I N PA R T N E R S H I P W I T H
REIT INVESTING
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2011
Supplement
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National Retail Properties (NYSE: NNN), a real estate investment trust, invests in single tenant net-leased retail properties nationwide. NNN has generated consistent returns for more than a decade supported by its strong dividend yield and 22 consecutive years of increased dividends. Its annual total return for the past 15 years has been 12.3%. NNN maintains a conservatively managed, diversified real estate portfolio with properties subject to long-term, net leases with established tenants. Its 1,248 properties are located in 46 states with a total gross leasable area of approximately 13.6 million square feet. Current occupancy is 96.9% and these properties are leased to more than 285 tenants in 36 industry classifications. A net lease shifts property operating expenses (i.e., maintenance, taxes, insurance and utilities) to the tenant, so the rental revenue NNN receives has significantly fewer expenses and more stable net cash flow. NNN is one of 105 publicly traded companies in America to have increased annual dividends for 22 or more consecutive years.
CompANy HigHLigHTs:
22 consecutive years of annual dividend increases Strong balance sheet - investment grade rated by S&P, Moodys and Fitch Diversified: 1,248 properties totalling 13.6 million s.f. Total market capitalization over $3.5 billion Long-term net leases with average remaining lease term of more than 12 years 96.9% occupancy
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Convenience Stores Restaurants - full service Automotive Parts Theaters Automotive Service Sporting Goods Restaurants - limited service Drug Stores Books Health and Fitness
23.1% 10.7% 7.7% 5.8% 5.4% 4.6% 4.1% 3.8% 3.0% 2.9%
Total Assets $2.8 billion AFFO per share (Q2 2011) $0.42 Quarterly Dividend $0.385 Annualized Dividend $1.54 Annualized Dividend Yield (06/30/11) 6.3% 52-Week Stock Range $21.05 - $27.73
Southeast 29.7%
NYSE: NNN
Annualized Dividend Yield: 6.3%
Kevin B. Habicht
Investor Relations:
Chris Barry 450 S. Orange Avenue Suite 900 Orlando, FL 32801 (800) NNN-REIT (407) 265-7348 Fax: (407) 650-1044 www.nnnreit.com
R E A LT Y
INTEGRITY
CREATIVITY
STABILITY
Kimcos Shopping Center Portfolio Contains Positive Defensive Attributes and is Well Positioned for the Environment & Long-Term Growth
Top 20 Metro Statistical Areas (MSAs), including Puerto Rico, generate more than 60% of Annual Base Rent Strategic Asset portfolio boasts above average median household income demographics versus the associated MSA Bias toward high credit quality tenants under long-term leases Non-discretionary food and pharmacy are some of our largest tenants Approximately 55% of properties contain a grocery/food component Strong position with discount stores and off-priced retailers Geographically diversified Conservative policy regarding TIs means in-place rents are not artificially inflated Capturing value through the re-leasing of below-market spaces and executing redevelopment opportunities
C ON S E RVAT I V E B A L A NC E SH EE T Strong balance sheet provides liquidity and funding flexibility. I N V E S TM E N T G R A D E RATI N G Standard & Poors | Moodys | Fitch (BBB+/Baa1/BBB+) M AN AG E M E N T T E A M Established and well recognized.
www.kimcorealty.com
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Macerich owns 70 regional malls in 72 million square feet, optimally located in the nations most coveted markets defined by dominant market share, strong long-term growth prospects and powerful demographics and psychographics. These malls are designed to deliver results with fresh and exciting shopping experiences that start with undeniably lucrative markets and the very best in quality real estate.
