L&B Realty Advisors, LLP Client Focused. Performance Driven. US Property Investment 5 Ws and 1 H

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1 L&B Realty Advisors, LLP Client Focused. Performance Driven US Property Investment 5 Ws and 1 H November 2017

2 Presenter Biography Eric R. Smith, Executive Vice President, Business Development Mr. Smith s focus is consultant relations, product development and new investors for L&B s fund and separate account strategies. Prior to his role in business development, Mr. Smith headed up the office and industrial asset management department and was responsible for the investment strategy and performance for $1.17 billion in office and $120 million in industrial assets. When Mr. Smith began his career at L&B, he served in the acquisitions department as an analyst and then as an associate director responsible for sourcing, analyzing, and closing property acquisitions for the east coast of the United States. While in that capacity, he closed $118 million in acquisitions and $160 million in office dispositions. Prior to joining L&B, Mr. Smith was a founding member and managing principal of Humphrey & Smith, L.L.C., a commercial real estate appraisal firm in Fort Walton Beach, Florida. Mr. Smith holds a Bachelor of Science degree in Business Administration from the University of Central Florida. 2

3 US Property Investment Keys to Success Invest for current and future long-term income and increasing cash dividend (Why) Employ disciplined and consistent acquisition strategy over time (When) Start now (Who) Acquire high-quality true core assets (What) In the best locations in major markets (Where) Structure Properly and Actively Asset Manage (How) = Good investment performance and increasing cash yield to pay future liabilities 3

4 US Economy Stable Real GDP 2 to 2.6% growth (annual) Employment 1 to 1.5% growth (annual) 4.5% Unemployment Wages Growing 3.5% (annual) 4

5 US Economy Stable Consumer Confidence 95.1, is good Up 16% over Consumer Spending Growing, 69% of RDGP Interest Rates (10-yr) Currently stable at 2.3% Expect bp increase next 3 yrs Inflation 1.7%, expected trend to 2.0% by

6 $20.0 $18.0 $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $- U.S. Real GDP 2.3% 2.6% 2.0% Real GDP ($Billions) Real GDP Growth (%) 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% Sources: L&B Realty Advisors, LLP: ULI Real Estate Consensus Forecast April

7 U.S. Real GDP 7

8 US Employment 155, , % 150, , % 145, % 140, , % 130, , % 4.5% 4.6% 4.0% 2.0% 120, % Sources: L&B Realty Advisors, LLP: ULI Real Estate Consensus Forecast April 2017 Total Employed (Thousands) Unemployment Rate 8

9 US Employment 9

10 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Avg. Hourly Earnings YoY Change 5.5% US Wages Growing 5.0% 4.5% 4.0% 3.6% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Sources: L&B Realty Advisors, LLP; Federal Reserve Bank of Atlanta 10

11 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Index 1966 = US Consumer Confidence Source: University of Michigan Consumer Sentiment Index 11

12 US Consumer Spending 69.5% 69.0% 68.5% 68.0% 67.5% 67.0% 66.5% 66.0% 65.5% 65.0% 64.5% Personal Consumption Expenditures ($Billions) PCE as % of GDP Source: L&B Realty Advisors, LLP; Bureau of Economic Analysis $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 12

13 US Retail Sales $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ Retail Sales (in $Billions) e-commerce Sales Retail Sales Growth 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Sources: L&B Realty Advisors, LLP, Moody s Economy.com 13

14 US Consumer Spending Source: 14

15 US Interest Rates $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Federal Reserve Taper -$1.07 Trillion 24% reduction 2.8% 2.4% 3.2% 14% 12% 10% 8% 6% 4% 2% 0% Federal Reserve Assets ($ Billion) Sources: Federal Reserve Board ( ULI Real Estate Consensus Forecast April yr Constant Maturity Treasury 15

16 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 US Inflation (Core CPI) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 1.7% 0.5% 0.0% Source: 16

17 US Inflation 17

18 US Inflation 18

19 WHY? Current and Future Income and cash yield 19

20 NCREIF (NPI) Indices vs 10-yr CMT 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% -2% 0% 2% -4% -6% -8% -10% -12% -14% -16% -18% -20% -22% -24% 10-yr Constant Maturity Treasury NPI Income NPI Appreciation NPI Total Sources: L&B Realty Advisors, LLP; NCREIF 20

21 % 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% -18% -20% -22% -24% NCREIF (NPI) Appreciation vs 10-yr CMT 10-yr Constant Maturity Treasury NPI Appreciation Sources: L&B Realty Advisors, LLP; NCREIF 21

