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Capital Markets Presentation

Capital Markets Presentation. Real Estate Capital Markets Outlook for 2005: Themes and Key Ideas. 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.

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Capital Markets Presentation

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  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. * Core All Cash IRR (3Q, 2005) now 6-7% * Core Levered IRR (3Q, 2005) now 8-10% 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-year U.S. Treasury Bond rates based on quarterly average unless otherwise stated.

  6. Sources: NCREIF; PPR 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. Hotel 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 (Cont’d) • 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 (Cont’d) • 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 (Cont’d) • Allocation Trends Align with Demographic Drivers (Cont’d) • Surging syndicated equity drives pricing on the margin (Cont’d) • 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 (Cont’d) • 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 ISN’T 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 • M&A driving REIT market which continues to “cartelize”. REITs outperform S&P and indexed funds (private REITs follow suit) • Average REIT dividend yield of 4.7% vs. S&P 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/M&A • 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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