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R E IT
By Brad Case
IN V E S T I N G
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Vice President, Research and Industry Information, National Association of Real Estate Investment Trusts
would have had to displace 44 percent of her equity holdings. Using cash as a portfolio stabilizer would have brought her equity returns down to 8.81 percent per year costing her an extra 63 basis points per year relative to the S&P 500, in spite of your sector-picking skill. Diversification is a much more efficient way to bring down portfolio volatil-
tate without giving up the liquidity and other benefits of the stock market. With that combination, your client would have been able to slash her cash position by 54 percent, and the combined assets would have generated returns averaging 10.84 percent per year again of 140 basis points per year relative to the S&P 500 with, as required,
Declining correlations
the relationship between reit and s&P 500 total returns diminishes over the length of the investment time horizon
1 month 6 months 12 months 24 months 36 months 48 months 60 months
ity. In the same example, suppose you had combined equal holdings of the high-return info-tech sector of the stock market with listed equity real estate investment trusts (REITs), which give your client exposure to a completely different asset class income-producing real es-
no incremental volatility. In short, portfolio stabilization is a job best left in the hands of diversifying assets. That doesnt mean, though, that cash is the enemy: In fact, cash can give your client the latitude to benefit from your abilities in both strategic and tacti-
pick up photos
Renew Drivers License
fertilizer, mulch
golf balls
iTunes card
Theres nothing fancy about everyday shopping needs: picking up dry cleaning in the morning, grabbing pizza for lunch, shopping after work for a new DVD, take-out food, sweat socks, shampoo or even bread and butter. Everyday necessity shopping drives daily customer trafc to the retail, food and big box stores at Cedars Bread & Butter Shopping Centers. Our tenants have long-term leases that generate predictable cash ow and our strong balance sheet permits us to take advantage of attractive acquisition and redevelopment opportunities. Centers that serve everyday shopping needs is our formula for good business.
60.9%
GEOGRAPHIC FOOTPRINT
IN HIGH-ENTRY-BARRIER MARKETS We manage a portfolio of over 130 shopping center properties with approximately 16 million square feet of GLA, located in market areas that have features that align with our business strategy: Significant barriers to entry Stable communities Fixed traffic patterns Anchor tenants are the prime operators in their respective market areas
30.9%
8.2%
30.9% 60.9%
Mid-Atlantic States Other States
DEVELOPMENT PIPELINE
There are presently seven projects in the Cedar Pipeline. Four are ground-up projects and three are redevelopment projects. The total budget for the seven projects is $60 million. Pre-leasing of the seven projects is in excess of 80% at this time.
8.2%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Favorable debt maturities with a low average interest rate, provide underlying nancial stability for our portfolio
*Does not include (a) $29.5 million outstanding balance under stabilized property credit facility due in January 2012, subject to a one-year extension option, or (b) $103.1 million outstanding balance under development property credit facility due in June 2011, subject to a one-year extension option. Does not include managed properties.
2
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2
Scheduled Lease Expirations as a percentage of total annualized base rents
*Includes managed properties and month-to-month tenancies.
31% SUPERMARKETS 8% DISCOUNT DEPARTMENT STORES 8% DEPARTMENT STORES 8% BUILDING MATERIALS/GARDEN 7% ENTERTAINMENT/COMMUNITY 6% FOOD SERVICE 6% DOLLAR STORES/NOVELTIES 4% PERSONAL SERVICE
www.cedarshoppingcenters.com
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cal portfolio choices. By protecting your clients from short-term liquidity problems, cash can help them also achieve strong long-term investment returns. In effect, clients can use cash to separate the serious part of their portfolio the portion that they may or will depend on to finance spending needs from the funny part on which they can earn seriously high returns. You can help accomplish this by encouraging your client to think of cash not as a given percentage of her overall portfolio, but as a given number of dollars enough so that shes comfortable her expenses will be covered through even a severe downturn. That way she knows she wont have to sell assets during a downturn shell be able to ride it out and benefit from being in the market during the recovery. And that knowledge will give her the confidence to use a more aggressive, high-return asset allocation. Several advisors suggest that cash holdings should be enough to cover between six months and three years of anticipated household spending. Insulating your clients investment portfolio from her liquidity needs makes it possible for her to realize the full benefits of diversification. To extend the previous example, if your client were confident that her liquidity needs were covered, then she might be comfortable with volatility, say, one-fourth greater than the S&P 500 in her equity portfolio. In that case, splitting her equity holdings between the information-technology sector and listed equity REITs would have produced returns averaging 12.72 percent per year since 1990. With an initial investment of $100,000 that equity portfolio diversified among two asset classes, benefiting from strong sector selection, and with easily tolerated volatility would have generated terminal wealth (as of mid-2011) of more
