REITInsight. In this issue:

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1 REITInsight Newsletter Issue No. 9 REIT Insight is a market commentary by Resource Real Estate's Global Portfolio Manager, Scott Crowe. It discusses our perspectives on major events and trends in real estate securities. REIT Insight is a viewpoint from an investment practitioner with a unique focus on both publicly traded and non-traded REIT markets. In this issue: n The Future of non-traded REIT liquidity events

2 The Future of non-traded REIT liquidity events Non-traded REIT liquidity events have totaled more than $21 billion over just the last two years and a number of other non-traded REITs have indicated they are exploring liquidation options for the near future. In fact, our analysis indicates that there is a pipeline of nearly $20 billion 1 of potential liquidity events on the horizon over the next two years. However, we believe speedy liquidity events above $10 are likely to become less speedy and premiums are diminishing. Liquidity Event Exit Price Relative to Effective Original Offer Price Source: Blue Vault, Resource Real Estate Estimates These events have attracted attention, and some of the most successful ones have very likely contributed to the record capital raising that has occurred over the last two years. Below we analyze three aspects of the liquidity event phenomenon: The Importance of Liquidity The primary importance of liquidity events is that sponsors have increasingly been able to engineer an exit above the investors' entry price, (i.e. investors have been paid a dividend and made a profit on their initial investment). American Realty Capital has arguably been one of the most successful in creating these outcomes. This is an important change to the dynamic of the non-traded REIT market. Traditionally, investors could expect simply to collect a yield from distributions, and liquidity events were often engineered to create an exit for the sponsor (not the investor). The new dynamic of liquidity events reflects a greater emphasis on investor total return and a timeline for return of principal. 1 These include Cole Corporate Income Trust, Griffin-American Healthcare REIT II, Phillips Edison - ARC Shopping Center REIT, Carter Validus Mission Critical REIT, Steadfast Income REIT, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine, Inland American Real Estate Trust and Wells Core Office Income REIT. 2 REITInsight Issue No. 9

3 A market commentary by RRE s Real Estate Securities Global Portfolio Manager, Scott Crowe REITInsight The other driver behind the increase in liquidity events is a merging of worlds between publicly-traded REITs and non-traded REITs. The vast majority of liquidations have happened via an IPO into the REIT public market, a sale to an affiliated publicly traded REIT, or a sale to a REIT sponsor that is a publicly listed company. Below is a detail of the 35 full cycle liquidity events that have occurred to date in the non-traded REIT space. Full Cycle Liquidity Events By Exit Type Merged with or Acquired by a Private Entity, 4 Merged with or Acquired by a Public Entity, 7 Stock Exchange Listing, 16 Acquired by another non-traded REIT, 8 Source: Blue Vault, Resource Real Estate Estimates In fact, publicly listed REITs that also directly sponsor or are affiliated with the sponsor of non-traded REITs total nearly $20 billion in market cap today, up from $1 billion just five years ago. The ability of non-traded REITs to act as conduits of assets for the public markets represents an attractive potential source of nontraded REIT liquidity; however this is very dependent upon equity market pricing. Impact of Liquidity Events We believe one of the main reasons liquidity events have proved so impactful is the potential opportunity for price discovery in the non-traded REIT market. In other words, because non-traded REITs are booked at cost and traditionally not revalued for a number of years, 2 it has been difficult for investors to understand their true total return. Liquidity events have created some price transparency, though it should be noted that most non-traded REITs that liquidate are probably the more successful ones (i.e. not every investor has enjoyed the same experience). 3 2 Non-traded REITs don't have to show an estimated per-share valuation until 18 months after the sponsor stops raising funds, which in many cases can take years. 3 An important trend that reflects a greater focus on shareholder value is the absence of internalization fees in a liquidity event. Usually, sponsors are still making money too, but via units and performance fees, which are economics that are achieved alongside investors. REITInsight Issue No. 9 3

