Volume VI Issue 12 A Publication of Paramount Capital

Corporation Dec 15, 2014

Strategy and Insight for the Commercial Real Estate Industry

Real Estate Focus:

Celebrating Our Sixth

Year of Publication.

The New Three “D’s”

of CRE.

NCREIF Returns.

CRE Financing Rates.

Economic/Investment

Focus:

Jeff Gundlach Fourth

Quarter Webcast

Highlights.

Investment Guru-

Walter Schloss.

REIT Focus:

First Industrial Realty

Trust, Inc., an

Industrial REIT.

REAL ESTATE FOCUS

Celebrating Our Sixth Year of Publication

With this issue of VOM, we are celebrating our sixth year of publication and want to thank

all our subscribers and readers for helping make this newsletter one of the top private and

exclusive publications in the CRE industry.

The New Three “D’s” of CRE

Back in the March 2009 issue of VOM and in the early stages of the Financial Depression,

we described the CRE industry with three “D’s”, Default, Deleveraging and Deflation.

Default was due to the large number of deals in foreclosure or distress, Deleveraging

referred to the global deleveraging of real estate and other financial assets and Deflation

was the decline in value of almost all assets and prices. This was all the result of the

Financial Depression that battered economy from 2007 to 2012.

The CRE industry has recovered and is now entering a robust growth phase and we want to

discuss the new three “D’s”, Demand, Development and Debt. Demand refers to the

increased demand for real estate space by tenants and properties by investors. In many

markets, demand for apartment, office, retail and industrial space is the highest in years

with rising rents, especially in apartments and lower vacancies. There is also an insatiable

demand to buy CRE assets, especially Class A apartments and Class A office buildings in

the core markets like San Francisco, Seattle, Boston, Chicago, Los Angeles, New York and

Miami from US and International investors. Much of this demand has been fueled by the

Fed’s ZIRP and the resulting low cost of capital. We see this trend continuing for the next

couple years unless interest rates begin to rise.

Development refers to the robust CRE development business with more than 275,000

apartment units built in 2014 and millions of square feet of commercial projects and a large

backlog of to-be-built projects. Two of the largest development projects currently being

built in the U.S. are Hudson Yards in New York City and the Transbay Transit Project in

San Francisco.

Hudson Yards is the largest private real estate development in the history of the U.S. and

the largest development in New York City since Rockefeller Center. It is anticipated that

more than 24 million people will visit Hudson Yards every year. The site will ultimately

include more than 17 million square feet of commercial and residential space, 5 state-of-

the-art office towers, more than 100 shops, a collection of restaurants, approximately 5,000

residences, 14 acres of public open space, a 750-seat public school and a 175-room luxury

hotel.

The Transbay Transit Center Project in San Francisco is a visionary transportation and

housing project that transforms downtown San Francisco and the San Francisco Bay Area’s

regional transportation system by creating a “Grand Central Station of the West” in the

heart of a new transit-friendly South of Market St. neighborhood. The approximately $4.5

billion project will replace the former transbay terminal at First and Mission streets in San

Francisco with a modern regional transit hub connecting eight Bay Area counties and the

State of California through 11 transit systems: AC Transit, BART, Caltrain, Golden Gate

Transit, Greyhound, Muni, SamTrans, WestCAT Lynx, Amtrak, Paratransit and future

High Speed Rail from San Francisco to Los Angeles/Anaheim. In addition to the Transbay

Terminal, the South of Market area will include numerous new high rise office, apartment

and condominium towers, a number of which are already under construction.

The chart below from Robert Charles Lesser & Co., a real estate consulting firm, shows the

current development cycle of the CRE industry.

The last of our new three “D’s” is Debt and this refers to the current ramp up in CRE

lending. While the CRE industry began to turnaround from the financial depression in

2012, the lending market did not get going until mid-2013. The table below shows annual

CRE loans by commercial banks, life insurance companies and CMBS during the last five

years, with sizeable increases in 2014.

(billions) 2010 2011 2012 2013 2014

Commercial Banks $1,491 $1,411 $1,422 $1,486 $1,586

(11-14)

Life Insurance Cos. $30 $45 $45 $52 $25(Q-2)

CMBS $11 $29 $44 $80 $81(Q-3)

Data per Federal Reserve H.8 reports and the Mortgage Bankers Association of America

Although CRE lending is increasing, the underwriting is still conservative with typical loan

to value ratios of not more than 70% and spreads over US Treasury securities as shown in

the financing rates below as provided by Berkadia Commercial Mortgage.

