From the March 2008 issue of Research Magazine • Subscribe!

March 1, 2008

Special Scenarios

As conditions in the housing and credit markets unfold, certain real estate investment trusts are positioned for solid financial performance.

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Ken AvalosRaymond James (727) 567-2660Ken.Avalos@RaymondJames.com

Paul D. PuryearRaymond James (727) 567-2253Paul.Puryear@RaymondJames.com

REIT Outlook: We expect 6-8% funds from operations (FFO) growth annually over the next two years (although we acknowledge there is some risk to this projection) and when combined with 4-5% dividend yields, which are also growing, this would normally extrapolate into a 10-12% total return in 2008. But as you might suspect, there is quite a bit more to this story in the current environment.

Fundamentally, we like the outlook for commercial real estate. We see little threat in new supply but are less sanguine when it comes to demand as we believe recent economic data points foretell at best a significant slowdown in growth and the odds for an outright recession seem to increase daily.

But as we write this report we are in the "muddle through" camp, albeit with slower GDP growth in 2008 than the 2.1% consensus of the 66-economists survey published by Bloomberg. We think 1.0-2.0% growth is a more likely scenario, enough to sustain moderate commercial real estate tenant demand. The housing market, which we track extensively, is a long way from staging a recovery in our view, and overhangs any economic outlook, along with the credit issues that have roiled the debt markets.

Unfortunately the investment outlook for REITs, and almost everything else, will not clear up until the credit markets stabilize and confidence rises in the outlook for economic growth. We think both will likely happen as we get past mid-year 2008 and have a better view of the ultimate impact of the 2 million mortgage loans that are scheduled to reset over the next 24 months.

Based on this view, we recommend that investors market weight the REIT sector within their respective portfolios, and depending on investors individual economic outlook and risk tolerance, balance their respective allocations across the property types accordingly.

We believe the data historically supports the contention that the real estate cycle runs seven years peak to trough and seven years trough to peak. It's not a stretch for us to believe that four years into this up-cycle may leave four or five more years of general up-cycle trends depending on how this mid-cycle correction plays out. We think this expectation combined with the catalysts of a lower 10-year yield benchmark, reasonable earnings growth and the return of the M&A market may be enough to extend the investment horizon for the stocks.

National Retail Properties (NNN) Outlook: The company recently reported third quarter operating results, delivering FFO (funds from operations) per share of $0.46 versus our estimate of $0.44 and the Street's consensus of $0.45. The upside from our model was driven primarily by gains on inventory portfolio sales as well as a slightly better G&A result than we modeled.

Management increased the low end of its 2007 FFO guidance by one penny to $1.84-1.87 per share and introduced 2008 FFO guidance of $1.94-$2.00 per share. Our FFO/share estimates are essentially unchanged, with 2007 now at $1.87 (+$0.01) and our 2008 estimate now $1.99 (-$0.01), and represent 12% and 7% year-over-year growth respectively.

National Retail continues to reap the benefits of the company's focus on retail consolidators or retailers in fast growth sectors. Management continues to do an outstanding job with sourcing accretive acquisitions, and with solid FFO growth prospects and an attractive 6% dividend yield, the risk/reward equation appears favorable for NNN shares. We maintain our Outperform rating on NNN shares, and we are re-establishing our price target at $25 per share.

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Lou TaylorDeutsche Bank

203-863-2381HYPERLINK "mailto:Louis.taylor@db.com"Louis.taylor@db.com

REIT Outlook: As was the case in Q3, quarterly results matter a little, but 2008 guidance matters more. For our coverage universe, 15 of the 41 companies have already given guidance. So the real focus will be on those companies that have not. The apartment sector has the greatest divergence. As we look at our estimates relative to the Street, we're generally above consensus in the apartment sector.

But the apartment estimates have the widest range of estimates, both low and high. There are a few very low estimates for each company which is tugging the consensus lower. As for our assumptions, we're only forecasting 4% revenue growth in 2008. With the turmoil in single family likely to extend into 2H 2008, we think our assumptions are still reasonable.

Top Picks: ProLogis (PLD), Simon Property Group (SPG) and Vornado Realty Trust (VNO)

At $0.59/share for Q4, we're at the lower end of a consensus for ProLogis that ranges from $0.58/share to $0.79/share, with a mean of $0.68/share. We may be low, but we've taken a conservative view of Q4 Corporate Distribution Facilities Services' (CDFS) dispositions as the company will likely push sales it doesn't need to meet its numbers into '08. Development starts will be a key data point.

For core metrics, we expect rents spreads to be 10%, which is roughly even with the 11% results in Q3, and stabilized occupancy to remain around Q3's 95.5%. As for 2008, we're at $4.80, versus management guidance of $4.65 to $4.85 and consensus of $4.84. The company should also provide detailed '08 drivers with Q4 results.

We expect Simon to deliver Q307 FFO of $1.60, which compares to Street estimates at $1.67. For the full year, excluding the charge for the Arizona write-off ($0.11/share), we are at $5.85, which compares to management's guidance for FFO of $5.83-$5.88. In term of the core, we expect operations to remain stable with a slight seasonal pick up in occupancy and healthy 20% rent spreads.

For Vornado, our estimate for the quarter is $1.38/share vs. consensus of $1.43/share. We're at the lower end of consensus, which ranges $1.34 to $1.50. We expect continued solid performance from VNO's core businesses. For office rents, we are looking for 25% spreads in NYC and 5% in DC. For retail, we expect consistent growth of 3% in same store net operating income (NOI) in 2007 and have rent roll ups of 20%. We're at $6.03 for 2008 which is a penny higher than consensus.

KIMCO (KIM) Outlook: KIM's core portfolio continues to perform, its development pipeline remains robust, and it has consistently found ways to increase its asset-management platform and grow earnings. These elements come together to deliver an attractive long-term earnings growth profile (10%-plus FFO).

Our $0.54 estimate for Q407 is inline with the consensus. We expect stable core operations with 3% same property NOI growth and 10% rent spreads. Transaction volumes remained modest with $116 million of acquisitions and $226 million of dispositions in Q4. Management indicated at our Outlook Conference that cap rates have nudged up. This is impacting margins on its merchant development pipeline, but easing construction costs and better land availability are helping keep margins within their historical range. We have just $2 million ($0.02/share) of gains from merchant building, net of taxes, in our Q4 estimate. For 2008, we expect FFO of $2.75, which compares to the company's $2.70-$2.78 guidance.

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