EFTA Document EFTA01437758

Deutsche Bank Markets Research North America United States Financial REITs Industry US REIT 3Q16 Earnings Preview REIT pullback & low bar could spark 3Q rallies, but don't get too excited House view remains constructive for REITs as fundamentals moderate Following a strong start to 2016 the REITs have traded off 10% since 8/1. The decline coincides with a 30bps rise in the 10-year yield and increasing probabilities of a Dec rate hike. While painful, the move has reset valuations, which now appear much healthier. As we have stated in the past, we think the REITs remain in macro limbo, with expectations regarding yields and overall risk appetites trumping bottom up trends. Given the DB house view, which calls for muted GDP growth, a stable 10-year environment, and no recession through 2017, combined with less aggressive REIT valuations, we think the stocks have a little room to run if 3Q can exceed low expectations. Data Centers remain our focus, despite expected leasing volume decline Following several Q's of record leasing we think the Data Centers could be poised to see some moderation in 3Q as activity naturally ebbs and flows. There are some concerns that public cloud players may take a pause in leasing activity following a rapid period of expansion, but with penetration of cloud workloads still low, we think any such pause would be temporary. Also, with the 10% and 14% drops in DLR and CONE, respectively since 8/1, we think expectations are low, making for an interesting setup for 2 names with secular demand drivers and above average growth prospects over the next few years. Strip valuations looking better, but Sports Authority optics could be a challenge Last Q we got less positive on the Strips as valuations had gotten ahead of fundamentals. With the markets seemingly feeling less risk averse, the Strips have pulled back by 11%, easing valuation concerns. 3Q could be optically challenging, however, as the impact from the Sports Authority bankruptcy, as flagged as it has been, finally hits reported SS NOI results. We will be more focused on how much progress has been made on releasing these boxes and who else might be next, with Golfsmith's bankruptcy a much smaller impact on the space. With still substantial relative value discounts in the space, we remain constructive on Buy-rated RPT, RPAI, and BRX. Slowing trends expected in the Apartments, Malls, and Office sectors._ We are looking for moderating fundamentals for the Apartments and Office as supply in gateway markets remains elevated and job growth has slowed. While the issues in S.F. and NYC have been making headlines for some time, we will be focused on L.A. where job growth has decelerated for the past 2 months and D.C. where trends have improved. SLG, however, appears to have had another good leasing Q, with 2.3msf of YTD activity as of mid-September EFTA01437758 suggesting over 800ksf of deals signed with a couple of weeks left in 3Q. _Healthcare fundamentals healthy, but investment volumes remain soft Health care operating trends were positive in the Q per data from NIC, as occupancy was up and rent growth improved versus last Q. Although we have been concerned about pending supply, demand appears to be healthy. Concerns about the acquisition environment, however, remain; with Sr. Housing transaction volume continuing to fall in 3Q and VTR's recent acquisitions in the life sciences and hospital segments also suggesting fewer opportunities in traditional Sr. Housing. Estimates, valuations, and risks Our target prices are based on our forward NAV estimates and earnings multiples. Risks are supply/demand imbalances and capital market conditions. See pgs 54-55 for a summary of our target price and estimate changes. Date 18 October 2016 Results Vin Chao, CFA Research Anal st Mike Husseini, CFA Research Associate Vlad Rudnytsky Research Associate WPM Research Associate Research Associate Key Changes Company CIO.N CONE.OQ DLR.N Source: Deutsche Bank Target Price 15.00 to Rating 15.50(USD) 60.00 to 59.00(USD) 112.00 to 108.00(USD) EFTA01437759 Deutsche Bank Securities Inc. Distributed on: 18/10/2016 05:00:00 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. EFTA01437760 18 October 2016 REITs US REIT 3Q16 Earnings Preview Table Of Contents REIT 3Q16 preview 3 Set up into 3Q better than it's been in a long time_ 3 ...but catalysts remain elusive 4 Data Centers remain our favorite property type 4 Strip REIT valuations looking better, but Sports Authority optics could be a challenge 5 Slowing trends expected in the Apartments, Malls, and Office sectors... 