vk shutters client presentation (1!31!12) _final
TRANSCRIPT
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CAPITAL MARKETS PRESENTATION
JANUARY 31, 2012
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CAPITAL MARKETS UPDATE
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Continued Themes & Concerns
Stability of the European Banks & Sovereigns
How much are low rates the result of low growthprospects/global risk concern or the result ofaggressive Fed policy? Should we be concernedwith 10-Year rates at 2%?
Where will the mountains of cash & liquidity go in a0-2% rate environment with limited opportunities foryield?
How does a global investment system built on 7-8%annual returns adapt to the reality of earning nadain low risk assets while fearing inflation?
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Complacency is gone; Volatility is back; but theworld is much calmer today than Q4.
The VIX index spiked 146% as of August 8th;but now back below pre-July 15 levels.
The Fed has made it clear that rates will be low
for an extended period of time.
What Has Happened in the Overall Capital MarketsSince July 15
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What Has Happened in the Overall Capital MarketsSince July 15
5 year Treasuries have dropped 67 bps & 10year Treasuries have dropped 98 bps.
CMBS spreads widened 90-100 bps, but AAA
spreads have come back in significantly. Markets are settling into a new paradigm; slow
to moderate growth but extremely low fixed
income returns.
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1000
1050
1100
1150
1200
1250
1300
1350
1400
7/15
7/25 8/
28/
108/
188/26 9/
29/
129/20
9/28
10/6
10/1
4
10/2
411/1
11/9
11/17
11/25
12/5
12/13
12/2
1
12/29
1/6
1/16
1/24
S
&P500
10
15
20
25
30
35
40
45
50
VIX
S&P 500 VIX Index
Source: Bloomberg
S&P 500 vs. VIXJuly 15, 2011 - Present
S&P up 0.6%
VIX down 4.9%
+146%+133%
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0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
7/15
7/28
8/10
8/23 9/5 9/
1810/1
10/14
10/27 11
/911/22 12
/512/18
12/31 1/
131/26
5-Year 10-Year
Source: Bloomberg
U.S. Treasuries
July 15, 2011 to Present
0.77%
1.93%
10 Yr. Treas. -98 bps
5 Yr. Treas. -67 bps
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CMBS 2.0/3.0 Yield Curve
106
143
188235
650
375
225
475400
525
690
110
0
100
200
300
400
500
600
700
800
AAA AA A BBB
BasisPointsoverSwaps
March 2011 August 2011 January 2012
Source: Wells Fargo Securities
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45
50
55
60
65
70
75
7/15
7/28
8/10
8/23 9/
59/18
10/1
10/14
10/27
11/9
11/22
12/5
12/18
12/31
1/13
1/26
Price
Source: Trepp
2007 CMBXJuly 15, 2011 to Present
Investors have pulled away from risk; but now confidence has returned
AJ: 55-60% 2007 LTV down 21 pts.at low, but now down just 2 pts.
Down 21 pts.
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0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-1
4
Sep-14
Nov-14
Jan-15
1Mo. LIBOR 5-Year 10-Year Source: Chatham Financial
Meanwhile, The Bond Markets PredictLow Rates for a Long Time
10 Yr. Treas. less than2.70% for 3 years
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Conundrum Faced By CIOs TodayAnnual Returns on $100 mm Invested
Return(%)
Return($)
1 Month Treasury 0.00% $0
5 Year Treasury 0.75% $0.75 mm
10 Year Treasury 1.95% $1.95 mm
AAA 10 year CMBS 3.25% $3.25 mm 1.67x
Treasuries
Class A Core Real Estate 7.00% $7.00 mm 3.59xTreasuries
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-10%
-5%
0%
5%
10%15%
20%
25%
30%
35%
40%
45%
50%
Jan-10
Apr
-10
Jul-1
0
Oct
-10
Jan-11
Apr
-11
Jul-1
1
Oct
-11
Jan-12
S&P NASDAQ MS REIT (Total Return Index)
Source: Bloomberg
U.S. REITs Have Outperformed Other MarketsJanuary 2010 - Present
S&P: +18.2%
NASDAQ: +23.6%
MS REIT: +48.8%
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-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
7/15
7/28
8/10
8/23 9/
59/
1810/1
10/1
4
10/27
11/9
11/22
12/5
12/18
12/3
11/13
1/26
Industrial Retail Apartment Hotel Office
Source: Bloomberg (Bloomberg REIT Indexes)
REIT Performance by SectorJuly 15, 2011 - Present
Industrial: +9.2%
Retail: +4.6%
Apt: -1.0%
Hotel: -2.9%Office: -8.7%
Oct. 3rd HotelsDown 37.0%
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DEBT CAPITAL MARKETS UPDATE
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Current Themes in the Debt Markets Huge amounts of liquidity are in the system due
to
a) low of corporate, consumer, and MBSissuance, and
b) aggressive Fed policy
Strong Life Co, Bank, & CMBS demand fordecent product.