4 Due to the lack of price transparency, REITs have traditionally competed on factors separate from investor return, namely their headline yield, marketing story, and sponsor distribution power. However, now the ability to execute a successful liquidity event has also become the potential to be a marketing gimmick. We use the word gimmick because we believe that a lot of the ability to create liquidity events is dependent on market timing, which relies on a healthy dose of luck (we elaborate further in a little bit). Another major impact of liquidity events is the significant contribution to sector capital raising. In fact, assuming $0.50 of every dollar is recycled back into the non-traded REIT market, liquidity events have contributed 30% 4 of the total capital raised in just the last two years. Advisors benefit from liquidity events as they provide a favorable experience for the client who receives both the yield and hopefully, their principal back, potentially with some profit. The advisor also covers their commission if the price is above the original issue price. This encourages recycling of much of the capital back into the non-traded REIT market, furthering the economics to advisors and sponsors. The Future of Liquidity Events We expect successful liquidity events to be less frequent, to take longer and be less profitable. Our reasoning is simple non-traded REITs had been acquiring assets at the low point in the real estate cycle and liquiditating into a REIT market, trading at a premium valuation. Today, we are at a more advanced stage of the real estate cycle where values have appreciated and yields have fallen. We have also seen a decrease in the valuation of many of the net lease publicly traded REITs, the asset type that represents approximately two thirds of the non-traded REIT market, due to concerns about higher interest rates. We can see this in the graph below using the FFOx of Realty Income 5 as a proxy: the listed REIT market is trading at a lower multiple, 6 which means that the ability to pay high prices for non-traded REITs has decreased. Real Estate Cycle and Liquidity Events Net Lease Retail REIT Market Valuation Source: Blue Vault, Full Cycle Study Source: Bloomberg 4 There has been $35.160B in NTR sales in the last 24 months, and $21.262B of equity has been raised through liquidity events. Assuming $.50 of every dollar, or $10.631B realized through liquidity is reinvested, then 30.24% of the sales is reinvested dollars. 5 Realty Income is a $10B publicly traded REIT focused on commercial (primarily retail) net-lease assets. 6 For net-lease retail assets. 4 REITInsight Issue No. 9

5 A market commentary by RRE s Real Estate Securities Global Portfolio Manager, Scott Crowe REITInsight While the listed REIT market may provide better future opportunities, it is difficult to create a defined exit strategy based on unpredictable future REIT market valuations. Instead we believe that investors should be prepared to stay in non-traded REIT programs longer, focusing on the attractiveness of the investment, 7 rather than an early exit. The introduction of greater transparency of the value of clients' investments in non-traded REITs, with the introduction of FINRA Rule , 8 will drastically change the focus of investors by providing a much clearer picture of the value of their investments and the performance of the non-traded REIT manager. Clients will likely see their investment value net of fees and commissions. In addition, quicker and more frequent valuations will reflect any return of capital through distributions and valuation movement in the underlying real estate. The creation of a true price in the non-traded REIT market not only gives investors important information, but should also create other efficiency gains. There will be more focus on actual manager performance and total return rather than marketing, liquidity events and uncovered headline yields. A price mechanism is one of the most important aspects of a market and the introduction of a clearer picture of value has the potential to further improve the non-traded REIT space for investors. Scott Crowe, Global Portfolio Manager Scott Crowe is the Global Portfolio Manager for Resource Real Estate. Previously, he was the lead Global Portfolio Manager for Cohen & Steers, where he led an investment and research team of over 20 portfolio managers and analysts. Mr. Crowe was accountable for over $10B in FUM across the firm s global, international and emerging market portfolios. Prior to this, Mr. Crowe held the position of Head of Global Real Estate for UBS Equities Research where he built and managed the US REIT division while leading a global team of more than 40 analysts. Mr. Crowe began his career at Paladin Property Securities and was also an Associate Lecturer at the University of Technology Sydney. Mr. Crowe holds a Masters in Finance from the University of Technology Sydney and a Bachelor of Commerce from the University of NSW/National University of Singapore. 7 Management competency and alignment, portfolio quality and conservative financing. 8 The Financial Industry Regulatory Authority (FINRA) has proposed changes that will increase disclosure on the fees and commissions paid on investments in non-traded REITs. REITInsight Issue No. 9 5

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