5 ...Healthcare fundamentals healthy, but investment volumes remain soft 5 3Q16 earnings call schedule 6 REIT outlook Macro outlook calling for sub 2.0% GDP growth and continued low yields 7 CRE fundamental slowing, but still growing 8 Pricing in the private markets proving resilient 9 Unsecured markets remain healthy 10 DB REIT coverage trading at a 7.1% discount to consensus NAV meaningfully below the 5.0% premium seen in July 11 Rising yields weighing on REIT stocks 12 REIT performance trends 13 DB REIT coverage returns 13 Index level performance 14 Sector Previews 15 Apartment: Slowing job growth and new supply continue to impede rent growth EFTA01437761 15 Malls: Rising demand headwinds and slowing SS NOI growth expected 22 Shopping Centers: Store closures to hit 3Q internal growth, but progress for retenanting more important 27 Office: Valuations remain attractive, but specter of recession remains an overhang 37 Data Centers: Measuring growth in years not quarters 43 Industrial: Fundamentals remain solid, backed by e-commerce and retail demand 47 Healthcare: Rents continue upward climb as primary markets mostly shrug off new supply 49 Summary of ratings and estimate changes 54 Valuation and risks 56 DB REIT comp sheet 57 Page 2 Deutsche Bank Securities Inc. EFTA01437762 18 October 2016 REITs US REIT 3Q16 Earnings Preview REIT 3Q16 preview Set up into 3Q better than it's been in a long time... Broad-based sell-off since 8/1/16 Since the YTD peak on 8/1, the RMZ has dropped by almost 10% versus a 1.3% drop for the S&P500. Uncertainty regarding the direction of rates remains an issue with the 10-year yield ranging from as low as 1.50% to as high as 1.80% over that time. Concerns ranging from the potential for nearer-term rate hikes, the impact of the U.S. election, and to the probability of a recession have all been cited as reasons for the weakness, but overall the market's taste for yield appears to have diminished since early August with the S&P Electric Utilities Index also falling over 7%. The pullback in the REITs could also simply reflect profit taking on a group that has outperformed for most of the year and was trading almost 2 standard deviations above historical multiple averages at the YTD peak established on 8/1. With the stocks now back in line with historical multiples, our coverage trading at an 8% discount to NAV, and with low expectations into the Q, we think the setup for the group is better than it's been in a while. Figure 1: YTD RMZ performance 10.0% 15.0% 20.0% 25.0% -15.0% -10.0% -5.0% 0.0% 5.0% as of 10-14-16 Source: Deutsche Bank, SNL MSCI US REIT (RMS) Figure 2: Performance by risk bucket since 8/1/16 -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% -7.7% -8.4% -9.0% EFTA01437763 Small Cap Mid Cap -9.5% Large Cap Div Yield >3.5% as of 10-14-16 Source: Deutsche Bank, SNL Property sector performance more nuanced The market's improving economic outlook has helped reduce near-term recession fears and pushed 10-year yields higher over the past few months, which has led to significant underperformance of Freestanding Retail (triple nets), which have fallen 11% since 8/1 but remain a top performing sector YTD at +25%. Other more economically sensitive property types like Office and Apartments, which were some of the weakest performers earlier in the year, have done "less bad" in the post 8/1 period down only 7% and 8.4%, respectively. While yield concerns have weighed on REITs overall over the past few months, performance by property type was not just yield driven, with Data Centers falling almost 8% since 8/1 after running up 36% YTD up to that point. Concerns about a near-term pullback in hyper-scale cloud demand and the lack of near-term flow through from recent leasing activity drove some profit taking in a group that remains up over 25% YTD. Malls have also fared poorly Deutsche Bank Securities Inc. Page 3 -8.4% -8.9% -10.1% -10.1% Div Yield <=3.5% High Growth >5.0% '16 FFO growth Low Growth <=5.0% '16 FFO growth Change since 08/01/16 Debt / Debt / EBITDA >5.0x EBITDA <=5.0x