GSA-NAV Based Pricing Model 2013

REIT Valuation
The NAV-based Pricing Model

Important disclosure on pages 36-37
660 Newport Center Drive, Suite 800, Newport Beach, CA 92660, USA
+1 949 640 8780 2013, Green Street Advisors, Inc.
An Impressive Track Record
Its All Relative
Our NAV-based Pricing Model has served as the backbone of our stock
selection process for over twenty years. The model is designed to assess
relative valuations; i.e., it identifies the REITs that are most/least
attractively valued.
The model combines NAV a great starting point and high quality
estimates are essential with the factors that impact the premiums at
which REITs should trade: franchise value, balance sheet risk, corporate
governance, and overhead. The compartmentalized nature of the model
forces discipline to consider all relevant valuation issues.
20-Year Annualized Total Return of
Green Street's Stock Recommendations*
25%
12%
-1%
Buy Universe Sell
* Past performance can not be used to predict future
performance. Please see disclosure on page 37
The NAV-based Pricing Model 2
Table of Contents Sections
I. Executive Summary 3
II. Overview 4-14
III. NAV 15-17
IV. Overhead 18-22
V. Franchise Value 23-29
VI. Balance Sheet Risk 30-33
VII. Corporate Governance 34-35
www.greenstreetadvisors.com 2013, Green Street Advisors, Inc.
Use of this report is subject to the Terms of Use listed at the end of the report
Executive Summary
Overview Our NAV-based pricing model has been a driver of our stock reccomendations for > twenty years
It has played an instrumental role in our successful recommendation track record
Compartmentalized nature of the model forces discipline to consider all relevant valuation issues
The Basics Warranted share price = NAV plus or minus a premium for future value added by management
G&A, franchise value, balance sheet risk and corporate governance impact the size of the premium
It is a relative valuation model: roughly equal number of Buys and Sells at all times
Relative approach anchors around average sector premiums at which REITs trade
The Components The impact of G&A is readily quantified and is dealt with apart from the other factors
Differences in G&A are large; they warrant large differences in unlevered asset value premiums
G&A appears to be poorly understood by REIT investors - pricing inefficiencies abound
Franchise values are inherently subjective, but objective inputs help
Management Value Added (MVA) shines a bright light on performance attributable to mgm't
Total returns relative to peers are also important
Balance sheet acumen scores give credit for broad financing menus and low debt costs
Comprehensive Leverage Ratio is a better gauge of balance sheet risk
Employs leverage ratio and coverage ratio concepts
Adjusts for unfunded development, maturity schedules, secured v. unsecured
Corporate Governance scoring system ranks the REITs in a systematic fashion
II. Overview
Our model assesses relative valuations: equal number of Buys and Sells
It has been instrumental in establishing a great twenty-year recommendation track record
Compartmentalized nature of the model forces discipline to consider all factors that matter
NAV is a great starting point, and high-quality estimates of NAV are essential
A variety of other factors cause big differences in premiums to NAV ascribed by the market
G&A is a critical factor that is not well understood by the market
Franchise value: how much value will management add (or detract) in the future?
Balance sheet risk has played a huge role in past performanceit has a big impact on pricing
The model assesses those factors and ascribes warranted premiums/discounts to NAV
That output translates into warranted share prices, our proxy for relative intrinsic value
Overview: A Disciplined Approach Toward Stock Selection
Company Research Macro Research
* Please see recommendation track record disclosure on page 37
A Key Driver of Success: The Green Street NAV-based pricing model is designed to assess the valuation of any REIT relative to
sector-level peers. The discipline and rigor the model embodies have played a pivotal role in the two-decade-long success of our
recommendation track record. While the model is designed to be neutral with regard to whether REITs in aggregate are cheap or
expensive, investors can employ other Green Street analytic tools to help assess overall valuation and/or sector allocation issues.
Stock Recomendations
The NAV-based Pricing Model, coupled with heavy analyst input,
drives our stock recommendations. The recommendations are
always market and sector neutral.
20-Year Annualized Returns of Green St Recs*
12%
25%
-1%
Buy
Universe
Sell
Overall REIT Valuation
The RMZ For ecast Tool , published
monthly, assesses overall REIT valuation vs.
bonds and stocks. Has proven very helpful in
identifying periods when REITs are badly mis-
priced.
Property Sector Allocation
The Commer ci al Pr oper ty Outlook ,
published quarterly, addresses sector-level
valuation questions with a focus on the long
term. It is based on extensive research we've
published on long-term sector performance
and cap-ex requirements.
NAV-Based Pricing Model
NAV
+ Warranted Premium to NAV
= Warranted Share Price
Overview: Why Use NAV?
Too Simplistic Far Better There is More to it Than Just NAV
Compartmentalized Analysis Looks at All Relevant Factors
Because We Can: Most equity investors focus a great deal of attention on P/E multiples and/or yields, so it is fair to question why
NAV should be the primary valuation benchmark for REITs. The short answer is that investors elsewhere would use NAV if they
could, but the concept doesn't translate well to companies that are not in the business of owning hard assets. Because the value of a
REIT is, first and foremost, a function of the value of the assets it owns, NAV is a great starting point for a valuation analysis.
Dividend Yield
FFO Yield or
Multiple
AFFO Yield or
Multiple
Discounted Cash Flow
"DCF"
We use DCF internally to
double-check results
Net Asset Value
"NAV"
Good NAV estimates are
critical and they require
serious resources
NAV: The Starting Point
The Warranted Premium to NAV
Warranted premiums are a function of:
Premiums Ascribed by the Market to
Other REITs
Franchise Value
Balance Sheet Risk
Overhead (G&A expenses)
Corporate Governance
Warranted Share Price
Used to compare valuations relative to
those of other REITs. It's fair to call it
"relative intrinsic value."