Widening spreads for assets < 60% leased or
low in place cash flow
Overall spreads for stabilized assets still haveroom to tighten
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Retail$4.0B21%
Multifamily$0.6B
3%
Industrial$0.8B
4%
Hotel$3.8B21%
Office$9.4B50%
CMBS$3.9B
21%
Life Cos
$6.1B
33%
Foreign Banks$2.3B
12%
Finance Co's/Funds
$1.1B6%
US Banks
$5.2B
28%
Eastdil Secured Debt Placements Closed & Under ContractJanuary 2011 Today: $18.5 Billion
Source: Eastdil Secured, as of January 26th, 2012
Lender Type
Product Type
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CMBS 3.0 In 2011, total issuance was $35 billion, 15 deals were done
above $1 billion; 2 deals above $2 billion.
After a volatile Q3-Q4 in 2011 that created material losses,CMBS shops are back in business and actively pursuingdeals. Estimated 2012 volume is $50 bill ion.
More competitive on intermediate size deals ($50-$100mm); deals at 50% or less leverage; and deals at65%-75% leverage.
Less Competitive on a) low debt yield deals, b) deals
between 55%-65% leverage.
Primary Concerns a) limited ability to effectively hedgeloans, b) sufficient transaction volume to build pools timely.
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Source: Commercial Mortgage Alert
U.S. CMBS Issuance2002 2011
$78
$93
$229
$198
$167
$35
$12
$52
0
50
100
150
200
250
2002 2003 2004 2005 2006 2007 2010 2011 2012
Estimate
billions
$50
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Source: Morgan Stanley & Wells Fargo Securities
Historical AAA CMBS Spreads to Swaps
4738
3127 25
100
200
110
0
20
40
60
80100
120
140
160
180
200
220
2002 2003 2004 2005 2006 May-11 Aug-11 Jan-12
BPSo
ver
Swaps
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Life Companies
Most aggressive lenders for moderate leverage,quality deals with good sponsorship.
Significant amount of capital available for 5, 7 to10 year, fixed rate deals, but growing interest in 5year debt.
Targeting $50 bill ion in originations in 2012.
Least impacted by market turmoil.
Some groups starting to get full on certain largeCBDs.
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Bank Lending
Growing number of bank balance sheet lenders inthe market, but material concerns about European
Banks. Banks have significant liquidity with limited
corporate and consumer demands.
Initially increased their exposure to real estate viaREITs; now expanding exposure to project basedloans.
Growing interest from Asian banks; slow demandfrom European banks
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FIXED RATE COUPONS LIFE CO. CMBS
LTV: 50.0% 60.0% 65.0% 70.0%
5 Year Fixed 3.75% 4.00% 5.25% 5.40%
10 Year Fixed 4.25% 4.50% 4.90% 5.10%
FLOATING RATE SPREADS AND COUPONS (BANKS)
50.0% 60.0% 65.0% 70.0%
5 Year Floating Spread 2.00% 2.50% 2.75% 3.25%
5 Year Swapped to Fixed 3.05% 3.55% 3.80% 4.30%Treasury/Swaps: 5 year at 0.80%/1.05%; 10 year at 1.95%/2.05%, 1 Mo. LIBOR at 0.30%
Current Loan Pricing Class A Office; 85%+ Leased;Top 10 Market
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Current Themes in the Equity Capital Markets
Activity is accelerating again as confidence
returned in January. Cap rates are stable after some pressure last
quarter.
Economically sensitive deals - hotels & majorlease up situations have been impacted most inthe 4th quarter, but are improving in 2012.
Core plus with a story under some pressure.
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Well leased deals have held very well &
opportunities with an attractive basis/foot haveheld well.
Some REITs stepped back to assess the market
given stock price volatility in 4th quarter; but arenow focused again as market has stabilized.
Current Themes in the Equity Capital Markets
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$121
$68
$23$51 $62
$118
$160
$184
$279
$68
$35
(23%)
$48
(24%)
$61
(25%)
$102
(27%)
$32
(20%)
$0
$50
$100
$150
$200
$250
$300
$350
$400
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
B
illions
Al l Other US West Coast & AZ
$66 $80
$153
$208
$245
$381
$86
$153
$31
$87
US Sales VolumeTransactions >$25 Million
Source: Real Capital Analytics
2011 Volume Equaled 2004
Pricing is approaching2005/2006 levels
West Coast less activethan East
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West Coast & ArizonaTransactions >$25 Million by Property Type
Source: Real Capital Analytics
$0
$20
$40
$60
$80
$100
$120
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
B
illions
Apartment Hotel Retail Office Industrial
$15 $18
$35$48
$61
$102
$18
$7
$19
$31
Office 28%
of Volume
Office 43%of Volume
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$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
Jan . 2007
(Pre EOP)
May 2010 Jan. 2011 Jan. 2012
billio
ns
200
220
240
260
280
300
320
#o
fD
ea
ls
Prop Sales Financings
Loan Sales JV/Private Equity
# of Deals
$82.0
$24.2
$34.6
$47.7
Source: Bloomberg
Eastdil Secured Active TransactionsIn Process: Sales, Financings, Loan Sales & JVs(Private Market Only)
37% YOYIncrease
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-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Jan-9
2
Jan-9
3
Jan-9
4
Jan-9
5
Jan-9
6
Jan-9
7
Jan-9
8
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Jan-1
1
Jan-1
2
Pu
blicV
alueas
%o
fNAV
31
Source: Green Street Advisors, As of 1-20-12
13.1%(1)
(1) Current premium to asset value is 9.5% on an unlevered basis.