EFTA01437764 Avg volume > 1MM Avg volume <= 1MM -7.9% -9.1% -8.3% EFTA01437765 18 October 2016 REITs US REIT 3Q16 Earnings Preview in the face of slowing rent spreads and NOI growth, while concerns about retailer health, in particular teen apparel and department stores remain in high focus. Malls as a group have dropped 14% since 8/1. Industrial, which remains an investor favorite as e-commerce demand and rational supply growth make it one of the few property types seeing improving internal growth and continued development opportunities, is up 25% YTD and down only 6.5% since early August. Healthcare, which is typically considered defensive and more yield oriented has not pulled back as much as we would have thought. Figure 3: REIT performance pre 8/1/16 40.4% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% -5.0% 0.0% 5.0% 36.4% 36.0% 33.6% 25.5% 22.6% 20.6% 17.9% 17.8% 14.8% 7.2% Figure 4: REIT performance post 8/1/16 -1.4% -16.0% -14.0% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% -6.5% -6.9% -7.8% -8.4% -8.4% -10.2% -10.4% -10.8% -10.9% -10.9% -12.7% -13.6% YTD as of 8/1/16 Performance Since 8/1/16 EFTA01437766 Source: Deutsche Bank, SNL Source: Deutsche Bank, SNL ...but catalysts remain elusive While the set up is good, we aren't expecting 3Q to provide a lot of sparks to the upside as only a handful (BXP, FRT, GGP, CLI, SRC in our coverage) are expected to provide initial 2017 guidance this Q and internal growth trends are likely to slow for the Apartments, Malls, and Strips, while leasing volumes for CBD office could also moderate with D.C. in election related lock down and S.F. job growth slowing. NYC, however could surprise to the upside with JLL reporting a pickup in 3Q office net absorption versus the past few quarters. SLG also reported YTD leasing activity as of mid-September that suggested another strong quarter of leasing in 3Q. Data Centers remain our favorite property type Data center leasing volume, recently driven by accelerating hyper-scale cloud demand, has also come into question as there has been some discussion of a near-term pullback in demand from this group. Additionally, there could again be some flow through concerns as any 3Q leasing activity is unlikely to have a significant impact on 2016 revenues given commencement timing. CONE, which has been one of the biggest beneficiaries of the aforementioned hyperscale cloud demand, could see the biggest deceleration in volumes in our data center coverage from recently-elevated levels, but we think this is already reflected in the 14% decline in the shares since 8/1. CONE also remains the cheapest on AFFO, despite its recent equity raise that took leverage down to the mid-4x range. We also think expectations for DLR are low, with leasing activity trailing its peers for most of the post Telx acquisition period, still no backfill for the head of sales role, and the stock off 10% since early August. If Page 4 Deutsche Bank Securities Inc. EFTA01437767 18 October 2016 REITs US REIT 3Q16 Earnings Preview DLR can follow up on its already reported strong early 3Q leasing activity, we think the stock could see a nice near-term move higher. Strip REIT valuations looking better, but Sports Authority optics could be a challenge Last quarter we got less positive on the Strips as valuations had gotten ahead of fundamentals as investors sought the safety of grocery-anchored Strip centers with stable, albeit unexciting internal growth preferred given macro uncertainties. With the markets seemingly feeling less risk averse, the Strips have pulled back by 11%, pushing valuations into much more comfortable territory. The group continues to benefit somewhat as a safety trade, as reflected in smaller discounts to NAV than most of our coverage. Within the Strips, there remains a substantial, and in our view unwarranted, disparity in valuations, which we think will narrow as markets become more comfortable with the improving operating and financial risk profiles of Buy-rated names like RPT, RPAI, and BRX. 3Q could be optically challenging, however, as the impact from the Sports Authority bankruptcy, as flagged as it has been, finally hits reported SS NOI results. We will be more focused on how much progress has been made on releasing these boxes and who else might be next, with Golfsmith's bankruptcy a much smaller