Overview: What is NAV?
REIT Balance Sheet
Book Value of Assets Book Value of Liabilities
Market Value of Assets Market Value of Liabilities
Mark It to Market: An NAV-based valuation methodology is only as good as the underlying estimate of NAV. High-quality
estimates of marked-to-market asset value require a great deal of effort and resources, but the estimate can be reasonably precise
when done properly. It is also important to mark-to-market the right-hand side of the balance sheet, as the cost of in-place debt can
stray substantially from prevailing market. Many market participants skip this important step.
Replace
With
Replace
With
Results
In...
NAV
The marked-to-market
equity value per share
Common Question: Many REIT investors
and analysts do not mark debt to maket. Is it
really necessary?
Imagine: Two identical office buildings,
except that one is encumbered by a 60%
LTV mortgage carrying a 7% interest rate
with another five years to run, while the
other has an identical loan at a 5% rate.
Which building will command the higher
price?
5%
7%
The answer is obvious to any real estate
market practitioner. Building prices are
profoundly impacted by assumed debt, and a
high-cost mortgage negatively impacts pricing.
The same holds true when those buildings are
held by a REIT and if the debt is unsecured
rather than secured. Marking assets to market
without doing the same for liabilities yields the
wrong answer.
5%
Overview: Warranted Premiums to NAV
NAV Plus or Minus? Prospective future total returns for any REIT are a function of how its real estate portfolio is likely to
perform, as well as the value that its management team is likely to add or detract. Our Pricing Model provides a systematic
assessment of the four key variables - franchise value, corporate governance, balance sheet risk, and overhead - that typically
distinguish REITs that deliver "real estate plus" returns from those in the "real estate minus" camp.
Warranted Premium to NAV
for a REIT is a Function of...
Prevailing Premiums for
Sector Peers Based on
Prevailing Share Prices
The net value that a management team is
likely to add or detract in the future
Franchise Value
A gauge of management's
propensity to add or detract
value
Capitalized Value of
Unusual G&A
This can be readily
quantified and is dealt with
apart from the other factors
that impact
premiums
Our governance scoring
system provides an annual
review
Balance Sheet Risk
Capital Structure plays a big
role in how REITs are valued
Our Pricing Model tallies up a total score
on the variables below and ranks each
REIT relative to sector peers
Whi ch i s i t, NAV or UAV?
The investment world focuses on premiums
to NAV , which are impacted by leverage,
but the mechanics of our model strip out the
distortions leverage can cause by focusing
on premiums to unlever ed asset value
(UAV) . Even though the model is UAV-
centric, the many references herein to NAV
are employed to better speak the language
most commonly used in our industry.
Overview: The Influence of Property Sectors
Each sector tends to march to its own drummer on average premiums ...to which the dispersion of premiums for all REITs can be applied
A Normal World: The starting point in calculating the warranted premium for any REIT is the sector-average premium ascribed by
the market at current share prices. An assumption is made that the dispersion of observed premiums for the entirety of our
coverage universe serves as a good indicator of how premiums should be dispersed in any given sector. REITs that stack up better
in the Pricing Model relative to their sector peers are then ascribed better-than-average warranted premiums, and vice versa.
Dispersion of Observed Premiums - All REITs
-20% -15% -10% -5% 0% 5% 10% 15% 20%
Premium to Asset Value vs. Sector-Peers
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St Dev 5%
Observed Average Premium to Asset Value
-5%
-2%
0%
5%
20%
5%
Apts Office Mall Industrial Strip Health Care
Dispersion of Warranted Premiums Across Sectors
-20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%
Premium to Asset Value
Apts Office Mall Industrial Strip Health Care
Relative Model:
Avg Obs Premium =
Avg Warr Premium
Why Sector Premiums Vary
There are three primary reasons:
1) REIT investors often disagree
with private-market valuations
2) Some sectors may offer more
lucrative growth opportunities.
3) A sector full of "A-students"
should trade better
The model is neutral with regard
to sector valuations.
Overview: The Drivers of Asset Value Premiums
Ranking the REITs: The warranted premiums emanating from our Pricing Model are a function of four key inputs: franchise
value, balance sheet risk, corporate governance, and overhead. The impact that overhead should have on the asset value premium is
readily quantified, while the other three variables are scored independent of each other. The aggregate score is then compared to
scores of sector peers to translate it into a premium to unlevered asset value.
Warranted Premiums to Unlevered Asset Value in the
Office Sector as of December 2012
-15% -10% -5% 0% 5% 10% 15%
BPO OFC
BDN SLG VNO KRC DEI
CLI CUZ WRE PDM HIW BXP
Franchise Value - 60 Points
Objective Inputs + Subjective Control
Balance Sheet Risk
30 Points
Measured by
Comprehensive Leverage
Ratio (see page 32)
10 Points
Based on Green Street's annually
updated corporate governance
score (see page 35)
- MVA Score (see page 25)
- Relative Total Returns
- Balance Sheet Acumen Score
(see page 29)
Overhead
The warranted premium to UAV
emanating from G&A
=
Variance between a company's G&A
ratio and the sector avg
All-REIT cap rate

Analysts have the final say on
the biggest question: How
much shareholder value is this
company likely to create?
Overview: The Output
It's All Relative: The output of the model consists of warranted premiums to unlevered asset value (UAV). This output can be
translated into warranted premiums to NAV and/or warranted share prices. Alternatively, mis-priced stocks can be readily
identified by comparing warranted premiums to UAV with observed premiums (based on current share prices) to UAV. The model
is a RELATIVE valuation model and answers the question: "Which REITs in a given property sector offer the most/least attractive
valuations?"