4.6% avg.
REITs vs. Private Market Real EstateREITs Are Back to a Premium
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$8.1
$15.3$12.3
$18.0$13.7 $11.6
$24.2 $25.6$5.2
$5.9
$3.1
$4.2
$4.2
$1.2
$2.6
$12.3
$17.3
$22.1
$26.8
$18.2
$5.2
$10.4
$19.2
$13.8
$33.4
$4.1
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
2003 2004 2005 2006 2007 2008 2009 2010 2011
Billions
Common Shares Preferred Equity Unsecured Notes
$25.6
$38.5
$49.0
$36.0
$18.0
$34.6
$47.5
$37.5
$51.3
Source: NAREIT
REIT Balance Sheets are in Good ShapeWith $80 Billion of Purchasing Capacity
Total Equity$89.9 Bil lion
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Upcoming Maturities
Source: Trepp (Foresight Analytics)
$166 $188 $205
$214 $210$185
$156
$20$21
$22 $23 $24
$23
$22
$76 $55
$54 $54 $62
$67$102
$59 $62
$66 $71 $72
$69 $59
$0
$50
$100
$150
$200
$250
$300
$350
$400
2009 2010 2011 2012 2013 2014 2015
billions
Banks Insurance Co's CMBS Other
$347 $362 $368 $344 $340
$243$242
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$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
$160.0
$180.0
$200.0
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
billions
Non Construction, Standing CRE Loans Commercial Construction & Land Dev. Loans REO
Commercial Banks & S&Ls30+ Day Past Due & Nonaccrual
Commercial, Construction & Land Development Loans
Source: FDIC Insured Institutions
$105.2
$189.6
$143.2
Future Supply - Banks
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In Foreclosure
$18.36B
22%
90+ Days
$12.68B
15%
60 Days
$2.26B
3%
30 Days
$2.64B3%
REO$15.57B
19%
NonPerf/Mat
Balloon
$7.04B
8%
Performing
$24.7B
30%
Special Servicing Delinquent Loans by CategoryTotal: $83.3 Billion
Source: Trepp
56% ($47B) are90+ Days, in
Foreclosure or
REO
$18.1 Billion ofloans > $25 mm
and > 90+ Days inForeclosure or
REO
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9.0-10% unlevered IRR & 1.75-2x EquityDiscount to replacement costExit in 3 to 5 years @ 10-20% discount to 2007 levels
8.5 9.0% unlevered IRR, levered IRR 12.0% to 14.0%;Focus on stabilized yields (ballpark 7.0-7.5% range)
7.5 - 8.5% unlevered IRR, levered IRR 9.0 - 10.0%Underwriting modest rent growth 2014-2016 to 2007 levelsby 2016
7.0 - 7.5% unlevered IRR, levered IRR 8.0 - 9.0%Sub 5% cap if occupancy sub 85%. As high as 6.0% if
stabilized.
Return Metrics
CORE
CORE-PLUS
VALUE-ADD
TROPHY
Asset ProfileCurrent Investment Climate / West Los Angeles
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10% unlevered IRR 15% or higher levered IRR; Focus on exit pricing below
replacement cost 1.75-2x equity multiple ideally
7.5% to 8.5% unlevered IRR 6.5% to 7.5 stabilized cash on cash yield
7- 8% unlevered IRR, 10% to12% levered IRR Underwriting rent growth of 20-30% over 3-4 year period,
with a year of 10% growth trending down
6.5 -7.5% unlevered IRR, levered IRR 9.0-10.0% 5 - 5.5% cap rate
Focused on price psf relative to replacement cost andpeak 2007
Return Metrics
VALUE-ADD
TROPHY
Asset Profile
Current Investment Climate / San Francisco
CORE
CORE-PLUS
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OBSERVATIONS
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Observations European debt issues seem under control at this
time but can create material volatility until resolved.
None off us should be complacent given theEuropean situation & job issues.
The transaction market was remarkably resilient.
Sustained low interest rates will make capital veryitchy to find homes.
Investors will see limited opportunities in fixedincome investments pushing them towards real
estate debt.
Lingering fears of inflation will further push capitalinto real estate.
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Observations Activity will continue to increase with 2007 debt
maturities & global deleveraging.
Lending standards have tightened and spreads willcontinue to be relatively tight.
Growth rate & absorption assumptions have been
reduced, but exit cap rates & debt cost assumptionshave fallen to offset much of that change.
Economically sensitive deals are more challenging andpriced case by case depending on basis per foot.
Investors will pay up for lower risk. Pricing will increasefor core, well leased product, but definition will narrow.
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CAPITAL MARKETS PRESENTATION
JANUARY 31, 2012