CRE Financing Rates

10-yr UST @ 2.33% + 120 to 220 bps = 3.53% to 4.53%

5-yr UST @ 1.62% + 150 to 280 bps = 3.12% to 4.42%

10-yr Swap @ 2.41% + 160 to 210 bps = 4.01% to 4.51% (Conduit)

FHA 223(f) refi program at 3.35% + 60 bps MIP and FHA 221(d)(4) new-

construction program at 3.80% + 65 bps MIP.

Mortgage spreads slightly dropping, even as lenders try to preserve yields within the

4% +/- range for longer term, fully-levered loans.

Funding sources rationalizing lower rates/spreads due to improving CRE

performance fundamentals.

Financing rates are courtesy of John Oharenko, Senior Vice President, Berkadia

Commercial Mortgage, LLC, john.oharenko@berkadia.com, 312-845-8565 and feel free to

contact John for your real estate financing needs.

NCREIF Returns

The NCREIF Property Index (NPI) returns were 2.6% for Q3-14, 11.3% for the 12 months

yoy and 11% for the prior year 12 month return as shown in the table below.

The total returns for the four primary property types for the 12 months yoy were; retail-

13.1%, industrial-12.4%, Office-10.7% and apartment-10%.

ECONOMIC/INVESTMENT FOCUS

Jeff Gundlach Fourth Quarter Webcast Highlights

Our favorite bond guru is Jeff Gundlach, founder and CEO of Doubleline, a fixed income

investment management firm with $52 billion under management. Mr. Gundlach gave his

fourth quarter webcast presentation last week and below are two key charts from his

presentation, which can be seen at www.doubleline.com. Chart 1 shows the holders of US

debt which is now at $18 trillion and Chart 2, government revenues and expenditures.

Investment Guru-Walter Schloss

One of the most successful stock investors of all time, which many of you have never heard

of, is Walter Schloss. Mr. Schloss was born in 1917 and passed away in 2012 at the ripe

young age of 95. He was an employee and disciple of the grandfather of value investing,

Benjamin Graham and worked at his firm in 1934 as a security analyst. Mr. Schloss started

his own firm, Walter Schloss Associates, in 1944 and for the next 47 years generated one of

the best long term investment records ever, with a 15.3% average annual return net of fees.

He is also famous for his 16 factors needed to make money in the stock market, which are

listed below.

1. Price is the most important factor to use in relation to value.

2. Try to establish the value of the company. Remember that a share of stock

represents a part of a business and is not just a piece of paper.

3. Use book value as a starting point to try and establish the value of the enterprise. Be

sure that debt does not equal 100% of the equity. (Capital and surplus for the

common stock).

4. Have patience. Stocks don’t go up immediately.

5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can.

Don’t sell on bad news.

6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You

can’t be 100% certain but try to look for the weaknesses in your thinking. Buy on a

scale down and sell on a scale up.

7. Have the courage of your convictions once you have made a decision.

8. Have a philosophy of investment and try to follow it. The above is a way that I’ve

found successful.

9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is

a fair one, then you can sell but often because a stock goes up say 50%, people say

sell it and button up your profit. Before selling try to reevaluate the company again

and see where the stock sells in relation to its book value. Be aware of the level of

the stock market. Are yields low and P-E ratios high? If the stock market

historically high. Are people very optimistic etc?

10. When buying a stock, I find it helpful to buy near the low of the past few years. A

stock may go as high as 125 and then decline to 60 and you think it attractive. 3

years before the stock sold at 20 which shows that there is some vulnerability in it.

11. Try to buy assets at a discount than to buy earnings. Earning can change

dramatically in a short time. Usually assets change slowly. One has to know much

more about a company if one buys earnings.

12. Listen to suggestions from people you respect. This doesn’t mean you have to

accept them. Remember it’s your money and generally it is harder to keep money

than to make it. Once you lose a lot of money, it is hard to make it back.

13. Try not to let your emotions affect your judgment. Fear and greed are probably the

worst emotions to have in connection with the purchase and sale of stocks.

14. Remember the word compounding. For example, if you can make 12% a year and

reinvest the money back, you will double your money in 6 yrs, taxes

excluded. Remember the rule of 72. Your rate of return into 72 will tell you the

number of years to double your money.

