6,105 5,539 5,504 5,504 $1,382 $1,456 $1,496 $1,771 1,404 $1,383 $1,376 $1,376 $1,376 $1,376 $1,376 $1,376
Straight line rents (FAS 142) (16,392) (21,759) (23,352) (24,888) (24,888) ($4,296) ($6,315) ($5,892) ($5,256) (4,061) ($6,847) ($6,222) ($6,222) ($6,222) ($6,222) ($6,222) ($6,222)
Fair value lease revenue (FAS 141) (3,408) (5,007) (6,205) (3,464) (3,464) ($1,139) ($1,140) ($1,134) ($1,594) (3,581) ($892) ($866) ($866) ($866) ($866) ($866) ($866)
Funds Available for Distribution $117,735 $91,765 $114,194 $100,008 $106,780 27,095 16,926 21,971 25,773 33,620 32,805 25,743 22,026 25,209 24,404 24,857 25,538 - - - - -
Diluted avg shares/units outstanding (FFO) 68,271 74,805 94,923 101,289 101,289 68,430 73,248 74,715 82,827 84,499 92,616 101,289 101,289 101,289 101,289 101,289 101,289
Diluted average common shares (EPS) 65,354 71,688 91,673 98,137 98,137 65,364 70,127 71,554 79,707 81,084 89,335 98,137 98,137 98,137 98,137 98,137 98,137
Diluted FFOPS $1.91 $1.82 $1.68 $1.32 $1.38 $0.46 $0.47 $0.48 $0.42 $0.56 $0.48 $0.35 $0.32 $0.33 $0.33 $0.33 $0.34
Funds Available for Distribution (FAD) per share $1.72 $1.23 $1.20 $0.99 $1.05 $0.40 $0.23 $0.29 $0.31 $0.40 $0.35 $0.25 $0.22 $0.25 $0.24 $0.25 $0.25
Dividends Per Share $1.24 $1.34 $0.70 $0.56 $0.57 $0.34 $0.34 $0.34 $0.34 $0.34 $0.11 $0.11 $0.14 $0.14 $0.14 $0.14 $0.14
FFO Growth (Y/Y) -8.7% -4.9% 5.5% -8.7% 23.5% 0.9% -25.8% -25.3% -41.6% -31.4% -6.5% 6.8%
FAD Growth (Y/Y) -12.8% -48.9% -27.9% -24.9% 0.5% 53.3% -13.6% -30.1% -37.4% -32.0% -3.4% 15.9%
Dividend Growth (Y/Y) 8.1% 8.1% 8.1% 8.1% 0.0% -67.2% -67.2% -58.2% -58.0% 28.1% 28.1% 0.6%
Payout Ratio (Dividend/FFO) 65.1% 73.5% 41.4% 42.6% 41.2% 73.3% 71.2% 70.4% 79.4% 59.3% 23.2% 31.1% 44.4% 42.8% 43.2% 42.6% 41.8%
Payout Ratio (Dividend/FAD) 71.9% 109.2% 57.8% 57.1% 53.8% 84.6% 145.0% 113.9% 107.7% 84.2% 31.1% 43.3% 64.4% 56.6% 58.5% 57.4% 55.9%
Payout Ratio (Dividend/Net Income) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Source: Oppenheimer & Co. Inc., Company Reports
REITs/REAL ESTATE
42
Exhibit 58: BioMed Properties, Inc Balance Sheet 2008A – 2010E ($ in thousands, except per share data)
2008A 2009E 2010E
(in thousands) 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
ASSETS:
Land 313,694 334,306 390,685 347,878 365,154 368,754 370,642 370,972 371,272 371,272 371,272 371,272
Ground Lease
Land under development 103,810 83,259 29,054 69,529 52,247 52,247 52,247 52,247 52,247 52,247 52,247 52,247
Buildings and improvements 1,680,143 1,892,296 2,137,926 2,104,072 2,193,415 2,207,311 2,221,005 2,224,119 2,227,414 2,229,033 2,230,673 2,232,340
Construction in progress 812,880 619,507 357,437 439,221 405,764 405,764 405,764 405,764 405,764 405,764 405,764 405,764
Tenant Improvements 73,888 85,557 145,095 161,839 164,700 164,700 164,700 164,700 164,700 164,700 164,700 164,700