Warranted vs. Observed UAV Premiums
-15%
-10%
-5%
0%
5%
10%
15%
-15% -10% -5% 0% 5% 10% 15%
Warranted UAV Premium vs. Property-Sector Peers
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Cheap REITs
Expensive
REITs
and low-quality REITs
can be cheap...
Translating the Model's Output into
Recommendations
The Model helps identify mis-priced stocks...
...but Analysts, not the model, ascribe
investment recommendations
Recommendations are market neutral
- Equal number of Buys and Sells
- Roughly 25% Buys and Sells
- Roughly 50% Holds
Recommendations are Sector neutral
- Balanced number of Buys/Sells in each sector
- Each sector runs "its own" model
High-quality REITs can be
over-priced...
Company Quality
Weak Strong
Overview: Unlevered Asset Value is the Base
Dont be Fooled by Leverage: The factors that cause REITs to trade at premiums impact the value of the entire firm, not just the
equity portion. Because of that, it is essential to ascribe warranted premiums to unlevered asset value (UAV) before factoring in
leverage to derive the warranted share price.
The Impact of Leverage on Warranted Premiums to NAV
-60%
-40%
-20%
0%
20%
40%
60%
-20% -15% -10% -5% 0% 5% 10% 15% 20%
Premium to Unlevered Asset Value
P
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N
A
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REIT with 30% Leverage
REIT with 60% Leverage
Leverage magnifies the impact of the
strengths and weaknesses that cause
premiums to unlevered asset value. It is
inappropriate to compare the NAV
premiums of two REITs without
considering their leverage profiles.
Miller and Modigliani's Proposition I:
A firm's value is independent of its capital
structure. Said differently, just as you can't
make a pizza bigger by cutting it into more
slices, adding leverage does nothing to
increase firm value.
More from M&M: Capital structure can
negatively impact firm value when
potential costs of financial distress
become material. This is the foundation
for why Balance Sheet Risk is part of the
model.
Overview: The Pricing of Risk
Risk On, Risk Off: The market constantly reassesses how it prices risk in both the bond and REIT markets. Our pricing model
does the same. A tight dispersion of observed premiums to asset value in the REIT market beget a tight dispersion of warranted
premiums.
The differential in observed premiums has shrunk
a lot in the last year. This warrants a tightening of
the output warranted premiums. Said differently,
great REITs will not be ascribed quite as much
credit, while lesser REITs will look better.
The Dispersion of Observed Premiums to UAV vs
Risk Premia in the Bond Market
1%
2%
3%
4%
5%
6%
7%
8%
'05 '06 '07 '08 '09 '10 '11 '12
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0 bp
100 bp
200 bp
300 bp
400 bp
500 bp
600 bp
700 bp
REITs: St Dev of Observed Prem to UAV vs. Peers Bonds: High-Yield vs. BBB
B
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Fixed Income Risk
Premium = Junk Yield
less Invesment-Grade
Yield
Dispersion of Warranted Premiums
Premium to asset value vs. sector-peers
-20% -10% 0% 10% 20%
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New
Prior
Overview: Investment Style
Are We Quality Snobs? Yes, but we try our best not to be. REITs with higher quality (i.e., low cap rate) properties and low
leverage tend to screen as attractively valued in our model, and those tend to be REITs with low dividend yields. The model is
designed not to have such a bias: that it does have a bias reflects a quirk about how REITs are priced in the marketplace. With many
investors focusing undue attention on yields (regardless of whether they're based on dividends, FFO, or AFFO), quality, safety, and
growth are usually on sale.
Composition of our Buy & Sell Portfolios
54%
43%
62%
43%
30%
40%
50%
60%
70%
Buys Sells
High Prop Quality Low Div Yld
Our model is explicitly designed to be neutral
with regard to qualitative issues. REITs that
own lesser quality assets can be cheap and
vice versa. We defer to private-market pricing
to help make that call.
But, our Buy portfolio is typically overweighted with REITs that
have high property quality and low dividend yields. The opposite is
true for our Sells.
Annualized Ten-Year Returns
8.8%
13.4%
12.4%
10.1%
5%
10%
15%
High
Dividend
Yield
Low
Dividend
Yield
Above-Avg
Property
Quality
Below-Avg
Property
Quality
A quality bias is okay, however, as
many REIT investors "chase yield".
High-yielding REITs are typically
overpriced as a result, a phenomenon
that has translated into lower total
returns.
Quality
Junk
III. NAV
An NAV-based valuation model is only as good as the underlying NAV estimates
Green Street devotes a great deal of resources toward producing high-quality NAV estimates
Caveat emptor with regard to other sources of NAV estimates
Our US research team includes 25 full-time professionals
Mark debt to market - this is often overlooked in some estimates
Cap-ex complicates the analysis, but it must be considered
NAV: Where Do Green Street NAVs Come From?
Hard Work: There are plenty of providers of REIT NAVs, but no one takes it more seriously than Green Street. We devote a great
deal of resources toward deriving the best possible estimates of NAV because it has always been the driver of our valuation
conclusions.
A Large Research Team
Kicking the Tires
Extensive property visits
Deep market contacts - public & private
Lengthy coverage of most REITs
Strategic partner: Eastdil Secured
Real Estate Data Sources
Cap-ex: the 500-Pound Gorilla
25 full-time research professionals in US
We take NAV seriously
It has always driven our Pricing Model
Green St's property databases are extensive
We use other research vendors: RCA,
REIS, CBRE, Axiometrics, RE Alert, etc.
Local leasing and sales brokers
Capitalized costs are big and they need to be considered
They vary a lot even among REITs in the same sector
Cap-ex is broadly misunderstoodwe have studied extensively
Market participants universally underestimate cap-ex
NAVs need to be based on NOI after factoring in cap-ex
NAV - A Simplified Example
The Adjustments:
A.
