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This report was prepared by AlixPartners LLP (“AlixPartners”) for general information and distribution on a strictly non-reliance basis. No one in possession of this report may rely on any portion of this report. The recipients of the report accept that they will make their own investigation, analysis and decision relating to any possible transactions and/or matter related to such and will not use or rely upon this report to form the basis of any such decisions.
This report may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. Those differences may be material. Items which could impact actual results include, but are not limited to, unforeseen micro or macro economic developments and/or business or industry events.
This report may contain certain statements which are or could be considered to be forward-looking statements. Such statements are not guarantees of future performance and involve risks and uncertainties which are not possible to predict. Actual results and trends may differ materially from those described in such statements.
The information in this report reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the report to reflect events, circumstances or changes that occur after the date the report was prepared. In preparing this report, AlixPartners has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise provided to us. AlixPartners has not audited or verified the data reviewed in connection with the preparation of this report.
AlixPartners makes no representation or warranty regarding any actions the Company may take in reliance on or in reference to matters presented in this report. To the extent that it is lawfully able to do so, no liability or responsibility whatsoever is accepted by AlixPartners for any loss howsoever arising from any use of, or in connection with, the Report.
Neither this report nor any of its contents may be copied, reproduced, disseminated, quoted or referred to in any presentation, agreement or document with attribution to AlixPartners, at any time or in any manner other than for the internal use of the Company, without the express, prior written consent of AlixPartners.
Disclaimer – Important Information Regarding This Report
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Overview
•Commercial Real Estate
•Debt & Equity
• Debt
• Equity
Outline
3
Fundamentals attempting to stabilize, declining rents/cash flows creating disconnect as Capital Markets drive values up ahead of space markets
Banks minimizing writeoffs. Search for higher yields/ relative value driving money back into CRE (and REITs)
Fear is giving way to greed, as winners and losers are finally beginning to emerge
normally creates best new CRE loans and equity returns
Scarce
Booming REITs (?)
Poor CRE returns
Equity?
www.alixpartners.com 10
Conventional Wisdom The Real Story
Fewer distressed sales than expected – some more in 2H 2010, 2011/2012
Many CRE buyers especially for “core” apartments, hotels, and CBD office, early retail. New buyers including foreign investors, as yield search intensifies!
Distressed bargains
Few new buyers
Targeted Investments?
www.alixpartners.com 11
Conventional Wisdom The Real Story
“Real” workouts increasing (new equity / write-offs required). More foreclosures, debt sales and bankruptcies result in 2011-2012.
Few bankruptcies or foreclosures
Operators?
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Conventional Wisdom The Real Story
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•Overview
Commercial Real Estate
•Debt & Equity
• Debt
• Equity
Outline
13
U.S. Economy Had Been Heavily Dependent On Consumer – Not Business Spending…Until Recently (Rebuilding Inventories)
Source: U.S. Bureau of Economic Analysis
14
-8
-6
-4
-2
0
2
4
6
1.4
0.1
3.0
0.9
3.2
2.32.9
-0.7
0.6
-4.0
-6.8
-4.9
-0.7
1.6
5.0
3.7
1.7
2.5
Gross Domestic Product% Change @ Annual Rate
2006
:Q2
2006
:Q3
2006
:Q4
2007
:Q1
2007
:Q2
2007
:Q3
2007
:Q4
2008
:Q1
2008
:Q2
2008
:Q3
2008
:Q4
2009
:Q1
2009
:Q2
2009
:Q3
2009
:Q4
2010
:Q1
2010
:Q2
2010
:Q3
-10
-8
-6
-4
-2
0
2
4
6
8Contribution to % Change in GDP
% Change @ Annual Rate
Govt consumption exp and gross investment
Net exports of goods and services
Gross private domestic investment
Personal consumption expenditures
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Q1-07
Q2-07
Q3-07
Q4-07
Q1-08
Q2-08
Q3-08
Q4-08
Q1-09
Q2-09
Q3-09
Q4-09
Q1-10
Q2-10
Q3-10
Q4-10F
Q1-11F
Q2-11F
Q3-11F
Q4-11F
-8
-6
-4
-2
0
2
4
6
0.9
3.22.3
2.9
-0.7
0.6
-4.0
-6.8
-4.9
-0.7
1.6
5.0
3.7
1.72.5 2.3 2.5
3.0 3.0 3.2
U.S. GDP Growth
Qu
art
erl
y A
nn
ua
l Gro
wth
(%
)U.S. Economy Is Expected to Grow, Albeit Slowly; Double Dip Not Expected but Unemployment Remains High (Above 8% to 9%) for Several Years
www.alixpartners.com 15
Recession
Source: The Blue Chip Economist Consensus Forecast, Federal Reserve Board
Forecast
Unfortunately, Employment Gains Will Take Significantly Longer Than Hoped – Each Recession Has Taken Progressively Longer To Recover Jobs!