Accumulated Depreciation (115,983) (129,221) (144,522) (162,110) (180,203) (204,704) (235,657) (261,862) (288,228) (314,594) (341,015) (367,549)
Investments in real estate, net 2,868,432 2,885,704 2,915,675 2,960,429 3,001,077 2,994,072 2,978,701 2,955,940 2,933,170 2,908,422 2,883,641 2,858,774
Investment in unconsolidated partnership $21,356 $21,158 $20,296 $18,173 49,756 49,243 47,747 47,747 47,747 47,747 47,747 47,747
Total Real Estate Held for Investment, net $2,889,788 $2,906,862 $2,935,971 $2,978,602 $3,050,833 $3,043,315 $3,026,448 $3,003,687 $2,980,917 $2,956,169 $2,931,388 $2,906,521
Cash and cash equivalents $19,383 $21,357 $23,451 $21,422 32,318 34,101 30,279 30,279 30,279 30,279 30,279 30,279
Restricted cash $8,351 $7,991 $8,291 $7,877 4,951 15,638 15,974 15,974 15,974 15,974 15,974 15,974
Accounts receivable, net $4,716 $3,377 $7,284 $9,417 14,749 10,178 5,482 5,482 5,482 5,482 5,482 5,482
Accrued straight line rents, net $40,682 $46,997 $52,721 $58,138 62,040 69,046 75,489 75,489 75,489 75,489 75,489 75,489
Acquired above market leases, net $5,374 $5,017 $4,661 $4,329 4,009 3,688 3,368 3,368 3,368 3,368 3,368 3,368
Deferred leasing costs, net $112,334 $109,380 $107,145 $101,519 95,204 90,472 85,926 85,926 85,926 85,926 85,926 85,926
Deferred loan costs, net $14,554 $13,230 $12,057 $9,933 8,451 8,535 7,794 7,794 7,794 7,794 7,794 7,794
Prepaid expenses and other assets
Other assets $30,767 $68,323 $70,837 $38,256 37,607 36,939 43,051 43,051 43,051 43,051 43,051 43,051
TOTAL ASSETS $3,125,949 $3,182,534 $3,222,418 $3,229,493 $3,310,162 $3,311,912 $3,293,811 $3,271,050 $3,248,280 $3,223,532 $3,198,751 $3,173,884
LIABILITIES AND SHAREHOLDERS' EQUITY:
Mortgage notes payable $377,675 $373,571 $354,828 $353,161 $351,469 717,764 671,693 671,693 671,693 671,693 671,693 671,693
Secured term loan $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000
Exchangeable senior notes $175,000 $175,000 $175,000 $128,250 $111,068 $103,077 $103,524 $257,091 $216,224 $216,224 $216,224 $216,224
Secured Construction Loan $457,628 $483,997 $500,998 $507,128 $507,128 0 0 0 0 0 0 0
Total Long Term Debt $1,260,303 $1,282,568 $1,280,826 $1,238,539 $1,219,665 $1,070,841 $1,025,217 $1,178,784 $1,137,917 $1,137,917 $1,137,917 $1,137,917
Unsecured line of credit $310,747 $213,210 $266,660 $108,767 $204,334 292,404 321,124 325,667 349,441 330,727 311,589 291,810
Security deposits $7,326 $7,611 $7,469 $7,623 $7,641 7,660 7,187 7,187 7,187 7,187 7,187 7,187
Dividends and distributions payable $27,385 $29,441 $29,441 $32,445 $32,563 15,383 15,383 15,383 15,383 15,383 15,383 15,383
Accounts payable and accrued expenses $80,893 $73,362 $74,878 $66,821 $87,359 66,406 71,389 71,364 71,364 71,364 71,364 71,364
Derivative Instruments $53,858 $23,264 $31,676 $126,091 $100,840 17,910 15,948 -9,052 -9,052 -9,052 -9,052 -9,052
Acquired below market leases, net $22,199 $20,702 $19,212 $17,286 $14,762 13,550 12,344 12,344 12,344 12,344 12,344 12,344
