2012-RELUI-Commercial-Real-Estate by fanzhongqing



Commercial Real Estate 2012

Pat Donahue: Ladies and gentlemen, I would like to welcome you to the Second Annual
Commercial Real Estate 2012 put on by Cal State Fullerton. We're thrilled to be here, I'm Pat
Donahue, Chairman and CEO of Donahue Schriber. I'm your host for the day or moderator,
whatever you'd call this and we're thrilled to be back. I know some of you were here last year
and we're looking forward to a putting on a fun panel for you today and talk a little bit about real
estate. Really, not just in Orange County but throughout the West. We have a tremendous group
of people to join us. So, I'd like the panelists to come on up and join us. I think you're already
wired for sound, probably wired in other ways, knowing you guys.


Pat: Lot of iced tea, coffee today. Some housekeeping issues, if you please turn off your cell
phones, anybody you want to talk to is in this room. I can tell you right now. [laughter]

Pat: Also, this is an interactive program, meaning if you have a question, this is not a big, big
room. So, raise your hand or if I don't see you, shout out question or something like that. These
guys are all CEO's and partners, nobody ever interrupts them, just interrupt them alright?

Pat: Just take them back to the real world, what goes on, on the world, alright? And again, we'll
have some time for questions and answers in the latter part of it. If it's a something that's off
topic or you want to ask specifically, maybe you hold that question but if somebody says
something that you want to follow up on, again please feel free to ask and in fact the panelists
have been encouraged to ask each other the same thing, to do that, to talk a little bit. Now, they
were very lively last night over a couple of beers and couple bottles of wine. I don't think It will
be quiet as lively but I told them if we could duplicate about half of this, we will have
accomplished our goal. Again, I want to welcome you and we'll get started and introduce these

I'm going to have each of them introduce themselves and tell you a little bit about their company.
Because I've done this a couple of times and I can screw them up so bad, have the wrong name
with the wrong company and all that. So, I'd like to do that, but I'm going to show them how to
do it, alright? Because I want to give them some of the different things that we're looking for.

So, I'm going to tell you a little bit about Donahue-Schriber real quickly. We're a private REI,
OK, a private real estate investment trust and one of the main things today to is going be talked
about capital. We think it's a very critical piece. And so, we're a private REI, owned by Pension
Funds. We have about 85 shopping centers in California, most of it is in California, about 80
percent, Arizona and Nevada and Oregon, soon to be in Washington State.

They're all neighborhood shopping centers. It will be the Von's and the Walgreen's in most of
those. It's a high quality portfolio, probably about 200 million dollars in revenues, 135
employees, right here in Costa Mesa. I am a college graduate from Cal State Fullerton, the only
one on the panel, I want you to know.


Pat: Thank you. However, I am thrilled to announce that the panel is not all USC Trojans.

Pat: There is only one USC Trojan on the panel this year. I'll let you guess. [laughter]

Pat: But do say guys where you went to school well, because I think it's a very interesting cross
section of guys and survivors that have gone through what, all of us that have gone through in
the real estate business. So that's a little bit about Donahue-Schriber. Doug, why don't you
introduce the O'Donnell Company.

Douglas O'Donnell: Sure, we have three different companies. One is a property management
company and what we do is manage industrial properties and we oversee the leasing of the
brokers on our properties. The second is a development company which primarily industrial
development. We developed about 15 million square feet since 1972.

Right now, we have a 64 acre project in Banning, California that we're developing on spectacular
basis. Now the third company is our public non-traded REIT, which we got SEC approval in
September and now we're starting our fundraising. And that will be all industrial nationwide.

Pat: How many square feet do you have right now under ownership?

Douglas: Two and a half million.

Pat: Two and a half million. How many employees? I try to give you those questions.

Douglas: We outsource, we're privately held company and we outsource everything. So, we
have including myself, six employees.

Pat: Is that right? Great, that's good.

Douglas: Six employees, a billion dollar REIT, and the property management as well as the
development. We outsource our architecture, we outsource our attorneys, we outsource
engineers, everything, accountants, because we don't want to have them on board when things go

Pat: Right, OK. So, two million square feet of space that you have...?

Douglas: Two and a half.

Pat: Oh, OK. [laughter]

Pat: Six employees...

Douglas: That's 500 square feet.

Pat: And market capital of about a billion dollars, is that what you said?

Douglas: Something like that.

Pat: Something like that. OK, excellent. Scott Sanfilippo, Greenlaw Partners.

Scott Sanfilippo: San Diego State University. Greenlaw Partners is 43 employees. We own,
operate, manage four million square feet of office, industrial, retail all throughout California and
Phoenix. We've been very active recently on the value ad office. We've purchased about 1.6
million square feet of office in the last 18 months of which we've actually least about a million of
that, new leasing and we've sold about 500,000 square feet in the last six months as well.

We invest for our own account and for our joint venture partners which is typically private
equity. We've invested on alongside now, probably about 280 million in the last 18 months.

Pat: OK, so public non-traded REIT, mostly private equity. Walton Street Capital...

Scott: OK, Walton Street Capital, Westbrook Partners, Guggenheim.

Pat: OK, great. Mr. Eyrich, where do you get your money? [laughter]

Keith Eyrich: Well, the Irvine Company is, the stats, but I never happen to know these stats but
now I know it. It's all over the website by the way. The Irvine Company is a private company so
there's not a lot that can be disclosed. The part of the company that I'm associated with is the
Investment Properties Group. I'm Chairman of the Retail Division which is about the smallest
part of the Investment Properties Group. The Retail Group has eight and a half million square
feet of shopping centers, 41 centers. The other components of the Investment Properties Group
are apartments, 115 or so apartment communities throughout the state representing about 40
million square feet of property. Office, 485 office buildings throughout the state representing
another 40 million.

Our little retail group and then rest of the 90 is made up of resort properties, yacht, marinas just
one of these things. I've been with the company a little over 20 years and various executive
positions there. I went to Cal State Long Beach and Pepperdine Law. What else Patrick?

Pat: Well, that's probably about right.

Keith: OK. [laughter]

Pat: Keith, again the capital structure would be basically cash flow and traditional, you would
be more of a traditional landlord for hold.

Keith: Yeah, I think I can say historically, in the beginning the company developed master plan
communities, sold residential development land and some commercial property land to third
parties for development, homebuilders, used that money to develop investment properties
portfolio, which provides a significant cash flow and revenue stream for the company today.

Pat: OK. Next to Keith is Allen Staff. Allen is the Market President for Bank of America. He'll
tell you more about it but basically, he's responsible for everything Bank of America does from
Bakersfield to the Mexican border. And that includes the tellers, so if any of you have a
problem... [laughter]

Pat: Like, you just call him at home at night and just do that.

Allen Staff: OK. Pat promised me two topics were off the table. One was mortgages. The
second was debit cards. [laughter]

Pat: Well, it's the only lie I'm going to tell you. [laughter]

Allen: Oh man. I've been with the bank for 26 years, come April. Drake University, undergrad,
and graduate school at Wyoming, University of Chicago. So, that's the market presence stuff is
really an opportunity to bring all the different lines of business together. Here in Orange County,
we've got over 6,000 of our associates at the bank worked here in Orange County out of 300,000
worldwide. Orange County is very important to us. The day job if you will is, getting to work
with Pat and a lot of his peers, commercial real estate side and that's all I've been doing at the
bank for all of those 26 years in Southern California. We make loans to developers, investors and
all product lines and our client based as Pat indicated, is Southern California based clients.

We follow them only 60 percent of the real estate projects that we financed wherein California,
the rest in neighboring states throughout the country.

Pat: Great. Next down is Geoff Stack. We have probably 150 years of experience on this panel,
now Geoff probably makes up a 100 of that. [laughter]

Pat: But, Geoff was a principal in Sares-Regis. Geoff, tell us a little about Sares-Regis.

