REIT InsightNEWSLETTER — AUGUST 2013

This is the second issue of REIT Insight, a monthly market commentary by RRE’sReal Estate Securities Portfolio Manager, Scott Crowe,1 which discusses our perspectiveson major events and trends in real estate securities. REIT Insight is a viewpointfrom an investment practitioner with a unique focus on both publicly traded and non-traded REIT markets.

In this month’s REIT Insight thetwo major themes of focus include:

1. NON-TRADED REITs

• WP Carey swallows CPA16

• Inland divests to AR Capital

• Stacking up the ARC Propertiesinternalization versus Cole’s

2. PUBLICLY TRADED REITs

Wall Street puts Real Estate “on sale” – a buying opportunity

1 Portfolio Manager for the Resource Real Estate Diversified Income Fund.

WP Carey Swallows CPA16

At the end of July, WP Carey (WPC) announced it was acquiring CPA16 (its largest non-traded REIT) in a $4B merger agreement using stock with an implied price of$11.25 and 7.7% cap rate. The deal is expected to close in the First Quarter of 2014.We hold CPA16 as one of our largest positions (we had accumulated below its NAV of$8.70 in the secondary market2), and we are also investors in WPC.

For CPA16 shareholders this is clearly a “win” in our opinion, with liquidation above the$10 initial investment price and after years of dividend payments. For WPC the deal isearnings and dividend-accretive, and will make WPC the second-largest net lease REIT.About 30% of WPC will now be European exposure.

This transaction highlights one of the reasons WPC is one of our core investments.WPC’s advantage is that they have a wider opportunity set with less competition – saleand leaseback from corporates, including warehouse and distribution centers whereyields are still high (versus net lease retail), as well as an established European presence(where we see opportunities to acquire at attractive valuations).

Inland Divests Net Lease Assets to AR Capital

Inland American (the largest non-traded REIT) announced that it was selling $2.3B ofnet lease assets to AR Capital. This represents 25% of Inland’s portfolio, with theremainder mostly multi-tenant retail, lodging and student housing. Inland maintainedtheir guidance for FFO and the dividend.

The price reflected a 7.5% cap rate and while it was at a 15% premium to InlandAmerica’s book value, it was in line with their NAV valuation. This is a confirmatorysignal for Inland’s NAV at $6.93. We hold a position in which we have accumulated inthe secondary market below $6. Inland is considering a liquidity event after revaluingthe portfolio at the end of the year, which could be a watershed event with billionscoming back into the non-traded REIT space. It remains to be seen how Inland willexecute a liquidity event, especially given its somewhat eclectic asset mix.

Three separate ARC REITs are acquiring assets: ARC Properties (a listed REIT), AR Capital V and AR Capital Healthcare. ARC has stated that they will no longer beactive in the net lease investment, which is noteworthy given their recent dominance ofthis space.

NON-TRADEDREITs

2 RRE Property Securities may be able to provide liquidity for your positions in non-traded REITs. Please ask your RRE Representative to find out more.

2 REITInsight — August 2013

ARC Properties Internalization

ARC Properties recently announced that it will internalize following the completion ofthe acquisition of CapLease.3 We generally favor internally managed vehicles, andtherefore support the move. While CapLease’s management is very capable, theindependence of management will be important, given that a number of key positionsat ARCP are to be filled by AR Capital executives.

A comparison with Cole’s internalization, while tempting, is difficult. The internalizationof ARCP does not include AR Capital, the vehicle which manages ARC’s non-tradedREITs. A significant amount of value is retained outside of ARCP in AR Capital (due toits ability to charge fees from future ARC non-traded offerings, its advisory fees and thefact that it promotes from liquidity events). In contrast, Cole was a “completeinternalization” in which the entire manager internalized (WP Carey and NorthStar offera similar structures). We believe there is significant value in these managementbusinesses (we are shareholders in both WP Carey and NorthStar).

We agree that the cost of Cole’s internalization was high with $145M upfront paymentin cash and stock, plus another potential $330M in incentive and contingent paymentsover the next three years. This represented somewhere around $480M or ~9% of ColesNAV. In comparison, while we are pleased that AR Capital does not charge“internalization fees,” AR Capital itself is not being internalized. It is important to notethat other fees are being paid by ARC’s non-traded REITs including performance fees,advisory fees and substantial awards of deferred stock to management.