TOTAL LIABILITIES $1,762,711 $1,650,158 $1,710,162 $1,597,572 $1,667,164 $1,484,154 $1,468,592 $1,601,676 $1,584,584 $1,565,870 $1,546,732 $1,526,953
Noncontrolling Interest $16,690 $15,572 $14,968 $12,381 13,139 $10,169 $10,865 $10,865 $10,865 $10,865 $10,865 $10,865
Preferred Stock $222,413 $222,413 $222,413 $222,413 $222,413 $222,413 $222,413 $230,000 $230,000 $230,000 $230,000 $230,000
Common stock $656 $717 $717 $808 $812 $981 $982 $982 $982 $982 $982 $982
Addiitonal paid-in capital $1,279,852 $1,430,942 $1,432,350 $1,647,039 $1,661,656 1,833,026 1,833,898 1,833,898 1,833,898 1,833,898 1,833,898 1,833,898
Accumulated other comprehensive income/(loss) ($101,549) ($111,490) ($122,534) ($141,288) ($100,314) (91,525) (88,894) (72,964) (80,643) (86,675) (92,320) (97,407)
Dividends in Excess of Earnings ($54,824) ($25,778) ($35,657) ($112,126) ($154,708) (147,306) (154,045) (333,407) (331,407) (331,407) (331,407) (331,407)
Total Shareholders' Equity $1,346,548 $1,516,804 $1,497,289 $1,616,846 $1,629,859 $1,817,589 $1,814,354 $1,658,509 $1,652,830 $1,646,798 $1,641,153 $1,636,066
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,125,949 $3,182,534 $3,222,419 $3,226,799 $3,310,162 $3,311,912 $3,293,811 $3,271,050 $3,248,280 $3,223,532 $3,198,751 $3,173,884
Source: Oppenheimer & Co. Inc., Company Reports
REITs/REAL ESTATE
43
Exhibit 59: Oppenheimer & Co. REIT/Real Coverage Universe
Real Estate sector coverage view is CautiousInvestment horizon for all price targets is 12-18 months
Ticker Company Current rating Sector
Share
Price
Div.
yield
2009
FFO
2010E
FFO
2009
P/FFO
2010E
P/FFO
2009
P/FAD
2010E
P/FAD
08-09E
FFO
growth
09-10E
FFO
growth
Forward
NAV
OPCO
Econ.
Cap
Rate
OPCO
Nom.
Cap
Rate
Implied
Nominal
Cap Rate
Current
Return to
NAV
Target
price
Total
return
potential Key Risk factors (1)
FCEA Forest City Enterprises Outperform Diversified Properties $11.73 0.0% $2.15 $2.43 5.5x 4.8x 10.8x 0.0x 5.6% 12.9% $16.72 7.9% 8.4% 9.4% 42.5% $17.00 44.9% Development risk, restrictive lending environment, weak home sales
CPT Camden Property Trust Outperform Apartments $40.32 4.5% $2.97 $2.65 13.6x 15.2x 16.8x 0.0x 4.7% -10.7% $42.54 6.1% 6.8% 7.0% 5.5% $48.00 23.5% Acquisition risks, job losses, development risks
YSI U-Store-It Trust Outperform Self-Storage $7.30 1.4% $0.74 $0.54 9.9x 13.6x 11.5x 0.0x -24.0% -27.7% $8.38 8.0% 8.6% 9.2% 14.7% $8.50 17.8% Development risks, reduced pricing power, weak consumer
AIV Apartment Inv & Mgmt Outperform Apartments $16.99 2.4% $1.34 $1.39 12.7x 12.2x 14.7x 0.0x -26.9% 4.2% $17.63 6.3% 7.3% 7.2% 3.8% $19.50 17.1% Acquisition risks, job losses, development risks
HCN Health Care REIT Inc. Outperform Health Care $44.17 6.2% $3.12 $3.22 14.2x 13.7x 16.7x 0.0x -6.6% 3.3% $43.47 8.0% 8.2% 8.1% -1.6% $49.00 17.1% Tenant bankruptcies, development risk, financing costs, reimbursement risk.