Geoffrey Stack: I'm clearly the oldest guy in this panel, make no bones about it.

Pat: I think in the room, frankly. [laughter]

Geoff: Now, I know a couple of people out here older than I am, not many. Sares-Regis was
found in 1993 when we merged Sares, which was the old Sam's company with the company that
I founded called Regis, and formed Sares-Regis Group. Interesting thing is, both companies were
founded in the mid-70's and two of the guys who founded them are myself and [inaudible 11:28]
still ran our respective operation, so we've been doing this a long time. We're in both the
commercial and mostly industrial, a little bit of suburban office and residential, primarily
multi-family who ran a little bit of for sale. On the commercial side of our business, we've done,
since we started, 79 deals totaling about 35.2 million square feet and valued about 2.85 billion.
Then on the residential, we acquired and developed 74 projects totaling 17,373 units with a value
of 2.37 billion.

So, both sides do about equally the same and we've done a lot deals over the years. We operate in
California, Arizona and Colorado. We've got four lines of business. We're in the acquisition and
development of commercial properties. Today, we've got six projects ongoing, about 5.2 million
square feet with a value of about 580 million.

Acquisition and development of multifamily rentals. Then, we've got eight projects throughout
California totaling about 3,000 units with a value of about a billion. We are under construction
on a couple of those and the rest will start this year. Then when we're in the management
business, and on the commercial side, we have 32 properties totaling about 13 million square

On the residential side, we've got 48 projects totaling about 14,000 units. We've got a little bit for
sale, we were smart enough to get out of the for sale in Southern California in '07. We're still
struggling with a little bit in Northern California. We've got six projects. We've got about 213
houses, townhouses and condos left to sell. All of which I think, except for two projects will
probably be out of this year, we'll see. It certainly picked up a little bit.

In the fore sale housing, I just mentioned that, so any given day, we employ between 550 to 570
people. The company is owned by three partners down here and then in Northern California we
have a partnership, we have two of the partners up there.

Pat: Fantastic.

Geoff: I went to Georgetown...

Pat: It was so long ago that you probably forgot. [laughter]

Geoff: And then in Wharton, I've got an MBA.

Pat: You went to Georgetown and Wharton. So, you've got a very interesting... when I sat and
look at this, talked to these guys and put this together. I want to thank Mike Capftin from Boyd
Commercial who put this together because that may not be brought up by the time we get out of
here. Mike Caftin put this together. But, this cross section, it's a very interesting group of people
that bring a real different dynamic to what's going on. One of the common threads is they're all
very successful in the last two and a half years. They've really adapted and I would think that
their companies are very well-positioned to now go forward in the foreseeable future, whatever
that means in the business cycle today. It's probably 18 months but right now, they're really have
weathered the storm, found their way through it, adapted to it in various ways and are now prime
to thrive in what's going on.

The goal is about 30,000 ft. You don't get to sit with these guys, they're CEO's. I don't know
what they do, they go in the backroom, they play golf or whatever they do.

Allen: We're not sure what we do either.

Pat: Exactly right. The theory is that, we just all finished gold and we're just sitting around the
fireplace talking shop. OK, that's what it is. So again feel free to ask a question. I would like to
know who we're speaking to. How many of you were involved with a financial institution?
Thank you, Chase for your sponsorship of two tables. Thank you very much, that's fantastic.
Who else is a banker? OK, we have got a lot of bankers, that's good. Money makes the thing run.

How about brokers? Real estate brokers, investment brokers, or leasing brokers? Et cetera? How
about management or operations people? How about private real estate companies? Entrepreneur


Pat: Who have I left out? Just start shouting at me if you're not in any of those categories.

Woman 1: Consultants.

Pat: OK, how about consultants? We've got a lot of consultants, thank you for that. Anybody
else that wants to be recognized as a group?

Man 2: Am I the only home builder in the crowd? [laughs]

Pat: Alright, we have got one home builder.

Douglas: Any reets?

Pat: Any reets? Any representatives of any reets? No. Good question, Doug.

Man 3: Cal State Fullerton students.

Pat: Any Cal State Fullerton students? There you guy, you guys. Alright good. [applause]

Pat: Could I ask, next year, that we could set a few more tables and have a few more students? I
think we can figure that out. Well, Allen, I mentioned to all of you. If we really look back over
what has gone on. Capital, I think, is the thing that all of us learn, with the possible exception of
Keith Irig at the Irvine company. But all of the rest of us were faced with different capital needs
and capital constraints. We all have different capital structures. Allen, I would like you to start

There seems to be a lot of money that wants to go into high quality real estate. Talk to us a little
bit about what you look for, in lending money to different people. I also hear a lot of complaints
about the banks are not lending money. You and I have had some lively conversations about the
fact that that's probably not quite true. So take a couple minutes and help us on the banking and
the financial side, and set the table for us on the capital.

Allen: Sure. We've got a market in which there is a lot of debt capital available. Raise your
hand if you're with a bank. It's a bunch of people in here right? They are all here, talking to the
same four or five developers trying to figure out a way to do a deal. You are all the pretty girl at
the dance. There is tons of money available, and what's important about that dynamic, is that we
fight as an industry. And our company in particular fights, this battle sometimes about the
perception about not lending money in our company. Even through all of the downtime, through
2008-2009-2011, we averaged close to $700-billion of brand new financing every year.

Although, that doesn't quite make the headlines sometimes, we're very active. I try to explain to
people, we don't make furniture. We don't own our own burger franchises. That's what we do. If
we're going to continue with the inertia and continue to take care of our clients we need to
provide capital. So, as an industry we're very active, and as a company in particular very much
so as well.

I think some of the perception was compared to what? Compared to 05, 06, 07? I think a lot of
folks, in all business not just real estate, want to hit the reset button about some of the bases, or
bad bases, they may have from a mass that's built or acquired from that timeframe. Then the
lending that went on as a result. Compared to that, maybe there is less appetite.

Although, I will tell you that one of the items that is #1 issue for everyone is our business is,
we've got to answer the question. Who is the client? How are they doing? How have they done

on the downturn? How are they poised for success in the future. There are fewer of those great
assets, and clients that made it through, than there were before. Again, that limits the size of the

We are first and foremost, as an industry and our company, looking to who the client is, and
what their track record is. The number of real estate deals that you do is a function of their
activity. If the clients are active, us lender types are active as well.

I'll tell you that there is a lot of money available for the business. It's the same stuff, which is the
right people are going to be doing the right real estate, and we're going to flow to that. I will tell
you that the interest rate environment, I'm not going to be able to speak for the equity side of the
equation. But that's helping drive money to the business as well.

Pat: You guys have any comments on that? Geoff, how about your capital in the past three
years? Has it changed dramatically?

Geoff: It has not changed dramatically. It changed, pretty significantly, after the beginning of
2008 or 2009. What really happened is, we put together some deals in '07 that we financed and
we started them all into a multifamily and that carried us through the downturn. If we had had to
try to finance those things in '08 or '09, they never would have got done. We had a number of
projects, mostly on the commercial side, not a lot, but a number that we wanted to do. We
thought they were good projects, and they turned out to be excellent projects, but we couldn't get
them financed at all. There was no bank who would give us a loan. We did them with an
institutional partner. A couple of which we have had long term relationships.

Basically, what they did was say, fine, we can't get financing, here's the deal. 70 percent we will
price as debt and 30 percent we will price as equity and we will finance the whole thing, 100
percent. We did four commercial projects like that. All turned out to be very successful. If we
had to rely on bank debt then, we couldn't have got them done.

That was a dramatic shift in the '08 and '09. Now, it has come back totally and now it is right.
Today you have got banks lining up, everyone wants to do a deal, particularly multifamily. We're
clearly the prettiest girl in the room. It's amazing how quickly it changed, and frankly, to me, it
was amazing how quickly capital dried up.

