mathew crowther +44 (0)20 7766 2446

Pramerica Real Estate Investors

Ref: LDWR-89GEHB

Pramerica Real Estate Investors, 6th Floor, Grand Buildings, Trafalgar Square, 1-3 Strand, London WC2N 5HR, Tel: +44 (0)20 7766 2400, Fax: +44 (0)20 7766 2449

Mathew Crowther +44 (0)20 7766 2446

MezzanineFinancing


Ref: LDWR-89GEHB

APB Annual Seminar

Mezzanine in 2010

• Why should Borrowers and Senior Lenders consider it?

• Where does it come from?

• What does it look like? – pricing and structures


Ref: LDWR-89GEHB

APB Annual Seminar

The “Funding Gap”

• Debt or preferred equity that fills the funding gap between borrower equity and senior debt

• 60/65% to 80/85% LTV

• Primary mezzanine – back to basics

SENIOR DEBT

EQUITY

MEZZANINE


Ref: LDWR-89GEHB

APB Annual Seminar

Demand - ACQUISITIONS

• Transaction volumes remain low

• Core real estate investors / cash buyers

• Property companies / opportunistic investors


Ref: LDWR-89GEHB

APB Annual Seminar

Demand - ACQUISITIONS

• Transaction volumes remain low

• Core real estate investors / cash buyers

• Property companies / opportunistic investors

• Increases “buying power” / target larger assets

• Enables diversification across larger portfolios

• Increases returns / multiples


Ref: LDWR-89GEHB

APB Annual Seminar

Demand - REFINANCING

• More activity

• Institutional real estate investors

• Loans pooled in conduit CMBS


Ref: LDWR-89GEHB

APB Annual Seminar

Demand - REFINANCING

• More activity

• Institutional real estate investors

• Loans pooled in conduit CMBS

• Alternative source of equity

• Non-dilutive

• Fits into existing structure

• Visible exit for borrower

• Tax - efficient


Ref: LDWR-89GEHB

APB Annual Seminar

As always...

• Good quality property

• Strong sponsor

• Viable debt exit


Ref: LDWR-89GEHB

APB Annual Seminar

The “New” Mezzanine Market

• Banking market

• Real estate market

• Regulation

• Yield gap


Ref: LDWR-89GEHB

APB Annual Seminar


• Banking market


• Regulation

• Yield gap

• Senior lender and mezzanine providers working together

• Mezzanine “value-add”


Ref: LDWR-89GEHB

APB Annual Seminar


• Banking market


• Regulation

• Yield gap

• Exit / refinance risk

• “Equity buffer”

• Primary vs. secondary


Ref: LDWR-89GEHB

APB Annual Seminar


• Banking market


• Regulation

• Yield gap

• Senior lenders 60%-70% LTV

• Massive demand for mezzanine


Ref: LDWR-89GEHB

APB Annual Seminar


• Banking market


• Regulation

• Yield gap • Cashflow driven funding


Ref: LDWR-89GEHB

APB Annual Seminar

Cashflow Driven Funding

UK Yield Gap 2000 – 2010

PositiveYieldGap

Source: Pramerica Real Estate Investors Research 2010, Eurostat, Cushman & Wakefield, Bloomberg

Expected Returns

Mezzanine returns more dependent on capital returns

Mezzanine returns more dependent on income returns

FrequencyDistributionofMezzanine Loans

Source: Pramerica Real Estate Investors, Research 2010


Ref: LDWR-89GEHB

APB Annual Seminar

Where does it come from?

• European market size comparable to US

Europe€1.9 trillion*

US€2.25 trillion*

* Figures are as at year end 2009 and assume €1 = $1.2. Source: Pramerica Real Estate Investors Research 2010, DTZ


Ref: LDWR-89GEHB

APB Annual Seminar




US€2.25 trillion*

* Figures are as at year end 2009 and assume €1 = $1.2. Source: Pramerica Real Estate Investors Research 2010, DTZ** Source: Preqin 2010

• Specialist debt funds

• REITs

• Private equity sources alone - excess of 50 funds raised in 2008-2009 which total $40 billion**


Ref: LDWR-89GEHB

APB Annual Seminar




US€2.25 trillion*


• Commercial banks


• Non-discretionary investors

• Opportunity funds


• REITs



Ref: LDWR-89GEHB

APB Annual Seminar




US€2.25 trillion*


• Commercial banks


• Non-discretionary investors

• Opportunity funds


• REITs


WE MUST ATTRACT GLOBAL INSTITUTIONAL INVESTORS


APB Annual Seminar

Ref: LDWR-89GEHB

Pricing?

