Capital Markets Presentation

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Capital Markets Presentation

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Title: Capital Markets Presentation


1
Capital Markets Presentation
  • Real Estate Capital Markets Outlook for 2005
    Themes and Key Ideas

2
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!

3
REAL ESTATE CAPITAL MARKETS OUTLOOK
IRR Compression 2001-2005 (Median Ten Year IRR)
4
All Cash Yield Targets By Food Group
Grocery/Discount Anchored Retail
Office
Multi-Family
Industrial
5
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.
6
Office Cap Rates
7
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
8
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

9
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)

10
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)

11
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

12
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.

13
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

14
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

15
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).

16
REAL ESTATE CAPITAL MARKETS OUTLOOK
Top Tenant-in-Common Sponsors in 2004 Properties
purchased or under contract through Nov. 30
17
REAL ESTATE CAPITAL MARKETS OUTLOOK
  • TIC TAC DOUGH and Fund of Funds New Drivers
  • Improving Fundamentals Too

18
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.

19
Historical NCREIF Performance by Property Type
Source NCREIF
20
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.

21
Retail Trends
Major Retail Segments Cap Rate Compression
2001-2005 (Median Capitalization Rates)
22
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.

23
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.

24
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!

25
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

26
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)

27
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
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