But if you think back to 2008, the Lemen failure, and all of this stuff it's understandable. I
suspect that although, large institutions like Allen's continued to fund, and some do. I know the
people that we were doing things with, one of which was Bank of America, funded all the way
through this. But if you had had to get a commitment in the second half of '08 or '09, you
couldn't get one. That was a major change.

Pat: Right. I have a brief story. We have a shopping center in Delmar, California. It's our
flagship. Our partner wanted to sell. You could have bought our partner's 50 percent interest for
$26,000,000 of equity. It would have valued the shopping center at about $86,000,000 because
there was debt involved. I begged anybody I could talk to, about giving us $26,000,000 for that
50 percent interest. This is September of 2009. I had Waltenstreet Capital. I brought them out to
look at it. Everybody wanted to know how fast they could make a double. I said, "I don't know
how fast we could make a double, I know it's a really good piece of property, and there is a lot of

gold to be brought out of this mine." That shopping center was valued at $86,000,000,I needed
$26,000,000 to get half of it. Today, two years later, that shopping center is valued, Waterhouse
just gave us an appraisal on it, at $195,000,000. In two years.

Now we put $20,000,000 in it, but still. It's an amazing thing, how fast the capital dried up. And
the opportunities that were there. I want you guys to chime in on those subjects, as we go if you
think of one. I mean our best deal, that we ever did, was in the meltdown.

Douglas: Isn't that the case because the lenders, if they lend on that deal, the best they get is
their principle back, plus interest. If it goes sideways, they lose their job.

Pat: Right.

Douglas: It is what it is. It seems to me that, lenders are looking in the rear view mirror, as
opposed to, looking forward. Except, of course, Bank of America. [laughter]

Pat: There was a lot of coaching and a lot of whining involved in that last night.

Scott: It's really right. 2008 and 2009, we went long on land in both the commercial and the
residential side. It was very painful, and we had been funding these deals for a long time. We've
got a lot of money in these deals. I can just speak on the multifamily side. We've tied up two
different projects for a little less than 50,000,000 a unit. We're in the process of marketing and
we just got our first offer in a few days ago. The first offer was 85 a unit. I think the other will go
for 90 to 95 a unit. That's in basically, two and a half, three years. It popped that much. We
couldn't have sold those things, six months after we tied them up for the same price we had in
them. But we believed long term, that we would be fine.

On the commercial side, we have done the same on some industrial stuff. We haven't monetized
that yet, but later on this year I think we will. And again, I think it will be substantial.

Pat: How about debt and the structure. Scott, what are you doing when you are going out and
doing one of these buildings. How much debt are you putting on one of these buildings?

Scott: Well, most of what we're buying right now is typically 60 percent occupied or less. Some
100 percent vacant, and we've actually been buying all cash. With Waltons Street and
Westbrook. Trying to get a bit of leasing done. Then coming in and putting the debt in place.

Pat: Do you guys have a governor for the amount of debt you're going to put on it or are you
just going to max it out.

Scott: We're going to put on whatever Allen is going to let us. [laughter]

Allen: Good answer.

Pat: That's not the right answer. That's how we got in this mess.

Allen: Wait a minute!

Scott: I'll give you a great example. Kind of a follow up with what you said regarding the
perception of value. We bought a building a few years ago from a lender. The lender had

foreclosed. The lender has a loan on the building for $32,000,000. We bought the building,
generally vacant, for $11,000,000. About 30 cents on the dollar, for what their loan was. We put
a couple of tenants in there. The reason the lender was walking away from it is because of their
perception of value in that deal. So fast-forward, 18 months after we put a couple of tenants in
place. That lender walked away from the building at 11, gave us a new loan. Same lender that we
bought the building from, for $32,000,000.

Pat: Is that right?

Douglas: What a great country. [laughter]

Pat: Don't even mention who that lender is. Have we learned anything? Hey Doug, you were
talking about your public, non-traded, reed. You were talking about the kind of debt you were
placing on your projects. What kind of debt are you putting on them?

Douglas: Well, I will tell you what we used to do, and then I'll tell you what we're doing now.
From 96 to 2006, I would go find a piece of land, and in 45 days I would go get debt and equity.
Then, put up the deposit, make the joint venture deal, sign the loan documents. Build a building
and either lease it, and hold it, or sell it. Those days are over. What we're doing now, with the
public non-traded reed. Is we're buying fully leased buildings, approximately 7.5 percent cap
rate, and we're looking to pay a steady dividend with asset appreciation. Typically, we're looking
at 50 to 60 percent debt. Personally, I believe that we're in an interest rate bubble, so we're going
as long as possible with debt.

Pat: OK, but in the old days, on the old model, how much debt would you have put on
compared to the 50 or 60 model you're working with today?

Douglas: As much as they would let me.

Pat: So, you would put 110 percent if they would let you?

Douglas: Absolutely. We had some deals where we had zero money in. With a combination of
debt and mezoning debt then deferred development fees. Those were the days. Those are gone.
When I went to business school, and I went to a semester of real estate development at USC.
Everyone said, "What are you doing that for?" That was in 1998 or 2002. They said that's a
dinosaur. You're learning how to be a dinosaur, and you're paying a lot of money for it to. I said,
"You know what? Everything goes in cycles." So I feel a lot of similarities to where we are

I feel it's coming back, it's not there yet. Our first development was about 1996. It was a cold
1990 to 1996. But eventually it will come back to where we are developing non-loss. Today,
development is very specific. Market by market, and then size range by size range. There are
opportunities out there.

Pat: Right.

Douglas: But it's not a blanket real estate's back, let's go build.

Pat: Geoff, how much debt and have you adjusted your debt threshold as a company?

Geoffrey: What we've done, what we tend to do, in the past, before the downturn, you could
probably get 70, 75 percent loan-to-value coverage on multifamily. The biggest limitation would
be debt service coverage, not value so much, and they wanted at that point. I was underwriting
things, banks were underwriting things at 1.05, 1.1 debt service coverage. Today, you can
probably get 70 percent loan-to-value, but the debt service coverage is going to range between
1.2 and 1.25, and that's not going to get you probably to 70 percent. You may. They've clearly
restricted the level of debt that you can get on there, although in multifamily you're still getting
somewhere between 65 and 75 percent on the value. That's with a debt service coverage of 1.2 to
1.25, so we feel pretty comfortable there.

Pat: Just from our standpoint, we had about 65 percent debt, that was kind of the model, if you
buy something, we might even go up to 75 percent debt. We went through that. But after coming
back out of this, we have adjusted ours from the 65 percent model to 50 percent debt. If you're a
public reap, you want to be under 40 percent debt. The public, they call it the reep mafia, they
want to have a three in front of that debt. As one of the guys said one time to us, he said, you
have 65 percent debt and a 30 percent devaluation, which is what happened. You got nothing. So
it really, I think, has adjusted at least how we're doing business, and frankly, our investors are not
the ones pushing it. Management is pushing it. Cause I don't want to have to go meet with Allen


Pat: And say...

Geoffrey: None of us do.

Pat: I owe you how much? [laughter]

Pat: What do you mean? It's just two percentage points off. Yeah, but it's 50 million dollars.

Pat: Better go to New York and see somebody. Keith, talk to me a little bit about fundamentals
on Fashion Island retail at the moment. Are we coming out of this thing? How bad did it get for
you guys and are we getting better?

Keith: Well, Fashion Island, it was an interesting timing thing. We decided in late 2008 to do
another... It had been 10 years since, 20 years actually, since we did major renovations to the
center, the last one was '86 to' 89.

Pat: Yes, I know, I was there.