22 % NCREIF (NPI) Income vs 10-yr CMT 14% 12% 10% 8% 6% 4% 2% 0% Sources: L&B Realty Advisors, LLP; NCREIF 10-yr Constant Maturity Treasury NPI Income 22

23 WHEN? Capital Market Conditions favorable Stable equity Debt readily available Investment Timing 23

24 US Sale & JV Transactions >$25mm, in $Billions Year Office Apartment Retail Industrial Total YTD Sep-16 $81 $83 $32 $22 $135 YTD Sep-17 $72 $72 $22 $28 $121 % Change -11% -13% -31% 27% -10% Sources: L&B Realty Advisors, LLP; Real Capital Analytics 24

25 1Q83 1Q84 1Q85 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 NCREIF Transaction Volume & Cap Rates 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Source: NCREIF Aggregate Sale Price ($B) Transaction Cap Rate 25

26 Debt Financing 26

27 Debt Financing 27

28 Transactions by Buyer Type ($Billions) $600 $500 $400 $300 $200 $100 $ SOURCE: RCA Cross-Border Inst'l/Eq Fund Listed/REITs Private User/other 28

29 Manhattan DC Boston Los Angeles San Francisco Seattle Chicago Houston Dallas DC VA burbs Miami/Dade Honolulu Atlanta Austin San Jose Baltimore Orlando Phoenix Denver No NJ Minneapolis Long Island Columbus Charlotte Fort Myers Top U.S. CRE Markets for Foreign Capital as of Q ($ Million) $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 Source: Real Capital Analytics Canada Asia Mid-East Europe Rest of World 29

30 WHO? Start now 30

31 Select Global Bond Yields Japan Germany U.K. U.S. Australia 2 Years -0.15% -0.75% 0.44% 1.53% 1.93% 5 Years -0.09% -0.35% 0.78% 1.94% 2.30% 10 Years 0.05% 0.37% 1.33% 2.30% 2.75% 30 Years 0.87% 1.22% 1.89% 2.82% Source: Bloomberg (data as of Oct. 16, 2017) 31

32 NCREIF (NPI) vs 10-yr CMT 10-yr Traunch Avgs (81-91 to 06-16) % 10% 8% 6% 4% 2% 8.1% 5.0% 5.7% 2.8% 0% -2% -4% Sources: L&B Realty Advisors, LLP; NCREIF 10-yr Constant Maturity Treasury NPI Income NPI Appreciation 32

33 NCREIF (NPI) Income Return & Baa Spread Over 10-yr CMT (bps) Sources: L&B Realty Advisors, LLP; NCREIF, Moody s NPI Income BAA 33

34 Investment Performance NCREIF (NPI) 10 YR Components CRE Composite Office Industrial Warehouse Retail Multifamily Range Income 5.6% 5.5% 6.1% 5.9% 5.1% 100 bps Appreciation 0.8% 0.0% 0.9% 2.0% 1.1% Total 6.4% 5.5% 7.1% 8.0% 6.2% Income as % of Total Return 87% 99% 86% 74% 81% 20-YR Income 6.7% 6.7% 7.2% 6.9% 6.1% 110 bps Appreciation 2.8% 2.5% 2.8% 3.6% 3.3% Total 9.7% 9.3% 10.1% 10.7% 9.5% Income as % of Total Return 69% 72% 71% 65% 64% Since Inception Income 7.3% 7.2% 7.8% 7.3% 6.8% 100 bps Appreciation 1.9% 1.2% 1.8% 2.4% 2.0% Total 9.3% Sources: L&B Realty 8.5% Advisors, RCA 9.7% 9.8% 8.9% Income as % of Total Return 79% 85% 80% 74% 77% 34

35 WHAT? Strategy Core Core-plus Core assets with upside & leverage (preferably both) Build to Core Property Types (4 Food Groups): Office, Industrial, Retail, Multifamily 35

36 Office WHAT? Leasing velocity highest where the brains are Industrial Intersection of major population centers and ports Older less functional space in rising demand Retail High street, experiential and local grocery hold value Some existing retail will see highest and best use change Multifamily Preference for high rise and new product Peak rents plateau in highest rent markets Existing tenants still saving for downpayment on home, room to run 36

37 Office Vacancy rates in 17 of the 20 Metro areas listed have improved relative to their respective 10 year averages. Completions are now accelerating in 15 of the top 20 markets. Office influenced by: We work shared office concepts, open office concepts, lower space per employee, technology and digital communication. Data centers. Financial sector contraction continues. Banking and related sectors require fewer ATMs, branches and are now repurposing space. Increasing interest in CBD (central business district) office locations continues to occur in response to recruiting of millennials in the labor force and their attraction to 24/7 amenitized locations. 37