impact on the space. Slowing trends expected in the Apartments, Malls, and Office sectors... We are looking for moderating fundamentals for the Apartments and Office as supply in gateway markets remains elevated and job growth has slowed. While the issues in S.F. and NYC have been making headlines for some time, we will be focused on L.A. where job growth has decelerated for the past 2 months and D.C. where trends have improved. SLG, however, appears to have had another good leasing Q, with 2.3msf of YTD activity as of mid-September suggesting over 800ksf of deals signed with a few weeks left in 3Q. _Healthcare fundamentals healthy, but investment volumes remain soft Health care operating trends were positive in the Q, per data from NIC, as occupancy was up and rent growth improved versus last Q. Although we have been concerned about pending supply, demand appears to be healthy. Concerns about the acquisition environment, however, remain; with Sr. Housing transaction volume continuing to fall in 3Q and VTR's recent acquisitions in the life sciences and hospital segments also suggesting fewer opportunities in traditional Sr. Housing. Deutsche Bank Securities Inc. Page 5 EFTA01437768 18 October 2016 REITs US REIT 3Q16 Earnings Preview 3016 earnings call schedule Figure 5: DB Earnings Call Schedule 3016 FFO Expected Earnings Release Thursday, Oct 20 Prologis SL Green Realty Corp. Tuesday, Oct 25 Brixmor American Campus Communities, Inc AvalonBay Communities Inc. Wednesday, Oct 26 Mack-Cali Realty Corp. Simon Property Group Inc. Equity Residential QTS Realty Trust Boston Properties Inc. Thursday, Oct 27 Equity One Inc. DDR Corp. Kilroy Realty Corp. Digital Realty Trust Friday, Oct 28 Independence Realty Trust Ventas Inc. Kimco Realty Corp. Camden Property Trust Macerich Co. Monday, Oct 31 CyrusOne Inc. Tuesday, Nov 01 General Growth Properties Vornado Realty Post Properties Inc. Wednesday, Nov 02 Ramco-Gershenson Properties Trust Regency Centers Corp. Welltower, Inc. Retail Properties of America Taubman Centers Inc. Thursday, Nov 03 Paramount Group Federal Realty Investment Trust Spirit Realty Capital 4 Friday, Nov 04 Kennedy Wilson 2 Monday, Nov 07 EFTA01437769 City Office Yet to announce date American Farmland Medical Properties Trust PLD SLG BRX ACC AVB CLI SPG EQR QTS BXP EQY DDR KRC DLR IRT VTR KIM CPT MAC CONE GGP VNO PPS RPT REG HCN RPAI TCO PGRE FRT SRC KW CIO AFCO MPW BMO, 10/20 AMC, 10/19 AMC, 10/24 AMC, 10/24 AMC, 10/24 AMC, 10/25 BMO, 10/26 AMC, 10/25 AMC, 10/25 AMC, 10/25 AMC, 10/26 AMC, 10/26 EFTA01437770 AMC, 10/26 AMC, 10/27 BMO, 10/28 BMO, 10/28 AMC, 10/27 AMC, 10/27 AMC, 10/27 BMO, 10/31 AMC, 10/31 AMC, 10/31 AMC, 10/31 AMC, 11/1 AMC, 11/1 BMO, 11/2 AMC, 11/1 AMC, 11/1 AMC, 11/2 AMC, 11/2 AMC, 11/2 AMC, 11/3 BMO, 11/7 Dial In Call Time Number Code (if needed DB1 12:00PM 81585906 2:00PM ( 5055428 10:00AM 2633815 10:00AM 10092501 11:00AM 7799607 9:30AM ( ack-Cali 11:00AM 83479240 11:00AM 10:00AM 7711235 6876189 10:00AM 23629459 9:00AM 10:00AM 9742418 N/A 1:00PM ( 7486596 5:30PM 9116034 9:30AM ( 6007206 10:00AM 10:00AM 12:00PM EFTA01437771 2:00PM Ventas 3003492 6983019 7700937 11:00AM 9:00AM N/A N/A 10:00AM 10:00AM 5778078 9:00AM 10:00AM N/A N/A 10:00AM 11:00AM 11:00AM N/A 9675582 10:00AM N/A 11:00AM 11:00AM N/A 10:00AM N/A 11:00AM $0.81 $1.43 $0.50 $0.45 $2.18 $0.56 $2.65 $0.81 $0.62 $1.42 $0.27 $0.31 $0.87 $1.37 $0.19 $1.01 $0.17 $1.11 $1.04 $0.58 $0.35 $1.25 3587461 4724138 5378394 ity Office EFTA01437772 $0.80 $0.33 $0.23 $1.13 $0.25 $0.86 $0.18 $1.44 $0.19 $0.07 $0.22 $0.07 $0.30 1 DB est prior to report. In some cases this has been adjusted from prior publications for comparability to reported results 2 KW estimates refer to EPS 3 Guidance shown equates to NAREIT FF0 guidance except as noted via " * " 4 5 Spirit estimates refer to AFFO Consensus estimates are as of 10-14-16 Source: Deutsche Bank, company data, Thomson DB Proformal Cons.5 $0.69 $1.43 $0.50 $0.45 $2.08 $0.56 $2.65 $0.78 $0.62 $1.42 $0.33 $0.31 $0.87 $1.49 $0.22 $1.01 $0.38 $1.11 $1.04 $0.64 $0.36 $1.27 $0.80 $0.33 $0.80 $1.13 $0.26 EFTA01437773 $0.86 $0.19 $1.44 $0.22 $0.76 $0.26 $0.07 $0.30 $0.70 $1.50 $0.51 $0.43 $2.11 $0.55 $2.68 $0.78 $0.65 $1.43 $0.34 $0.31 $0.87 $1.44 $0.22 $1.00 $0.18 $1.10 $1.05 $0.62 $0.36 $1.27 $0.81 $0.34 $0.80 $1.14 $0.26 $0.89 $0.19 $1.42 $0.22 ($0.05) $0.26 $0.03 $0.30 FY16 FF0 Lo - pre Hi pre $2.52 $8.17 $2.03 $2.19 $8.26 $2.07 EFTA01437774 $2.58 $8.25 $2.06 $2.31 $8.46 $2.13 $10.77 $10.85 $3.05 $2.55 $5.92 $3.11 $2.65 $5.99 $1.36 $1.23 $3.36 $5.65 $0.84 $4.05 $1.34 $4.50 $4.05 $2.50 $1.51 $3.20 $1.33 $3.22 $4.50 $1.04 $3.75 $0.81 $5.62 $0.87 $1.40 $1.26 $3.44 $5.75 $0.88 $4.13 $1.42 $4.60 $4.15 $2.58 $1.55 $3.24 $1.37 $3.27 $4.60 $1.07 $3.90 $0.85 EFTA01437775 $5.68 $0.89 2016 Guidance (pre3Q16 report)3 $2.52-$2.58* $8.17-$8.25 $2.03-$2.06 $2.19-$2.31* $8.26-$8.46 $2.07-$2.13 $10.77-$10.85 $3.05-$3.11* $2.55-$2.65* $5.92-$5.99 $1.36-$1.40* $1.23-$1.26 $3.36-$3.44 $5.65-$5.75* $0.84-$0.88* $4.05-$4.13 $1.34-$1.42 $4.50-$4.60 $4.05-$4.15 $2.50-$2.58* $1.51-$1.55* N/A $3.20-$3.24 $1.33-$1.37* $3.22-$3.27* $4.50-$4.60* $1.04-$1.07* $3.75-$3.90 $0.81-$0.85* $5.62-$5.68 AFFO $0.87-$0.89 N/A N/A N/A $1.29 $1.33 $1.29-$1.33 DB1 $2.94 $8.19 $2.05 $2.33 $8.38 $2.21 DB Proformal Cons.5 $2.57 EFTA01437776 $8.19 $2.08 $2.28 $8.20 $2.12 $10.80 $10.80 $2.98 $2.54 $5.97 $3.07 $2.62 $5.97 $1.29 $1.25 $3.40 $5.53 $0.69 $4.10 $1.38 $4.53 $4.08 $2.28 $1.51 $4.88 $3.21 $1.38 $2.72 $4.50 $1.12 $3.84 $0.87 $5.65 $0.85 $1.39 $1.25 $3.40 $5.73 $0.80 $4.10 $1.50 $4.56 $4.10 $2.56 $1.54 $4.94 $3.24 $1.36 $3.27 $4.56 $1.06 $3.59 EFTA01437777 $0.85 $5.63 $0.89 ($0.21) $1.79 $0.54 $0.22 $1.29 $1.01 NA $1.29 $2.57 $8.29 $2.06 $2.25 $8.33 $2.11 $10.86 $3.08 $2.60 $5.98 $1.39 $1.26 $3.40 $5.70 $0.85 $4.12 $1.38 $4.55 $4.11 $2.56 $1.53 $4.87 $3.23 $1.37 $3.26 $4.58 $1.07 $3.84 $0.85 $5.66 $0.88 ($0.28) $1.07 $0.11 $1.26 Page 6 Deutsche Bank Securities Inc. EFTA01437778 18 October 2016 REITs US REIT 3Q16 Earnings Preview REIT outlook Macro outlook calling for sub 2.0% GDP growth and continued low yields The DB House View now calls for GDP growth of 1.3% in 2016, down modestly from 1.5% back in July, but the outlook for 2017 was pulled to +1.7% from +2.2%. DB has also adjusted its outlook for the 10-year which is expected to end 2016 at 1.75%, up 50bps from the July forecast, and is expected to increase 25bps finishing 2017 at 2.0%. Figure 6: House view Estimates Indicator Real GDP Growth Unemployment rate Compensation per empl. U.S. 10Y yield U.S. Key official interest rate Energy - WTI Energy - Brent Source: Deutsche Bank Unit % yoy % yoy USD/bbl USD/bbl 2016E 1.30 4.9 2.50 1.75 0.625 43.27 45.00 Estimates 2017E 1.70 4.6 4.50 2.00 1.125 53.00 55.00 2018E 1.90 4.6 4.50 N/A EFTA01437779 1.625 65.00 70.00 Figure 7: Real GDP growth 2.50 Figure 8: Employment and wages -4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 2.40 2.60 2.20 1.80 1.60 1.70 1.30 1.70 1.90 10.0 12.0 -0.30 -2.80 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Real GDP Source: Deutsche Bank, Bloomberg Finance LP 0.0 2.0 4.0 6.0 8.0 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Unemployment rate Compensation per empl. Source: Deutsche Bank, Bloomberg Finance LP Deutsche Bank Securities Inc. Page 7 EFTA01437780 18 October 2016 REITs US REIT 3Q16 Earnings Preview CRE fundamental slowing, but still growing Fundamentals in 3Q demonstrated relatively steady vacancy rates with some moderation in rent growth, particularly in the Apartment space, which should come as no surprise. More volatile and generally slowing job growth trends have combined with still elevated supply to drive rent growth at the national level lower by 70bps versus 2Q as landlords collectively pushed occupancy over rate with vacancy falling 10bps q/q. Rents in the Office markets also moderated from last Q, but remained healthy at +2.8% nationally, according to data from Reis, while vacancy held steady. In NYC, office net absorption showed a nice pick up from recent quarters according to JLL data, although market rents decelerated in 4 of the 5 major CBD office markets in 3Q, with DC the lone exception. Shopping center trends also demonstrated some moderation with rent growth off by 10bps from 2Q's level and vacancy up 10bps, likely due to Sports Authority related vacancy, though vacancy has been hovering near 10% since early 2015. Malls have found some equilibrium as well with the national vacancy rate at 7.8% in 3 of the past 4 quarters, while rent growth has been in the +2.0-2.2% range for the past year and a half. Healthcare, and more specifically, Sr. Housing trends were positive in 3Q, with rent growth improving by 60bps