Keith: Yeah, you were part of that, buddy. [laughter]

Pat: I was a young man. [laughter]

Keith: We decided at that time to go in, you make development decisions well in advance,
because it takes a lot of time to plan and title and think through things. We're very methodical
about that kind of thing. We believe in planning well so you're not constructing and constructing
and delaying and so forth. But it so happens that when we started the work in the center, it was

just at a time when business was getting hammered in any event, and so, in that sector the thing
about the downturn we suffered for us in retail was the speed and the severity of it. It cut across
really all segments in retail. So, Fashion Island in one sense, it turned out that we were doing a
lot of work in that center at a time when business wasn't going to be great anyway.

I developed a rationale for myself that, that was a smart thing to do. When the upturn started
we're going to be really well positioned. Fortunately, I think it's turned out that way, that's our
flagship. It looks better than it ever has. I think it's least better than it's ever been although we
continue to have work do on that, retail being a dynamic environment. You're always happy to
increase and improve your tenant mix.

But the moral of that story is I think, you plan this things well advanced and sometimes when
you come out of the ground it's great timing, sometimes it turns out not to be great timing.

Pat: Absolutely. How about the over retail portfolio given the square feet, during the downturn,
you lost how much in the occupancy?

Keith: I thought I lost across the portfolio greater occupancy lost in different segments because
there's neighborhood, community, big box and conventional super regional like Irvine Spectrum
Center, Fashion Island. The biggest loss for us happened to be in the Big Box segment because
there were a few different things happening, probably the least of which was the economy. But,
there happened to be this consolidation going on. People figured out that you needn't need to
have Bed Bath & Beyond and Linens 'n Things. People figured out that you don't need all this
computer stores because you're buying a lot of stuff online. So, you look at the Marketplace,
which is our Big Box example, that center at one time had Best Buy, Circuit City, The Good
Guys and CompUSA, all in one center.


Pat: You just think about that.

Keith: For us, it's a wonderful recovery story I think. I won't remember all of this but The Good
Guys is now Sprouts Farmers Market. PetSmart took the space that used to be CompUSA. I may
have reversed those in my head. Linens 'n Things is now Total Wine and REI and Best Buy is
still there. Best Buy is the segment leader almost exclusively now. Although Best Buy business
speaks to the dynamics of retail. It's now downsizing as rapidly as they can and splitting spaces
where they can. I think there are 45,000 feet in the Marketplace and all over the country. They're
trying to give back space because they realized they can be more efficient in half that amount of
space. That's an interesting challenge for landlords and for a lot of landlords it will be a great
opportunity, too.

Pat: Yeah, talk about the dynamics of that, they lose their major competitor, disappears off the
face of the Earth and they're still hanging on by their fingernails, so very interesting.

Keith: Who would think that the thing that I think smart people in the retail business are
looking at with a lot of focus now is what's happening with eCommerce and more recently,
mCommerce. By next year, more people are going to shop online and access the Internet
worldwide on handheld devices than any other way, and that has been such a shot in the arm for

retail sales online. You can't believe it because you have this convenience of being able to,
anywhere you are, you can decide to buy something. You see something, OK, I am going to buy
that, and now I think some 60 percent - 70 percent of online purchases last year came with free
shipping. That has been another wonderful thing.

And a lot of the online growth in retail is actually coming from big brick and mortar retailers,
which speaks to something that will help the brick and mortar retailers' health. It's going to have
an interesting impact, and we don't thoroughly understand it yet for shopping centers because it
may result in fewer trips.

Although we were chatting a little bit before, every time you buy something online, it turns out
to be the wrong size, that's a trip back to the shopping center because most of the stores now
accept those returns, and the stores... and whoever takes something back without spending more
in that store than the cost of the thing you brought back.

But the online whole scenario is going to have ripple effects throughout the business, and I think
it's probably not going to be actually so ripple. It will be significant and put new pressures on
shopping center developers, owners, managers, too.

In my opinion, continue to just make them more compelling places to go to and be and spend
time and money for all different reasons.

Pat: I think also to anticipate what's going to happen and who can be immune to it.

Keith: Yes.

Pat: I mean trading sprouts for a Good Guys...

Keith: Yeah.

Pat: It's hard to put... you're just not buying your bananas on the Internet, yeah. [laughter]

Keith: I think that's one of the things we're doing as a company. We're spending a lot of time in
saying, "OK three years up what do these shopping centers look like?" I just came back from a
conference with the ICSC Trustees and Wal-Mart spoke. Wal-Mart is going to put a medical
clinic in all of their stores, right. Well, guess what's going into Donahue Schriber centers real
soon. [laughter]

Keith: A medical clinic near you. They're always ahead of the curve, and they'll learn from
those people, and you've got to watch and you've got to anticipate and you've got to guess what's
going on out in front of you. The Internet is I think very positive for the retailer because that's
who is winning in the Internet commerce. Amazon doesn't make any money. It's a break even
business model.

There is something goofy going on, and once the sales tax benefit goes away from Amazon,
there is a lot of people trying to figure out who and what they are and how that becomes the
issue. So the real winners are the people that are the retailers, which we always felt was going to
be. Retail is the second oldest profession.


Pat: No hands on that. [laughter]

Keith: But they've really adapted to it, and you talk to the guys at Nordstrom's and Sachs and
Target and they're sitting there going, "Oh, yes, just part of who and what we are because they
are retailers, and there is companies like Webvan and Peapod and all these guys that were tech
companies that are no longer here." They were trying to be retailers. They couldn't figure out the
retail part, and that's truly the trick that's going on.

Pat: That's because retailers understood that at the end of the day you got to make a profit.

Keith: [laughs] Yeah, you've got to make a buck and you've got to deliver the goods.

Pat: I've got a question not being a retail guy. Where do you think the retail, the big centers, the
fashion islands, the South Coast, the district, where are they going? Are they becoming as much
entertainment centers, places where people go not just to shop but to be entertained? Because it
seems to me that's something that all of you guys have done, to some extent.

Keith: I think it's true. Some of my friends in retail out here, who've been around remember the
time that you couldn't do a movie theater deal in a center that had a supermarket or a department
store, because they will exclude that because of their parking hoax. You couldn't put restaurants
near department store entries or because the same thing, people go there, they park, they just go
to the restaurant, they spent an hour and a half and they never come and shop. Now, all those
same retailers desperately want those activity generators, the theater and the restaurants, they
bring people. Shopping centers are becoming and need to become to succeed again, very
compelling places to go and be. We talk about this sense of place that you have to create to have
a successful shopping center and now the demand for it is stronger and stronger than it ever has

You have to provide multiple reasons, multiple activities, multiple things to do. When we
developed Irvine Spectrum Center, opened in 1995, the first part of that was really a pure
suburban entertainment center. It was one of the very few in the country at that time. It was just a
huge movie theater with some very focused entertainment related retail and some food, a lot of

And that end of the centers functions still very well, we just completed some re-development
down there, add some new restaurant. But the history of that project is over time has extended
down and down and took out more strawberry fields and developed more parking lot, more
center. It went to retail until in '05 or '06, the folks from May Company called and we start
talking with them. And then Nordstrom and Target and now, it’s probably two thirds
conventional retail and third, food and entertainment.

All that is going to need to be, I think in every successful large shopping center, because you
need to have people coming at all times of the day, all days of the week, from all different
purposes and it just got to be better, it's a new park.

Pat: There's a lot of conversation about the mall, there's a dinosaur, the Regional Mall is dead
and all that and yet the investment community is still fortunately small for the retail side of
investing is still the dark, I think the Internet's going to start wreaking some havoc with that, but
still comes back to great real estate, is really how the malls have been able to regenerate
themselves. I think, at the end of the day if you're really peel on the back, it's great real estate and
people want to be there, to be a great access, great visibility and size enough to do kind of what
you want to do. I'll tell you I was just with the president of Simon and he says," Yeah, the
Internet's an issue, the tenants, I don't..." He's thinking about it, he isn't worried about it, he's
thinking about it.