than $1 million, 75 percent greater than the $591,000 that would have come from the S&P 500. As you know, assets with lower correlations provide greater diversification. Surprisingly, though, the correlations of assets from different assets classes are actually lower when your clients are able to use longer investment horizons meaning that the benefits of diversification actually become stronger when your clients dont have to raid their investment portfolios, but can let the synergies among different asset classes work the magic of diversification. Thats the real value of cash: giving your clients the comfort level to benefit from longer investment horizons. Using the returns every six months for stocks (the S&P 500) and listed equity REITs (the FTSE NAREIT Equity REIT Index) since the beginning of 1990, the correlation between REITs and stocks is 64.8 percent, indicating strong diversification benefits. Thats not surprising, because REITs, though traded through the stock market, give investors access to a different asset class. With longer investment horizons, though, the correlation between REITs and stocks declines sharply: just 56.5 percent using 12-month periods, 45.5 percent over 24-month periods, and 32.7 percent over 36-month periods. (The correlations continue declining over even longer investment horizons to 20.0 percent over 48-month periods, and an amazing 4.7 percent over 60-month periods but holding enough cash to cover such long periods would damage the returns of even very wealthy investors.) For investors who can avoid disrupting their portfolios, then, the diversification benefits of holding both REITs and non-REIT stocks can be huge. For example, the dot-com bubble corresponded with a period of softness in the commer-
cial real estate market; as a result, while stock returns from March 1997 to March 2000 averaged a stupendous 26 percent per year, REIT returns were virtually flat. Over the next three years, however, the situation reversed, with REITs gaining 47 percent while stocks hemorrhaged 41 percent of their value. In truth, it would have been difficult for even the most prescient and gutsiest advisor to convince a client to unload dot-com stocks and sink the gains into REITs in March 2000. Far better to have helped your client build a portfolio that was diversified for a three-year investment horizon and given her the confidence to ride that asset allocation through the markets zigs and zags. That approach would have given your client returns averaging 6.1 percent per year during a very difficult six-year market period, while the S&P 500 returned just 3.4 percent per year ultimately nearly doubling her wealth. (The REIT and non-REIT parts of the stock market continue to move very differently. For example, from December 2007 to December 2010, including the liquidity crisis, REITs gained 8.8 percent per year on average while stocks were losing 0.4 percent per year.) In short, computing correlation coefficients using monthly returns data actually understates the longer-horizon benefits of asset-class diversification while it overstates the benefits of diversifying across different non-REIT segments of the stock market. Your task, then, is to help your client develop a level of comfort with investing for the long horizon. She may need to hold additional cash to cover liquidity crises before she can be fully confident in the markets long-term potential but once youve made her comfortable with long-term investing, you can bring the power of diversification fully into play to maximize her wealth. n
SEPTEMBER 2011
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R E IT
By Ed MCCaRThy, CFP
IN V E S T I N G
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ts been a good year for real es- securities portfolios; and Paul Curbo, tate investment trusts (REITs). CFA, portfolio manager and member of the Real Estate SecuriAccording to the ties Portfolio Management National Association and Research Team with of Real Estate Trusts Invesco Real Estate. (NAREIT), the FTSE NAREIT All Equity What is the argument REITs Index increased for REITs as an investby 10.62 percent in the ment class? first half of 2011 versus Bohjalian: Investors seek6.02 percent for the S&P ing to diversify their port500. For the 12 months folios beyond traditional ending June 30, 2011, stocks and bonds would the REIT index was up BohjalIan do well to consider an al34.09 percent versus the location to REITs, which are tied to real S&P 500s 30.69 percent gain. Longer-term results also favor assets commercial properties that REITs. NAREIT reports that the FTSE generate steady rental streams. Because NAREIT All Equity REITs Index has of this, the characteristics of this asset outperformed the S&P 500 over the past class have been compelling. 10-, 15-, 20-, 25-, 30- and 35-year peForemost, they offer the potential riods ended June 30. Income investors for competitive total returns linked to have benefited from REITs, as well. economic growth and attractive current As of June 30, the FTSE NAREIT All income due to REITs minimum payEquity REITs Indexs yield was 3.44 out requirements. REITs are required percent compared to 1.92 percent for to distribute at least 90 percent of their the S&P 500. taxable income to shareholders. And Research magazine asked two lead- historically, real estate stocks have exing real estate portfolio managers for hibited low volatility and low correlatheir outlook on the sector: Thomas tions to other asset classes. N. Bohjalian, CFA, senior vice president and portfolio manager for Cohen Curbo: I think from a long-term per& Steers U.S. and global real estate spective there are three main reasons for
The Research Guide to REIT Investing
investment in REITs. One is income, in that REITs produce fairly consistent cash flow due to the underlying lease structure of how they receive their income. That produces a dividend yield of about 3.5 percent, which is relatively attractive compared to the S&P 500 (under 2 percent). Thus, income would be the first point I would make. The second point would be diversification for an overall portfolio. If you look at the long-term diversification of REITs as part of a portfolio, the correlation with the S&P 500 is around 0.54. Its also a fairly low correlation to an aggregate bond portfolio, with a long-term 30-year correlation of 0.14. I think those overall portfolio diversification benefits are helpful for most institutions and individuals. Thirdly, I would say theres the longterm historical performance of the asset class. Over a 20-year period, its delivered a return of 11.4 percent versus the S&P 500 at 8.7 percent very competitive historical returns.