to +3.8%, while vacancy fell by 10bps q/q. Notably, construction as a percent of inventory fell, albeit modestly in the Q. Figure 9: Vacancy rates 10.0% 12.0% 14.0% 16.0% 18.0% 0.0% 2.0% 4.0% 6.0% 8.0% 16.0% Figure 10: Rent growth 10.0% 7.8% 4.4% 10.5% 10.2% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% EFTA01437781 3.0% 3.5% 4.0% 4.5% Apartment Shopping Center Malls Vacancy rate 3016 Apartment Shopping Center Malls Office Industrial Sr Housing Source: Deutsche Bank, REIS, NIC Vacancy rate Q/Q Trend -10bp 10bp -10bp Obp Obp 4.4% 10.0% 7.8% 16.0% 10.5% 10.2% -10bp 3Q16 Apartment Shopping Center Malls Office Industrial Sr Housing Source: Deutsche Bank, Reis, NIC Office Industrial Sr Housing 3.8% 2.8% 2.3% 2.0% 2.0% 3.8% Apartment Shopping Center Malls EFTA01437782 Office Rent Growth y/y Rent Growth y/y Q/Q Trend 3.8% 2.0% 2.0% 2.8% 2.3% 3.8% -0.7% -0.1% 0.0% -0.3% -0.2% 0.6% Industrial Sr Housing Page 8 Deutsche Bank Securities Inc. EFTA01437783 18 October 2016 REITs US REIT 3Q16 Earnings Preview Pricing in the private markets proving resilient Private market pricing as measured via cap rate or price indices has remained resilient, despite volatile Treasury rates, CMBS market concerns, macroeconomic uncertainty, recently moderating fundamental trends, and still weak investment volumes. The recent widening of CMBS spreads, continued declines in investment volumes, and tightening lending standards for CRE overall bear watching. Given the lagging nature of real estate and anecdotal data suggesting still wide bid/ask spreads, we don't want to be complacent about the potential for falling asset values. That said, we note the financing environment remains healthy overall, cap rate spreads to the 10-year remain wide by historical standards, and DB's house view calls for a muted economic outlook that should keep the 10-year relatively contained. We also think that global uncertainties will keep interest in U.S. CRE elevated given what we believe is a still attractive risk/reward opportunity versus global alternatives. Figure 11: National investment volume growth y/y 20.0% 40.0% 60.0% 80.0% -60.0% -40.0% -20.0% 0.0% 60% 49% 36% 27% 22% 11% 27%28% 22% 10% 15% 18% 9%13% 6% -4% -7% 3% -17% -9% -21% -37% 7% 39% 46% EFTA01437784 30% 41% -21%-23% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% Figure 12: National cap rate trends 10.00% 100 200 300 400 500 600 as of Aug-16 0 Y/Y ch in deal volume l ap Rate Spread to 10-yr Investment volumes remain weak, down 23% in August and 15% YTD, though record volumes in 2015 are making comparisons difficult IIRetail (-35%), Office (-20%), and Industrial (-17%) volumes fell the most in August, Apartment volumes fell 11% IIYTD, Industrial (-28%), Retail (-17%), and Office (12%) have experienced the biggest y/y volume declines while Apartments (+5%) delivered a y/y volume gain, mostly via Garden style deals Source: Deutsche Bank, Real Capital Analytics www.rcanalytics.com Cap Rate Avg Cap Rate Avg Spread IIWeak volumes have had little impact on cap rates, which were down 10bps m/m and 23bps y/y in August at 6.09% IICap rates fell m/m for all the major property types in August: Industrial (-2bps) experienced the smallest decline, while Office cap rates fell the most (-33bps) EFTA01437785 IIThe cap rate spread to the 10-year is about 70bps wide of long run averages Source: Deutsche Bank, Real Capital Analytics www.rcanalytics.com Deutsche Bank Securities Inc. Page 9 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 EFTA01437786 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 EFTA01437787 18 October 2016 REITs US REIT 3Q16 Earnings Preview Figure 13: Moody's/RCA CPPI index trends 0.00 50.00 100.00 150.00 200.00 250.00 300.00 Figure 14: CRE pricing versus prior peak levels 100.0% 120.0% 140.0% 160.0% 180.0% as of 08-16 20.0% 40.0% 60.0% 80.0% 0.0% Apt National Major Markets Non-Major Markets IIMay marked the 4th consecutive m/m increase post Jan and Feb declines, which were the first since early 2010 Data as of 16Q2 Retail Ind Off-CBD All Major Non-Major IISuburban Office still below prior peak IIRetail now back to prior peak levels IIApartment prices continue to rise up 8% since the end of 2015 vs a 4% rise for all properties Source: Deutsche Bank, Moody's/RCA Source: Deutsche Bank, Moody's/RCA Off-Sub National Unsecured markets remain