SKT Tanger Factory Outlet Outperform Shopping Centers $39.42 3.9% $2.67 $2.68 14.8x 14.7x 18.0x 0.0x 9.2% 0.3% $34.81 7.0% 8.0% 7.3% -11.7% $43.00 13.0% Tenant bankruptcies, slowing leasing velocity
PSA Public Storage, Inc. Outperform Self-Storage $79.27 2.8% $5.55 $4.92 14.3x 16.1x 17.3x 0.0x 9.5% -11.3% $67.75 7.5% 8.0% 6.9% -14.5% $85.00 10.0% Weak pricing power, lack of investment opportunities
VTR Ventas Perform Health Care $43.94 4.7% $2.65 $2.69 16.6x 16.3x 17.4x 0.0x -3.3% 1.5% $37.45 8.0% 8.0% 6.6% -14.8% NA NA Possible Sunrise bankruptcy, reimbursement risks, access to capital.
UDR UDR, Inc. Perform Apartments $15.99 4.50% $1.15 $1.07 13.9x 14.9x 18.9x 0.0x -21.8% -6.9% $13.59 6.3% 6.8% 6.7% -15.0% NA NA Acquisition risks, job losses, development risks
UBA Urstadt Biddle Properties Perform Shopping Centers $14.93 6.4% $1.22 $1.15 12.2x 13.0x 15.8x 0.0x 0.9% -6.0% $15.27 8.5% 9.6% 8.5% 2.3% NA NA Acquisition risks, tenant bankruptcies, slowing consumer spending
SPG Simon Property Group Perform Regional Malls $76.70 0.6% $5.47 $5.79 14.0x 13.3x 15.4x 0.0x -14.7% 5.8% $59.52 7.5% 8.0% 7.0% -22.4% NA NA Tenant bankruptcies, Lack of acquisition opportunities
SNH Senior Housing Properties Trust Perform Health Care $21.90 6.6% $1.73 $1.76 12.7x 12.5x 12.7x 0.0x 3.6% 1.6% $21.91 9.3% 9.3% 9.3% 0.1% NA NA Acquisition risks, tenant bankruptcies, slowing consumer spending
REG Regency Centers Perform Shopping Centers $35.81 5.2% $1.05 $2.24 34.1x 16.0x 19.6x 0.0x -72.0% 113.8% $30.91 7.5% 8.1% 7.5% -13.7% NA NA Development risks, tenant bankruptcies, financing risks
PLD ProLogis Perform Industrial Properties $14.09 4.26% $1.34 $0.86 10.5x 16.5x 18.7x 0.0x 97.5% -36.3% $11.54 7.3% 8.2% 7.5% -18.1% NA NA Development risk, job losses, acquisition risks
NHP Nationwide Health Prop. Perform Health Care $35.03 5.0% $2.23 $2.34 15.7x 15.0x 15.9x 0.0x -0.7% 4.9% $28.60 8.0% 8.1% 7.0% -18.4% NA NA Tenant bankruptcies, reimbursement risks, acquisition spreads.
KIM Kimco Realty Perform Shopping Centers $14.13 4.5% $0.80 $1.15 17.6x 12.3x 14.5x 0.0x -60.1% 43.3% $11.81 7.4% 8.3% 7.6% -16.4% NA NA Development risks, tenant bankruptcies, financing risks
HRP HRPT Properties Trust Perform Office Properties $6.53 7.4% $1.09 $1.11 6.0x 5.9x 7.9x 0.0x 1.0% 1.4% $6.79 8.8% 10.4% 10.5% 4.1% NA NA Development risk, job losses, acquisition risks
HR Healthcare Realty Trust Perform Health Care $21.35 5.6% $1.66 $1.42 12.9x 15.0x 14.5x 0.0x 2.0% -14.2% $18.82 8.3% 8.3% 7.7% -11.9% NA NA Tenant bankruptcies, reimbursement risk, master lease roll.