This guys are very, very bright guys and it is interesting to watch how that business has really
changed. Kind of the thing where we've been and what happened and what you learned through.
Doug, talk to us a little bit about how bad did you see industrial get. Keith can't say this, but their
portfolio is a little bit, they have 80 million square feet, we have about 12 million square feet.
When we were off, we lost about 400 basis points of occupancy. So, we were 97 and we went 93
during the meltdown.

Keith: Still really great occupancy.

Pat: Still strong occupancy. He can't say, he's pretty close to me and those are the numbers he
can't say anything, he'll get in trouble. I don't care what tells me, I don't work for him anymore...

Pat: I know we've recovered about 50 percent of that. In fact, we've recovered all of 50 percent
of that. And you've recovered how much of that? No, I'm sorry, this is for Keith. I know I said
Doug but for Keith. How much did you recovered for that?

Keith: Well, more than 50 percent in the high end regional product, probably a little less than
50 percent in the neighborhood and community centers, in fact, they are different. It's important
to underscore one thing here. Retail is unique in terms of this other product types, apartments,
office, industrial, are to some extent commoditized. We have somebody wants to lease space,
generally, you want to lease them space and those kinds of products, but it's not that way in
retail. Retail, particularly in centers, where ownership is really thinking and focused about what
you're trying to create. It's all about tenant mix, and it's all about this specific uses and how they
fit with the other users, and how successful those businesses will be in terms of driving traffic
and producing sales.

So, it's a little tougher, as you know Pat, it's a different thing. So, and we of course focused on
that every day.

Pat: Do you take that to the point of turning away tenants?

Keith: Yes, oh definitely. Sure. Absolutely.

Pat: What if you're the problem they have? [laughter]

Pat: Because you could fill all the space and fill in the way that all of a sudden your center
becomes a much less compelling place and everybody is there not concerned with being seen, so.

Keith: We don't have that problem in industrial.

Pat: You know office and industrial, there is a little more art to retail than the other because the
other is a little more of a commodity. Nobody cares who their neighbor is in the office building.
In fact, if nobody's in the office building, the parking's better. [laughter]

Pat: So, they really don't care. Well, guess what, if they have a vacant box in your shopping
center, good luck, in trying to figure out what you're going to do with that, and the money and
time necessary to bring that back up, is much different than it is an office building. But tell me a
little bit about how bad it got? Let's say, that retail lost 500 basis points in occupancy, how bad
did industrial get?

Keith: Rents went down 40 percent.

Pat: 40 percent?

Keith: Absolutely. If you look at what the asking rates are the last five, 10 years, it's relatively
stable. Taking effective rents after TI's, commissions, downtime, and free rent, 40 percent all day

Pat: Unbelievable. Is that right?

Keith: Absolutely.

Pat: How about occupancy?

Keith: Occupancy, it's interesting it's that LA it's four percent, which tell me four percent.
That's below the normal five percent occupancy rate.

Pat: Right. So, the rents went down and people adjusted their rents for people instead of having
to move out?

Keith: Yes, unless they like empty buildings. They half to market otherwise, you're going to sit
empty, and the senior do that. What we do is we talk to our tenants early and often and we build
up very large reserves. We're very conservative at that way because of the fact we've seen so
many cycles and we've been fortunate to live through them. So, we're very considerate in that
regard and what we see in the future is that there's 1.7 trillion dollars worth of debt in the next
five years. If you see it all of the recess done that were done in 2007, five year recess, they're
coming dear this year. Typical industrial recess five to 10 years so as a result, what you have, is
$1.7 trillion worth of debt coming to you, next five years.

You have all the five to 10 year recess coming to you at the same time. So, it's going to be a
perfect opportunity for purchasing. I call it the perfect storm and if you own assets, you better be
very, very well capitalized. Because when that debt comes up, you're going to have to re-margin
your loans.

Pat: Right, excellent point. Scott, how bad did office get?

Scott: Prior to my 10 year at Greenlaw, I was with Crown Realty and Development. We own
office buildings here in Southern California and Phoenix, so I can talk about those and in the
Southeast US. The Southeast US, for some of the B Office Product, held on OK. So, the worst of
the worst was Phoenix, where we saw vacancy go from 10 percent to almost 40 percent in a
12-18 month period. I learned an important lesson in this cycle that I haven't seen previously
which was, when vacancy gets above 35 percent, the bottom just drops out. So, you went from
lease rates, in Phoenix, we talk an annual basis of 26-33 dollars a foot, we dropped to five and 10
dollars a foot which is effectively a zero net deal. We have an office building out there that is
130,000 square feet. We're trying to achieve a 17 dollar net rent in 2007 when the bottom
dropped out.

We were competing against guys that would do a zero net deal just to put somebody into the
building, because the stock that I think everybody watches or that's reported on is net absorption.
How many square feet have become occupied over whatever period, quarter the last year? The
stock that we actually watched closer to that is velocity.

Just how many leases is actually transacting in any given time because we're not the Irvine
Company so we don't own a third of the office buildings in the market. We have a couple.

Pat: Not many of us are. [laughter]

Scott: So, we have a couple and as long as there's velocity, we can go grab those tenants and fill
our buildings. In a market like Phoenix, the velocity stock for about 18 months. In Orange
County, LA the same thing happened which is there was just no tenant activity for about an
18-month period. So, if everybody held their breath for that period of time. That's as bad as I
have ever seen.

Pat: Geoff, how bad the departments get?

Geoff: There are good news and bad news, and of course I was thinking it was pretty bad until I
listened to these guys. [laughter]

Geoff: Yeah, the bad news is we are also in the commercial business. So, I know how bad it
had gotten in industrial business. On the apartment side occupancy, the apartment market
probably dropped. It was true that 2007 was fine in the first quarter of 2007, and then it started to
drop. Occupancy say, in end of 2007, were 94.5 or 95percent throughout our port folio.

Occupancy never really dropped that badly. It dropped to about 89 percent in Arizona, 89-90
percent in Colorado, and about 93 percent in California except the Empire which dropped down
to about 90.

So, we didn't have a big fall in occupancy relatively speaking. Rents dropped 15-20 percent.
They were nowhere near...something you guys felt, and the 15 percent was pretty much
California and about 18-20percent Colorado and Arizona.

And so, it dropped, and it was brutal, and of course, we have unwritten some new construction
deals on not only rents staying in place, but going up 3.5-5 percent. So, there was about 23
percent differences. Mr. Staff knows...

Allen: I got those...

Geoff: Some of our projection, you got the package. Oh! My God. So, we were hit, but not
badly, and by the way, we're back. We're basically back and occupancies today are about 94.5
percent in most places. In Arizona may be a percent less. Rents have come back. It is really
almost right back at the 2007.

Pat: And subsequently that's why apartments are the darling of this whole deal right.

Geoff: But remember, you know, it's a little different business. Somebody moves out, you paint
your carpet, 250 and 500 bucks and the goal is to get that rented in three to five days. That's a big
difference than having a big tenant move out or a retail tenant move out. We're really in the retail
business, just on the living side.

Pat: Let's talk about where we are...So, Keith you recovered pretty well, you've recovered, your
rents are back and you were Southern California top portfolio, your rents really didn't suffer.
Your occupancy suffered, but rents didn't go down too much.

Keith: No! That not true.

Geoff: One of the points that I wanted to make, because you can tend to think that rents and
occupancy bloom independently, but in fact, in a prolonged downturn, in everybody's property
type, you manage your occupancy by adjusting rents and occupancy cost. Because, retailers
across the world, they can pay us certain percentage of their gross sales, as occupancy cost. From
the landlord's perspective, you want that percentage to be as high as it can, and you have your

But if the sales come down, that percentage is going to leave less on the table to pay rent, and
people can't say in business long if they are not making any money. They got to feed their
families, they got to, pay their employees.

