REITInsight. In this month s REIT Insight:

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Basil Hensley
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1 REITIsight Newsletter March 2014 REIT Isight is a mothly market commetary by Resource Real Estate's Global Portfolio Maager, Scott Crowe. It discusses our perspectives o major evets ad treds i real estate securities. REIT Isight is a viewpoit from a ivestmet practitioer with a uique focus o both publicly traded ad o-traded REIT markets. I this moth s REIT Isight: Special Feature: The Future After FINRA: Opportuities for No-traded REITs I the News: America Realty Capital Properties spis off retail Ilad America cotiues path to liquidatio

2 The Future After FINRA: Opportuities for No-traded REIT Evolutio As we wrote here last moth, the Fiacial Idustry Regulatory Authority (FINRA) has proposed chages that will icrease disclosure o the fees ad commissios paid o ivestmets i o-traded REITs (NTRs). Click here to view February s REIT Isight. We believe the ew rules may go ito effect ext year, although the idustry has requested additioal time for implemetatio. While FINRA s chages will ivolve short term challeges, we believe they will ultimately be a beeficial catalyst for chage. Short-term obstacles could lead to log-term opportuities Regulatory chages regardig the disclosure of fees ad commissios will ot chage the structural demad for alterative ivestmets. We believe the demad for ucorrelated yield should cotiue to icrease give a agig demographic movig ito retiremet i the cotext of low bod yields ad a volatile stock market. NTRs, a type of private market ivestmet, ca produce may of the attributes ivestors desire today yield, a absolute retur profile ad o-correlatio by givig ivestors access to direct real estate ivestmet. We believe there is sigificat value i this capability. That beig said, we also believe that FINRA s proposals will likely cause fee ad commissio rates to compress as the costs of ivestmet are made more trasparet. This will likely create some short term challeges, although we expect the idustry will adapt to provide ew products ad pricig structures i order to cotiue to meet the growig uderlyig demad for real estate alteratives. I additio, greater trasparecy may attract a wider group of real estate ivestors to NTRs. This is perhaps the biggest opportuity for the NTR sector to create a better ad more trasparet product that ca access a much larger pool of ivestors. We expect to see the NTR sector adapt ad evolve i the followig ways: Elarge the alterative ivestmet audiece. At preset, oly oe i five fiacial advisors have cliets who ivest i o-traded REITs, 1 which gives the idustry plety of room to grow. Lower fees ad trasparet pricig will make NTRs appealig to more advisors ad with a bigger pool of ivestors, aggregate fee volumes should icrease. New fee structures. The itroductio of ew share classes with lower fees ad commissios that are also more back-ed weighted will reduce the upfrot impact to cliet statemets. I additio, this will allow more dollars i the groud," which i tur will improve log-ru ivestmet returs. While we do expect overall commissio rates ad fee levels to come dow, give the private ature of NTR ivestmets, it is also reasoable to assume that the sector will support fee ad commissio levels that are higher tha for mutual fuds. 1 IPA Stager FA Survey October REITIsight March 2014

3 A market commetary by RRE s Real Estate Securities Global Portfolio Maager, Scott Crowe REITIsight Stimulate ew product developmet. Curretly NTRs ejoy both a headlie yield as well as a distributio profitability advatage over products such as iterval fuds 2 ad daily NAV REITs. 3 Greater parity betwee NTR commissios, trasparecy o pricig ad potetially lower yield 4 will icrease the relative attractiveess of these other products that already ejoy fee trasparecy. I additio, we would expect to see the itroductio of more istitutioal real estate property types ad icrease product diversity away from Net Lease. 5 Lower costs. More trasparecy regardig the impact of the operatig ad fiacig activities o shareholder ecoomics should reduce due diligece costs. The ability for the sector to fid approaches to reduce the costs of ivestmet i NTRs will become more importat uder the ew FINRA cliet statemet rule regime. The power of aggregatio Mutual fuds provide a good precedet for the ability of a more widely distributed ivestmet product to coicide with lower commissios ad simultaeously lead to a sigificat icrease i value creatio. While the mutual fud structure had bee i existece for decades, it was t util the late 1980s that demad sigificatly icreased, reflectig the expasio of retiremet savigs plas ad a broader pickup i demad for fiacial assets, buoyed by risig equity prices, as well as low ad stable iterest rates. Assets of retiremet savigs plas ivested i mutual fuds rose from oe-fifth of all fud assets i the early 1990s to more tha oe-third by the ed of the decade. The respose of the idustry was to expad the umber ad variety of mutual fuds ad lower the cost of acquirig ad holdig mutual fuds. The growth of the equity mutual fud idustry actually coicided with a sigificat reductio i fees ad costs (as a percetage of assets). This icrease i assets ad decrease i fees reflects the power of aggregatio; ecoomies of scale ca lower costs as a percetage of each ivestor s allocatio ad allows a profitable distributio model with lower commissios due to higher volume. For the real estate alteratives idustry (icludig NTRs) there is potetial to create similar scale opportuities through the Iterval Fud structure. Iterval Fuds, through the ability to comigle both public ad private ivestmets withi a mutual fud, ca aggregate a large amout of assets to ivest i a wide pool of products. Iterval Fuds may be positioed to reduce tradig costs, cetralize due diligece ad research, lower fees ad cotribute to the growth i alterative real estate ivestmet ad NTR assets. 2 Iterval Fuds are 40 Act Mutual Fuds that offer quarterly liquidity ad eable simultaeous ivestmet i both private ad publicly traded assets (The Stager Digest) 3 I order to address valuatio ad liquidity shortcomigs, some REITs have created more trasparecy with daily NAV offerigs (Seekig Alpha, March 2013) 4 Due to disicetives for over distributio ad the impact of a ogoig aual fee deductio i the istace of a C share structure 5 More trasparecy o valuatio will ecourage more focus o total retur ad support real estate asset types with lower iitial yields REITIsight March