HCP HCP, Inc. Perform Health Care $30.76 6.0% $1.48 $2.18 20.8x 14.1x 18.3x 0.0x -34.2% 47.5% $25.65 7.5% 7.9% 6.9% -16.6% NA NA Development risk, job losses, acquisition risks
FRT Federal Realty Perform Shopping Centers $67.16 3.9% $3.43 $3.81 19.6x 17.6x 21.3x 0.0x -11.3% 11.0% $52.66 6.5% 7.1% 6.0% -21.6% NA NA Tenant bankruptcies, slowing consumer spending
EXR Extra Space Storage Inc. Perform Self-Storage $11.59 4.5% $0.97 $0.77 12.0x 15.1x 14.0x 0.0x -17.9% -20.6% $12.17 7.5% 8.0% 8.2% 5.0% NA NA Development risks, reduced pricing power, weak consumer
ESS Essex Property Trust Perform Apartments $83.76 4.9% $6.81 $4.61 12.3x 18.2x 18.3x 0.0x 10.3% -32.4% $73.84 6.0% 6.5% 6.0% -11.8% NA NA Acquisition risks, job losses, development risks
EQR Equity Residential Perform Apartments $33.25 4.1% $2.14 $2.07 15.5x 16.0x 18.0x 0.0x -0.8% -3.3% $27.78 6.2% 6.5% 6.0% -16.5% NA NA Acquisition risks, job losses, development risks
BXP Boston Properties Perform Office Properties $68.17 2.9% $4.61 $4.13 14.8x 16.5x 28.0x 0.0x 31.2% -10.4% $56.68 6.3% 7.1% 6.3% -16.9% NA NA Development risk, job losses, acquisition risks
BMR BioMed Realty Trust Inc. Perform Office Properties $15.43 2.9% $1.68 $1.32 9.2x 11.7x 12.8x 0.0x -7.8% -21.3% $13.08 8.3% 8.7% 8.4% -15.2% NA NA Development risk, job losses, acquisition risks
ARE Alexandria Real Estate Perform Office Properties $63.25 2.2% $5.52 $4.28 11.5x 14.8x 17.3x 0.0x -5.9% -22.4% $53.69 8.0% 8.1% 7.3% -15.1% NA NA Development risk, job losses, acquisition risks
WRE Washington REIT Perform Diversified Properties $27.39 6.3% $2.12 $1.86 12.9x 14.7x 16.6x 0.0x 0.0% -12.1% $24.57 6.9% 7.7% 7.2% -10.3% NA NA Development risk, job losses, acquisition risks
WRI Weingarten Realty Perform Shopping Centers $21.34 4.7% $1.98 $1.64 10.8x 13.0x 14.1x 0.0x -18.6% -17.3% $18.93 7.5% 8.3% 7.8% -11.3% NA NA Development risks, tenant bankruptcies, financing risks, ratings downgrade
SSS Sovran Self Storage Perform Self-Storage $36.34 5.0% $2.34 $2.45 15.5x 14.8x 15.4x 0.0x -27.9% 4.7% $32.12 8.0% 8.6% 7.9% -11.6% NA NA Weak pricing power, reduced unit demand, covenant risk
TCO Taubman Centers Underperform Regional Malls $34.28 4.8% $0.88 $2.67 39.0x 12.8x 13.2x 0.0x -41.9% 203.8% $27.20 7.2% 7.7% 6.9% -20.6% $30.00 -7.6% Impairments to international development, tenant bankruptcies
AVB AvalonBay Communities Underperform Apartments $80.48 4.4% $3.89 $3.75 20.7x 21.5x 24.5x 0.0x -4.6% -3.6% $58.14 6.2% 6.4% 5.2% -27.8% $65.00 -14.8% Development risk, yield compression risk, job losses
EGP EastGroup Properties, Inc. Underperform Industrial Properties $37.45 5.6% $3.14 $2.99 11.9x 12.5x 15.8x 0.0x -4.8% -4.8% $26.53 8.0% 9.4% 7.7% -29.2% $29.00 -17.0% Acquisition risks, development risk, economic weakness
MAC Macerich Company Underperform Regional Malls $32.93 0.7% $3.68 $3.15 8.9x 10.5x 13.6x 0.0x -32.9% -14.4% $23.35 7.3% 8.0% 7.1% -29.1% $28.00 -14.2% Development risks, tenant bankruptcies, financing risks
CBL CBL & Associates Underperform Regional Malls $10.44 1.9% $2.39 $1.90 4.4x 5.5x 5.9x 0.0x -25.8% -20.4% $8.64 8.3% 9.2% 8.8% -17.2% $9.00 -11.9% Development risks, tenant bankruptcies, financing risks
7.3% 7.8% 7.0% -14.86%
Ticker Company Current Rating Sector
Share
Price
Div.