15. Prefer stock over bonds. Bonds will limit your gains and inflation will reduce your

purchasing power.

16. Be careful of leverage. It can go against you.

REIT FOCUS

Summary

This month’s REIT Focus is on First Industrial Realty Trust, Inc. (“FR”), a publicly traded

REIT specializing in the acquisition, ownership, operation, development and management

of industrial properties. FR owns directly 638 industrial properties containing 63.6 million

sq. ft. of gross leasable area.

Property Information

The average occupancy, cash rental rate increase as of Q3-14 and same store NOI increase

as of Q3-14 were 93.9%, 1.9% and 3.6%, respectively. FR’s industrial properties are

located in 25 states.

Major Events

As of Q3-14, FR had five industrial building under construction containing 1.2 million of

gross leasable area at a total cost of $64.7 million with $24.9 million to be funded.

Corporate Data

FR was incorporated in Maryland and began as a public company in 1994. FR is traded on

the NYSE and is located in Chicago, IL. FR’s debt is rated BBB- by Fitch, Baa3 by

Moody’s and BBB- by Standard & Poor’s. FR has 110.5 million common shares

outstanding and a market capitalization of approximately $2.23 billion. FR is the sole

general partner and owns a 96.2% partnership interest in its UpReit general partnership,

First Industrial, L.P.

Management

Bruce W. Duncan, 62, President and CEO. Mr. Duncan was named President and CEO of

FR in January 2009 and brings more than 30 years of real estate management and

investment experience to FR. Mr. Duncan presently serves as Chairman of the Board of

Starwood Hotels & Resorts Worldwide, Inc. and is also an independent director of the T.

Rowe Price Funds. Mr. Duncan previously served as President and CEO of Equity

Residential, the largest publicly traded apartment company in the United States, from 2002

through 2005. From 1995 to 2000, Mr. Duncan was Chairman, President and CEO of

Cadillac Fairview Corporation, one of North America's largest owners and developers of

retail and office properties. Mr. Duncan holds an MBA in Finance from the University of

Chicago and a BA degree in Economics from Kenyon College.

Johannson Yap, 51, Chief Investment Officer and a Co-Founder. Mr. Yap directs the

overall investment and disposition strategy, including the approval process, for both on-

balance sheet and joint venture transactions and has overseen the underwriting and

execution of more than $12 billion of industrial real estate transactions Prior to joining FR,

Mr. Yap worked for The Shidler Group where he was responsible for financing,

construction management, leasing, asset and property management, and sales. Mr. Yap’s

professional affiliations include the Urban Land Institute and the National Association of

Real Estate Investment Trusts. Mr. Yap also serves on the Board of Advisors of the James

A. Graaskamp Center for Real Estate at the University of Wisconsin. Mr. Yap earned his

Masters of Business Administration and Masters of Architecture from the University of

Illinois Champaign-Urbana and his Bachelor of Science in architecture from the University

of the Philippines.

Scott Musil, 46, Chief Financial Officer. Brings more than 20 years of experience to the

position of Chief Financial Officer, Mr. Musil leads all aspects of FR’s finance function

including capital markets, treasury, financial planning and reporting, tax, investor relations

and internal audit. Mr. Musil is also a member of the executive committee responsible for

developing and executing FR’s strategic plan.

Mr. Musil previously held the roles of Chief Accounting Office, Treasurer and Assistant

Secretary with FR. Prior to joining FR, Mr. Musil served in various capacities with Arthur

Andersen & Company specializing in the real estate and finance industries. Mr. Musil is a

CPA and a member of the American Institute of Certified Public Accountants and the

National Association of Real Estate Investment Trusts. Mr. Musil earned his Bachelor of

Science in accounting from DePaul University and his Masters of Business Administration

from the University of Chicago's Graduate School of Business.

