ULI

Document Sample
ULI Powered By Docstoc
					           Urban Land Institute – Fall 2010

Deleveraging and Recapitalization of Commercial Real Estate




                      November 4, 2009
ULI – Deleveraging Commercial RE


   High Volume of Near Term Debt Maturities
             Refinancing poses significant challenges due to more strict underwriting standards and declining fundamentals.
                  The CMBS market remains closed and few alternatives have emerged to replicate its peak origination volume.
                                  Limited credit availability will cause refinancing shortfalls.
                      $450
                                                                                                                                                              $397.0
                      $400
                                                                                                                         $353.6                                           $213.4b
                      $350                                                             $322.8
                                                                                                                                                                          Shortfall
                                               $290.0
                      $300
                                                                    $106.4b                           $139.2b                                $170.0b
         $ billions




                      $250
                                                                    Shortfall                         Shortfall                              Shortfall
                      $200

                      $150

                      $100
                                                                                                                                                              Cumulative Shortfalls
                          $50                                                                                                                                 2009-2012: $629 billion
                           $0
                                                2009E                                   2010E                             2011E                               2012E
             Best Case
            Originations1                                            Banks               Insurance Co's                 CMBS Total*

                      1   Origination projections based on the average 4-year historical gross originations from all non-CMBS lenders (excludes HUD/Gov’t).
                      *   CMBS total includes both fixed and floating rate loans to first maturity.
     2                    Source: Wachovia, Commercial Mortgage Alert
ULI – Deleveraging Commercial RE


   Aggressive Underwriting Standards of the Past Pose Significant Challenges


                    CMBS Loan Maturities by Vintage                                       Loans in Special Servicing as % of CMBS Outstanding



                                                                                       $60.0                                                                                                                                                                        7.0%
                                                                                                                                                                                                                                                           6.15%
                                                                                                                                                                                                                                                5.84%
                                                                                                                                                                                                                                                          $ 49.92
                                                                                                                                                                                                                                               $ 47.87              6.0%
                                                                                       $50.0
                                                                                                                                                                                                                                        4.96%
                                                                                                                                                                                                                                      $ 40.53
                                                                                                                                                                                                                             4.49%                                  5.0%
                                                                                       $40.0                                                                                                                                $ 37.05




                                                                     ($ in Billions)
                                                                                                                                                                                                                                                                    4.0%
                                                                                       $30.0                                                                                                                       2.95%
                                                                                                                                                                                                                  $ 24.52
                                                                                                                                                                                                        2.48%                                                       3.0%
                                                                                                                                                                                                  2.04% $ 20.30
                                                                                       $20.0                                                                                                .71
                                                                                                                                                                                           1 %
                                                                                                                                                                                                    7.1
                                                                                                                                                                                                  $1 1
                                                                                                                                                        1 % $1
                                                                                                                                                         .51   4.38                                                                                                 2.0%
                                                                                                                                                 1.20% $ 12.78
                                                      Cumulative                                                                          0.97%
                                                                                                                            0.80% 0.85%             0.1
                                                                                                                                                 $1 4
                                                       2004-08:                                 0.65% 0.65% 0.69% 0.75%                   $ 8.32
                                                                                       $10.0                                $ 6.88 $ 7.23
                                                                                                $ 5.67 $ 5.68 $ 5.94 $ 6.45                                                                                                                                         1.0%
                                                      $122 billion

                                                                                        $0.0                                                                                                                                                                        0.0%




                                                                                                                                  8




                                                                                                                                                                                                                                                     9
                                                                                                                     8




                                                                                                                                                                                          9




                                                                                                                                                                                                                                        9
                                                                                                                                                                                                  09

                                                                                                                                                                                                             09
                                                                                                              08




                                                                                                                                                                                                                                 09
                                                                                                                                                                8
                                                                                                                                                      8




                                                                                                                                                                          8

                                                                                                                                                                                    8
                                                                                                    8