So, like everybody else, you manage occupancy by adjusting rents. You did it, we did it,
everybody in retail did it. So, that's a fact. They are not separate rents. Occupancy has gained
back to where I said. Rents, there's good rent growth occurring in primarily the regional

It's still difficult in the neighborhood and community center segment of the business across the
country because they tend to be smaller tenants, more mom and pop tenants, and there are a
number of issues that still affect the tenant base that make it difficult to get rent growth. One
good thing is that there's a very, very small amount of new retail being built so there's this
demand for space that will emerge.

Once you have the demand for space and the sales success with the improving economy, then
you're going to have the opportunity for rent growth.

Pat: OK. So we got apartments really strong, fundamentals are back. Looking forward to the
future. We'll talk about the future in a minute but right now you clearly went through the storm.
It was tough on you, not nearly as tough as the rest of us.

Keith: Yeah, no question. I mean, and we are back essentially where we were in '07, for the
most part.

Pat: OK.

Geoff: There may be a little bit of exception to that in Arizona but our rents are up significantly
year over year.

Pat: OK.

Geoff: And have been for the last couple years. So, Keith made a good point. It's interesting.
You do manage to, and particularly an apartment, you manage to your occupancy. Like we have
a thing called yield star, which is really a pricing model based on hotel rooms and airplane seats,
which is priced on availability. We price our units every day, every single day. So if we've got
units, we have too many units in a project or a unit type, that gets repriced everyday. So that's
were that rent fall, we kept our occupancy but to do that, good point, we had to drop our rent
substantially during the down turn.

Pat: Yeah.

Geoff:    Now the good news is an apartment, you turnover 50% a year generally, is about
average and we mark to market every day. We like that.

Pat: Right, exactly. Scott, tell us a little bit about where office is today. I mean, are there deals
being made? They're not negative deals are there? Are things getting better?

Scott: Well, they stopped getting worse. [laughs]

Geoff: Retail's not overbuilt, it's under demolished. [laughs]

Scott: Last night at dinner, we were talking about where we are and where we're going and I
think I told you, I went back and I dusted off some old files on some pricing for office buildings,
some comps that had happened in the market from $260 to $350 a foot, sale prices. What was
fascinating was the comp date was 1987. All right so, we haven't actually moved at all. We just
bounce up and down but we're still really where we were. But as far as lease rates, you know,
this is kind of the first year in the last, well since 2008, where we're not anticipating the rents to
drop significantly over the next 12 months. That we're really stabilizing.

Pat: The investors are starting to get real interested in office. There's a lot of money going to
office. What, they're thinking that it can't get any worse, like you said?

Scott: Well, I think what we're seeing is no different than what we saw back in 2004 through
2007, which is a couple of the early buys, of which we were very fortunate to have one of them
in Orange County, 2050 Main. Which we purchased for about a $178 a foot, we sold for $350 a
couple of months back. As those successes are starting to happen, you've seen a lot more capital
jumped in to the market trying to take advantage of that.

Pat: So, it's not the fundamentals necessarily, it's a replacement as you sit there and go, "Wait a
minute, how can I not buy a $350 dollar foot building and a $120...?

Scott: In the last 12 months, the fundamentals, well, the lease rates have continued to
deteriorate. We're actually seeing in Orange County for the first time some real positive
absorption. Well, we're seeing positive absorption not significant but we still haven't seen that
job growth. What we've really seen is a lot of musical chairs.

Pat: So, what happened during that period of time? Did you up your occupancy? Did you just
sit on it?

Scott: No we upped our occupancy.

Pat: By how much?

Scott: Well, we bought the building that 30 percent occupancy and we got it up to about 85,
because the term that we continue to hear right is the fight to quality. So, what we focused on is
buying best in class or quality office buildings, really avoiding anything that feels like functional
obsolescence and then just been a matter of going into the other buildings, the inferior buildings
and stealing tenants.

Pat: And you can't... [laughter]

Scott: Yes, that's right.

Pat: Doug, how about industrial? Where are we today in industrial from where we were? Are
rents still down to 40 percent off level or things stabilizing?

Doug: I always say industrial real estate and all real estate for that matter, that's not a
commodity. So, what we do is look at each market and then we look at size ranges within that
market. Let me give you an example, in the Inland Empire, there's a two month supply of
buildings over 500,000 square feet. Yet, if you want a 100,000 square feet in Inland Empire, you
probably have 30 alternatives. You have six better under construction over 500,000 square feet.
And Inland Empire 500,000 square foot building is to multi and Irvine to small building. So, the
same thing holds true to throughout the market. I would say that there's some good opportunities
to develop down by the port, however when you get down to it, the effective rents are weighed

And so, it's not the time that you can just blanket say, the market is back. It's spotty and different
buildings, different markets, different sizes are starting to come back. Like generally speaking,
the effective rates are too loaded just by spec development throughout the United States.

Pat: But, if we look back as discussed. Scott, you're saying, "Hey, we're at 1987, effective
rents, not even putting into account inflation of any sort.

Doug: Well, its values, sale prices and values.

Pat: But, how about rents? If you're doing a deal on, I mean, I've done enough office to be
dangerous. We did deals at a $1.65 to a $1.80, net effective let's say.

Doug: Well, the rents are down or the net rents are down because the operating expenses have

Pat: Alright. So, it gets to the students that are here, this is a 20 year kind of nothing burger in a
way. [laughter]

Pat: From where you are with rent.

Doug: No it's negative. Because in real terms it's a negative due to the fact that it's been 20
years of inflation.

Pat: Right. Exactly. Why would any institution want to do that. You guys I totally get.

Man 1: You buy all these buildings at 80 bucks a foot and sell them at 100. Why would any
institutional investor in the country? Why not own office buildings for 20 years? So, they have
the opportunity to replace that. How does that make it through the economic set down?

Pat: Did you all hear that question? The question is basically, "Why would anybody want to be
in a stabilized office investment?"

Scott: I don't really have a good answer for you. [laughter]

Scott: My hold is three to five years.

Pat: Scott's hold is three to five years. I can tell you that our investors, J. P. Morgan Strategic
Fund and New York State Teachers Pension Fund, do buy high quality CBDIs because they feel
that they are almost a bond type instrument. They think that cash flow is going to continue to be
consistently good.

Man 1: They buy A+ buildings.

Pat: Right.

Man 1: That's one thing. They're buying company portfolio. That's the kind they're replacing.

Pat: Right. Well, I think you bring up a very good point. Right now in valuations when you
look at stuff. It's the haves and have-nots. If you have quality retail, the pricing is as good as it's
ever been. Cap rates are as low as they have ever been in quality retail. And yet, if you're on the
other tier of it, you can pick up something for eight and a half, nine cap rates. The problem is
there are no solutions to that real estate. It may be under "demolished." You can't figure out
what's going on with it. So, that's a good point.

Allen, show time. It's not that I'm not interested in you.

Allen: Yeah, you don't like me. [laughter]

Pat: It's not that I don't like you. Tell us a little bit about what you're hearing from your
customers on this subject. Are they stabilizing across the board?

Allen: Yeah. A couple of things. I hope it is obvious to everybody but one of the things is
bridging from what we all went through and where we're at and maybe where we're headed. We
were in an environment, until things got tough, where I think there was this perception that NOI

just happens. It's a number on a spreadsheet, so it must happen. Everybody here talks about how
hard it is to generate NOI. It doesn't just happen. It's a grind-it-out world. By the way, that's a
leading indicator. Somebody says it's easy, it's time to sell.


Allen: You have to work with the right people. Who are scrappy. Who know you have to come
out every day and fight it out. You can't just sit and wait and say "I've achieved whatever I'm
going to achieve and it's going to stay like that forever." Retail's a great example of "You have to
work it all the time." But that goes for all product lines. What we know is, first of all, you have to
do business with people that have been through this and do know how to figure out a way to
generate that NOI. I will tell you that you need, first and foremost, the right people. When the
history books are written you're going to look at what one thing that helped us get from here to
there. As ugly as it was it would have been a lot worse with higher interest rates.