Ownership

Top Institutional Holders: Shares %

Cohen & Steers, Inc. 14,723,455 13.32

Vanguard Group, Inc. 14,578,135 13.19

London Co. of Virginia 8,217,552 7.43

Principle Financial Group, Inc. 7,285,650 6.59

Daiwa Securities Group, Inc. 5,546,866 5.02

Ownership Breakdown

% of Shares Held by All Insider and 5% Owners 3%

% of Shares Held by Institutional & Mutual Fund Owners 35%

Number of Institutions Holding Shares 126

Financial Analysis and Valuation

Select financial data for FR as of the Q3-14 10Q, 2013 10K and supplemental information

(in millions where applicable):

Financial Data

Real Estate Assets, Gross $3,155

Total Assets $2,576

Property Debt (at interest rates of 1.6% to 8.2%) $1,342

Common Stockholders’ Equity $1,050

Revenue $256

Net Income $27

Net Income Per Share $.12

Cash Flow from Operations $95

Unsecured Term Loan and Credit Facility ($817 with $376 used) $441

Market Capitalization $2,230

Property Debt to:

Gross Real Estate Assets 42%

Market Capitalization 60%

Enterprise Value 37%

Dividend and Yield ($.41/sh.) 2.1%

Valuation Methodology

Q3-14 Revenue Annualized $348

Less: Q3-14 Operating Expenses Annualized (excluding 128

depreciation, amortization and interest expense and less G&A

expenses)

Annualized Net Operating Income 2014 220

Projected Inflation Rate at 3.5% x1.035

Projected Forward NOI for Next Year $228

Projected Cap Rate 7%

Projected Asset Value of Company $3,257

Add: Developable Land Inventory (23.5M sq. ft. estimated a $2.50

per sq. ft.)

59

Construction in Progress (at book value) 40

Net Operating Working Capital (at book value) 49

Total Projected Asset Value of Company $3,405

Less: Noncontrolling Interests (at book value) (42)

Total Debt Per Above (1,342)

Projected Net Asset Value of the Company $2,021

Common Shares Outstanding 110.9M (114.8M common stock

shares and .4M LTIP units and less 4.3M in treasury shares)

Projected NAV Per Share $18

Market Price Per Share on 12/15/14 $19

Premium (Discount) to NAV 5%

Financial Metrics

The gross real estate assets, property debt, revenues, net income, funds from operations,

return on invested capital and dividends per share for the years 2009 through Q3-2014 are

shown in the table below:

(millions except per share

amounts)

2009 2010 2011 2012 2013 Q3-2014

Gross Real Estate Assets $3,358 $3,175 $3,121 $3,129 $3,119 $3,155

Property Debt $1,997 $1,742 $1,479 $1,335 $1,295 $1,342

Revenues $351 $288 $315 $327 $328 $256

Net Income ($13) ($222) ($27) ($22) $25 $27

Funds From Operations

(FFO) $107 $50 $72 $80 $105 $92

Return on Invested Capital

(1) 5% 3.2% 3.5% 5.6% 5.2% NA

Dividends Per Share $0(2) $0 $0 $0 $.34 $.41(3)

(1) This is the ratio of cash provided by operations divided by stockholders equity plus

property debt, less cash, and measures the return the REIT is earning on its invested capital.

(2) No dividends were paid from 2009 through 2012.

(3) Dividend is currently $.1025 per quarter.

The total return of FR year to date and through five years is show in the chart below:

FR Total Return YTD (10/14) 1-Yr 3-yr 5-Yr

13.81% 10.44% 27.2% 36.03%

As shown above, our net asset value per share for FR is $18/sh., versus a market price of

$19/sh. Current average cap rates for industrial properties per our industry experience and

CBRE’s Cap Rate Survey are in the 6% to 9% range, depending on the location, age and

credit of the tenants. We have used an average cap rate of 7% due to FRHH’s portfolio

being primarily well located industrial properties.

Valuation Analysis

FR’s strengths, concerns and recommendations are as follows:

Strengths:

Solid management team and quality portfolio of industrial assets.

Solid occupancy of 93.9% and yoy NOI increase of 3.6%.

Low leverage at 37% of enterprise value.

Attractive stock price at $19 per share.

Concerns:

Low dividend yield of 2.1%.

Decline in gross real estate assets of 6% from 2009.

FR has a significant amount of high cost mortgage loans and senior unsecured debt

at interest rates greater than 6%.

FR has more than thirty properties with less than 50,000 sq. ft. of gross leasable

area, which are too small and management and leasing intensive.

Recommendations:

FR is a solid company with a quality portfolio of industrial assets and are recommendations

are as follows:

We are recommending the purchase of the stock at this level even though the

dividend yield is low at 2.1%. The continued growth of the economy and global

trade as well as implementation of our recommendations below should result in a

higher dividend and stock price.