                                                                                                                                                                                                                       9
                                                                                                                                            8




                                                                                                                                                                                                                                                               9
                                                                                                                            J ul-0




                                                                                                                                                                                                                                               J ul-0
                                                                                                                   J un-0




                                                                                                                                                          O ct-0




                                                                                                                                                                                        J an-0




                                                                                                                                                                                                                                      J un-0
                                                                                                                                                Sep -0




                                                                                                                                                                    Nov -0

                                                                                                                                                                              Dec -0
                                                                                               Apr-0




                                                                                                                                                                                                                  Apr-0
                                                                                                                                      Aug -0




                                                                                                                                                                                                                                                         Aug -0
                                                                                                                                                                                                 Feb-

                                                                                                                                                                                                        Mar-
                                                                                                        May -




                                                                                                                                                                                                                           May -
                                                                                                                                                                      UPB                % of CMBS




         Source: Wachovia Securities                                                                    Source: Realpoint




     3
ULI – Deleveraging Commercial RE


   The Need to Deleverage May Force Sales and Recapitalizations

            Refinancing Conundrum                              Declining Fundamentals

                                            The forced deleveraging of commercial real estate will cause
                                              current owners to recapitalize their investment or force sales.
                                                    Pricing down 35–50% from peak valuations.
                                                    Cap rates have increased 200-300 bps (+/-).
                                                    Rents have declined 25% (+/-).


                                            Original Equity: $20MM (gone)
                                            Debt Written Off: $15MM
                                            Swap Breakage Cost: ?

                                             Additional Equity to Refinance at
                                             60% of Today’s Value: $26MM




     4
    ULI – Deleveraging Commercial RE


             Rebound of RMZ Helping REITs Recapitalize




                                        MS PRICE Index (RMZ) 2007 - 2009                      Real Estate Equity Issuance Volume by Offering Type1




                                                                                            REITS have raised approx. $23.8 billion of public equity capital YTD.
                                                                                                                                                                      $14,388

                                                                                                                                                                      $ 491
             1300                     ~45% Leverage
             1200
             1100
                                                              ~60% Leverage
             1000
              900
              800                                                                                                                                                               $ 7,137
                                            RMZ       51.3%                                                                                                           $13,375
              700                                                                                     $ 6,004                                                                   $ 533
              600                                                                                               $ 5,335
                                                                              98.5%                   $ 2,025    $ 890    $ 4,448
              500              Asset Value1           28.2%                   Increase                                    $ 580     $ 3,294                                     $ 4,703
              400                                                             from March
                                                                                                                                    $ 650                  $ 2,319
              300                                                                                     $ 2,838
                                                                                                                $ 4,445   $ 3,428
                   8
                   7




                 09
                   7




                   8




                   9
           N 7




           N 8




           Se 9
           M 7




           M 8




           Se 8




                 09
           Se 7
           M 7




           M 8




           M 9




                                                                                                                                                     ,1
                                                                                                                                                  $ 1 45                                  $ 817
                -0
                -0
                -0




                -0




                -0
                 0




                 0




               l-0
                 0




                 0




               l-0
                -0



               l-0




                -0




                -0




                                                                                                                                    $ 2,644
              p-
              p-




              p-
              n-




              n-
              n-




                                                                                                                                                           $ 2,319
             ov
             ov
             ay




             ay




             ay




                                                                                                                                                                                          $1 75
             ar




             ar




             ar



            Ju
            Ju
            Ju




                                                                                                                                                                                $1,902
           Ja




           Ja




           Ja

           M




                                                                                                       $ 1 41
                                                                                                          ,1                                         ,1
                                                                                                                                                  $ 1 45                                  $ 642
                                                                                                                          $ 440                                        $ 521

1   Assumes 45% leverage at January 2007.                                                             Q4 07     Q1 08     Q2 08     Q3 08         Q4 08    Q1 09      Q2 09     Q3 09     Q4 09
    Source: Bloomberg
                                                                                                                           IPOs             FOs            Converts                       (QTD)