Balance Sheet for REIT XYZ (X's $1,000)
Book Value Current Value
Real Estate Assets
Operating Real Estate $8,500,000 $9,350,000
$2,250,000 B.
Construction in Progress $500,000 $650,000
Land $200,000 $170,000
C.
D.
Equity in Unconsolidated JVs $1,000,000 $0
Value of Fee Businesses $0 $800,000
Other Assets $100,000 $70,000
E.
Total Assets $10,300,000 $13,290,000
Liabilities $5,000,000 $5,250,000
$1,500,000
Preferred Stock $500,000 $500,000
F.
Shareholders Equity $4,800,000 $6,040,000 G.
Fully Diluted Shares 200,000 204,750
NAV $24.00 $29.50 H.
Calculating NAV - A Simplified Example
Analyze
Market Value
and Replace
Fee Income: Some REITs generate asset management/property
management fees associated with JV structures. This fee income
can be lucrative, and the range of appropriate multiples to apply is
dependent on the quality of the fee stream. This value is not
reflected on GAAP balance sheets.
Other Assets: REITs often have a material amount of intangible
assets, which are deducted for this exercise.
Construction in Progress: Adjustments to the book value of CIP
reflect the extent to which stabilized yields are likely to exceed an
appropriately high risk-adjusted return bogey.
Fully Diluted Shares: Ensure that all in-the-money options,
converts, etc. are included in the share count.
JV Accounting is a Mess: Because of that, we present a pro-rata
allocation of assets and liabilities. There is no reliable way to
otherwise value JV interests, as leverage within the JV typically
renders more simplified approaches useless. A pro-rata allocation
also does a much better job of showing leverage that may be
embedded, but otherwise hidden, in JV investments.
Operating Real Estate: Usually the most important part of an NAV
analysis. A 12-month look-forward estimate of NOI is calculated, the
magnitude of an appropriate cap-ex reserve is determined, and an
appropriate cap rate is applied to economic NOI (NOI less cap-ex).
The quality of the analysis rests on an in-depth knowledge of
prevailing cap rates, the appropriate cap-ex treatment for each REIT,
and other required industry- and company-specific adjustments (e.g.
seasonality, one-time items, etc.).
Liabilities: Mark-to-market adjustments are necessary where:
subsidized financing is present, or market interest rates are
materially higher or lower than contract rates on the REIT's debt.
Land: Land values can be much higher or lower than book.
A
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IV. Overhead
The impact that G&A should have on the premium to unlevered asset value can be readily quantified
Unusually high or low G&A (as a % of assets) should be capped
G&A is a big deal: It warrants premiums to UAV of 5% or more for quite a few REITs
The market appears to put too little weight on G&A. Do NAV-centric investors stop at NAV?
G&A is strongly connected with company size, although exceptions certainly exist
Overhead: Translating into Warranted Share Price
How G&A tr anslates to War r anted An example for two mall REI Ts
Shar e Pr i ce Sector average G&A Ratio = 0.50%
Observed Avg Prem to Asset Value = 6%
A Big Deal: A dollar of cash flow devoted to G&A is worth the same as a dollar of cash flow at the property level, and efficiency
differences between REITs can have a profound impact on share valuation. The impact on appropriate unlevered valuations can be
calculated by capping those differences at the all-REIT cap rate and adding or subtracing that figure directly as a warranted
premium to unlevered asset value. G&A differentials can easily warrant double-digit percentage differences in share prices.
Extent to which normalized
(G&A/Asset Value) is lower or
higher than peer average
Avg Nominal All-REIT Cap Rate
A standardized cap rate is appropriate, as
there is no reason why G&A should be
valued differently across REITs
Warranted Premium to
Asset Value from G&A
Efficient Co Bloated Co
Efficient Co
Warranted UAV Premium from
G&A = 3.3%
(i.e., -20 bps/6% cap rate X -1)
Warranted UAV Prem Prior to
Considering Other Model
Variables = 9.3%
Bloated Co
Warranted UAV Premium from
G&A = -5.0%
(i.e., 30 bps/6% cap rate X -1)
Warranted UAV Prem Prior to
Considering Other Model
Variables = 1.0%
G&A Ratio = 0.30%
- Sector Avg = 0.50%
= Excess G&A = -20 bps
G&A Ratio = 0.80%
- Sector Avg = 0.50%
= Excess G&A = 30 bps
6% Currently
6%
Share Price Differential
at 50% Leverage 17%
Overhead: Does the Market Get it Right?
A Flimsy Connection: The impact that G&A would be expected to have on premiums to asset value is as large as 5-10% for
outliers. It is, therefore, reasonable to expect a strong link between G&A ratios (G&A/Asset Value) and observed premiums to
unlevered asset value. In reality, however, the link between the two is surprisingly weak. It appears that the market doesn't do a
particularly good job taking G&A into account.
Warranted Premiums to Asset Value from G&A vs. Observed Premiums
-15%
-10%
-5%
0%
5%
10%
15%
-10% -5% 0% 5% 10%
Warranted Premium (vs. Peers) Due to Unusually High/Low G&A
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This is a surprisingly weak relationship.
There are a lot of high-cost providers that
trade at premiums and vice versa.
R
2
= 0.13
Low Overhead High Overhead
Overhead: Misunderstood by the Market
Efficient = Cheap? The connection between G&A and share valuation is not as strong as it should be. Because of that, a
disproportionate number of efficient REITs stack up as cheap (i.e., they trade at smaller premiums to UAV than our model says is
appropriate) and vice versa. It could well be the case that some NAV-centric investors effectively "stop at NAV." That is a mistake.