4 2016 ad beyod At the March REISA Sprig Symposium we were asked what we thought 2016 would look like. We are optimistic. With all due caveats about our lack of a crystal ball, here, i brief, are our thoughts: There is eormous demad for ucorrelated yield i today s eviromet of low-bod yields ad market volatility, with icome-seekig retirees lookig for more diversificatio. Agaist this backdrop, the demad for the retur profile of ivestmets backed by physical real estate will grow. Lower fees ad a broader uiverse of ivestors may move the sector further ito the maistream ad allow the idustry to access a much wider pool of ivestors. We expect a more diverse sector with ew istitutioal sposors ad ew product types, icludig more istitutioal real estate property types, ad the growth of ew structures such as Iterval Fuds ad daily NAV REITs. Oce the idustry evolves from the ear-term challeges, the FINRA rule chages could i fact be a massive catalyst for iovatio ad growth. Scott Crowe, Global Portfolio Maager Scott Crowe is the Global Portfolio Maager for Resource Real Estate. Previously, he was the lead Global Portfolio Maager for Cohe & Steers, where he led the ivestmet ad research team of over 20 portfolio maagers ad aalysts. Mr. Crowe was accoutable for over $10B i FuM across the firm s global, iteratioal ad emergig market portfolios. Prior to this, Mr. Crowe held the positio of Head of Global Real Estate for UBS Equities Research where he built ad maaged the US REIT divisio while leadig a global team of more tha 40 aalysts. Scott bega his career at Paladi Property Securities ad was also a Associate Lecturer at the Uiversity of Techology Sydey. Scott holds a Hoors Fiace Degree from the Uiversity of Techology Sydey ad a Bachelor of Commerce from the Uiversity of NSW/Natioal Uiversity of Sigapore. 4 REITIsight March 2014

5 A market commetary by RRE s Real Estate Securities Global Portfolio Maager, Scott Crowe REITIsight I the ews: ARCP to spi off ARC America Realty Capital Properties to teder outstadig shares of Cole Credit Property Trust Ilad America makes limited buyback offer ARCP to spi off its power ceters ad multi-teat retail to a ew etity America Realty Capital Properties, Ic. (ARCP) will spi off its power ceters ad multi-teat retail to a ew publicly traded etity. The ew compay will be called America Realty Capital Ceters, or ARCeters (ARCM), ad will iitially ow 69 shoppig ceters. It will be 25%-owed by ARCP ad maaged exterally by ARCP. The upside for ARCP (ad probably the motivatio) is that a lower cost of capital could be eabled by creatig a separate multi-teat, retail-focused vehicle through ARCM. This would assist acquisitio capabilities for both etities, icludig successful liquidatios of ARC sposored NTRs. However we believe a improved cost of capital may prove elusive give that ARCM will be relatively highly leveraged (at 7.5x et debt/ebitda) ad will be a exterally advised REIT (which has historically led to heavily discouted valuatios). ARCP to teder outstadig shares of Cole Credit Property Trust ARCP also aouced a teder offer of $7.25 per share for all outstadig shares of Cole Credit Property Trust (CCPT I). The origial offerig price was $10, ad the curret estimated NAV is $6.55. At $7.25 per share, the et purchase price reflects a cash cap rate of 7.8% (which we view as a attractive price for ARCP) ad is approximately $159.2 millio, which brigs ARCP s acquisitio volume to $1.2 billio so far this year. Ilad America makes limited buyback offer Last moth we looked ito the value of Ilad America Real Estate Trust, Ic., which, with $9.7 billio i assets, is the largest o-traded real estate ivestmet trust. You ca fid our review here. The compay has ow offered to buy back 6% of its shares. The all-cash offer of ot more tha $6.50 per share ad ot less tha $6.10 per share equates to a et price of about $350 millio. A modified Dutch auctio could lift the offer to 8% of shares for a additioal $120 billio. We applaud the use of proceeds from divestmet to provide liquidity for shareholders at a price which should create value for those shareholders who remai ivested i Ilad America. Maagemet also states that the REIT will become self-maaged, for o fee, which we believe is a good outcome for Ilad shareholders. REITIsight March

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REITInsight. In this month s REIT Insight:

REITInsight. In this month s REIT Insight: REITIsight Newsletter February 2014 REIT Isight is a mothly market commetary by Resource Real Estate's Global Portfolio Maager, Scott Crowe. It discusses our perspectives o major evets ad treds i real