So, you can do some quick math. Scott talked about 60 to 65 percent occupancy. Most of the
time we didn't see occupancies drop that low. Maybe it went to 80 or 85. But in about 60 or 65
when the rates are really low like they were, it basically covers all the bills. And so, when you
look at the last few years, if you had income, if you had the ability to at least keep 80, 85 percent,
the difference is between 60 and 85 was the amortizing debt.

And working the leverage points down and getting to the point where you can bridge to a better
environment. Look at the environment today, and the recoveries, a really connected and in large
part the low interest rates and alternative investments being limited. As tough as it may sound the
four or five gap rate, greater apartment's sounds pretty good as compared to zero and zero doesn't

So, it's all connected I think, that low interest rate environment has helped us get to this point and
if we can project that at least the next couple of years, it's going to help us continue to repair our
way out of this.

Pat: Great time to be refinancing your house if you're going to do it to get your balance sheet in
order, not to take on too much debt but if you have debt coming due to dodge point, you better
get in line to do it and do it now and don't wait for this thing, those, you guys agree with those

Scott: Yeah.

Allen: We just refinance the project enclosed half a month ago. The deal that I built in '86, we
refinanced it a couple of times. We got a 69 percent loan devaluing loan through Freddie, they
have the loan. It's a seven year deal, we wanted some flexibility. We locked it at four percent for
seven years, five years interest only. If we wanted to do a 10 year deal, it would have been a 25
basis point hire. This is unbelievable. This rates are incredible and you're right, I thought about
we had a lot of bond deals, low floater bond deals. So, our occupancy didn't draw much. Our
rents dropped. Our low floater bond deal on average during this time, witness a low, a little less
than two percent. They have been about four. So, we actually made more money on our bond
deal even in the down times than we did in the good times.

Pat: Right. Well, we restructured our debt with you and then the 500 line banks, it saved $20
million of yearly amortization and $6 million of just debt service on a $350 million lot. That's
real money and that's just market time, that all that was, was market time. The company was
exactly the same company, so new assets or anything like that, it was all the same asset pools, so
it was really interesting. When I went to Cal State Fullerton, they taught me that inflation was
when a government prints money. I didn't learned a lot there but I did learn that.


Pat: Teasing professor, teasing. Now, it seems to me we've been printing some money, and
doesn't inflation have to head its ugly rear here pretty soon.

Scott: Rear its head? It's coming.

Pat: It's coming?

Allen: Now, the question is when?

Pat: How fast will it come and what's it look like?

Allen: Well, the good news is we're not guessing, one of our leaders told us. It's a couple of
years out. The raw message there was, we have to get to work and so we've all seen it. We've
seeing a lot of activity, a lot of trade, the private sector doing its thing and look then we'll keep
rates low, so you can all figure it out, but we got to pay the bills and that's going to have to come
in the form of higher interest rates down the road.

Doug: But for the next...

Scott: Two years.

Allen: We have two years.

Scott: For two years, Bernanke said no interest rate increase. However, if you read
ShadowRates.com, they're saying that based on the way CPI was originally intended, our
inflation rate right now is over nine percent.

Pat: Is that right? What is it, ShadowRates.com?

Scott: Yes. [laughter]

Pat: Let me verify. [laughter]

Pat: Is that the website... [laughter]

Scott: That's a website.

Pat: --Nine-- percent?

Scott: Nine percent, based on CPI when it was originally formed.

Pat: Yeah.

Scott: What's happened is the government is taking out all that which doesn't make them look

Pat: Right.

Scott: If you take into consideration everything, it's nine percent.

Pat: Is that right? That's remarkable... With the apartments, you're in a great spot.

Scott: Well, we are and we aren't. In '81 and '82 when interest rates were twenty-one and a half
percent on the construction side and seventeen and a half on the

Pat: Most of these people weren't born then [laughter]

Scott: I know, let me tell you, it was brutal. It was brutal and if we would have had those kind
of rates this time it would have been terrible.

Allen: I had to buy my first house at eighteen percent.

Scott: I'm with Allen, we've talked about it before. I really think we have two years of a
window here and what you do during that time. How you do when rates start to go up? You have
to invest on some things, so if you're going to do construction loans, you better do some kind of a
swap or something. We do the same thing on our bond deals through it, it's not that expensive.
When your bargaining goes up, you pay a max credit. In two years from now, or a year and a
half from here, you better be thinking of every piece of debt that you have and anything that's
invested. What are you going to do? How are you going to cover yourself? How are you going to
protect yourself? You have debt coming due, you may want to think about paying the
prepayment penalty and refinancing now or in the next year or two when rates are still low. You
may pay a little more, but you'll pay a hell of a lot less if we're all right and inflation goes up and
five years from now you're trying to refinance something.

I think you need be thinking strategically about where you're going to be at in two, three, five
years from now. What's your debt, what are you doing with it, and how you're going to cover
yourself? You can cover yourself and that's what you need to be doing instead of being just a

Pat: If you walk away with anything today, from Allen into Jeff's point, they've told you, hey,
there's a storm coming, it's two years away. You have two years to put the things on the
windows. [laughter]

Scott: I think that's really a great piece. Do you guys have anything else on inflation you want
to chime in? Are you preparing for it? Are you not worried about it? Do you not want to think
about it?

Pat: Are you hoping for it? [laughter]

Pat: Are you hoping for it?

Scott: It's a good way to get out of debt.

Doug: We need some right growth, that's...

Allen: Makes our sales per square foot look really good when that happens.

Pat: . Right. It's going to be interesting to watch how this all plays out. Let's wrap it up with a
couple of things of either the lesson that you learned from coming through all this or what you're
looking forward with... Let me say it a different way. What's keeping you guys up at night?
What's keeping you up at night? Doug, let's start with you.

Scott: I would 100 percent say that the lack of leadership in Washington. [laughter]

Scott: It seems to me, that everybody is both the both the Congress, Senate, House of
Republicans, and the President, I can't get all acting to their position, as opposed to acting for
what specific interest of our country.

Pat: Very well said. Thank you. Scott, we keep shifting, were you worried about your business?

Scott: We were talking about it last night. For me, it's financial market hysteria. There seems
that there is always something to worry about. I worry more about how the financial markets are
going to react to it. We have shut downs for 90 days, because everybody thinks it's the end of the
world until something else comes up and they realize that really wasn't the end of the world
[laughter] , the next one coming up is...

Pat: Realistic!

Scott: Yeah.

Pat: Keith what's keeping you up at night?

Keith: Death! We talk about lot of debt, but today it is said that the country people are carrying
almost 40percent more credit card debt, then all kinds of debt, than they had a decade ago. I
think the country is going crazy for debt. The government isn't doing anything about it. I am real
worried about sort of fundamentals of clerical system here and the ability to come to grips with
issues like that, and deal with that.

Pat: What happens if they're not dealt with? Allen?

Allen: Being the optimist that I am... [laughter] The fact that we deal with these issues, actually
I had an opportunity to talk to political leaders in California, and we talked about all these budget
issues and things like Keith brought up, either individually or the issues we have in our budget
deficits, and I am not feeling too good about the conversation. The leader said, "Don't worry, we
are out of money, so, we have to deal with it." So, at least or the point, we have to deal with.

Because, we can't take any of that any longer, and I, being the optimist, and I think, a lot of folks,
if you follow the money, how the money is going to work, lot of money is being invested.

Everybody, fundamentally is optimistic. Otherwise, you wouldn't be doing anything to get
yourself... trying to get a balance.

Because at times you get bombarded with nothing but negative things and people sowing
hysteria or sowing negative, and there are clearly some challenges. No question.

But we're pretty good about previously of working our way through. So, I am optimistic that we
have to do good whether they are here or in Europe. You got to deal with the problems.

