KEY METRICS DEFINITIONS

Non-Listed REIT Report - 4Q 2013
Executive Summary
KEY METRICS DEFINITIONS
Rating Matrix
Distribution Risk
Balance Sheet Risk
Market Risk
Distribution Risk
Three-tiered rating system to assess distribution sustainability and key performance and risk metrics of non-listed REITs
GREEN
YELLOW
RED
Strong Performance/Low Risk
Moderate Performance/Moderate Risk
Weak Performance/High Risk
Strong cap rate spread, FFO payout ratio
Moderate cap rate spread, FFO payout ratio
Low cap rate spread, FFO payout ratio
below 100% (full distribution coverage),
above 100% but improving, and/or minimal
significantly above 100% or negative, and/or
and/or no significant balance sheet risk to
balance sheet risk to impact operating
significant balance sheet risk to impact
impact operating performance metrics.
performance metrics.
operating performance metrics.
Predominantly high quality core real estate,
Mostly high quality real estate, moderate
Significant high risk alternative investments,
minimal asset writedowns, high occupancy,
asset writedowns, stable occupancy,
significant asset writedowns, declining
moderate leverage, minimal short-term debt
moderate leverage, moderate short-term
occupancy, high leverage, significant short-
risk, and/or variable rate debt risk.
debt risk, and/or variable rate debt risk.
term debt risk, and/or variable rate debt risk.
REIT acquired their assets after the capital
REIT has exposure to capital markets pricing
REIT has significant exposure to capital
markets bubble, acquired institutional quality
bubble and property market recession,
markets pricing bubble and property market
assets, and maintains a high cap rate spread.
resulting in moderate cap rate spreads.
recession, resulting in low cap rate spreads.
Key performance metrics that provide insight into long-term sustainability of distributions and risks to distribution
Portfolio Cap Rate
Reflects gross yield on income-producing investments by dividing net revenue generated from investments by Invested Assets. Portfolio cap rate increases
Interest Rate
with higher rental rates on re-leasing or per lease agreement and declines with lower occupancy or lower rental rates on re-leasing.
Reflects weighted average interest rate on all outstanding debt. Interest Rate includes average interest rates on variable rate debt.
Cap Rate Spread
Distribution Rate
FFO Yield
Difference between Portfolio Cap Rate and Interest Rate. Cap Rate Spreads are a leading indicator for long-term FFO yield and REIT operating performance.
With ramp-up non-listed REITs, Cap Rate Spreads are a critical metric, particularly as a forecasting tool in the early stages of a non-listed REIT.
Reflects distribution paid by the REIT to its common shareholders. The monthly or quarterly distribution is annualized and based on current offering price.
Funds from Operation ("FFO") divided by Current Equity. FFO has been defined by NAREIT and is the industry standard for publicly-listed REITs. NAREIT FFO
is based on GAAP net income with adjustments for depreciation, amortization, nonrecurring gains, and various other items. NAREIT recently clarified their
FFO definition to exclude impairments (asset writedowns). Our calculation of FFO is NAREIT FFO adjusted for acquisition expenses, which have historically
been capitalized but are now required to be expensed. For non-listed REITs with extended capital raises, an adjustment for these up-front acquisition
IPA MFFO Yield
expenses provides a FFO that better reflects real estate operating performance.
Modified Funds from Operation ("IPA MFFO"), as defined by the IPA ("Investment Program Association"), divided by Current Equity for non-listed REITs. The
IPA has attempted to standardize the presentation of FFO among non-listed REITs with their defined IPA MFFO. IPA MFFO attempts to provide a better
representation of real estate cash flows by excluding many non-cash components of income and expenses, including straight-line rent and other accounting
accruals, and items related to investing rather than operating activities. NAREIT FFO is an accrual metric, while IPA MFFO attempts to be a cash metric. IPA
MFFO is a good supplementary measure, but IPA MFFO doesn't reflect true real estate cash flow. In addition, IPA MFFO is not disclosed by all non-listed
REITs, and the many required adjustments are not available in the SEC filings to appropriately estimate IPA MFFO for these non-listed REITs.
FFO/MFFO Payout Ratio
Distributions declared divided by FFO and IPA MFFO. FFO/IPA MFFO Payout Ratios greater than 100% indicate that distributions exceed FFO/IPA MFFO,
while FFO/IPA MFFO Payout Ratios below 100% indicate that FFO/IPA MFFO fully covers the distribution.
Balance Sheet Risk
Invested Assets
Important for understanding investment and financing strategies and risks to assets, debt, and equity
Reflects the gross (original) cost of assets acquired for the purpose of generating income or capital appreciation. Invested Assets provides the best metric for
calculating Leverage Ratios and Portfolio Cap Rates. Invested Assets differs from Total Assets by excluding several items that don't directly relate to real
estate performance including cash, accounting accruals, depreciation, and certain other items.
Occupancy (Economic)
Remaining Lease Term
Asset Writedowns
Percentage of real estate investments with tenants currently paying rent, as opposed to Physical Occupancy, which is tenants paying rent and occupying the
real estate. Economic Occupancy includes "dark" properties, where the tenant pays rent but does not occupy the property.
Represents average remaining lease terms on real estate investments with leases in place. This metric highlights leasing risk.
Total downward accounting adjustments to the cost basis of investments due to lost value on these investments. Asset writedowns include impairments on
Liquidity Ratio
real estate, loan loss provisions on debt investments, and other-than-temporary impairments on debt and equity securities.
Percentage of cash and cash equivalents as a percentage of Total Assets.
Short-Term Debt Ratio
Percentage of debt financing that is scheduled to mature within the next three years. This metric provides an assessment of refinancing risk.
Current Equity
Current shareholder equity that includes distributions reinvested net of redemptions.
Leverage Ratio
Percentage of debt financing against Invested Assets. This metric highlights leverage risk.
Variable Debt Ratio
Percentage of debt financing subject to variable interest rates. Debt with rates fixed under a rate swap agreement are considered fixed.
Market Risk
Capital Market Risk
Important for understanding impact of market timing - both capital and property markets - on expected total return
Reflects degree of risk associated with timing and pricing of commercial real estate acquisitions in capital markets. Capital markets experienced a significant
pricing bubble in 2006-2008 that reflected a period of low cap rates and low yield spreads that resulted in low leveraged yields and valuation declines for
non-listed REITs exposed to the pricing bubble. In addition to acquisition timing, cap rate spread over time provides good insights into capital markets risk.
Property Market Risk
Reflects degree of risk associated with performance of properties, specifically occupancies and rents, based on impact of commercial real estate property
markets. Property markets experienced a recessionary phase from 2008-2010, where commercial real estate had declining occupancies and rents. Non-listed
REITs that acquired assets prior to the recessionary phase typically lost revenue. With the current recovery, REITs are positioned to grow revenues.
© Copyright 2014 by MTS Research Advisors. This report is not intended to and does not constitute investment advice. Unlawful reproduction is strictly prohibited.

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