pension funds: why real estate? · sources: ernst & young, reznick group private equity funds...

Source: Reznick Group

Pension Funds: Why Real Estate?

Proven performance of real estate over the past decadeacross all property types

Need for higher yields due to aging baby-boomerpopulation

Worldwide appeal due to greater information andresearch, plus increased transparency

Portfolio diversification and appreciation potential

Consistent cash flow

Sources: Ernst & Young, Reznick Group

Private Equity Funds

Fund Type Yield Expectations

Core 7-10%

Core-Plus 10-13%

Value-Added 14-17%

Real Estate Hedge Funds 12-15%

Mezzanine Debt 15-18%

Opportunistic 17-20%


Blackstone

Currently raising in excess of $10 billion for a new opportunistic fundon the heels of raising $5 billion in 2006

In 2006, acquired Carr America for $ 5.6 billion (equity and deptassumed)

In 2006, acquired Trizec Properties (with Brookfield Properties) for$8.9 billion

In the past three years, has gobbled up more than $20 billion worth ofhotel companies including MeriStar Hospitality, WyndhamInternational, La Quinta, Extended Stay and Boca Resorts

Last month, acquired EOP for $39 billion (equity and dept assumed)and simultaneously sold off over $21 billion of the EOP portfolio

Just recently, they filed to go public and sell a 10% stake in itsmanagement partnership, for $4 billion.


An Interesting Perspective

2004: A record 20 public REIT M&A deals totaling $34 billion

2005 and early 2006: The total price paid for all eight REITprivatizations in 2005 (a record year) plus the Trizec Propertiesand Carr America transactions (closed in 2006) was slightlyover $38 billion

Last month: Blackstone acquired Equity Office Properties for$39 billion (equity and assumed dept)

Prior to the EOP acquisition, the largest REIT M&A transactionon record was the General Growth acquiring Rouse Co. for$12.6 billion in 2004


Private Equity Funds Privatizing REITs

Private Equity Fund Perspective:

Larger targets; less competition

Arbitrage between the value of a REIT’s asset and its stock price

Possible development pipelines for a value-added or opportunisticplay

REIT Management Perspective:

Favorable time to sell – high demand, high prices

High Cost of compliance (Sarbanes-Oxley)

Increased operating flexibility

Ability to leverage up certain assets


Other Significant Trends

REITs Launching Private Equity Funds

Prologis raised $1.85 billion from a global institutional client base

AMB launched a $2.2 billion fund in Japan

Globalization of Funds

Opportunistic funds are seeking opportunities in Mexico, Latin America, India, Japanand China, where they can get better yields than in the U.S.

Funds Going Public

KKR raised money in a REIT IPO

JER also created a REIT

Fund sponsors like Blackstone and Fortress are going public at record multiples

International REIT Acquisitions

More than 20 countries have thus far passed their own REIT legislation

Many funds are privatizing REITs outside the U.S.

Source: CBRE

U.S. Real Estate Returns Average Annual Return, 1997 thru 2006

16

14

12

10

8

6

4

Percent

NAREIT (Public Real Estate)

NCREIF (Private Real

Estate)

Russell

2000NASDAQ S&P 500

U.S. Govt.Bonds

Real Estate Investment Trusts Sector Net Acquisition of Financial Assets

20062005200420032002200120001999199819971996

400

300

200

100

0

US$ Billions

Source: Global Insight

Biggest REITs Before the Big Buyout*

Sources: Forbes, Green Street Advisors

*Data as of Jan 30, ’07

**Before Acquisition

REIT/ Major Properties Prop. Type

Recent

Price

Dividend

Yield

Net Assets

(US$ Bill.)

Simon Property Group Shopping Malls $113.5 2.7% $26.7

Vornado Realty Offices $123.6 2.8% $20.3

Equity Office Properties** Offices $54.7 2.4% $19.5

General Growth Properties Shopping Malls $60.7 3.0% $16.9

Equity Residential Apartments $55.6 3.3% $16.4

Small Size REITs Likely Targets for Takeover, According to Forbes*

*Data as of Jan 30, ‘07

REIT/ Major Properties Prop. Type

Recent

Price

Dividend

Yield

Net Assets

(US$ Bill.)