yield
2009E
CFFO
2010E
CFFO
2009E
P/CFFO
2010E
P/CFFO
2009E
Implied
CFFO
growth
2010E
Implied
CFFO
growth
Implied
Share
Price
CFFO
Target
Multiple
Implied
Equity
Value/Sh
Current
Return to
Implied Sh
Price
Target
price (2)
Total
return
potential Risk factors to price targets
ESC Emeritus Corp. Outperform Senior Housing $19.44 0.0% 1.05$ 2.01$ 18.5x 9.7x 14.2% 90.9% 24.85 19.66x 24.85$ 27.8% $27.00 38.9% Oversupply in the market and operational, acquisition and integration risks
BKD Brookdale Senior Living Inc. Outperform Senior Housing $18.58 0.0% 1.28$ 2.11$ 14.5x 8.8x 0.0% 64.5% 23.79$ 11.30x 23.53$ 28.0% $24.00 29.2% Oversupply in the market and operational, acquisition and integration risks
Ticker Company Current Rating Sector
Share
Price
Div.
yield
2009E
EPS
2010E
EPS 2009E P/E 2010E P/E
2009E EPS
Growth
2010E EPS
Growth DCF WACC%
Perpetual
FCF
Growth
Current
Return to
DCF
Target
price (2)
Total
return
potential Risk factors to price targets
JLL Jones Lang LaSalle Perform Brokers $62.85 0.32% $ (0.03) $ 3.12 -2171.1x 20.2x -101% NA $46.03 9% 4.00% -26.76% NA NA Acquisition risks
Ratings distribution
OUTPERFORM 9
PERFORM 23
UNDERPERFORM 5
TOTAL 37
Note
(1) A higher than expected rise in interest rates generally pose a risk to real estate valuation across all REITs. Similarly higher than expected construction and operating costs are a risk across the entire REIT sector.
(2) Price targets are derived using a premium/discount to our forward net asset value (NAV) estimate