                  5
ULI – Deleveraging Commercial RE


    Public vs. Private Valuation Arbitrage
                                                                                                                   11.0%
                                                                                                                                                                                                                     With the increase in REIT
                                                                                                                           9.8%
                                                                                                                                                                                                                       prices over the past
                                                                                                                   10.0%       9.6%
                                                                                                                                                                                                                       several months an
                                                                                                                   9.0%                8.5% 8.4%                 8.8%
                                                                                                                                                     8.3%                    8.3%
                                                                                                                                                                                                 Average: 8.5%
                                                                                                                                                                                                                       arbitrage between public
                                                                                                                                                                                7.7%
                                                                                                                   8.0%                                 7.5%
                                                                                                                                                                     7.4%                        Average: 7.8%         and private valuations
                                                                                                                                                                                          7.1%
                                                                                                                   7.0%
                                                                                                                                                                                             6.2%
                                                                                                                                                                                                                       has developed.
                    Public vs. Private Market Cap Rates
                                                                                                                   6.0%
                                                                                                                            CBL          MAC          SPG          SKT        TCO          WDC                       Especially for companies
 10.0%
                                                                                                 9.3%                             Private Market Estimate      Implied Trading Cap Rate
                                                                                                                                                                                                                       in the upper quartile,
  9.0%    8.5%
                                         8.6%         8.6%
                                                                     8.6%
                                                                                                                                                                                                                       implied cap rates based
                                                              8.2%               8.3%                         Average: 8.5%
  8.0%
                 7.8%
                           7.3%
                                                                          7.6%
                                                                                                       8.0%
                                                                                                                                                                                                                       on current trading prices
                                               7.1%                                    7.2%

  7.0%
                               6.8%                                                                           Average: 7.5%                                                                                            are significantly below
                                                                                                                                                                                                                       the estimated private cap
  6.0%
                                                                                                                                                                                                                       rates.
                                                                     ce
                                           e



                                                         l




                                                                                  e
                          t
             l




                                                                                                   r
                                                      ria
          al



                        en




                                                                                                 te
                                         ar




                                                                                ag
                                                                  ffi
         M




                                                                                               en
                                                    st
                      tm



                                    C




                                                                                                                                                                                                                     REITs are building
                                                                              or
                                                                 O
                                                  du




                                                                                          C
                                    th
                   ar




                                                                            St
                                 al



                                                In




                                                                                        r ip
                 Ap




                                                                          lf
                              He




                                                                        Se



                                                                                      St




                                                                                                                   11.0%
                   Private Market Estimate                   Implied Trading Cap Rate                                      9.9%                                  9.9%                                                  substantial currency to
                                                                                                                   10.0%               9.3%                                               9.7%
                                                                                                                              9.3%
                                                                                                                                                                             8.9%                   Average: 9.3%      take advantage of
                                                                                                                   9.0%
                                                                                                                                              7.8%   8.0%            8.4%                    8.3%                      upcoming opportunities.
                                                                                                                                                                                7.8%                Average: 8.0%
                                                                                                                   8.0%
                                                                                                                                                        6.7%
                                                                                                                   7.0%

                                                                                                                   6.0%
                                                                                                                            DDR          EQY          FRT          KIM        REG          WRI

                                                                                                                                  Private Market Estimate      Implied Trading Cap Rate




         Public valuations are becoming compelling relative to private valuations based on current implied
                                                    cap rates

         6              Source: Green Street Advisors.
ULI – Deleveraging Commercial RE


     Real Estate Equity Capital Markets Remain Attractive for Issuers




                            REIT Forward FFO Multiples                                                                                             Real Estate Funds Flows




   18.0x                                                                                                                                    $6.8
                                                                                                                                                                                               1,200
                                                                                                                                                          $6.4
   16.0x
                                                                                                                                     $6.0                                                      1,000