Home Properties Apartments $64.1 4.1% $3.0

Colonial Properties Apartments $50.1 5.4% $2.9

Maguire Properties Offices $43.2 3.7% $2.5

Sunstone Hotel Investors Hotels $27.5 4.6% $1.9

Felcor Lodging Hotels $21.9 4.6% $1.6

Sources: Forbes, Green Street Advisors

Source: CBRE

Overall Capitalization Rates By Property Type

200620052004200320022001

11.0

10.0

9.0

8.0

7.0

6.0

5.0

Rate

Industrial Suburban RetailCBD Office Apartment

U.S. Vacancy Rates Industrial vs. Office Space

2006200520042003200220012000199919981997

18

16

14

12

10

8

6

Percent Vacant

Industrial

Office

Sources: CB Commercial, Economy.com

U.S. Vacancy Rates

Office Space Markets

2006200520042003200220012000199919981997

20

18

16

14

12

10

8

6

4

Percent Vacant

DowntownMetropolitanSuburban

Sources: CB Commercial, Economy.com

Industrial Space Demand Absorption vs. Availability

Sources: CBRE

200620052004200320022001

300

200

100

0

-100

-200

12.0

11.5

11.0

10.5

10.0

9.5

9.0

SF (Millions) Rate

Absorption - LAvailability Rate - R

Office Space Demand Absorption vs. Vacancy

Sources: CBRE

200620052004200320022001

100

50

0

-50

-100

-150

17

16

15

14

13

12

SF (Millions) Rate

Absorption - LVacancy Rate - R

Interest Rates Fed Funds Rate and 10-year Government Bond

20072006200520042003200220012000199919981997

8

6

4

2

0

Percent

Fed Funds Rate10-year Government Bond


Yield Curve

10-year Government Bond Minus Fed Funds Rate

20072006200520042003200220012000199919981997

4

3

2

1

0

-1

-2

Percent


Corporate Spread

Moody’s Corporate Aaa Minus 10-year Treasury Bond

20072006200520042003200220012000199919981997

2.5

2.0

1.5

1.0

0.5

Percent


Mortgage Rates

United States

20072006200520042003200220012000199919981997

9

8

7

6

5

4

3

Rate

30-Year Fixed

15-Year Fixed

1-Year ARM

Sources: Freddie Mac, Economy.com

1-Month LIBOR

London Interbank Offered Rate

20072006200520042003200220012000199919981997

7

6

5

4

3

2

1

0

Rate

Sources: Freddie Mac, Economy.com

Foreign Purchases of U.S. Securities Net Foreign Purchases

20072006200520042003200220012000199919981997

200

150

100

50

0

US$ Billions


S&P 500 Yield Dividend / Price Ratio

0601969186

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

Ratio


Construction Put in Place

Private Residential vs. Private Nonresidential

20072006200520042003200220012000199919981997

30

20

10

0

-10

-20

-30

Percent Change, Year Ago

Residential ConstructionNonresidential Construction

Sources: U.S. Census, Economy.com

Travel Expenditures

Resident and International Travel for United States

0504030201009998979695949392

20

15

10

5

0

-5

-10

-15


U.S. Resident TravelInternational Travel

Sources: TIA, Economy.com

Hotel Occupancy Rate

Las Vegas

2006200520042003200220012000199919981997

92

90

88

86

84

82

80

78

76

Percent

Sources: Las Vegas Convention & Visitors Authority, Economy.com

Unsold Inventory Index

California

20072006200520042003200220012000199919981997

12

10

8

6

4

2

0

Months Supply

Sources: CAR, Economy.com

Sources: Wall Street Journal

Highest Share of Subprime Loans Subprimes as a Percentage of All Loans

Metro Percent

McAllen, TX 26.8

Memphis, TN 24.0

Sharon, PA 23.1

Miami, FL 23.0

Richmond, VA 22.3

Brownsville, TX 21.6

Merced, CA 21.6

Sumter, SC 20.7

Bakersfield, CA 20.2

Jackson, TN 20.2

Sources: CNN Money, First American Loan Performance

Highest Share of Subprime Loans atLeast 60 Days Late Percentage of Delinquent Subprime Loans

Sources: CNN Money, First American Loan Performance

Metro Percent

Cleveland, OH 24.9

Detroit, MI 24.6

Jackson, MS 22.7

Jackson, MI 22.0

Youngstown, OH 21.8

Flint, MI 20.7

South Bend, IN 20.3

New Orleans, LA 20.1

Kankakee, IL 20.1

Akron, OK 19.7

Single-Family Housing Starts United States, SAAR

20072006200520042003200220012000199919981997

2.0

1.8

1.6

1.4

1.2

1.0

Millions


Multi-Family Housing Starts United States, SAAR

20072006200520042003200220012000199919981997

500

450

400

350

300

250

200

Thousands


Existing Single-Family Home Sales United States, SAAR

2006200520042003200220012000199919981997

6.5

6.0

5.5

5.0

4.5

4.0

3.5

Millions

Sources: NAR, Economy.com

Existing Condo & Co-op Sales United States, SAAR

070605040302010099

1000

900

800

700

600

500

400

Thousands


Existing Median Home Price Single Family Homes, United States


2006200520042003200220012000199919981997

240

220

200

180

160

140

120

100

14

12

10

8

6

4

2

0

US$ Thousands Percent Change, Year Ago

Home Price (L)% Change, Year Ago (R)

Real GDP Growth

United States, 2000 Prices

20062005200420032002200120001999199819971996

5

4

3

2

1

0


Sources: Global Insight

20072006200520042003200220012000199919981997

6.5

6.0

5.5

5.0

4.5

4.0

3.5

4

3

2

1

0

-1

-2

Percent Percent Change, Year Ago

Unemployment Rate - LCivilian Employment - R

U.S. Employment Picture

Unemployment Rate & Employment Growth


Recent Transactions…….

Hospitality Real Estate

Source: Wall Street Journal, April 18, 2007

• Lightstone to buy Extended Stay Hotels fromBlackstone for $8 billion

• One of the biggest deals in noncasino hotel deals

• Blackstone took Extended Stay private back May2004 (paying $1.99 bill. + $1.13 bill. in debt )

pension funds: why real estate? · sources: ernst & young, reznick group private equity funds...

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