INVESTMENT STRATEGY & COMMERCIAL REAL ESTATE OUTLOOK

(1)

Cole Capital: An American Realty Capital Properties Company

INVESTMENT STRATEGY &

COMMERCIAL REAL ESTATE OUTLOOK

Kevin White, CFA, SVP, Investment Strategy and Research

THE VIEWS EXPRESSED IN THIS PRESENTATION ARE THOSE OF THE PRESENTER AS OF THE DATE OF THE PRESENTATION AND ARE SUBJECT TO CHANGE. THE FORWARD-LOOKING STATEMENTS IN THIS PRESENTATION ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES, FORECASTS AND PROJECTIONS, AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THESE FORWARD-LOOKING STATEMENTS, AND YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY SUCH STATEMENTS.

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THE CRISIS IS

FINALLY OVER!

(3)

Consumers

Spend

Hiring

Corporate

Profits

Corporate

Investment

THE VIRTUOUS

CIRCLE

Saving

Taxes

(4)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

TO

TA

L B

A

N

K CREDIT

(YEA

R-O

V

ER-YEA

R,

12 -MO

N

T

H MO

VIN

G

A

V

ERA

G

E)

Sources: Bank Credit (Federal Reserve); Inflation (BLS); ARCP calculations Data as of July 31, 2014

BANKS ARE

(5)

HOUSEHOLD

DEBT BURDENS

ARE LOW

Source: Federal Reserve Data as of March 31, 2014

14%

15%

16%

17%

18%

19%

60%

70%

80%

90%

100%

110%

120%

130%

140%

1980

1984

1988

1992

1996

2000

2004

2008

2012

HOUSE

H

OLD

FI

NANCI

A

L

OBLI

GATI

ONS

RATI

O (%

OF D

ISPOSABLE

IN

COM

E)

HO

USEHO

LD DEB

T

(%

O

F DISPO

SA

BL

E

INCO

ME)

Household Debt

(6)

Sources: Federal Reserve (Household Net Worth); Bureau of Economic Analysis (Personal Savings Rate) Data as of March 31, 2014

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

400%

450%

500%

550%

600%

650%

700%

1993

1998

2003

2008

2013

PERSONAL SAVINGS

RATE

HOUSE

H

OLD

NE

T

WORTH (%

OF D

ISPOSABLE

IN

COM

E)

Net Worth

Savings Rate

HOUSEHOLD

FINANCES ARE IN

DECENT SHAPE

(7)

FEDERAL FINANCES

ARE IMPROVING

Source: Congressional Budget Office Data as of August 27, 2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

FE

D

ERAL

D

EBT HE

LD

BY TE

PUBLI

C

(%

OF

GD

P)

FEDERA

L DEFICIT

(%

O

F GDP)

Deficit

Debt

Forecast

(8)

Source: Bureau of Economic Analysis (Profits) Data as of June 30, 2014

CORPORATE

PROFITS HAVE

REBOUNDED

6%

7%

8%

9%

10%

11%

12%

13%

14%

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

CORPORATE

PROFI

T

S (%

OF GD

P)

(9)

JOB

CREATION

HAS BEEN

HEALTHY

Fuels Consumer

Spending

Demand for

commercial

real estate

(10)

THE ECONOMY

SHOULD PICK

UP IN 2015

Source: Moody's Analytics Data as of July 31, 2014

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2000

2002

2004

2006

2008

2010

2012

2014

2016

GDP GROWTH

Forecast

(11)

EXPANSIONS SINCE WORLD WAR II

0

2

4

6

8

10 1980 - 1981

1958 - 1960

1945 - 1948

1970 - 1973

1954 - 1957

1949 - 1953

1975 - 1979

Avg Since 1938

2009 - 2014

2001 - 2007

1938 - 1944

1982 - 1990

1961 - 1969

1991 - 2000

EXPANSION LENGTH (YEARS)

EXPANSIONS

SINCE WORLD

WAR II

Source: Moody's Analytics Data as of June 30, 2014

(12)

-800

-600

-400

-200

0

200

400

600 1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

YIEL

D

CURVE (1

0-YEA

R

TREA

SURY YI

ELD

MINUS FEDERAL

FUNDS RATE, BPS)

Recession

Spread

YIELD CURVE SIGNALS

NO RECESSION IN SIGHT

Source: Moody's Analytics

(13)

FOR COMMERCIAL REAL ESTATE, THE

ECONOMY IS ONLY HALF THE STORY

Sources: NCREIF Property Index (Commercial Real Estate Total Returns); Bureau of Economic Analysis (GDP) Data as of June 30, 2014; Past performance is no guarantee of future results.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

PRIVATE COMMERCIAL

REAL

ESTAT

E TOTAL

RETURNS

(YEAR-OVER-YEAR)

GDP GROWTH

(YEAR-OVER-YEAR)

GDP

Commercial Real

Estate Total Returns

(14)