* 2009 FFO Growth estimates are generated using normalized numbers
**Return calculations exclude applicable costs, including interest and commission.
1/11/2010
Source: Company Data, Oppenheimer & Co. estimates, SNL, Factset
REITs/REAL ESTATE
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Exhibit 60: Stocks Mentioned Which Opco Does Not Cover:
Company Name Ticker Price DateGeneral Growth Properties GGP Not Trading 1/12/2010
Source: Oppenheimer & Co. estimates, company reports
REITs/REAL ESTATE
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Price Target Calculation
Our price targets are based on a premium/discount to our 12-month forward net asset value (NAV) calculations. The premium/discount
allotted is determined by our view of the quality of the company's assets, management and markets, as well as our outlook for growth in
the portfolio. Our 12-month forward NAV estimates are $8.50 for YSI, $43 for HCN, $17 for FCEA, $58 for AVB, $9 for CBL, $23 for
MAC, $27 for EGP, $35 for SKT, $43 for CPT, $18 for AIV, $68 for PSA and $27 for TCO. We believe PSA should trade at 18.7X
12-month forward FAD, a 25% premium to our 15X target multiple for the storage sector, and at a 25% premium to our 12-month forward
NAV of $68, resulting in a price target of $85. Our $43 price target for SKT assumes it trades at ~20X 12-month forward FAD, and at a
25% premium to our 12-month forward NAV. We believe HCN should trade at a premium to its NAV in line with HCP (19% premium) and
VTR (17% premium), which justifies a $49 price target. Our $65 price target for AVB is based on a 12% premium to our forward NAV
estimate of $58 (versus where the shares trade at a 19% premium to NAV). Our $19.50 price target for AIV and $48 PT for CPT are
based on our belief that a 10.6% premium to our forward NAV estimate of $18 for AIV and 15% premium to forward NAV of $42.50 for
CPT are justified because apartment peers trade at a 17.6% premium to NAV. Our $28 price target assumes shares of MAC trade at
15.8X 12-month forward FAD of $2.17, and at a modest premium to our 12-month forward NAV of ~$23. Our $29 price target assumes
that EGP trades at 13x 12MF FAD of $2.19 and at a slight premium our 12MF NAV of $27. Given TCO's strong portfolio, and solid
balance sheet, we believe a 10% premium to 12MF NAV is reasonable. Our price target for YSI assumes that it trades in line with our
calculated 12-month forward NAV of $8.50, and at 16x estimated 12-month forward FAD. The implied nominal cap rate range for our
companies under coverage is 5.2-10.5%.
For BKD and ESC, our price targets are based on implied cash flow from facility operations target multiples of 11.3X and 12.3X,
respectively, which are based on a premium to their long-term average of ~11.5X 12-month forward-looking cash flows. We believe a
premium is justified given our expectations for solid internal growth and additional acquisitions/lease agreements over the next 6-12
months. Our 12-month forward implied price per share is $24 for BKD and $27 for ESC.
Key Risks to Price Target
Risks to our price targets for our Outperform-rated names include greater declines in demand for CRE driven by greater job losses,
reduced business formation, negative consumer sentiment and decreased discretionary spending. We would expect these factors to
result in reduced rent and occupancy levels and higher borrowing costs, driving up property-level cap rates. Risks to our price targets for
our Underperform-rated names include improved growth in CRE demand, stabilizing operating fundamentals and flattening of the yield
curve reflecting a stabilizing of borrowing costs and implied property cap rates.
Companies with Updates:OUTPERFORMPublic Storage(PSA,$77.98)Tanger Factory Outlet Centers(SKT,$38.33)
PERFORMWashington REIT(WRE,$27.14)HCP, Inc.(HCP,$30.24)Sovran Self Storage, Inc.(SSS,$35.36)BioMed Realty Trust, Inc.(BMR,$15.49)Weingarten Realty(WRI,$20.84)Ventas, Inc.(VTR,$43.66)
UNDERPERFORMCBL & Associates Properties(CBL,$10.15)Macerich Company(MAC,$32.23)
Important Disclosures and CertificationsAnalyst Certification - The author certifies that this research report accurately states his/her personal views about the
subject securities, which are reflected in the ratings as well as in the substance of this report.The author certifies that no
part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views
contained in this research report.
Potential Conflicts of Interest:
Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firm
REITs/REAL ESTATE
46
including the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensation
based upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any
research analyst and any member of his or her household from executing trades in the securities of a company that such
research analyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an
officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in
covered companies that are required to be specifically disclosed in this report, Oppenheimer & Co. Inc. may have a long
position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in
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foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of
interest.
Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered byOppenheimer & Co. Inc:
Stock Prices as of January 13, 2010
Apartment Investment & Management Co. (AIV - NYSE, 16.55, OUTPERFORM)Camden Property Trust (CPT - NYSE, 39.77, OUTPERFORM)Emeritus Corp. (ESC - NYSE, 18.78, OUTPERFORM)U-Store-It (YSI - NYSE, 7.15, OUTPERFORM)Forest City Enterprises, Inc. (FCE.A - NYSE, 11.20, OUTPERFORM)Brookdale Senior Living Inc. (BKD - NYSE, 18.03, OUTPERFORM)Tanger Factory Outlet Centers (SKT - NYSE, 38.33, OUTPERFORM)Health Care REIT (HCN - NYSE, 43.77, OUTPERFORM)HRPT Properties (HRP - NYSE, 6.35, PERFORM)Senior Housing Properties Trust (SNH - NYSE, 21.52, PERFORM)UDR, Inc. (UDR - NYSE, 15.60, PERFORM)ProLogis (PLD - NYSE, 13.59, PERFORM)Kimco Realty Corp. (KIM - NYSE, 13.74, PERFORM)Public Storage (PSA - NYSE, 77.98, OUTPERFORM)Urstadt Biddle Properties, Inc. (UBA - NYSE, 14.54, PERFORM)HCP, Inc. (HCP - NYSE, 30.24, PERFORM)Boston Properties Inc. (BXP - NYSE, 67.49, PERFORM)Sovran Self Storage, Inc. (SSS - NYSE, 35.36, PERFORM)Simon Property Group, Inc. (SPG - NYSE, 75.19, PERFORM)Jones Lang LaSalle Inc. (JLL - NYSE, 60.46, PERFORM)BioMed Realty Trust, Inc. (BMR - NYSE, 15.49, PERFORM)Alexandria Real Estate Equities (ARE - NYSE, 63.34, PERFORM)Extra Space Storage (EXR - NYSE, 11.18, PERFORM)Federal Realty Investment Trust (FRT - NYSE, 66.01, PERFORM)Regency Centers (REG - NYSE, 35.15, PERFORM)Weingarten Realty (WRI - NYSE, 20.84, PERFORM)Ventas, Inc. (VTR - NYSE, 43.66, PERFORM)Nationwide Health Properties (NHP - NYSE, 34.53, PERFORM)Healthcare Realty Trust (HR - NYSE, 21.07, PERFORM)Taubman Centers (TCO - NYSE, 33.67, UNDERPERFORM)AvalonBay Communities, Inc. (AVB - NYSE, 78.59, UNDERPERFORM)Washington REIT (WRE - NYSE, 27.14, PERFORM)EastGroup Properties Inc. (EGP - NYSE, 36.93, UNDERPERFORM)CBL & Associates Properties (CBL - NYSE, 10.15, UNDERPERFORM)Macerich Company (MAC - NYSE, 32.23, UNDERPERFORM)
All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer &
REITs/REAL ESTATE
47
Co. Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price
histories, please write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017, Attention: Equity Research
Department, Business Manager.
Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:
Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.
Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.
Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.
Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential
conflict of interest.
Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:
Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments,
and/or the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.
Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to
a perceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than
higher rated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy,
aggressive trading accounts might decide to liquidate their positions to employ the funds elsewhere.
Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness
perceived in the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.
Distribution of Ratings/IB Services Firmwide
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
OUTPERFORM [O] 385 45.70 136 35.32
PERFORM [P] 411 48.80 108 26.28
UNDERPERFORM [U] 47 5.60 6 12.77
Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not
correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned
buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.
Company Specific DisclosuresIn the past 12 months Oppenheimer & Co. Inc. has provided investment banking services for HRP, SNH, HCP, and BMR.
REITs/REAL ESTATE
48
Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3
months from HRP, SNH, HCP, and BMR.
In the past 12 months Oppenheimer & Co. Inc. has managed or co-managed a public offering of securities for HRP, SNH,
HCP, and BMR.
In the past 12 months Oppenheimer & Co. Inc. has received compensation for investment banking services from HRP,
SNH, HCP, and BMR.
Additional Information Available
Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017,
Attention: Equity Research Department, Business Manager.
Other DisclosuresThis report is issued and approved for distribution by Oppenheimer & Co. Inc., a member of all Principal Exchanges and SIPC. This
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REITs/REAL ESTATE
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Copyright © Oppenheimer & Co. Inc. 2010.
REITs/REAL ESTATE