38 Industrial E-commerce growth is fueling persistent demand Fulfillment and distribution properties continue to be in great demand, outstripping new supply. Activity is moving back up the value chain as more traditional retail functions become integrated with warehouse activities. Last mile becoming more important, increasing demand for close-in distribution facilities. Import and export activity also increasing demand. Transportation becomes an even more important component in the distribution of goods. Secondary locations becoming very important. 38

39 Retail Amazon Affect Growth in online sales is accelerating from a low base (9% of total retail sales) at an increasing rate (16%) Amazon / Whole Foods WF located in cluster of best prime customers Amazon buys old malls For distribution centers Omnichannel Creating sales how customers want to buy Because of the growth in e-commerce, bricks and mortar retail suffers unwarranted negative headline risk. Retailers of specialty/designer/luxury merchandise appears to be holding up well. Class B&C malls with retail tenants oriented toward middle income consumers are having the greatest difficulty, and the highest and best use will likely change. Very little new construction is occurring. Repurposing space continues and may represent opportunity. This is good. 39

40 Multifamily Age demographics continue to be a perfect storm for multifamily. Millennials: Many more singles delaying marriage and child-bearing, but forming households. Seniors: age-restricted housing, assisted living, etc. have increased with increases in life expectancy. All = continued increase in demand for apartments. Locations for development. Emphasis on suburban development is reversing. Now more interest in in town and CBD development is occurring in response to increased demand. Currently vacancy rates are below 10-year averages in most MSAs. 40

41 WHERE? Major markets = margin of safety Keep to major Prime markets Demographic trends indicate further urbanization 41

42 WHERE? James Pickard s Urban Regions Map

43 WHERE? Virginia Tech Megapolitan Geography

44 WHERE, Is the future growth 44

45 WHERE? Office 45

46 WHERE? Industrial Source: 46

47 HOW? Simpler is better 47

48 FIRPTA Changes PATH Act (12/2015) exempts non-u.s. pensions from FIRPTA on sale of USRPIs or distributions from REITs. (U.S. taxation from ECI may still apply for pass-through investments) To qualify for the non-u.s. pension exception to FIRPTA, the following requirements must be satisfied: Non-U.S. Organization Employee Pension. Widely Held. Goverment Oversight. Tax Benefits IRS expected to provide guidance, but hasn t yet. 48

49 FIRPTA Changes Limitations on Specified Listed Entities In the event any person owns an interest in a qualifying shareholder and directly or indirectly holds more than 10% of the stock of the REIT, exemption may be partially disallowed REIT distributions (including capital gain dividends) or interest payments still subject to 30% U.S. withholding (which may be reduced by treaty) Examples of Entities that May Qualify: Based on legislative history, it appears that Congress specifically intended that Australian Listed Property Trusts and Dutch Belegginsintellings would meet the qualifying shareholder requirements, although other entities organized in other jurisdictions may qualify as well 49

50 Active Investment (Asset) Management Active vs Passive Asset Management Enduring competitive advantages / disadvantages Product, People, Capital & Marketing Incremental gains compound Operating Cost discipline Invest capital to enhance / competitive position Strategize toward next buyer, tactically execute 50

51 Takeaways New Normal Prolonged forecast period of low yields. Focus on durable long-term Income and cash yield Consistently apply disciplined acquisition strategy over time Start now. Acquire true Core assets Target the best locations in the Prime major markets Actively investment (asset) management 51

52 Thank you! L&B Realty Advisors, LLP N. Central Expressway Suite 1200 Dallas, TX Christian R. Metten Executive Vice President Eric R. Smith Executive Vice President Paul M. Noland Vice President

53 L&B Realty Advisors, LLP Client Focused. Performance Driven. There is a force that drives L&B it is the connection of our people, their careers and our clients Investing in real estate since 1965 cycle tested Over $14 billion assets acquired / managed since inception Headquartered in Dallas, TX 1984 SEC registered investment advisor Employee Owned 17 key professionals own equity 111 employees Experienced Key Professionals Average of 18 years at L&B; average of 26 years of real estate experience Strong experience across all property types and geographic regions Motivated and stable workforce; low turnover Real estate is our only business Diversified Client Roster with Long-Term Relationships Managing assets for current clients for over 30 years 53

54 Well Diversified Depth and Breadth Across the U.S. $8.4 Billion AUM as of 6/30/17 Geographic Regions Property Type Mountain 2% WN Central 1% EN Central 9% Northeast 14% Other, 2% Industrial, 10% Office, 25% Pacific 15% Multifamily, 25% Mideast 30% Southeast 12% Kauai Retail, 38% Maui Southwest 17% 54