Warranted Premiums from G&A vs. Attractiveness of Current Valuation
-10%
-5%
0%
5%
10%
-10% -5% 0% 5% 10%
Warranted Premium from G&A
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Buy Hold Sell
...And a disproportionate number of the
REITs with high G&A are Sells
A disproportionate number of the
REITs with low G&A are Buys
High G&A Low G&A
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Overhead: A Strong Connection with Size
Big is Betterat Least When it Comes to G&A: Not surprisingly, big REITs are more efficient when it comes to overhead, and
this efficiency should translate into higher relative valuations. By contrast, small REITs, particularly those with less than, say, $3
billion in assets, face a daunting challenge in spreading overhead over a smaller asset base.
-10%
-5%
0%
5%
10%
$0 $2 $4 $6 $8 $10
Asset Value ($0-10 BN)
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-10%
-5%
0%
5%
10%
$10 $20 $30 $40 $50
Asset Value ($10-50 BN)
Company Size and Warranted Premiums Attributable to G&A
Yeah, but High G&A may ensue from a dynamic
business model, but this math counts only the costs.
The Response: Benefits derived from dynamic
business models are captured in Franchise Value
$10
V. Franchise Value
Franchise value: How much value will management create in the future?
Objective inputs serve as guides:
MVA is a tool designed to directly gauge the franchise component of past performance
Total returns relative to peers are also important
Access to a variety of capital sources at low costs begets higher UAV premiums
Subjective inputs are also critical. Does a mangement team "get it"?
Franchise Value - What is it?
Lessons from REIT History
Simplicity is a virtue
Activity Value Added
Development is a tough business
Capital allocation skills are critical
Other Factors to Consider
Will past performance recur?
Has there been a strategy change?
Has management learned lessons?
Past Performance Balance Sheet Management
Management Value Added (MVA) Balance Sheet Acumen Score
Total Returns to Shareholders Full Menu of Options is good
Cheap debt UAV Premium
An Important Assessment: Franchise value and G&A are the most important drivers of UAV premiums. Franchise value pertains
to the value that a management team is likely to create in the future, which is a question best addressed by combining objective
tools with subjective input from experienced analysts.
Subjective Factors
Objective Metrics
Franchise Score
Franchise Value: a Forward-Looking Concept
Franchise value is an estimate of the relative value that
a management team is likely to add or detract in
coming years. Our analysts determine franchise value
based on a wide variety of objective inputs and
subjective assessments.
The objective metrics help guide
the analyst, but the ultimate score
is entirely at his/her discretion.
Franchise Value: What Does MVA Measure?
Key Drivers of REIT NAV Growth
MVA = Management Value Added: The big differences in NAV growth rates across the REIT industry are attributable to two
factors (balance sheet management and capital allocation) over which management has a great deal of control, as well as one (how
properties in a given sector or locale are priced) that is largely out of its control. Management does, of course, exercise some
influence over the value of the portfolio through operational skills, but even though operations are the focus of a lot of managerial
and analytical attention, they are far from the most important driver of NAV/sh growth. Management performance is best assessed
after backing out NAV/sh growth derived from the property portfolio.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
-10% -5% 0% 5% 10% 15%
Annualized Property Appreciation (levered)
A
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Property price appreciation is a key driver of NAV growth,
but NAV growth has parted ways with appreciation for many
REITs. Other factors clearly play a big role.
Property Portfolio Performance
Dependent on sector, quality, & locale
Operating prowess also matters
but not as much as portfolio make-up
Most REITs are good operators
differences across companies are small
Balance Sheet Management
Low leverage has won
Forced recaps hurt...a lot
Some REITs derive a cost of capital
advantage here
Capital Allocation Acumen
Two ways to create NAV:
Grow when NAV premiums persist
Buy back stock when discounts exist
Development is a tough business
Management Value Added (MVA)
What does it Measure?
MVA measures value added or subtracted via balance sheet management,
capital-allocation or other factors not related to the performance of the real
estate portfolio.
How is it Calculated?
MVA is the difference between NAV/sh growth and the leveraged growth
in same-store portfolio value over any time period.
Franchise Value: MVA & Total Returns
Total Return
MVA is superior when it comes to factors that matter most MVA Relative Absolute
Measures an objective important to shareholders
Isolates variables where management has control (balance sheet & capital allocation)
Backs out portfolio effects due to sector, location, quality, etc.
Adjusts for capital market changes beyond management control
But it's not perfect
Gives credit for superior real estate operational skills
Benchmark is precise and easy to calculate
MVA is a Great Tool: Most assessments of REIT managerial performance rely on total returns to shareholders - either on an
absolute basis or relative to a chosen REIT peer group. While total returns are certainly important, they can be profoundly impacted
by factors beyond which REIT managers typically exercise much control. MVA, by contrast, backs out the influence of some of
those variables, including the type and location of the real estate a REIT owns.
Assigning the Grades
We blend the MVA and relative total return signals in assessing past performance
Primary focus is on full-cycle returns - 5-yrs or so
Past returns don't necessarily predict the future. Analysts have full override authority
Franchise Value: The MVA Report Card
Some Tough Grades: MVA affords comparisons of management performance across the various property sectors, although some
sectors (e.g. Health Care) have presented bigger opportunities for lucrative expansion. Most REITs have failed to deliver NAV/sh
growth commensurate with the leveraged appreciation that has taken place in their property portfolios, resulting in negative MVA.
MVA
-80%
-60%
-40%
-20%
0%
20%
40%
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2
Things to keep in mind about MVA:
- Forced recaps in '09 & '10 explain the worst grades
- Development was a drag for many REITs
- This 6-year period was: 1) highly volatile; and 2) chosen due to data availability
- REITs that report inflated same-store NOI growth may wind up with lower MVA
- Past does not always predict the future: some REITs have changed
Franchise Value: The Insight MVA Adds
Different Grading Scale Different Grades: Total shareholder returns convey a lot of information about managerial
performance, but returns are heavily influenced by whether a given REIT happened to own the right type of real estate in the right
location. MVA explicitly adjusts for that factor, and it helps differentiate track records that are a function of good management vs.
those that involve a dose of good fortune. It is important to heed signals from both performance metrics.
