Opportunistic Investing and Real Estate Private Equity Funds

1
Opportunistic Investing and Real Estate Private
Equity Funds
2
Risk-Return Spectrum of Real Estate Investing
Security of Income Growth
Opportunistic

• Corporate Restructurings
• Global Distressed Sellers
• Recovery Capital
• Growth Capital
• Emerging Property Sectors
• High-Yield / Subordinated Debt

Value Added
Return

• Property Leasing Strategies
• Property Repositioning Strategies
• Development / Re-Development

Core

• Fully Leased Multi-Tenant Property
• Core Diversified Private Funds
• Publicly Traded REITs

Risk
3
Typical Areas of Investment Focus

• Distressed Debt Loan to Own
• Real Property in Recovering/Growth Markets
• Privatizations
• Mezzanine Investments
• U.S. Core Product
• Portfolio Sale-Leaseback Transactions with Option
  Value
• Wholesale-Retail

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Total Opportunity Fund Equity Raised1988 - 2001
( in billions)
ofFunds 1 1 0 2 5 2 12 10 13 19 20 17 20 23
Source Ernst Young
5
Evolution of Investment Activities
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Growth
Recovery
Restructuring
International

• Distressed debt opportunities driven by
  Resolution Trust Corporation (RTC) sales
• Single asset and portfolio acquisitions from
  motivated sellers (e.g., RTC, lenders, etc.)
• Investments made in economically depressed
  regions such as Texas

• Early diversification in land, corporate deals
  and debt investments
• Increased geographic diversification in U.S.
  markets
• Start of California recovery
• REIT growth phase private to public arbitrage

• Development and new product strategies
• Redevelopment and repositioning strategies
• Mezzanine debt
• Increased international focus

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Opportunity Fund Fee Structure

• Promote General Partner receives 20 of total
  profits against (versus above) a preferred return
  to the investor of 10
• Catch-Up GP receives 60 to 100 of
  distributions after return of capital and 10
  preferred return until GP has received 20 of
  total profits (distributions thereafter pro rata)
• Asset Management Fees typically 50 bps of costs
  under management (some funds charge 150 to 200
  bps on equity, either committed or invested)
• Financing/acquisition fees typically 1 where
  charged

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Typical Fund Economics
in millions Comments
General Terms Size of Fund 2,000 Equity
leveraged 31 equals 8.0 billion in
cost Sponsor Commitment 360 18 of total
equity Revenues to Sponsor Before
Expenses Profits from 20 Promote
400 Assumes 2.0 billion in equity doubles
to produce 2.0 billion in profits (4
years at 20 IRR 3 years _at_ 25 IRR) Profits
from Equity 288 18 of remaining 1.6 billion of
profit after 20 promote paid Asset
Management Fees 120 50 bps on 8.0 billion of
cost over weighted avg. three year
life Transaction Fees 80 Assumes 1 on 8.0
billion of cost from financings, selected
sales, etc. Total Revenues to Sponsor 888
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Sample Fund Economics(Assumes Successful
Investment)
Year 0 Year 1 Year 2 Year 3 Year 4 Totals
Investment of Capital (360 ) (360 ) Asse
t Management Fees 30 30 30 30 120Transactio
n Fees 20 20 20 20 80Profit on
Equity -- -- -- 288 288Promote --
-- -- 400 400Return of Invested Equity
-- -- -- 360 360 Total Cash
Inflows 50 50 50 1,098 1,248 Total Net
Revenues (360 ) 50 50 50 1,098
888 Internal Rate of Return Pre-Overhead 41 Mul
tiple of Invested Capital 3.5x
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Typical Deal Structure

• Shared Ownership Operating partner should have
  minimum 10 equity stake in the joint venture
• Promote Structure 20 of profits above a 15
  IRR, 25 of profits above a 20 IRR
• Asset Management Fees 50 basis points of cost
• Property Management Fees 3 of gross revenues
• Market leasing fees, development fees, and
  construction management fees vary considerably
  according to deal specifics

