GLOBAL FINANCIAL CRISIS IMPACT ON COMMERCIAL REAL ESTATE

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					GLOBAL FINANCIAL CRISIS
IMPACT ON
COMMERCIAL REAL ESTATE
University of Connecticut Center for Real Estate
Alumni Panel Discussion
November 19, 2008
     Alumni Presenters
 Denise      Rowe Stake
   VicePresident, Portfolio Management
   Cornerstone Real Estate Advisors
   UConn    Class of 1990 (BS), 1997 (MA)
 Thomas       Kelley
   Managing Director
   Babson Capital Management, LLC
   UConn    Class of 1977 (BS)
 Frank      Sataline
   Senior Managing Director
   Cigna Investment Management
Real Estate Equity
Denise Rowe Stake
       Why Invest in Real Estate?

20%
                                                      14.2%
                                13.3%                                        11.8%
10%                    7.9%
       5.3%                                    5.6%           5.2%   4.3%                   5.4%
                                                                                     3.1%
                                        0.2%
 0%


-10%
                               Past performance is absolutely no
                               guarantee of future performance,
-20%          -22.0%
                                especially in the short-term and
-30%
              1 Year                          5 the long-term
                                   maybe not inYear
                                   3 Year                 10 Year

                NCREIF - NPI               S&P 500            Lehman Govt. Bond Index
Top 200 Pension Fund Allocations
                      6.0                                                                              5.5%
                                         Total assets (L)
                      5.5
                                         Real estate allocation (R)                                    5.0%
                      5.0
                      4.5
                                                                                                       4.5%
                      4.0
        $ trillions




                      3.5                                                                              4.0%
                      3.0
                      2.5                                                                              3.5%

                      2.0
                                                                                                       3.0%
                      1.5

                      1.0
                                                                                                       2.5%
                      0.5

                      0.0                                                                              2.0%
                            85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*



       Source: Pensions and Investments, UBS Research, Cornerstone Research
 * 2008 is estimated based on a 20% decline in total assets and constant real estate dollars allocated
Commercial Real Estate Sales Activity
                                                                            Portfolio deals, REIT buyouts fueled peak activity in
                                                                                2007, transactions fall to 5-year low in 2008
                   75

                               Apartments    Industrial   Office   Retail




                   50
 Billions of US$




                   25




                    0
                        2001   2002         2003          2004       2005            2006              2007               2008

                                                            Source: Real Capital Analytics, Cornerstone Research 8-28-2008
Commercial Real Estate Valuation

                             Transaction vs Current Value Cap Rates
          11%


          10%
  Cap Rates




              9%


              8%


              7%

                                            Cap Rates - All Sold Props
              6%
                                            Current Value (Appraisal) Cap Rates

              5%


              4%
                   93   94   95   96   97      98     99    00     01    02       03   04   05   06   07     08
                                                                                                      Year



                                                                           Source: NCREIF, Cornerstone Research 8-28-2008
             Real Estate Fundamentals
   Office: 2008Q3: 13.5% vacancy, up 30 basis points for quarter
       Suburban vacancy up 40bp to 15.5%, CBD steady at 9.7%
       Financial sector job cuts will push up CBD vacancy
   Industrial: 2008Q3 10.7% availability, up from 10.3% in Q2
       Supply should react quickly to slower demand
   Multifamily: 94.3% occupancy in Q3, down from 94.4% in Q2
       Reflecting weak employment and shadow supply in some markets
   Hotels: Full Service Chain occupancy near 70% but is stressed
       Leisure/transient business travel were sharply off this summer
       Diminished airlift and corporate travel cuts will challenge 2009
   Retail: Most challenged sector near-term
       Weak October retail sales a precursor to disappointing holiday sales
       Accelerated retail chain consolidation hurts marginal players and
        locations
Real Estate Debt
Thomas Kelly
       Increasing Leverage, Decreasing Coverage
                  through 2007 Vintage
                                            1.60                                                                                                          120

                                            1.40
                                                                                                                                                          100
                                            1.20
                                                                                                                                                          80
                                            1.00
                                     DSCR




