Capital Markets Presentation

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Capital Markets Presentation

• Real Estate Capital Markets Outlook for 2005
  Themes and Key Ideas

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Dynamics - Flow Forces
• G-I-Normous capital flow into commercial real
  estate continues to propel pricing amidst
  scarcity of supply of investment-grade product.
• Rate and Spread Compression
• Unprecedented IRR Compression
• Historic High PSF
• IO, Open Prepay, Pre-Sales at Stabilized Value
  Get the Flow Out!

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REAL ESTATE CAPITAL MARKETS OUTLOOK
IRR Compression 2001-2005 (Median Ten Year IRR)
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All Cash Yield Targets By Food Group
Grocery/Discount Anchored Retail
Office
Multi-Family
Industrial
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REAL ESTATE CAPITAL MARKETS OUTLOOK
Cap Rate Spreads to U.S. Treasury (1) (10-year
trend) Basis Points
Source NCREIF and Morgan Stanley. Notes (1) 10-y
ear U.S. Treasury Bond rates based on quarterly
average unless otherwise stated.
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Office Cap Rates
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REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups
Food Group Ranking 1. Retail 2. Trophy
Office 2. Industrial 2. Multifamily 5. Office 6. H
otel
Trophy Market Ranking Washington, DC NYC
Metro San Diego Edge L.A. Southern Florida
Market Recovery Seattle Atlanta St. Louis
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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Dynamics - Flow Forces (Contd)
• Mainstream Money Management- No Longer Fringe
  Asset Class
• Income-producing commercial real estate has
  become favored risk-adjusted, fixed-income
  investment alternative.
• Lenders view real estate debt as attractive
  alternative to single-credit corporate paper.
• With better Corporate Junk Bonds yielding 6.5,
  how is RE overpriced at 7

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Dynamics - Flow Forces (Contd)
• Allocation Trends Align with Demographic Drivers
• Retiree redemptions LOOM!! Most Important Factor
  in All Investing for next Decade!
• Public and private joint venturing with
  tax-exempt institutions and foreign open-end
  funds to lever more purchasing power
• Surging syndicated equity drives pricing on the
  margin
• Private REITs (INLAND as icon)

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Dynamics - Flow Forces (Contd)
• Allocation Trends Align with Demographic Drivers
  (Contd)
• Surging syndicated equity drives pricing on the
  margin (Contd)
• Broker-dealer distribution and fee frenzy
• Hedge funds (Farollon land spec in Mission
  Bay)
• Individual and Retirement Planning RE as
  Standard Diversification Product (TIAA model)

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Dynamics - Flow Forces (Contd)
• Commingled institutional equity rather than
  separate account funding propels the tax-exempt
  fundraising.
• More Co-Invest More Discretion
• Many pension funds have raised RE allocations
  significantly
• Migration toward European model

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Short-term capital (LIBOR-based) has been very
  stable.
• Low volatility beta over last 4 years.
• Sophisticated borrowers arbing LIBOR vs.
  Treasury, Spread Investing.
• 50 of securitized debt is unhedged and floating
  according to HFF data.

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Mezz, Mezz, Mezz!!! Structured finance,
  especially mezzanine debt and preferred equity,
  booming. New niches like larger loans,
  longer-term mezz and aggressive, clubbed A-B
  packages. Loan to Own raiders on the loose.
• Who ISNT Doing Mezz
• Compressed yields

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Foreign investment capital, with weakening
  dollar, expanding in 2005
• German funds under scrutiny for yield performance
  
• Israeli and Middle East investors are very active
  and aggressive
• Japanese capital returning

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• MA driving REIT market which continues to
  cartelize. REITs outperform SP and indexed
  funds (private REITs follow suit)
• Average REIT dividend yield of 4.7 vs. SP 500
  of 1.7
• REITs up 70 since end of 2002.
• Real estate mutual fund flow of 7.55 B in 2004
  vs. 4.5 B in 2003 (75 increase).

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REAL ESTATE CAPITAL MARKETS OUTLOOK
Top Tenant-in-Common Sponsors in 2004 Properties
purchased or under contract through Nov. 30
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REAL ESTATE CAPITAL MARKETS OUTLOOK

• TIC TAC DOUGH and Fund of Funds New Drivers
• Improving Fundamentals Too

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REAL ESTATE CAPITAL MARKETS OUTLOOK

• Pricing
• Stagress Stagnant real job growth (part-time
  vs. core) yet real economic progress holds down
  rates.
• Oil price increase lags 12-15 months.

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Historical NCREIF Performance by Property Type
Source NCREIF
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REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups

• Heyday for infill and edge city locations.
• Fortress mall cap rates fall to lows near 5.
  (back to mid 1980s)
• Power centers command premium (all cash IRR of
  7.0-7.5, flat returns) for income stability and
  lease term.

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Retail Trends
Major Retail Segments Cap Rate Compression
2001-2005 (Median Capitalization Rates)
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REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups

• Secondary office market sales activity bringing
  new liquidity to this large segment.
• Large industrial properties are oversubscribed
  and trade at trophy premium.
• Multifamily, despite economic vacancy, still
  command pricing power.

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REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups

• Development sites with entitlements red hot as
  entrepreneurs often with institutional capital,
  seek higher returns.
• Condo conversion mania
• Net lease purchasing at historic highs driven by
  RELPs, syndicated equity and 1031 exchange
  capital.

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REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups

• Land Spec Fast Growing and Institutionally
  Driven (JPMF in Inland Empire)
• Note Sales, Loan To Own, Partner Recaps Any
  Opportunity, Stupid!

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REAL ESTATE CAPITAL MARKETS OUTLOOK
Next

• Recognition of True Reproduction Costs and
  Valuation
• Global acquisitions/MA
• Mills/Scotland malls
• GEPT Canada
• Blackstone model/precedent
• Galileo/New Plan
• Simon/China JVs

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REAL ESTATE CAPITAL MARKETS OUTLOOK
Next

• Foreign capital surge (esp. Debt)
• New Megabank Equity
• Direct /Co-Invest
• Citicorp
• Fractionalization
• Mutual Fund R.E. (evolution from private
  syndicates 401K)

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REAL ESTATE CAPITAL MARKETS OUTLOOK
Next

• Blowoffs Rates above 5.5 and LIBOR spike
• Business Week Survey of Corporate/Wall Street
  Experts 5.1 T-10 Consensus
• Condo conversion, presales at Stabilized Value
• Master leases