Where do you think we are in the REIT investment cycle? Bohjalian: REITs are in the recovery and expansion phase of the investment cycle. Real estate companies for the most part exited the recapitalization stage of the cycle in 2010.
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Today, most property sectors in the U.S. have bottomed out and turned upward, setting the stage for even more investment activity and accelerating internal growth. We expect cash flows will continue to improve as vacancies decline and landlords gain the leverage to charge higher rents. Id note that, unlike previous commercial real estate cycles, the current one has been marked by low levels of new supply. Construction loans dropped off dramatically during the credit crisis. This has resulted in far less of the problematic oversupply that currently plagues residential markets in some countries.
Curbo: I would say its a pretty favor-
able point. I think were in the middle of commercial real estate fundamentals being pretty healthy with demand outpacing supply. Also, earnings growth for these companies is in the high single digits to low double digits, and dividend increases are likely to follow on par or even better than the earnings growth that were seeing. If you look at the valuations today, the stocks are trading at a slight premium to the underlying asset value of the companies. But given the improvement in fundamentals that were seeing and were likely to see over the next couple years, I think that its a fairly good time to invest in REITs. I would say the only caveat to all this is the overall economy and all the headwinds that we see in terms of economic and employment growth. Those also present a headwind for REITs, as well.
Where are you finding REIT investment opportunities today, and why do you like those sectors? Bohjalian: We favor economically
are focused on geographic locations Occupancy today is in line with its historiwith attractive income profiles that can cal average, which you cannot necessarily better withstand inflation in food and say for most sectors in the United States. I gas prices. think it entered the downWe also have a favorturn relatively healthier able view of apartment than most other asset landlords. They have classes, and its recovery been benefiting from inhas been a bit stronger. creased demand, strong The areas that are pricing power and very most favorable are the low new supply. Occuglobal gateway markets, pancies have been supthe largest markets in ported by fewer people the country New York, having the confidence to San Francisco, Los AngeCuRBo purchase single-family les and Washington, D.C. homes. It remains difficult those are the markets to obtain a mortgage, and home prices with the healthiest trends today, and continue to decline without reaching a we think theyre likely to continue to clear bottom making even those with outperform. the means to buy a house reluctant to leave their apartments. Has the recession and the economys slow recovery changed your Curbo: One of the main places would be investment universe? Bohjalian: Remarkably, our invest-
sensitive sectors, including hotels, regional malls and high-growth urban offices protected from new supply. Among regional mall companies, we
SEPTEMBER 2011
the apartment space. All the turmoil that were seeing and the very slow or lack of recovery in the single-family housing market are really a benefit to the apartment space. Home-ownership rates have come down from their peak they peaked in 2004 at about 69 percent. Today theyre about 66.4 percent, but theyre still above their long-term average. Theres still a movement that were seeing from home ownership into rentals, which is benefiting the apartment space. That is most acute in the age demographic of individuals in households under the age of 35, who are the prime renters for apartments. We see that as a long-term demographic shift that is beneficial to the space. In addition, new construction volumes in apartments are quite low by historical standards. Over the next two or three years, we see below-average construction volumes with fairly decent demand levels, which should result in rent growth that is fairly attractive. I would also say the CBD (central business district) office market is attractive.
ment universe emerged from the recession largely intact. This is attributable to successful capital raises done by real estate companies, first involving equity offerings and then bond and preferred security issuance, as well. This enabled REITs to strengthen their balance sheets and even make property acquisitions on attractive terms.