                                                                                                       Net Fund Flows ($ billions)
   14.0x
                                                                                                                                                                           $4.7
                                                                                                                                                                                               800
   12.0x                                 Average: 11.0x
                                                                                                                                     $4.0




                                                                                                                                                                                                     RMZ
   10.0x                                                                                                                                                                                       600

     8.0x
                                                                                                                                                   $1.9                                        400
                                                                                                                                     $2.0
                                                                                                                                                                                     $1.3
     6.0x
                                                                                                                                                                   $1.0
                                                                                                                                                                                               200
     4.0x

                                                                                                                                     $0.0                                                      0
     2.0x                                                                                                                                   2004   2005   2006     2007    2008   2009 (YTD)
             Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3


  1997       1998   1999   2000   2001      2002      2003   2004   2005   2006   2007   2008   2009                                                       RE Fund Flows   RMZ




   Source: Dealogic and FactSet. Market data as of 10/28/09. Green Street Advisors.
   1 Chart excludes mortgage REITs, gaming deals, and index-add transactions.




         7
ULI – Deleveraging Commercial RE


   The REIT Unsecured Market has Reopened
    After gapping significantly during a long period of uncertainty and heightened risk, spreads have tightened and the market has
         opened for quality public names with strong liquidity positions.

                                                                     REIT Unsecured Spreads & Issuance
                             15.0%                8.5%
                                                                                  DRE 19s, 8.375% Yield
                                                                                                                     HPT 14s, 8.125% Yield
                             14.0%                8.0%
                                                                                CLI 19s, 7.875% Yield
                                                                                                                       PLD 14s, 7.75% Yield
                                                                                                                                                          BDN 15s, 7.625% Yield
                             13.0%                7.5%                                                               DRE 15s, 7.50% Yield
                                      Yield (%)




                             12.0%                7.0%                                                                                                   KIM 19s, 6.897% Yield

                             11.0%                6.5%
                                                                                                                                            AVB 20s, 6.119% Yield
                 Yield (%)




                             10.0%                6.0%       Yield curve based on Modified
                                                             Adjusted Duration of 4.7 years                      AVB 17s, 5.717% Yield
                             9.0%                 5.5%

                             8.0%




                                                                                                                                              9


                                                                                                                                                     9
                                                                                  9


                                                                                            9


                                                                                                      9


                                                                                                                9


                                                                                                                           9


                                                                                                                                     9
                                                       9


                                                                9


                                                                         9




                                                                                                                                            -0


                                                                                                                                                   -0
                                                                                   0


                                                                                             0


                                                                                                       0


                                                                                                                 0


                                                                                                                            0


                                                                                                                                      0
                                                   l-0


                                                            l-0


                                                                     l-0


                                                                                g-


                                                                                          g-


                                                                                                    g-


                                                                                                              p-


                                                                                                                         p-


                                                                                                                                   p-


                                                                                                                                           ct


                                                                                                                                                   ct
                                                  Ju


                                                           Ju


                                                                    Ju

                                                                             Au


                                                                                       Au


                                                                                                 Au


                                                                                                           Se


                                                                                                                      Se


                                                                                                                                Se


                                                                                                                                          O


                                                                                                                                                  O
                             7.0%
                             6.0%
                             5.0%
                             4.0%
                                  4




                                                                        5




                                                                                                               6




                                                                                                                                                    7




                                                                                                                                                                                8




                                                                                                                                                                                               9
                                                   05




                                                                                        06




                                                                                                                                 07




                                                                                                                                                               08




                                                                                                                                                                                      09
                                -0




                                                                      -0




                                                                                                             -0




                                                                                                                                                  -0




                                                                                                                                                                              -0




                                                                                                                                                                                             -0
                                               r-




                                                                                    r-




                                                                                                                            r-




                                                                                                                                                             r-




                                                                                                                                                                                      r-
                              ct




                                                                    ct




                                                                                                           ct




                                                                                                                                                ct




                                                                                                                                                                            ct




                                                                                                                                                                                           ct
                                             Ap




                                                                                  Ap




                                                                                                                          Ap




                                                                                                                                                           Ap




                                                                                                                                                                                    Ap
                             O




                                                                O




                                                                                                      O




                                                                                                                                            O




                                                                                                                                                                          O




                                                                                                                                                                                           O
                              Such drastic tightening into attractive financing levels is unprecedented in the last five years


     8     Source: Barclays Capital Live, Bloomberg.
ULI – Deleveraging Commercial RE


   Rising Cap Rates for Core Assets?