healthy Figure 15: U.S. CMBS issuance Figure 16: U.S. REIT Unsecured Issuance $10.0 EFTA01437788 $12.0 $14.0 $2.0 $4.0 $6.0 $8.0 $$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 U.S. CMBS Issuance Source: Deutsche Bank, CMA Avg U.S. REIT Unsecured Issuance Source: Deutsche Bank, CMA Avg Page 10 Deutsche Bank Securities Inc. Dec-00 Sep-01 Jun-02 Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 in B's 149.7% 166.1% 133.8% 100.3% 118.9% 90.6% EFTA01437789 109.2% 116.7% 100.4% 139.3% 146.0% 99.0% 91.9% 99.0% 85.4% 120.6% 138.6% 105.6% EFTA01437790 18 October 2016 REITs US REIT 3Q16 Earnings Preview Figure 17: 10-year new issue AAA CMBS spreads 100 120 140 160 180 20 40 60 80 0 Figure 18: IG and HY spreads to 10Y Tsy as of 10-14-16 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 as of Sep-16 New Iss 10-yr AAA CMBS Spreads Avg IIAfter dropping back to the average level since 2014, spreads again blew out in early October IIRecent tick up in spreads appears to have been driven by portfolio quality Source: Deutsche Bank, CMA IG spread to 10-year P vg IG spread High yield spread to 10-year Avg HY spread IG spread of 147bps is down 77bps from the 224bps YTD peak in mid-February IIHY spread of 480bps is down 295bps from the 775bps YTD peak in mid-February Source: Deutsche Bank, Haver DB REIT coverage trading at a 7.1% discount to consensus NAV meaningfully below the 5.0% premium seen in July Figure 19: Historical premium/discount to NAV -7.1% discount EFTA01437791 10.0% 15.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% Figure 20: Quarterly REIT capital raising $10,000 $15,000 $20,000 $25,000 $5,000 Data as of 10/14/16 $0 Equity Debt DB Coverage Avg Median +2 st dev 2 st dev IIDB REIT coverage trading at a 7.1% discount to NAV vs a -1.4% discount historically Source: Deutsche Bank, company data, as of 10/10/16 Source: Deutsche Bank, SNL, company data Preferred Deutsche Bank Securities Inc. Page 11 Prem/(Disc) to NAV 10/14/11 1/14/12 4/14/12 7/14/12 10/14/12 1/14/13 4/14/13 7/14/13 10/14/13 1/14/14 4/14/14 7/14/14 10/14/14 1/14/15 4/14/15 7/14/15 10/14/15 1/14/16 4/14/16 EFTA01437792 7/14/16 10/14/16 EFTA01437793 18 October 2016 REITs US REIT 3Q16 Earnings Preview Rising yields weighing on REIT stocks Following a strong start to 2016 that saw the RMZ deliver a 19% total return through 8/1, the REITs have since traded off, down 10% through 10/14. The decline coincides with a 30bps rise in the 10-year yield and an increase in the probability of a December rate hike to 66% from 37%. While painful, the move has reset valuations which now appear much healthier. Our coverage is now trading at a 5.6% implied cap rate, a 7% discount to consensus NAV (8% discount to DBe), roughly in-line with historical FFO and FAD multiples, and a still wider (44bps) dividend yield spread to the 10-year. As we have stated in the past, we think the REITs remain in macro limbo, with expectations regarding yields and overall risk appetites, trumping bottom up trends However, the DB house view, which calls for muted GDP growth, a stable lOyear environment, no recession through 2017, and REIT valuations now much less aggressive, we think the stocks have a little room to run if 3Q can exceed low expectations. Figure 21: NTM P/FFO 13.0x 14.0x 15.0x 16.0x 17.0x 18.0x 19.0x 20.0x 0.0x st dev from avg Figure 22: NTM P/FAD Data as of 10/14/16 13.0x 15.0x 17.0x 19.0x 21.0x 23.0x 25.0x 27.0x 0.3x st dev from avg Data as of 10/14/16 DB Coverage Avg Data is based on consensus estimates Source: Deutsche Bank, SNL Median +2 st dev -2 st dev EFTA01437794 DB Coverage Avg Data is based on consensus estimates Source: Deutsche Bank, SNL Median +2 st dev -2 st dev Figure 23: Dividend Yield Spread to 10-year Current - Avg = 44bps 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Figure 24: Premium/Discount to NAV -7.1% discount 10.0% 15.0% Data as of 10/14/16 -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% Data as of 10/14/16 Spread Avg Data is based on consensus estimates Source: Deutsche Bank, SNL Median +2 st dev -2 st dev DB Coverage Avg Data is based on consensus estimates Source: Deutsche Bank, SNL Median +2 st dev -2 st dev Page 12 Deutsche Bank Securities Inc. Div Yield Spread to !0-yr NTM P/FFO 10/14/11 1/14/12 4/14/12 7/14/12 10/14/12 1/14/13 EFTA01437795 4/14/13 7/14/13 10/14/13 1/14/14 4/14/14 