• Arrangement Fees

• Coupon:

• Current pay

• PIK - accrued element of coupon, compounded at total coupon rate and distributed at the repayment of the mezzanine in priority to equity

• Exit Fees:

• Fixed Fee

• Sales Fee based upon the value or sales price of underlying properties, payable upon sale or refinancing

• Profit Participation based upon a share of the equity profit achieved upon sale or refinancing of each security property

SENIOR DEBT

EQUITY

MEZZANINE


Ref: LDWR-89GEHB

APB Annual Seminar

Pricing?

Arrangement Fees

Total Coupon Exit Fee Sales FeeProfit

Participation

1-2% 10-14% 0-2% - -

2%+ 12-15% 2-5% 0-2% 0-20%

3%+ 10%+ 5%+ 2%+ 20%+

High Yield

•Prime property

•Income weighted return


Ref: LDWR-89GEHB

APB Annual Seminar

Pricing?

Arrangement Fees


Participation

1-2% 10-14% 0-2% - -

2%+ 12-15% 2-5% 0-2% 0-20%

3%+ 10%+ 5%+ 2%+ 20%+

Core Mezzanine

•Good quality property

•Portfolios

•Some asset management


Ref: LDWR-89GEHB

APB Annual Seminar

Pricing?

Arrangement Fees


Participation

1-2% 10-14% 0-2% - -

2%+ 12-15% 2-5% 0-2% 0-20%

3%+ 10%+ 5%+ 2%+ 20%+

Value-add Mezzanine

•Pre- let development

•Business plan delivery


Ref: LDWR-89GEHB

APB Annual Seminar

Structure – Relationship with Senior Lenders

• Separate facility agreements

• Cash waterfalls and amortisation

• Control / deposit accounts

• Cash sweep

• Covenants

• Cure rights - access to cash

• Intercreditor agreements - practicalities


APB Annual Seminar

Ref: LDWR-89GEHB

Pramerica Real Estate Investors, a Pramerica Financial company*• One of the largest global real estate investment managers ($43.1 billion gross assets under management).(1)

• 39 year track record as a fiduciary for institutional clients.• 19 offices worldwide.

Pramerica Financial*• Size: One of the largest life insurance companies and financial service institutions in the United States; $693 billion of

assets under management.(2)

• Stability: Pramerica Financial’s credit rating is affirmed A.(3)

• History: Managing assets for more than 130 years.

Pramerica Real Estate Capital• Global debt platform headquartered in London and New York.• Discretionary specialist mezzanine debt fund.• Institutional global investors.

(1) Pensions and Investments, December 28, 2009. Ranked by total worldwide real estate assets, including mortgages. Figures are as at June 30, 2010, total net assets under management equal $23.4 billion.

(2) As of March 31, 2010.(3) Relates to Pramerica Financial. Reaffirmed by Standard & Poor’s, December 2009.* In the United Kingdom and various other jurisdictions in Europe, all investment activities are carried out by representatives of Pramerica Investment Management Limited ('PIML'), which is

authorised and regulated by the Financial Services Authority of the United Kingdom (registration number 193418). Pramerica Real Estate Investors, which is affiliated to PIML, is the real estate investment management business of Pramerica Investment Management. Both Pramerica Real Estate Investors and Pramerica Investment Management are trading names of Prudential Investment Management, Inc. the principal asset management business of Prudential Financial, Inc. ('Pramerica Financial') of the United States. Prudential Financial, Inc. is not affiliated in any manner with Prudential plc, a company incorporated in the United Kingdom. PIML is registered in England No. 3809476 VAT no. 447 1835 36, Registered Office, Grand Buildings, 1-3 Strand, Trafalgar Square, London WC2N 5HR.

QUESTIONS?

mathew crowther +44 (0)20 7766 2446

Documents