                                 Unlevered Return Expectations on                                                                     Return Premium on Real Estate
                                     Real Estate vs Baa Rates                                                                   Unlevered IRR Expectations Minus Baa Rate

   12.0%                                                                                                         400 bps

   11.0%
                                                                                                                 300 bps




                                                                                                                                                                                                                                   Cheap
   10.0%

    9.0%
                                                                                                          8.7%   200 bps

    8.0%




                                                                                                                                                                                                                                   Pricey
    7.0%                                                                                                         100 bps

                                                                                                          6.4%
    6.0%
                                                                                                                    0 bps
                         Unlevered Returns (IRRs)
    5.0%
                         Long-term Baa
    4.0%                                                                                                         -100 bps   6

                                                                                                                                  8

                                                                                                                                           0

                                                                                                                                                    2

                                                                                                                                                             4

                                                                                                                                                                      6

                                                                                                                                                                               8

                                                                                                                                                                                        0

                                                                                                                                                                                                 2

                                                                                                                                                                                                          4

                                                                                                                                                                                                                   6

                                                                                                                                                                                                                            8
           6

                   8

                           0

                                    2

                                            4

                                                    6

                                                            8

                                                                    0

                                                                            2

                                                                                    4

                                                                                            6

                                                                                                    8




                                                                                                                       J an-8

                                                                                                                                J an-8

                                                                                                                                         J an-9

                                                                                                                                                  J an-9

                                                                                                                                                           J an-9

                                                                                                                                                                    J an-9

                                                                                                                                                                             J an-9

                                                                                                                                                                                      J an-0

                                                                                                                                                                                               J an-0

                                                                                                                                                                                                        J an-0

                                                                                                                                                                                                                 J an-0

                                                                                                                                                                                                                          J an-0
         Jan-8

                 Jan-8

                         Jan-9

                                  Jan-9

                                          Jan-9

                                                  Jan-9

                                                          Jan-9

                                                                  Jan-0

                                                                          Jan-0

                                                                                  Jan-0

                                                                                          Jan-0

                                                                                                  Jan-0




          As of 10/13/09



     9
ULI – Deleveraging Commercial RE


   Limited US Sales Volume
                                                  Volume of US Sales > $25 mm ($ in billions)
                                  $400                                                      $366

                                  $350
                                  $300                                                                         40-50% of
                                                                                    $236                      Post 9/11 &
                                  $250                                                                          Post Dot
                                                                           $198                                Com Bust
                                  $200                                                                          Volume
                                                                  $133
                                  $150
                                                           $75                                         $81
                                  $100              $62
                                           $46
                                   $50                                                                          $16

                                     $0
                                           2001     2002   2003   2004     2005     2006    2007       2008     2009
                                                                                                                YTD
                                                                     Retail   Other

             Transaction data suggests cap rates have risen but tight credit, the general unwillingness of owners to
                 recognize loss of value, and an amend and extend approach by existing lenders has lead to limited
                 transactions.
             However, as maturities mount, owners will be forced to sell.
             Given access to capital, REITs are well positioned to take advantage of the distress.
                Public markets will play a key role in digging out of this mess.
                The vast majority of transactions will be sales out of special servicers and banks.
                Focus is now on interim defaults vs. maturity defaults.
                Peak defaults will likely be in 2010, which should result in an increase in transactions.
    10   Source: Real Capital Analytics.

				
DOCUMENT INFO