Annualized Total Return vs. Peers
M
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A

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d
)
and gives management teams of
these REITs too much credit
A focus on total shareholder returns fails
to give management teams on this side of
the line enough credit...
Total Returns & MVA
June '06 - June '12
Franchise Value: Balance Sheet Management Acumen
The Balance Sheet Management Acumen Scorecard
The Front Nine: How Deep is the Financing Menu? The Back Nine: What is the Cost of Debt?
Access to a variety of financing options is desirable Some REITs can access debt more cheaply than their peers
Unsecured Debt: Best gauged after adjusting for term and overall leverage
Has gained a cost advantage in recent years
Companies get credit for having accessed this market Big REITs tend to have an advantage here
More credit given for high ratings
Example: an advantage on this front of 50 basis points
Preferred Stock Should directly translate into a 20 bp lower WACC
Virtues have become more obvious That boosts warranted asset value premium by 3%
REITs with access to this market get credit which equates to a 5% increase in share price
The overall impact is probably even bigger
it also enhances the external growth story
The Other Objective Input to Franchise Value: Some REITs do a much better job than others in maximizing the financing
opportunities that are available to successful public companies. Differences in balance sheet management skills across REITs can
have a meaningful impact on the Weighted Average Cost of Capital and, therefore, the share price. Our Balance Sheet Management
Acumen Score attempts to capture those differences.
Balance Sheet Management Acumen Score
Ascribes higher warranted premiums to asset value to REITs with access to multiple capital
sources and/or a cost of capital advantage. Impact on warranted premiums currently ranges
from -2% for REITs that rely exclusively on secured debt to +4% for REITs with a full menu of
options and a demonstrably cheaper cost of debt.
VI. Balance Sheet Risk
Excessive balance sheet risk has harmed performance of many REITs
REITs with lower leverage have long been rewarded with higher premiums to UAV by the market
Balance sheet risk has a bigger impact on pricing now than it used tono surprise
Our Comprehensive Leverage Ratio is a gauge of balance sheet risk
Employs leverage ratio and coverage ratio concepts
Adjusts for unfunded development, maturity schedules, secured v. unsecured, etc.
Balance Sheet Risk: Balance Sheets Matter
Low Leverage is Better: Even though property prices have risen more than 50% over the last ten years, REITs that have
employed less leverage have delivered far better returns over that time period than REITs with higher leverage. The same statement
has held true over the vast majority of ten-year periods since the Modern REIT era commenced in the early-'90s. Not surprisingly,
investors are willing to ascribe much higher NAV premiums to REITs with low leverage.
Leverage & Total Returns (past 10 years)
-20%
-10%
0%
10%
20%
-20% -10% 0% 10% 20%
Avg Leverage during Period vs. Property-Sector Peers
T
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2
= 0.46
More Leverage
Leverage & Premiums to Asset Value
-20%
-10%
0%
10%
20%
-20% -10% 0% 10% 20%
Leverage vs. Property-Sector Peers
A
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= 0.27
More Leverage
Leverage has a Big Impact on Pricing
A 10% variance in the lev'g ratio currently equates to a 4%
variance in the UAV premiums at which REITs trade
Leverage has Impacted Total Returns
A 10% variance in the lev'g ratio has been associated
with a 5% gap in total returns. Every year!
Balance Sheet Risk: Step One - Measuring Leverage
How Much Leverage? Balance sheet risk is, first and foremost, a function of how much debt a REIT has. Two equally valid ways to
measure that are the traditional leverage ratio and an approach that converts the most widely used coverage metric (Debt/EBITDA)
into a gauge of overall debt. Our Blended Leverage Ratio serves as a good starting point for assessing balance sheet risk.
Leverage Ratio
(Mark-to-mkt Liabs + Preferreds)/Current Value Assets
Counts preferreds as debtthey're senior to equity
Counts full value of land and development in assets
Based on marked-to-market value
Easy to understand and compare across sectors
Good for comparisons across REITs, but can send a false
"all-clear" signal when cap rates are low
Keep Debt/EBITDA handy to spot false signals
Debt to Operating Assets
Book Value Debt/(EBITDA/Cap Rate)
Ignores preferredsthey're not debt
Ascribes no value to non-earning assets
Based on book valuethe amount that is owed
Based on widely used Debt/EBITDA
Dividing by cap rate is helpful for comparing REITs
but it can flash a green light when cap rates are low
so keep Debt/EBITDA handy
Blended Leverage Ratio
A good starting point for balance sheet risk assessment
A conservative, but not too conservative, gauge
Treats preferreds as a debt/equity hybrid
Counts 50% of the value of non-earning assets
Counts pro rata share of JV debt
50/50 Weight
Balance Sheet Risk: Step Two - A Comprehensive View
Total Leverage is the Primary Driver
Qualitative & Structural Factors also Matter
Assessing Balance Sheet Risk: The amount of leverage a REIT employs is the key driver of balance sheet risk, but there are a
number of structural and qualitative factors that can serve to increase or mitigate risk. By assessing all of these factors in a
systematic fashion, our Comprehensive Leverage Ratio affords a better assessment of the relative riskiness of REIT balance sheets.
Leverage Ratio
Debt/Operating Assets
Blended Leverage Ratio
Near-Term Maturities
Non-Recourse Debt
Unfunded Development
Property Sector
Leverage ratio is adjusted up (down) on a sliding scale by as
much as 10% (i.e., 1000 bps) for REITs with heavy (small)
debt maturities in next 3 years.