FR should sell (at compressed cap rates) many of its smaller properties that are less

than 50,000 sq. ft. which will reduce G&A expenses and increase operational

efficiency. This will also free up capital for reinvestment, debt reduction and capital

improvements.

FR should refinance its high cost debt and if there are egregious prepayment

penalties or prepayment prohibitions, then the loans should be defeased and

properties sold and the capital reinvested in new projects.

FR should increase its dividend as its payout ratio of FFO is only 36% while the

average for all industrial REITs is 67%.

A five year price chart of FR is shown below:

REIT FOCUS REVIEWS IN PRIOR ISSUES OF VOM ARE AS FOLLOWS:

1. BRE Properties, Inc., June 15, 2011

2. Boston Properties, Inc., July 15, 2011

3. Simon Properties Group, Inc., August 15, 2011

4. First Industrial Realty Trust, September 15, 2011

5. Public Storage, October 15, 2011

6. Ashford Hospitality Trust, Inc., November 15, 2011

7. AvalonBay Communities, Inc., December 15, 2011

8. Alexandria Real Estate Equities, Inc., January 15, 2012

9. Federal Realty Investment Trust, Inc., February 15, 2012

10. Digital Realty Trust, Inc., March 15, 2012

11. Lasalle Hotel Properties, April 15, 2012

12. Apartment Investment and Management Company, May 15, 2012

13. Equity Residential Apartment Company, June 15, 2012

14. The Macerich Company, July 15, 2012

15. SL Green Realty Corp., August 15, 2012

16. Kimco Realty Corp., September 15, 2012

17. Cole Credit Property Trust II, Inc., October 15, 2012

18. Realty Income Corporation, November 15, 2012

19. Piedmont Office Realty Trust, Inc., December 15, 2012

20. Camden Property Trust, January 15, 2013

21. Hudson Pacific Properties, Inc., February 15, 2013

22. CBL & Associates Properties, Inc., March 15, 2013

23. Essex Property Trust, Inc., April 15, 2013

24. Commonwealth REIT, May 15, 2013

25. Douglas Emmett, Inc., June 15, 2013

26. UDR, Inc., July 15, 2013

27. Inland Real Estate Corporation, August 15, 2013

28. Highwoods Properties, Inc., September 15, 2013

29. Mack-Cali Realty Corporation, October 15, 2013

39. Home Properties, Inc., November 15, 2013

40. Kilroy Realty Corporation, December 15, 2013

41. Cedar Realty Trust, Inc., January 15, 2014

42. Brandywine Realty Trust, February 15, 2014

43. Associated Estates Realty Corporation, March 15, 2014

44. Weingarten Realty Investors, April 15, 2014

45. EastGroup Properties, Inc., May 15, 2014

46. Spirit Realty Capital, Inc., June 15, 2014

47. Parkway Properties, Inc., Jul 15, 2014

48. Equity Residential, August 15, 2014

49. Boston Properties, Inc., September 15, 2014

50. The Macerich Company, October 15, 2014

51. Essex Property Trust, Inc., November 15, 2014

General Publication Information and Terms of Use

View of the Market is published at www.paramountcapitalcorp.com/vom-newsletter by

Paramount Capital Corporation and edited by Joseph Ori, Executive Managing Director.

Use of this newsletter and its content is governed by the Terms of Use as described herein.

This newsletter is not an offer to sell or the solicitation of an offer to buy any security in

any jurisdiction where such an offer or solicitation would be illegal. This newsletter is

distributed for informational purposes only and should not be construed as investment

advice or a recommendation to sell or buy any security or other investment, or undertake

any investment strategy. It does not constitute a general or personal recommendation or

take into account the particular investment objectives, financial situations, or needs of

individual investors.

The price and value of securities referred to in this newsletter will fluctuate. Past

performance is not a guide to future performance, future returns are not guaranteed, and a

loss of all of the original capital invested in a security discussed in this newsletter may

occur. Certain transactions, including those involving futures, options, and other

derivatives, give rise to substantial risk and are not suitable for all investors. There are no

warranties, expressed or implied, as to the accuracy, completeness, or results obtained from

any information set forth in this newsletter. Paramount Capital Corporation will not be

liable to you or anyone else for any loss or injury resulting directly or indirectly from the

use of the information contained in this newsletter, caused in whole or in part by its

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