                                                                                                                                                                   LTV
                                            0.80                                                                                                          60

                                            0.60
                                                                                                                                                          40
                                            0.40
                                                                                                                                                          20
                                            0.20

                                            0.00                                                                                                          0
                                                        2002          2003          2004          2005          2006           2007          2008
                                                        Fitch Stressed LTV (*)                               Moody's Stressed LTV (***)
                                                        Fitch Stressed DSCR (**)                             Moody's Stressed DSCR (****)
               (*) Fitch Stressed LTV = Current Balance / (Fitch NCF / Fitch Stressed Cap Rates)

               (**) Fitch Stressed DSCR is calculated based by using a blend of the Fitch term DSCR (Fitch NCF/Actual Debt Service) and Fitc h constant DSCR (Fitch
               NCF/Fitch Constant Debt Service)
               (****) Moody’s Stressed DSCR = Moody's NCF / 9.25% Stressed Rate X Loan Balance
               (***) Moody’s Stressed LTV = Current Balance / (Moody's NCF / Moody's Cap Rates)

Source: Rating Agency Presales
This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by
the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC. Please consult your tax or financial advisor for additional information concerning your
specific situation
                                           Subordination Levels
                 40                                                                                                                                                                40

                 35                                                                                                                                                                35

                 30                                                                                                                                                                30

                 25                                                                                                                                                                25

                 20                                                                                                                                                                20

                 15                                                                                                                                                                15

                 10                                                                                                                                                                10

                   5                                                                                                                                                               5

                   0                                                                                                                                                            0
                   1995         1996        1997       1998        1999        2000       2001        2002        2003       2004        2005        2006        2007        2008

                                            10-Yr AAA (*)                        AA                    A                  BBB                      BB                    B

           As of 10/9/08                   13.55%                       11.31%                    8.56%                     5.22%                    3.14%                  2.22%
           As of 10/9/07                   12.08%                       10.04%                    7.59%                     4.21%                     2.45%                  1.64%
           As of 10/4/06                   12.01%                       9.98%                     7.45%                     4.19%                     2.32%                  1.50%
(*) 10-Yr AAA subordination level is derived from the junior ‘AAA’ tranche to facilitate comparisons to recent structural changes.

Source: Rating Agency Presales
This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by
the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC. Please consult your tax or financial advisor for additional information concerning your
specific situation
                                            Loan Maturity Risk




This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by
the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC. Please consult your tax or financial advisor for additional information concerning your
specific situation
This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by
the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC. Please consult your tax or financial advisor for additional information concerning your
specific situation
                                                                                                                                                                          As of: 11/17/08
                                                                                           Govt. Bailout Plans
Date         Name                                   Amount                          Source and Structure of Money            Target                       Notes
                                                                                    Fed buys bi-weekly term funding to
                                                                                    depository instituions for fixed amounts                              Treasury collateral for AAA RMBS and
12/12/2007 Term Auction Facility (TAF)                                              of credit.                                                            other OMO eligible collateral
           Term Securities Lending Facility                                                                                                               Done in conjunction with BOE, BOC, ECB
 3/11/2008 (TSLF)                                                                   28 day facility to FedNY primary dealers                              and Swiss Nat. Bank.

                                                                                Fed backstop against losses to                                            JPM absorbs first billion of losses, then
 3/16/2008 Bear Stearns Bailout                                  29,000,000,000 JPMorgan from Bear Stears Acquisition JPMorgan                            Fed takes up to $29B
                                                                                Provides overnight treasury loans to
           Primary Dealers Credit Facility                                      primary dealers in exchange for eligible
 3/16/2008 (PDCF)                                                               collateral.
                                                                                                                                                          In return, treasury gets $1B of 10% senior
                                                                                                                                                          preferred stock in each company, and
            Federal Takeover of                                                 Up to $100B to each agency in                                             warrants for purchase of 80% of equity at
   9/7/2008 Fannie/Freddie                                      200,000,000,000 Treasury Funds                                    Fannie/Freddie          virtually no cost.
                                                                                NY Fed credit liquidity facility to AIG                                   Fed also got warrants for a 79.9% equity
 9/17/2008 AIG Loan                                             122,800,000,000 secured by AIG. 3month LIBOR+850                  AIG                     stake.