Balance sheets comprised almost exclusively of secured debt
have less entity-level risk. Where secured > 90% of all debt,
total leverage is reduced by 10% (e.g., 50% becomes 45%).
Development that has commenced, but is unfinished, is treated
as both a contingent liability and a contingent asset.
The leverage ratio is reduced for REITs in sectors that can
support higher debt levels (e.g., apartments) and increased in
those that can't (e.g., hotels).
Green Street's
Comprehensive
Leverage Ratio
50/50
Weight
VII. Corporate Governance
REITs with good governance typically trade at higher premiums to unlevered asset value
Our Corporate Governance scoring system ranks the REITs in a systematic fashion
De-staggered boards are highly desirable
Other big factors include past behavior and disavowal of entrenchment devices
Category
Max
Points
Ideal Structure
Board Rating:
Non-staggered Board 20 Yes
Independent Board 8 80+%
Investment by Board Members 12 Large Investment by Numerous Members
Past Conduct/Reputation 15 No Blemishes, Fair Comp, Leadership
Total 55
Anti-Takeover Weapons:
State Anti-takeover Provisions 9 Opt out/Shareholders Approve Change
Ownership Limits from 5/50 Rule 9 Limit Waived for Ownership by other REITs
Veto Powers by Insiders 9 No Veto power
Shareholder Rights Plan 8 Shareholders Must Approve Implementation
Total 35
Potential Conflicts of Interest:
Business Dealings with Mgmt. 6 No Business Dealings
Divergent Tax Basis of Insiders 4 Basis Near Share Price
Total 10
Perfect Score 100
(1) Average premium to unleveraged asset value from '06 to present
for companies under coverage during the entire period.
Green Street's Governance Scoring System: Our governance ranking system, which is published annually, differs in two key
respects from those provided by other evaluators: 1) our familiarity with the companies allows for subjective input; and 2) issues
unique to REITs (e.g., the 5 or fewer rule) are ignored by others. Scoring is on a 100-point basis with the key inputs highlighted
below. REITs with higher governance scores typically trade at larger premiums to asset value
Governance Score vs. Observed Premium to
Unleveraged Asset Value (UAV)
-15%
-10%
-5%
0%
5%
10%
15%
20%
20 40 60 80 100
Corporate Governance Score
H
i
s
t
.

P
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e
m
i
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m

t
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U
A
V

(
1
)
Governance and Asset Value Premiums (1)
-2.8%
1.3%
Above Avg Score Below Avg Score
36
Issuers of this Report: U.S. and EEA: This report has been prepared by analysts working for Green Street Advisors (GSA (U.S.)) and/or Green Street Advisors (U.K.) Limited (GSA (UK)), both of which are subsidiaries of Green Street Holdings, Inc.
This report is issued in the U.S.A by GSA (U.S.). GSA (UK) accepts no responsibility for this report to the extent that it is relied upon by persons based in the U.S.A. GSA (U.S.) is regulated by FINRA and the United States Securities and Exchange
Commission, and its headquarters is located at 660 Newport Center Drive, Suite 800, Newport Beach, CA 92660.
This report is issued in the European Economic Area (EEA) by GSA (UK). GSA (U.S.) accepts no responsibility for this report to the extent that it is relied upon by persons based in the EEA. GSA (UK) is registered in England, (Company number.
6471304), and its registered office is 22 Grosvenor Square, 3rd Floor, London, W1K 6LF. GSA (UK) is authorized and regulated by the Financial Services Authority in the United Kingdom and is entered on the FSAs register (no. 482269]).
References to Green Street in Disclosures in this section and in the Other Important Information section appl y to:
GSA (U.S.) to the extent that this report has been disseminated in the U.S.A; or
GSA (UK) to the extent that this report has been disseminated in the EEA.
Green Street Advisors U.S. is exempt from the requirement to hold an Australian financial services license under the Act in respect of the financial services; and is regulated by the SEC under U.S. laws, which differ from Australian laws.
Green Street Advisors UK Ltd. is exempt from the requirement to hold an Australian financial services license under the Act in respect of the financial services; and is regulated by the FSA under UK laws, which differ from Australian laws.
Green Street reserves the right to update the disclosures and policies set out in this document at any time. We encourage a careful comparison of these disclosures and policies with those of other research providers, and welcome the opportunity to discuss them.
For Green Streets advisory customers, this research report is for informational purposes only and the firm is not responsible for implementation. Nor can the firm be liable for suitability obligations.
Affiliate Disclosures: Green Street does not directly engage in investment banking, underwriting or advisory work with any of the companies in our coverage universe. However, the following are potential conflicts regarding our affiliates that should be considered:
Green Street is affiliated with, and at times assists, Eastdil Secured, a real estate brokerage and investment bank, when Eastdil Secured provides investment banking services to companies in Green Streets coverage universe. Green Street is never part of the
underwriting syndicate, selling group or marketing effort but Green Street may receive compensation from Eastdil Secured for consulting services that Green Street provides to Eastdil Secured related to Eastdil Secured's investment banking services. Green Street
does not control, have ownership in, or make any business or investment decisions for, Eastdil Secured.
Green Street has an advisory practice servicing investors seeking to acquire interests in publicly-traded companies. Green Street may provide such valuation services to prospective acquirers of companies which are the subject(s) of Green
Streets research reports. Green Street may receive fees that are contingent upon the successful completion of a transaction or other fees for its work on behalf of prospective acquirers
An affiliate of Green Street is the investment manager of an equity securities portfolio on behalf of a single client. The portfolio contains securities of issuers covered by Green Streets research department. The affiliate also acts as a sub-adviser to an outside
Investment Management firm. The sub-advisor will develop and provide a suggested asset allocation model based on published research that is received from the research department. The affiliate is located in a separate office, employs an investment strategy
based on Green Streets published research, and does not trade with Green Streets trading desk.