Curbo: I think the slow recovery does
have an impact. Our process of how we look at sectors and markets begins with a rent-growth forecast at the market level. We take into account the differentiating characteristics of supply and demand at that local market level, so our views are really driven by our bottom up research. Tenant demand is a bit slower in this cycle because the job growth is not there. I talked about secondary retail as being an area where theres a bit of challenge. Another area is suburban office, where we just need more job growth for that sector to perform. n
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R E IT
By Alexei BAyer
IN V E S T I N G
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2 0 1 1
Bright Spots
Taking income and price into consideration, the index has outperformed most other asset classes: U.S.-equity REIT total returns of 11.79 percent were more than double those of the S&P 500, 3.87 percent, in the first seven months of 2011, and significantly outperformed the market in July. A number of sub-sectors of the real estate market, which REITs allow investors to focus on, have done well. The self-storage sector had a gain of 19.54 percent through July 2011, apartments improved 19.50 percent, and regional malls moved up 18.41 percent. Some REITs are benefiting directly from the market bust. Shopping malls anchored by value-oriented retail tenants are doing well, because in the current economic climate Americans are concerned with saving money. Multi-family dwellings are also benefiting, since there has been a shift toward renting.
Some investment strategies identify markets where prices have held up well. Commercial properties and coops in Manhattan or houses in and around Washington, D.C., and Houston, for instance, have been driven up because of the influx of job-seekers. Even in distressed areas, there are some good money-making ideas such as purchasing distressed properties at rock-bottom prices and renting them out. However, there is a risk that too much money will pile into too few investment opportunities. Bubbles tend to be a serial event because they typically result from a particular investor mindset. Before the collapse of Lehman in 2008, bubbles kept popping up one after the other. The real estate bubble began to deflate in the final months of 2007, but stock prices took off, pushing the Dow Jones industrial average to an all-time high. As stock prices began to deflate in early 2008, a bubble emerged in commodities, as oil prices surpassed $140 per barrel. The same may be happening in some select real estate sectors, like commercial real estate in Manhattan, which already seems overvalued, and yet it keeps attracting strong inflows of money from hedge funds, foreign sovereign funds and other investors.
Turnaround Time
will not start to bring solid, predictable returns to investors until the current crisis is overcome. When will the turnaround occur, then? The residential real estate sector is a crucial part of the traditional economic model: In a recession, the Federal Reserve typically lowers interest rates, which allows families who delayed buying homes to come into the market. The housing market has a strong multiplier effect on the rest of the economy, because buying homes also entails buying furniture, consumer electronics and a second car for local commuting, hiring landscapers, etc. Once existing homes begin to move, the construction industry comes back to life, as well.
Systematic Solutions
Real estate investment opportunities will probably continue to emerge, though residential real estate will not be able return to health meaning that it
The government could theoretically develop a system that would eliminate the backlog of homes in the market while at the same time reducing the drain on its resources (since Fannie Mae losses end up on the lap of the taxpayer) and reviving the construction industry. By introducing a gradual tightening of requirements for energy efficiency for new and resold homes, and giving homeowners generous tax credits and subsidized loans to install solar panels and water management systems, efficient insulation and smart timers, the government could plow some funds into giving a leg up to domestic high-tech industries and putting construction workers back to work. n
SEPTEMBER 2011
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CORPORATE OVERVIEW
Founded in 1992, LTC is a self-administered real estate investment trust (REIT) that primarily invests in senior housing and long-term care properties through facility lease transactions, mortgage loans, and other investments. At June 30, 2011, LTC had investments in 89 skilled nursing properties, 102 assisted living properties, 14 other senior housing properties, and two schools. These properties are located in 30 states. Other senior housing properties consist of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.
COMPANY HIGHLIGHTS
Diversified Portfolio of Well-Structured Leases and Loans Attractive Yield and Well-Protected Monthly Dividend Conservative Balance Sheet Strong Management Team
PORTFOLIO SUMMARY
Six Months Ended June 30, 2011 Gross Investments % of Investments Rental Income Interest Income % of Revenues No. of Props No. of SNF Beds No. of ALF Units No. of ILF Units Investment per Bed/Unit
Type of Property
89 102 14 2 207
423 423
GEOGRAPHIC DIVERSIFICATION
2829 TOWNSGATE ROAD, SUITE 350 | WESTLAKE VILLAGE, CA 91361 805-981-8655 PHONE | 805-981-8663 FAX
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$0.498
$0.55
1999
2001
2003
2005
2007
2009
2011*
Since inception, W. P. Carey has consistently increased distributions by employing a conservative investment strategy and focusing on investing for the long run. We are pleased to share the continuing success of that approach with our shareholders.
Past performance is not a guarantee of future results. This material does not constitute an offer to sell or a solicitation to buy any securities described herein.
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