Cole Capital: An American Realty Capital Properties Company
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.
THE CRISIS IS
FINALLY OVER!
Consumers
Spend
Hiring
Corporate
Profits
Corporate
Investment
THE VIRTUOUS
CIRCLE
Saving
Taxes
-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
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
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
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
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)
JOB
CREATION
HAS BEEN
HEALTHY
Fuels Consumer
Spending
Demand for
commercial
real estate
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
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
-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
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
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
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.
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
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
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
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
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.
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
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
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
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)
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
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.