COMMERCIAL CONSTRUCTION IS NEAR

ITS LOWEST LEVEL IN DECADES

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

50

100

150

200

250 1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

CO

MMERCIA

L CO

N

STRUCTIO

N

(SHA

R

E

O

F GDP)

RE

AL COM

M

ERCI

A

L RE

AL E

STATE

CONSTRUCTI

ON

(2009

$B SAAR)

Commercial Construction

Share of GDP

Source: Bureau of Economic Analysis

(15)

RENT GROWTH IS RETURNING

-6%

-4%

-2%

0%

2%

4%

6%

8%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

REN

T

GRO

W

TH

(YEA

R-O

V

ER-YEA

R)

Average of Retail, Office, Industrial

RENT GROWTH

IS RETURNING

Source: REIS; Cole Capital Data as of June 30, 2014.

(16)

Sources: S&P 500 (Stocks); Barclays U.S. Aggregate (Bonds); NCREIF Property Index (Commercial Real Estate); average income yield = 2013 monthly average (stocks/bonds) and 2013 quarterly weighted average (commercial real estate)

Data as of December 31, 2013. Past performance is no guarantee of future results.

2013 Average

Income Yield

Historical

Volatility

(1994-2013)

Correlation

With Inflation

(1994-2013)

CRE

5.8%

8.3%

0.58 Bonds

3.2%

4.9%

0.16 Stocks

2.0%

19.3%

0.01

COMMERCIAL REAL ESTATE OFFERS

YIELD, RELATIVE STABILITY, AND THE

POTENTIAL TO HEDGE INFLATION

(17)

HIGHER INTEREST

RATES CORRELATED

WITH HIGHER RETURNS

Sources: NCREIF (NCREIF Total Returns); Federal Reserve (10-Year Treasury) Data as of June 30, 2014; Past performance is no guarantee of future results.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

NCREIF TOTAL

RETURNS

(YEAR-OVER-YEAR)

NCREIF Total Returns

Period of Rising Interest Rates

Correlation to 10-Year-Treasury = 0.21

(18)

E-COMMERCE IS,

AS OF YET, ONLY

A MINOR HEADWIND

Source: U.S. Census Bureau Data as of June 30, 2014

0%

1%

2%

3%

4%

5%

6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

E-CO

MMERCE SHA

R

E

E-Commerce Share

(19)

E-COMMERCE IS TAKING

A BIGGER PIECE OF A

GROWING PIE

Source: U.S. Census Bureau

Note: Billions. Data as of June 30, 2014

Brick-and-Mortar

E-Commerce

$75

$1,240

$826

$8

2001

2014

(20)

JOB CREATION IS OFFICE-INTENSIVE

98

100

102

104

106

108

110 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

JOB I

N

DE

X

(2003=1

00 )

Office Jobs

Non Office Jobs

JOB CREATION IS

OFFICE INTENSIVE

Source: U.S. Bureau of Labor Statistics Data as of June 30, 2014.

(21)

INVENTORIES ARE IN CHECK

1.2

1.25

1.3

1.35

1.4

1.45

1.5

1.55

1.6 1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

INVENTORY-TO-SALES RATIO

INVENTORIES

ARE IN CHECK

Source: U.S. Bureau of Labor Statistics

(22)

Sources: NCREIF (Price); Engineering News-Record (Construction Costs) Data as of June 30, 2014.

70

80

90

100

110

120

130 1979

1983

1987

1991

1995

1999

2003

2007

2011

RE A L PR ICE INDE X (A DJ U STE D FOR CONSTR U C TION COSTS)

Real Price Index

Average

REAL CRE PRICES ARE SLIGHTLY

ABOVE THEIR LONG-RUN AVERAGE

(23)

COMMERCIAL

PROPERTY PRICE

INDICES

Source: Real Capital Analytics

Data as of June 30, 2014; (indexed to 100 as of December 2000)

70

90

110

130

150

170

190

210

230 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

PRI

C

E I

N

DI

CE

S

(2000=10

0)

Apartment

Retail

Industrial

Office

(24)

MAJOR VERSUS

NON-MAJOR

MARKET PRICES

Sources: Real Capital Analytics

Data as of June 30, 2014; (indexed to 100 as of December 2000)

70

90

110

130

150

170

190

210

230 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

PRI

C

E I

N

DI

CE

S

(2000=10

0)

Major Markets (All-Property)

Non-Major Markets (All-Property)

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SECONDARY MARKETS OFFER COMPELLING YIELDS

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

CAP RATES

Major Markets

Non-Major Markets

SECONDARY MARKETS

OFFER COMPELLING

YIELDS

Source: Real Capital Analytics

(26)

States With Strong Demographics

Sources: Census Bureau; Cole Capital

Data as of June 30, 2014. Areas in green are preferred, in red are disfavored, and in yellow are viewed with caution.

SECONDARY TECH, ENERGY, AND

POPULATION-DRIVEN MARKETS

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