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Whitehall Funds Overview

• Description

• Family of opportunistic real estate funds
  sponsored and managed by Goldman Sachs. The
  Funds invest in real estate companies, projects,
  loan portfolios, debt recapitalizations and
  direct property.
• Since its 1991 inception, Goldman Sachs has
  raised approximately 11.6 billion of equity in
  nine funds, including its latest fund, Whitehall
  2001, which has committed capital of 2.3
  billion.
• Goldman Sachs has committed approximately 2.2
  billion to the Whitehall Funds since inception
  with nearly 400 million committed to Whitehall
  2001. GS employees have committed an aggregate
  of 594 million since inception (approximately
  200 million to Whitehall 2001).
• Since inception investments of approximately 66
  billion in total cost across 20 countries
  including U.S., Canada, U.K., France, Italy,
  Germany, Brazil, Sweden, Spain, Portugal, Hong
  Kong and Thailand.

Size
GS Commitment
Scale
As of June 30, 2003
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The Whitehall FundsHistorical Equity Raised
The Whitehall Funds are the largest series of
real estate opportunity funds in the world with
over 11.5 in equity across nine funds
(1)
(1) Represents aggregate commitments to Whitehall
3 and Whitehall 3-S. Whitehall 3-S was a
supplemental fund offered only to investors in
Whitehall 3.
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The Whitehall Funds Product Stratification by
Region
Americas (54)
Asia (8)
Europe (38)
Remaining cost by region. Actual figures as of
June 30, 2003.
13
The Whitehall FundsGeographic Stratification by
Region
3.9 billion, or 58 of remaining investment
level distributions are concentrated within the
Americas, while European and Asian activity are
dominated by Italian/French and Japanese
holdings, respectively.
Americas (58)
Europe (32)
Asia (10)
Canada8
Thailand17
France49
Italy39
U.S.88
Note All distributions are at the investment
level prior to all fund level expenses and the
impact of any fund level financing. Actual
figures as of June 30, 2003.
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The Whitehall FundsInvestment Activity by Year
( in millions)
Total Fund Cost Purchased
Fund Equity Invested (1)
65.7 billion Total Cost 37.8 billion Fund
Cost 28,800 Total Assets
11.6 billion Total Fund Equity 304 Total
Investments 101 Operating Partners
2003 YTD

• Represents equity funded does not include equity
  committed to identified transactions or platform
  basket commitments to unidentified transactions.

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Investor Makeup of the Whitehall FundsContinuing
Shift towards Private Client Investors

• Goldman Sachs is sponsor and largest investor in
  each Whitehall Fund, typically committing 18 to
  20
• The remainder of the funds consist of
  institutional investors and high net worth
  individuals

Raised 1991 - 1997
Raised 1998 - 2001
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Current Trends in Real Estate Markets

• Flight to quality and near-term yield
• Contractual cash flow tied to strong credit
• Minimal near-term lease expirations
• Increasing allocations towards real estate
• Pension fund industry is 80 trillion industry
  which is allocated 2 towards real estate
• Public REIT market is similarly sized (179
  billion)
• Less appealing alternative investments
• Limited number of solid markets to invest in
• Focus on Midtown Manhattan, Washington D.C. and
  Southern California

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Current Investment Profile for Opportunistic
Investors

• Domestic opportunities are sparse given economic
  uncertainty yet minimal distress
• Great time to be a seller of stabilized assets
  record pricing levels for well-leased,
  well-located, high quality product
• Looming maturities particularly in tech centric
  markets and hospitality sector could create new
  found distress
• Market recovery and restructuring opportunities
  continue to persist in Europe
• Large corporate restructurings and divestitures
  (e.g. telecoms)
• Public to private opportunities given depressed
  real estate public equity values
• Economic distress continues to drive investment
  activity in Asia
• Distressed debt and wholesale-to-retail
  arbitrage
• Corporate restructurings (e.g., golf) and
  divestitures

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The Retail Fund Flows Phenomenon

• Morgan Stanley REIT index trading at all time
  high despite overall weak underlying fundamentals
  (now at avg. 6 dividend).
• Public market forward multiple on AFFO now 12.5x
  vs. historic 10.5x.
• Compared to avg. SP forward multiple of 17.5
  times, ratio now gt70 vs. historical 50 ratio.
• Syndicators focused on low leverage, income
  driven acquistions raised 4.0 billion last year
  and will likely raise 6 to 8 billion this year.
  