Our bottom line is that we applaud ARC’s ability to generate shareholder returns(because at the end of the day, that is the most important outcome), but we would becareful of making too much of a direct comparison between the Cole and ARCPinternalizations. Further, we think that the sector would continue to benefit fromgreater transparency and discussion regarding the entirety of fees and payments to thesponsor and its employees. As a side note, but somewhat related in the discussion ofAR Capital and Cole, shareholders would benefit from the requirement for astockholder vote in the instance of an outside bid for a non-traded REIT (in situationssuch as AR Capital’s bid for Cole III).

3 In May ARCP announced the acquisition of another publicly traded REIT, CapLease (LSE), a net lease REIT-mostly focused on suburban offices (52%) & warehouses (21%).

3REITInsight — August 2013

REIT InsightA market commentary by RRE’s Real Estate Securities Global Portfolio Manager, Scott Crowe

We are in the midst of mid-cycle correction in REITs with prices down minus 20%,driven by uncertainty regarding the outlook for interest rates and a knee-jerk reactionfrom investors to liquidate yielding investments. Markets can be volatile, and at times(like these) dislocate from underlying fundamentals. However this also providesopportunities.

The opportunity now is that the market is pricing in a greater than minus 10% declinein real estate values. In fact, in our view, the opposite is likely to occur. Real estatevalues should continue to appreciate as cash flows improve in line with a gradualrecovery in the economy, and in the context of record low supply. As the long-terminterest rate cycle begins to change to a more upward path, the key for investors is toown a stake in the equity and cash flow of real estate. Higher rates reflect expectationsof an improving economy, and typically higher investor confidence should see acontinued improvement in prices.

We believe that this real estate cycle has strength and longevity. We also believe thatthe slow economic recovery should keep rates low in absolute terms for a while andthat the structural undersupply of new commercial real estate has the potential to driveabove-average rent growth. (We are already seeing the early effects of this in “REITEarnings Results.” See below).

4 REITInsight — August 2013

PUBLICLYTRADED REITs

REIT Discount to NAV New Supply of Real Estate Historically Low

Source: BofA Merrill Lynch, August 2013 Source: Green Street Advisors

Long-term Average

In response to what we see as a great opportunity to gain a discounted entry into thisreal estate cycle, we are in the process of increasing our weighting to publicly tradedREITs within our asset allocation mix, targeting some of the most oversold sectorsincluding healthcare and net lease.

We focus on several real estate securities markets, which affords the ability to accessthe widest opportunity set, create diversification and the ability to access investmentswith lower levels of correlation and higher yields.

REIT Earnings Results Point to Strong Fundamentals

REITs recently finished second quarter reporting, and it is evident that underlyingfundamentals are solid and improving. Since reaching a bottom of minus 1.4% in 2009,REIT underlying property cash flow growth is running at nearly 5%. Since 1998 REITunderlying property cash flow growth has tracked real GDP growth with a 0.69correlation (with a one-year lag). As the economy continues to improve, we believe real estate cash flows and values should rise.

5REITInsight — August 2013

REIT Insight

This is a great buying opportunity.

A market commentary by RRE’s Real Estate Securities Global Portfolio Manager, Scott Crowe

Asset Allocation Matrix – Overweight Publicly Traded REITs

REIT Underlying Property Cash Flow Growth Property Cash Flow — Growth 2Q13

Source: ISI Source: ISI

2Q13 CashNOI Growth

Storage ........................................................................... 9.1%

Residential ..................................................................... 5.5%

Malls ............................................................................... 5.5%

REIT Sector .................................................................... 4.9%

Strips .............................................................................. 4.0%

Office............................................................................... 3.9%

Industrial ........................................................................ 0.4%

TargetLow Mid High Allocation ow/(uw)

Publicly Traded REITs (Equity) 30% 35% 50% 40% 5%

Publicly Traded REITs (Preferred) 30% 35% 50% 33% (2%)

Non-traded REITs 25% 30% 35% 27% (3%)

100% 100%

1845 Walnut Street, 18th FloorPhiladelphia, PA 19103www.resourcerei.com

Scott Crowe, Global Portfolio Manager

Scott Crowe is the Global Portfolio Manager for the Resource Real Estate Diversified Income Fund.Previously, he was the lead Global Portfolio Manager for Cohen & Steers, where he led the investmentand research team of over 20 portfolio managers and analysts. He was accountable for over $10B in FuMacross the global, international and emerging market portfolios. Prior to this, Scott held the position ofHead of Global Real Estate for UBS Equities Research where he built and managed the US REIT divisionwhile leading a global team of more than 40 analysts.

Scott began his career at Paladin Property Securities and was also an Associate Lecturer at the Universityof Technology Sydney. Scott holds an Honors Finance Degree from the University of Technology Sydneyand a Bachelor of Commerce from the University of NSW/National University of Singapore.