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Real Estate Debt Market Overview
1
Quarterly Transaction Volumes: 1Q2008 – 1Q2010*
2008 Annual Total: 2009 Annual Total:
$136 bn $49 bn
$50
$44
$39
$40 $8
$6 $34
$4
$30 $14
$17
$14
$19
$20 $17
$8 $3
$13 $5
$6 $5
$8 $10 $2
$9
$10 $2
$4
$2 $5
$14 $3 $3 $3 $5
$10 $11 $2 $1
$4 $2 $1
$5 $1 $4 $5 $1
$3 $2
$0 $2
1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010*
Apartm ent Industrial Office Retail
$ in billions. Source: Real Capital Analytics.
* Preliminary as of 1Q 2010.
2
Loan maturities will continue deleveraging trend
Estimated Total U.S. CRE Maturities
350.0
$337.6 $331.0
Banks/Thrift
Insurance Company
300.0 CMBS-Floating $295.9
CMBS-Fixed
$137.6b $131.0b
$246.5 $95.9b Shortfall Shortfall
250.0
Shortfall
$4.0b $46.5b
$ US (Bil)
$204.0 Shortfall Shortfall
200.0
150.0 Cumulative Shortfalls
2009-2013: est. $415.0 billion
100.0
50.0
0.0
2009e 2010e 2011e 2012e 2013e
Projected
Originations1
1 Origination projections based on the average 3-year historical gross originations from all non-commercial CMBS lenders.
Source: Deutsche Bank, Intex, Trepp, Mortgage Bankers Association, Federal Reserve.
As of August 2009.
3
Out-performance of CRE loans made immediately following a recession
Yield Spread on CRE Whole Loans Compared with Direct CRE Equity Returns
Four quarter
rolling average Direct valuation recovery leads to Limited competition
6% attractive refinance opportunities for currently providing high
equity investors, providing debt spread levels
investors an exit strategy.
4
2
0
-2
Attractive risk-adjusted spreads
available during previous economic Competitive lending during RE
-4 downturns bull market (eg CMBS) placed
prolonged downward pressure
on CRE lending spreads
-6
-8
1 Q1 9 8 8
4 Q1 9 8 8
3 Q1 9 8 9
2 Q1 9 9 0
1 Q1 9 9 1
4 Q1 9 9 1
3 Q1 9 9 2
2 Q1 9 9 3
1 Q1 9 9 4
4 Q1 9 9 4
3 Q1 9 9 5
2 Q1 9 9 6
1 Q1 9 9 7
4 Q1 9 9 7
3 Q1 9 9 8
2 Q1 9 9 9
1 Q2 0 0 0
4 Q2 0 0 0
3 Q2 0 0 1
2 Q2 0 0 2
1 Q2 0 0 3
4 Q2 0 0 3
3 Q2 0 0 4
2 Q2 0 0 5
1 Q2 0 0 6
4 Q2 0 0 6
3 Q2 0 0 7
2 Q2 0 0 8
1 Q2 0 0 9
4 Q2 0 0 9
ACLI Contract Yield Spread Over 10Yr Treasuries NCREIF NPI
Source: ACLI, NCREIF, economy.com, RREEF Research data through 2Q09
4
Real Estate Debt Summary
Dislocation in the global real estate and credit markets have presented compelling investment
opportunities, as property owners face liquidity issues and loan maturities
Real estate debt investments will continue to be attractive because it offers investors excellent
risk-adjusted returns, current income, manageable credit risk and predictable duration
Life companies and other portfolio lenders are lending again, albeit mostly on high quality,
stabilized assets
Although many banks indicate they are back in the market, it remains to be seen whether they
will make a significant impact given their existing issues. Banks are only lending selectively on
high quality assets, require some level of recourse and construction loans are scarce
Borrowers, taking the cue, begin to return as well as they seek “reasonable” financing that was
unavailable over the last two years
While there has been a discernible increase in the availability of real estate debt capital
available to borrowers, there remains a tremendous shortfall in the amount available and the
projected amount necessary to refinance maturing debt over the next 4 to 5 years
5
Strategies Up and Down the Risk Return Spectrum
Depending on investor’s risk-return profile, real estate provides a range of investment strategies
Senior Mortgages
● Senior Mortgage loans secured by stable, cash flowing
real estate assets
● Strong credit structures and transparency
Senior
Senior Senior Mortgage ● Up to ~65% LTV; interest rate of 5-7%; fixed and floating;
Mortgage
Mortgage 0 – 65% LTV term of 3-7 years
Subordinate Debt
10%
Subordinate Debt ●Subordinate debt investments in real estate assets and
Sub Debt
Sub Debt 60 – 75% LTV real estate companies
● Mezzanine loans, B notes, or low-leveraged preferred
Opportunistic Debt equity
Opp. Debt 80%+ LTV
Equity 30% Selected commercial mortgage back securities
●
● 60-75% LTV; return of 8-15% (mostly current income;
some accrual); fixed or floating; term of 3-7 years
Equity Opportunistic Debt
Equity 50 - 100% LTV
● Debt instruments secured by real estate and related
assets where there is an opportunity to gain control
and/or receive high debt returns
Commercial Real Asset Capital ● Purchase loans, positions or assets from distressed debt
Estate Asset Structure holders including banks, funds, insurance companies,
owners etc
● Provide debt to operating companies, capital-constrained
PE funds, cash-strapped borrowers; various levels of
repositioning
● 80%+ LTV; returns of 16%+ (some current income); 2-7
year terms
For illustrative purposes only. Not to scale.
6
Senior Lending
The collapse of financial markets, ensuing credit crunch and pronounced economic recession will
continue to have a profound impact on the commercial real estate financing markets.
Maturing real estate debt shortfall of approximately $415 billion from now until 2013 provide great
opportunities for loan originations
Newly originated loans on today’s values provide lenders with the ability to choose from the
highest quality collateral, sponsors and credit structures
Senior mortgage strategies have potential to deliver excellent risk adjusted returns.
Asset classes include office, industrial, residential, retail, and mixed use; target properties
that are predominantly stable, cash-flowing.
Loan size of $10-$30 million; well-structured loans at lower leverage (~65% LTV), strong
DSCR (min. 1.30x) and debt yield (min. 10%); interest rates of 5-7%.
Well-located properties in major metropolitan markets or stable regions near major markets.
7
Opportunistic Debt
Opportunistic plays that provide investors with attractive risk-adjusted returns, oftentimes, with the
prospect of eventually controlling the asset or situation.
Purchase discounted or distressed positions in the capital structure
Purchase performing and non-performing loans, assets or positions from banks, funds,
insurance companies, owners etc.
Distressed loans of banks and debt holders can be in form of Senior Mortgages,
Mezzanine loans, sub-debt notes, or participations
Rescue Capital (e.g. gap equity, “white knight” capital, LIFO)
Provide capital (in the form of debt or preferred equity) to cash-strapped individual
borrowers, capital-constrained funds, and operating companies to meet capital
requirements for loan covenant breaches, construction completion, lease up, etc.
Provide capital (as debt or preferred equity) to property owners who want to execute a
debt purchase or Discounted Pay Off (DPO).
8
Current Challenges facing Debt Holders
• Operational
Debt service payments cease/reserves run out
Extensions and Modifications
Discounted Payoffs (DPO)
Discounted Sales
Foreclosure
Loss of ability to influence or consent to major decisions, including terms of debt
modifications
• Accounting
Unrealized Losses (FV) or Valuation allowances (Historical Cost)
Income recognition/Non-accrual status
Write off of investment
Bring on property and senior debt onto books
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