• Wells raising up to 250mm of equity per month,
  with 2.5bn raised in 2003, with promise of
  delivering 7 current yield.
• Investor paying 15 load, with 10 going to
  broker and 5 (or 125 million) going to Wells
  with subsequent annual 50 bps AM fee

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The Stabilized/Value Add Spread Phenomenon
(Tale of Two Cities within 6 Blocks in Chicago)
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Evolution of RE Pricing and Impact of Leverage
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Historical One-Month LIBOR Rates
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Evolution of RE Pricing and Impact of Leverage
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The Retail Fund Flows Phenomenon

• Will retail investors investing with Wells, CNL,
  Inland, etc. ultimately get what they thought
  they were getting?
• Will spread between stabilized and value-add
  continue? If not, how will spread be narrowed?
• Will higher valuations lead to more IPO/merger
  activity?
• Will lower cap rates/interest rates lead to more
  build-to-suit activity, giving more benefit of
  current environment to tenant vs. 100 accruing
  to owner of stabilized product?

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Why Today is Considered Good if not Great

• 1.8 million housing starts nationwide
• Substantial refinancing activity lowering costs
  and increasing real estate equity valuations
• Record 75bn of CMBS originated in 2003
  increased aggressiveness in mezzanine lending
  lower spreads
• Substantial defense spending greater tenant
  demand (D.C., S. California)
• Imports from China and outsourcing to India
  lowering overall costs and dampering inflation
• Tremendous retail flows into stabilized real
  estate REITs trading at all time high prices and
  historically low dividend yields
• Corporate profits up 20 NASDAQ up 77 SP up
  20
• Retail and auto sales holding up
• Substantial fiscal stimulus easiest monetary
  system in recent memory

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Troubling Concerns

• Lack of job growth declining office
  rents/negative absorption
• Continuing poor MF fundamentals
• 300k units built in 03, consistent with last 6-7
  years
• of population renting vs. owning down from 36
  to 32 since 94 however, couples getting
  married now avg. 28 yrs. vs. 22 and should
  benefit 24/7 cities such as NY, Chicago, etc.
• Hospitality industry remains under pressure
  ADRs 20 to 40 below 2000 peaks
• CMBS delinquency rates up to 2.4 6.9 for
  senior housing and 5.4 for hotels
• Weak value added sales activity creating huge
  spreads for well-leased vs. lease-up assets
• Huge deficits, both in trade and at local and
  national levels
• Lack of progress in educational system given
  funding concerns and need to retrain workers
  being displaced by outsourcing

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Other Factors to Consider

• Real GDP growth of 3.3 in 2Q03 vs. 1.4 in 1Q03
• Last quarter of negative GDP growth was 3Q01,
  resulting in 24 months of recovery with no job
  growth
• Unemployment at 6.1 unlikely to fall materially
  when job growth returns as currently disgruntled
  unemployed return to market and growing echo baby
  boomers enter market for first time
• Consumer almost 2/3rds of economy confidence
  remains weak and will likely remain so until real
  job growth returns
• Stocks trading at low 20s P/E ratios, down from
  40 at peak
• Private sector debt now at 1.5 of GDP, highest
  level since 1964
• U.S. deficit will reach 450bn in 2003, 600bn in
  2004. Largest prior level was 350bn in 1992.
• Now importing 140bn and exporting 25bn to China
  from almost 0 in 1985

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What Do Next 12 Months Look Like?
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Retail Trends(Generally in Equilibrium but
Tremendous Shifts)

• Discount department stores, warehouse clubs and
  supercenters now control gt70 of retail market
  share (vs. only 20 for traditional department
  stores) versus just 50 of the market 15 years
  ago.
• Wal-Marts market capitalization of 241 billion
  is over eight times the 29 billion market
  capitalization of all traditional department
  stores combined (i.e. Sears, Nordstrom,
  Federated, Saks, May Co. and J.C. Penny).
• Community center and power retailers reflected
  4 same store sales growth over the last 24
  months mall anchors and specialty retailers
  declined 2.5 over same period.
• Traditional grocers market share of U.S. grocery
  sales dropped from 85 in 1992 to lt40 ten years
  later, with supercenter and wholesale clubs now
  at 30.
• Wal-Marts supercenter sales represented 95
  billion (nearly 40 of total Wal-Mart sales),
  making it the largest grocery retailer in the
  country with almost twice the sales of its
  largest competitor (Kroger at 52 billion).