We have to make those tough decisions and move forward. So, those things are not keeping me
awake, but they are clearly something that we got to stay focused on.

But we have been through some difficult bends, 2009, it was three years ago, next month. We hit
the lights and the world was open. All that stuff.

Pat: Oh, my God!

Keith: Man, we made it through. OK, but now we have something new right? We've got make
those tough decisions and work through those. We get from here to there. We can't ignore it. So,
we got to deal with it. The issues that brought up today, I think ultimately if we can hit them
head on and not to try and sweep them under a rug, we'll all be better for it.

Pat: Geoff?

Geoff: I've got three things and similar to Doug and to Allen, first is the inability of any
leadership in congress. I particularly blame congress, both of the Democrats and Republicans.
This is the presidential election year, so, for 50 years, nothing's ever gotten done in the
presidential election year, read history, and we wouldn't expect that to happen this year but the
concern is, we have lack of leadership the previous year, the whole debt crisis things like this,
this is crazy. And these guys have gotten us now and figured out how to work it out and there are
major issues there. Although there are a bunch of responsible people I was just back at the round
table. And we have a number of both the Republicans and Democrats coming in the senate.
They've got a group, basically 45 senators split evenly between Democrats and Republicans,
were committed to solve the problem on the budget and figure out someone along the Simpson
Bowl's compromised and maybe they will and maybe they won't, but at least half the senate is
responsibly working together, together, that's really the key thing.

So, that's an issue and that really bothers me that the whole European debt crisis, certainly if
something happens temporarily, everything will shut down to 80-90 days so sort it out, and that
will cause some real problems. And then on our side, because we are a general contractor on the
residential side, we're very concerned about construction cost, haven't seen the increases too
much yet. We know that they are coming as more and more demands come.

So, those three things are things that concern us and we focus on all the time. I'm like Allen, they
don't keep me awake at night and I'm thinking about them all the time.

Pat: Got your head on the swivel. [laughter]

Geoff: I'm paranoid by my very nature.

Pat: That's why you've been at this for a long time you're doing fine. That's really what we have
for you, how about any questions? We've got a couple of minutes for questions. Yes ma'am, right

Woman 1: I have a question regarding their specific disciplines as it relates to where they see
the, what has been the stalled employment market, in real estate within their disciplines and what
they would recommend to the university students who are looking possibly to enter the field in
real estate?

Pat: Great, that's an excellent question. Who wants to jump in there? Doug, go ahead.

Doug: Well, for the college students, actually it's relatively a good time. The unemployment
rate for college grads is four percent and so, if you don't have a college degree, it's higher and if
you don't have a high school degree, it's much higher. But for college grads, it's relatively low.
What I would recommend that they do is take a job to get in at the ground level because we're
going to be ramping up and when the business ramps up, they're going to be the first person in
and they will be proving themselves and so they'll be the first person to get their responsibilities
expanded, make more money and grow with the company.

Pat: That's great. Anybody else on that same subject because that's a ...?

Scott: Well, that's a very good point. Doug made a very good point. You're going to hear about
this, before it was nine and 10 and it was up to 15 and Doug is exactly right. Four or five percent
of college graduate, high school graduate, I think up closer to 12 and if you're a non-high school
graduate, 15, if you're going to the Central Valley in this state, 25. So, it's all about having an
education. The good news is the job market is improving. It has continued to improve. It's really
slow. It's slower than all of them but if you think about this, this recession, this past recession
was the "the worst" recession since Depression, which I don't think anybody here was alive.

Pat: What was it like Doug? [laughter]

Doug: I know, let me tell you. I remember hearing my parents talk about it forever, and they
never stopped talking about the Depression, and they both had gone through the Depression. You
know the reality is for our generation and all your generation, this is our Depression, and it took
us what? 12 years to get out of the Depression in the 30s...

Pat: Really by then the World War II...

Doug: And the World War II really moved that on, it probably would have taken longer. So,
we're coming back and so, I think, we are clearly in the positive side and done set of good thing.
Get in at a place where you can learn. It's not about how much money you make initially. It's
where can you and gain the most experience? Where can you learn the most? And then, you'll
take ultimately to your next job and parlay that in to a higher salary.

So, it's really about learning, and the opportunity to learn a diverse number of things, that's what
I tell young people today to look for in a job. Not about how much we are going to make.

Pat: When I think for the students that are here, if there are any left, you guys, I don't know
where all these guys started, but I can tell you, they didn't start at the top. Right? They got in and

just proved that you know what you're doing. You are going to help solve whatever problems
coming for you. You become a problem solver. You're going to be sitting here in a couple of
years and I'll be out in the audience in the back row. [laughter] .

And it does feels like - yes sir!

Man 3: Yeah I have question for Doug. So, we are not in Santiago. We have taken a lot of our
properties and we have you guys burn them down...

Doug: That's a very good question. We are the largest private developer in Green Project, both
on the commercial and the residential side. And, we are very focused on it for several reasons.
It's not all altruistic. Number one, in terms of getting new projects approved, it's becoming more
and more critical in almost all settings, and that really becomes important.

Secondly, in terms of multifamily, but it's also true industrial, the greener we can build these
things where they... it is interesting enough that we've been doing this for years, double pane
windows, x-ray insulation, Home Friday things, it makes it less expensive for our residents to

They really like that and they are willing in many cases to pay more because, they think their
utility bills will be less.

For commercial tenants, it's the same thing. We did four spec buildings on industrial sites here,
all of which were silver and gold leaf certified, and they were really industrial buildings, and we
had an incredible number of people come and want to either buy or rent those buildings.

It's becoming more and more a thing of the future and I think it's really something to look at. We
look in terms of what's that front-end investment going to get you in terms of operating
efficiencies and savings over time because we try to build projects longer periods of time.

Pat: I promised I would get you out of here.

Doug: You're creating local jobs in the community as well.

Pat: Yeah, you're doing that too. I promised I'd have you out of here by 1:30 sharp. I've got one
more question for Scott.

Scott: Yeah, thanks. There's a lot of discussion but those opportunities now are kind of long
away, do you see it softening a little bit with regard to investment capital or expectations in price
and capital?

Pat: I'm going to have Scott answer it because I think the private equity was what I was
referring to and we're much more involved with what I would call patient capital. They clearly
are not looking to double their money. These are pension funds. They're trying to hit an eight
percent return and if they get that they're high-fiving. We've been able to give them well in
excess of that so right now we're having a ball. Scott, are you seeing those guys? Because that
was my first experience, was hey, how fast am I going to double?

Scott: It's actually almost exactly opposite what you would think, which is the prices were
depressed to a certain extent because that debt wasn't available and they were trying to achieve
that double. One of the things that is pressing the prices up right now from our perspective, and
is actually presenting more opportunities is two years ago is that the debt that was available felt
like that 40 to 50 percent. We're now in our 55 to 65 percent. While the lenders have all said that
we won't repeat history again, the anticipation is that two years from now we get back into that
70 to 75 percent leverage and that the underwriting standards loosen up a little bit so we're able
to apply the leverage and we're able to achieve the doubles without having the prices to be as low
as they are today.

Pat: At the higher interest rates.

Scott: At the higher interest rates. It's interesting because I'm a short-term holder so while the
debt worries me I'm actually encouraged because while the interest rates may go up, the leverage
going up is going to outpace the rate.

Pat: Ladies and gentlemen, will you please give these guys a round of applause? [applause]

Pat: Let me thank you all for coming out. Let me thank Chase for the two tables. Let me thank
Pat for organizing this whole thing with Mike Heffner's assistance, with Terry Dickens'
assistance. It was just a great program and if the panelists can stay around for a minute or two
I've got some little gifts for them. Keep Cal State Fullerton in mind for your real estate needs.
Thank you very much.
Transcription by CastingWords

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