           Asset Backed Commercial Paper                                        Fed loans to banking organizations to
           Money Market Mutual Fund                                             purchase asset backed commercial                                          Size is a guess. Amounts outstanding
 9/19/2008 Liquidity Facility (AMLF)                            200,000,000,000 paper from money market mutual funds CP Market                            have varied.
                                                                                                                                                          Democrats are considering doubling this
                                                                                                                                                          to $50B. Supposedly to be used to retool
                                                                                                                                                          aging plants to hybrid production. (Honda
                                                                                25-year, low-interest, 5yr IO loans from                                  and Nissan have qualifying plants in US
 9/29/2008 Auto Bailout                                          25,000,000,000 the Energy Dept.                         GM, Chrysler, Ford               as well).
                                                                                                                                                          $250B for immediate use, addl $100B
                                                                                                                                                          with presidential approval, final $350B
                                                                                                                                                          with congressional approval. Possibly
           TARP (Troubled Asset Relief                                          Treasury funds to buy troubled assets                                     being expanded to include more
 10/3/2008 Program)                                             700,000,000,000 now including equity stakes in banks              Banks and Insurers      institutions.

                                                                               Treasury backstop deposit at Fed, Fed                                      Fed refused to say how much they would
           Commerical Paper Funding                                            purchases 3-month CP and ABS of                                            buy under this program, but noted that
 10/7/2008 Facility (CPFF)                                    256,144,000,000 highly rated institutions                           CP Market               $1.3Trillion of paper would qualify.
                                                                               Fed takes CDs, bank notes and CP                                           Securities have to have maturities of 90
           Money Market Investor Funding                                       from highly rated US institutions as               US Money Market         days or less. Program administered by
10/21/2008 Facility (MMIFF)                                    540,000,000,000 collateral for loans.                              Funds                   JPM
                                                            ~2,072,944,000,000


 This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by
 the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC. Please consult your tax or financial advisor for additional information concerning your
 specific situation
Real Estate Portfolio Management
Frank Sataline
               Overview

1.   Answer the question,
      “Why real estate?”

2.   How real estate fits into CIGNA’s
     investment strategies and portfolio

3.   Where do we go from here?
        Why Real Estate?
PPR’s August ’08 Publication:
Why Real Estate Now?
Long-term considerations
  Market neutral
  Return enhancement
  Risk reduction
  Cash flow
  Hedging
Investment Strategy (Fixed
          Income)
 Maximize after tax returns
 Produce high/stable investment income
 Minimize impact of credit losses
 Maintain appropriate asset liability
  mgmt.
 Pursue primarily through “buy and
  hold”
 Bottom-up, relative value driven
  investment selection
Risky Asset Investment Strategy


   Maximize economic returns
   Optimize risk-adjusted net
    investment income
   Leverage CIM’s underwriting and
    sourcing capabilities in core asset
    classes
     Real Estate in CIGNA’s
            Portfolio?
   Employee Benefits Portfolio
      $15.6   billion
   Predominantly a fixed income investor
      plusreal estate mezzanine and equity and
      private mezzanine and private equity
   Commercial mortgages
      $3.5   billion or 22% of assets - at target
   Equity real estate
      $.4   billion or 2.5% of assets - at only 1/3 of
      target
      Where Do We Go From Here?
   Commercial real estate is a lagging indicator
   Prices going lower through ’09, volume off 75-
    80% YTD!
   Searching for a bottom. Hit it in 2010?
   Down 20-30% from peak
   What’s attractive now? Best relative value?
     Cash (i.e. capital preservation)?
     High yield public bonds
     AAA CMBS, REIT bonds?
     Real estate debt vs. equity
QUESTIONS?

Thank you alumni speakers.

All are invited to a reception!

University of Connecticut Center for Real Estate
Alumni Panel Discussion
November 19, 2008