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Retail Trends (contd)

• Wal-Marts supermarket/pharmacy-related sales
  projected to grow gtfive times faster than other
  industry competitors.
• Avg. Wal-Mart store has grown from 128k sf to
  gt200k sf
• Pricing competitiveness tremendous advantage
  Wal-Marts supercenter prices 22 below overall
  market avg. for sample basket of goods and almost
  30 below prices quoted by Kroger, Safeway and
  Albertsons.
• Retail sales have grown at CAGR of over 5 over
  last 11 years growing at faster rate per capita
  than retail sf per capita.
• Over 600 Wal-Marts and Targets are being built
  per year vs. only a handful of department stores.
• Occupancies remain high good malls and life
  style centers holding up primary risk remains
  credit
• General perceptions
• K-Mart will have difficulty coming out of BK due
  to severe talent drain
• Sears continues to be picked off by Best Buy,
  Home Depot, Lowes and apparel specialty stores.

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Hospitality Trends

• North-South travel much better than East-West
  given weak dollar relative to Euro and Yen and
  international perception, at least for time
  being, that U.S. more dangerous place to travel
  post 9/11.
• SARS had tremendous negative impact on Canada and
  Asia at height of crisis, occupancies fell as
  low as 3 in Hong Kong, 22 in Beijing and 15 in
  Toronto. U.S. cancellations due to disapproval
  of Canada and France opposing the Iraqi war also
  had impact.
• Consumers booking much later, causing great
  degree of difficulty for hoteliers in pushing
  rate through yield management and controlling
  variable expenses.
• Internet (particularly Expedia, which dominates
  the market) has had real impact on pricing given
  occupancy and booking trends, putting rates under
  meaningful pressure.
• Big evolving trend remains developing luxury
  properties with timeshare or residential
  components.

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Offshoring Phenomenon

• 2mm manufacturing jobs lost to offshoring from
  1983-2003
• Pct. of offshore inputs in US manufactured goods
  grew from 10 to 16 from 87 to 97 and from 26
  to 38 in high-tech manufacturing
• Replaced by 36mm new services job, raising
  overall std. of living (however, Silicon Valley
  negative absorption of 6mm sf annually for last
  two years has given back some of these gains)
• 210k non-mgf. jobs exported annually,
  conservatively expected to reach cumulative 3.3mm
  by 2015
• U.S. talks about allocation of capital in India,
  its allocation of people
• Bangalore produces gt30k engineers/yr. with
  English-speaking college grads available at
  3k/yr. and MBAs at 5k/yr.
• GE has 20k people in India GS moving 5 of
  workforce there.
• Substantial outsourcing also being driven by
  desire to increase market share in developing
  countries (China, eastern Europe, etc.)

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Offshoring Phenomenon (contd)

• Typical attribute of jobs outsourced
• No face-to-face customer servicing requirement
• High information content
• Work process is telecommutable and internet
  enabled
• High wage differential
• Low setup barriers
• Low social networking requirement
• 11 of U.S. occupations judged to be at risk
  given these factors
• Outsourcing of servicing easier (and thus
  faster) than in manufacturing in terms of
  resources, space, equipment requirements
• Regional analysis indicates Atlanta, Boston,
  Chicago, Detroit, Houston, New York, L.A., S.F.,
  and San Jose above national avg. in terms of at
  risk jobs

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Offshoring Phenomenon (contd)
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Outsourcing Phenomenon (contd)

• Using conservative estimate of 3.3mm jobs lost by
  2015
• _at_250 sf/job 825mm sf (6.3 of 13bn sf U.S.
  office inventory)
• _at_500 sf/job 1.6bn sf (12.6 of national
  inventory)
• Sam Zell of EOP recently quoted that outsourcing
  to countries like India will render commodity
  back office space obsolete
• Will U.S. economy evolve and be able to retrain
  displaced workers into higher paying services
  jobs, negating impact on office market?
• What will interim impact be?
• Is our educational system up to the task?
• Will political pressure against globalization
  result in protectionist measures?
• Will interim domestic outsourcing (moving from
  high cost states such as NY and California to low
  cost states such as Texas and Florida) be a
  result, especially if protectionist efforts
  successful?