7/14/14 10/14/14 1/14/15 4/14/15 7/14/15 10/14/15 1/14/16 4/14/16 7/14/16 10/14/16 10/14/11 1/14/12 4/14/12 7/14/12 10/14/12 1/14/13 4/14/13 7/14/13 10/14/13 1/14/14 4/14/14 7/14/14 10/14/14 1/14/15 4/14/15 7/14/15 10/14/15 1/14/16 4/14/16 7/14/16 10/14/16 Prem/(Disc) to NAV NTM P/FAD 10/14/11 1/14/12 4/14/12 7/14/12 10/14/12 1/14/13 4/14/13 7/14/13 10/14/13 1/14/14 4/14/14 7/14/14 10/14/14 EFTA01437796 1/14/15 4/14/15 7/14/15 10/14/15 1/14/16 4/14/16 7/14/16 10/14/16 10/14/11 1/14/12 4/14/12 7/14/12 10/14/12 1/14/13 4/14/13 7/14/13 10/14/13 1/14/14 4/14/14 7/14/14 10/14/14 1/14/15 4/14/15 7/14/15 10/14/15 1/14/16 4/14/16 7/14/16 10/14/16 EFTA01437797 18 October 2016 REITs US REIT 3Q16 Earnings Preview REIT performance trends DB REIT coverage returns Figure 25: 1-Month REIT coverage returns MPW ACC DLR UBA KRC EQR CIO RPT PLD AVB BRX CLI QTS KIM CONE VTR RPAI EQY AVERAGE REG CPT AFCO VNO SRC PPS TCO MAC FRT SLG KW GGP SPG BXP DDR HCN PGRE IRT -10.6% 5.1% 3.0% 2.9% 2.7% 2.0% 1.8% 0.5% EFTA01437798 -0.1% -0.4% -0.6% -0.8% -0.9% -0.9% -1.0% -1.0% -1.3% -1.7% -1.9% -2.0% -2.2% -2.4% -2.6% -2.7% -2.8% -2.8% -3.3% -4.0% -4.1% -4.6% -4.7% -4.9% -5.2% -5.4% -5.6% -5.6% -5.9% as of 10-14-16 -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 1 month Returns Source: Deutsche Bank, SNL AFCO IRT KW PPS KRC BRX PLD MPW SRC SLG QTS ACC VNO VTR PGRE AVERAGE CLI TCO 6.0% EFTA01437799 RPAI BXP CIO CPT EQY HCN EQR AVB REG KIM FRT CONE SPG DLR RPT UBA MAC DDR GGP -1.6% -2.4% -2.7% -4.1% -4.1% -4.7% -4.9% -5.0% -5.1% -5.6% -5.7% -6.0% -6.2% -6.4% -6.7% -7.7% -7.8% -8.1% -8.2% -8.4% -9.5% -10.3% -10.6% -10.7% -10.7% -11.0% -11.1% -12.9% -13.4% -14.9% as of 10-14-16 -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% EFTA01437800 3 month Returns Source: Deutsche Bank, SNL Figure 26: 3-Month REIT coverage returns 22.4% 7.0% 5.1% 2.0% 0.9% 0.8% 0.6% Figure 27: 12-Month REIT coverage returns CONE DLR SRC MPW ACC IRT CLI PLD VTR QTS UBA EQY RPT REG CIO RPAI KIM AVERAGE BRX CPT PPS BXP FRT HCN DDR KRC SPG MAC VNO GGP TCO AVB EQR SLG PGRE KW -9.9% -20.0% -10.0% Source: Deutsche Bank, SNL 0.0% EFTA01437801 10.0% 20.0% 12 month Returns Source: Deutsche Bank, SNL 30.0% 20.9% 20.3% 18.8% 18.5% 18.3% 17.1% 15.3% 15.2% 14.6% 14.2% 11.0% 9.5% 9.0% 8.2% 7.8% 6.2% 6.2% 4.9% 3.4% 2.5% 0.3% -0.7% -2.2% -3.3% -5.1% -7.1% as of 10-14-16 40.0% 50.0% 30.5% 29.2% 28.8% 25.1% 46.0% 40.4% 37.7% 37.5% 36.8% Figure 28: YTD REIT coverage returns MPW CONE SRC DLR IRT VTR ACC EFTA01437802 PLD QTS UBA CLI KRC RPAI REG EQY RPT CPT AVERAGE KIM PPS BRX CIO HCN AFCO SPG FRT BXP DDR GGP MAC VNO TCO SLG AVB EQR PGRE KW -20.0% 24.3% 22.4% 22.3% 21.7% 18.2% 17.6% 14.6% 12.7% 11.6% 11.5% 9.7% 9.6% 9.4% 9.0% 9.0% 8.9% 8.2% 8.0% 5.8% 5.3% EFTA01437803 3.8% 2.7% 1.0% 0.9% -1.9% -2.8% -2.8% -4.6% -5.0% -6.2% -10.1% -11.1% -12.5% -10.0% 0.0% 10.0% YTD Returns 20.0% as of 10-14-16 30.0% 40.0% 32.9% 30.6% 30.4% 28.9% Deutsche Bank Securities Inc. Page 13 EFTA01437804 18 October 2016 REITs US REIT 3Q16 Earnings Preview Index level performance Figure 29: 1-mo broad market returns -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 0.9% 0.8% 0.5% 0.10% 0.2% Figure 30: 1-mo returns by risk bucket -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% -1.4% -1.8% MSCI US REIT (RMZ) as of 10-14-16 Source: Deutsche Bank, SNL 10 Year T Note S&P 500 Electric Utilities S&P 500 Financials 1 month S&P 500 NASDAQ Russell 2000 as of 10-14-16 1 month Source: Deutsche Bank, SNL EFTA01437805 0.2% -0.4% -0.9% -0.8% -1.2% -0.8% -1.2% -1.3% Small Cap Mid Cap Large Cap Div Yield >3.5% Div Yield <=3.5% High Growth >7.0% '17 FF0 growth -1.6% Low Growth <=7.0% '17 FF0 growth Debt / Debt / EBITDA >5.0x EBITDA <=5.0x Avg volume > 1MM -0.8% -1.2% Avg volume <= 1MM as of 10-14-16 1 Month Source: Deutsche Bank, SNL Average Figure 31: 1-mo property type returns -6.0% -5.0% -4.0% EFTA01437806 -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 1.6% 1.1% -0.3% -0.6% -0.7% -1.0% -1.7% -1.9% -2.1% -2.2% -2.3% -1.3% -4.9% Figure 32: YTD broad market returns 10.0% 12.0% 14.0% 16.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 7.2% 6.2% 4.1% 2.0% 13.5% 8.0% Figure 33: YTD returns by risk bucket 10.0% 12.0% 14.0% 16.0% 18.0% 0.0% 2.0% 4.0% 6.0% 8.0% -0.47% MSCI US REIT (RMZ) as of 10-14-16 Source: Deutsche Bank, SNL 10 Year T Note S&P 500 Electric EFTA01437807