Anal yst Certification The research analysts listed below hereby certify that all of the views expressed in this research report accurately reflect their personal views about any and all of the subject companies or securities. They also certify that no part of their
compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analysts: Mike Kirby, Peter Rothemund.
Other Important Information
Management of Conflicts of Interest: Conflicts of interest can seriously impinge the ability of analysts to do their job, and investors should demand unbiased research. In that spirit, Green Street adheres to the following policies regarding conflicts of interest:
Green Street employees are prohibited from owning the shares of any company in our coverage universe.
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Green Street does not commit capital or make markets in any securities.
Neither Green Street nor its employees/analysts receives any compensation from subject companies for inclusion in our research.
Green Street does not directly engage in investment banking or underwriting work with any subject companies.
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The information contained in this presentation is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This presentation is produced solely for informational purposes and is not
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Green Street generally prohibits research analysts from sending draft research reports to subject companies. However, it should be presumed that the analyst(s) who authored this presentation has(/have) had discussions with the subject company to ensure factual
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Green Street Advisors Disclosure Statement
37
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Protection of Proprietary Rights: To the extent that this presentation is issued by GSA (U.S.), this material is the proprietary and confidential information of Green Street Advisors, Inc., and is protected by copyright. To the extent that this presentation is issued
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Review of Recommendations:
Unless otherwise indicated, Green Street reviews all investment recommendations on at least a monthly basis.
The research recommendation contained in this report was first released for distribution on the date identified on the cover of this report.
Green Street will furnish upon request available investment information supporting the recommendation(s) contained in this report.
At any given time, Green Street publishes roughly the same number of BUYrecommendations that it does
SELLrecommendations.
Green Streets BUYshave historically achieved far higher total returns than its HOLDs, which, in turn, have
outperformed its SELLs.
The results shown in the table in the upper right corner are hypothetical; they do not represent the actual trading of securities. Actual performance will vary from this hypothetical performance due to, but not limited to 1) advisory fees and other expenses that
one would pay; 2) transaction costs; 3) the inability to execute trades at the last published price (the hypothetical returns assume execution at the last closing price); 4) the inability to maintain an equally-weighted portfolio in size (the hypothetical returns
assume an equal weighting); and 5) market and economic factors will almost certainly cause one to invest differently than projected by the model that simulated the above returns. All returns include the reinvestment of dividends. Past performance,
particularly hypothetical performance, can not be used to predict future performance.
(1) Results are for recommendations made by Green Streets North American Research Team only (includes securities in the US, Canada, and Australia). Uses recommendations given in Green Street's "Real Estate Securities Monthly" from J anuary 28, 1993
through J anuary 2, 2013. Historical results from J anuary 28, 1993 through October 1, 2012 were independently verified by an international "Big 4" accounting firm. The accounting firm did not verify the stated results subsequent to October 1, 2012.As of
October 1, 2012, the annualized total return of Green Streets recommendations since J anuary 28, 1993 was: Buy +25.2%, Hold +11.1%, Sell -0.8%, Universe +11.6%.
(2) Company inclusion in the calculation of total return has been based on whether the companies were listed in the primary exhibit of Green Streets "Real Estate Securities Monthly. Beginning April 28, 2000, Gaming C-Corps and Hotel C-Corps, with the
exception of Starwood Hotels and Homestead Village, are not included in the primary exhibit and therefore not included in the calculation of total return. Beginning March 3, 2003, all Hotel companies are excluded.
(3) All securities covered by Green Street with a published rating that were included in the calculation of total return. Excludes not ratedsecurities.
Per NASD rule 2711, Buy = Most attractively valued stocks. We recommend overweight position; Hold = Fairly valued stocks. We recommend market-weighting; Sell = Least attractively valued stocks. We recommend underweight position.
Green Street will furnish upon request available investment information regarding the recommendation
Green Street Advisors Disclosure Statement
Recommendation Distribution (as of 1/2/13)
31%
42%
27%
31%
38%
31%
0%
20%
40%
60%
BUY HOLD SELL
%

o
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t
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R
a
t
e
d
GSA (US) GSA (UK)
Total Return of Green Street's Recommendations
1,2
Year Buy Hold Sel l Universe
3
2012 24.5% 24.7% 18.9% 23.0%
2011 18.9% 7.6% -4.7% 7.6%
2010 43.3% 32.8% 26.6% 33.8%
2009 59.0% 47.7% 6.0% 37.9%
2008 -28.1% -30.9% -52.6% -37.3%
2007 -6.9% -22.4% -27.8% -19.7%
2006 45.8% 29.6% 19.5% 31.6%
2005 26.3% 18.5% -1.8% 15.9%
2004 42.8% 28.7% 16.4% 29.4%
2003 43.3% 37.4% 21.8% 34.8%
2002 17.3% 2.8% 2.6% 5.4%
2001 34.9% 19.1% 13.0% 21.1%
2000 53.4% 28.9% 5.9% 29.6%
1999 12.3% -9.0% -20.5% -6.9%
1998 -1.6% -15.1% -15.5% -12.1%
1997 36.7% 14.8% 7.2% 18.3%
1996 47.6% 30.7% 18.9% 32.1%
1995 22.9% 13.9% 0.5% 13.5%
1994 20.8% -0.8% -8.7% 3.1%
1993 27.3% 4.7% 8.1% 12.1%
Cumulati ve Total Return 8603.3% 729.4% -9.7% 807.9%
Annuali zed 25.1% 11.2% -0.5% 11.5%

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