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Subject:  Re: AREEP: Good Yield + Call Option (REITnut rev Date:  9/8/2015  3:09 PM
Author:  Reitnut Number:  78812 of 86821

Good post, Investor 133. Here are a few additional comments on ARE:

1. Lab space is a good business if engaged in with care and intelligence. Owners enjoy long-term leases with internal rent bumps, expanding research budgets from good, stable tenants, little competition (this being a specialty property type), low sensitivity to the US economy, and the prospect of owning properties in strong cluster markets favored by medical research companies.

2. ARE has been running this business successfully for many years, led by CEO Joel Marcus.

3. Development and redevelopment projects increase both risks and potential reward. So far, ARE has made these projects largely successful.

4. Debt leverage is being reduced, but gradually. The current leverage ratio, based on estimated asset values, is slightly over 40%. This is not excessive, and is roughly in line with long-term REIT industry averages. Debt/ebitda is about 7.8x, which is a bit high and is due to ARE's substantial development pipeline (projects under development do not generate current cash flow).

5. Value is being created at ARE through strong tenant relationships, deep knowledge of the business and successful developments and redevelopments. The latter may slow somewhat due to ARE's higher cost of equity capital and its reluctance to raise substantial equity at a discount to NAV. I have been told that ARE will engage in more property recycling in order to fund new projects.

6. I do not value REITs on the basis of FFO or AFFO, as these metrics are too easy to manipulate by buying high cap rate properties with poor prospects or by levering up. NAV is certainly not a perfect metric, but I use it as the best of all alternatives. ARE is currently trading at an NAV discount of over 15%, which in my opinion is not warranted. NAV has increased about 5% since the end of last year.

7. Summary: ARE is a very good and well-managed company with a better growth profile than most REITs, less sensitivity to the US economy, good properties in excellent locations and an acceptable balance sheet. The stock is on sale, but nobody seems to care right now. AREEP, which is convertible into common stock and has substantial call protection, is another alternative here, for yield-oriented investors.

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