www.alixpartners.com 16
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Non-Farm Employment Trends1960-2010
All
Non F
arm
Em
plo
yees (
000s)
19 months to previ-ous peak
27 months to pre-vious peak
32 months to pre-vious peak
48 months to pre-vious peak ???
Source: U.S. Bureau of Labor Statistics
As a Result, Businesses and Individuals Struggle to Keep Their Heads Above Water
Consumers Lost Confidence, and Billions In Retail Sales Came “Off the Table” and Will Also Take Longer to Recover
Aug-0
7
Sep-0
7
Oct
-07
Nov-0
7
Dec-0
7
Jan-
08
Feb-0
8
Mar
-08
Apr-0
8
May
-08
Jun-
08
Jul-0
8
Aug-0
8
Sep-0
8
Oct
-08
Nov-0
8
Dec-0
8
Jan-
09
Feb-0
9
Mar
-09
Apr-0
9
May
-09
Jun-
09
Jul-0
9
Aug-0
9
Sep-0
9
Oct
-09
Nov-0
9
Dec-0
9
Jan-
10
Feb-1
0
Mar
-10
Apr-1
0
May
-10
Jun-
10
Jul-1
0
Aug-1
0
Sep-1
0
Oct
-10
$310,000
$320,000
$330,000
$340,000
$350,000
$360,000
$370,000
$380,000
$390,000
Total Monthly Retail Sales U.S. Census Bureau
$ m
illi
on
s
20www.alixpartners.com
2010 AlixPartners Holiday Spending Outlook Survey
• 85% of consumers say they are spending “the same or less” this year on retail purchases
• 86% of consumers say they plan to spend “the same or less” on holiday gifts in 2010
• Holiday gift spending could decrease by more than 8% this year as consumers continue to show caution due to the uncertain economic climate
Americans Have Become Even More Pessimistic About a Quick Recovery, with 76% Now Saying 2012 at the Earliest (vs. 63% in May)
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2010 2011 2012 2013 or later
Not sure Never
20
%
27
%
18
%
19
%
13
%
3%
8%
21
%
18
%
23
%
23
%
5%
5%
12
%
23
%
34
%
19
%
6%
1%
9%
26
%
46
%
14
%
4%
Expectations Regarding Timing of Recovery
Feb-09 Nov-09 May-10 Sep-10
When do you expect the U.S. economy to recover to what you consider “normal times”?
Source: AlixPartners consumer research
21
Although Retail Sales Have Been Holding Up In Spite of Pessimism
Source: AlixPartners analysis
Retail Comp Sales Index is a weighted index comprised of retailers reporting monthly sales in Specialty & Discount Apparel, Club, Department, Mass Merchandise, Pharmacy segments
22www.alixpartners.com
Nov-0
7
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-0
8
Nov-0
8
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-0
9
Nov-0
9
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep-1
0
Nov-1
0
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
5.9%
-1.9%
0.2%
1.2%
-2.3%
2.5%
0.7%1.1%
0.0%0.1%
-1.2%
-3.3%
-6.3%
-3.1%-2.8%-2.6%-2.9%
-0.9%
-2.8%-3.3%-3.4%
-1.8%
1.5%2.0%
-0.1%
1.9%1.4%
2.5%
7.6%
-0.5%
1.8%
2.5%2.3%2.4%2.1%
1.1%
5.0%
Wtd. Retail Comp Store Sales Index
Feb
-01
May
-01
Aug
-01
Nov
-01
Feb
-02
May
-02
Aug
-02
Nov
-02
Feb
-03
May
-03
Aug
-03
Nov
-03
Feb
-04
May
-04
Aug
-04
Nov
-04
Feb
-05
May
-05
Aug
-05
Nov
-05
Feb
-06
May
-06
Aug
-06
Nov
-06
Feb
-07
May
-07
Aug
-07
Nov
-07
Feb
-08
May
-08
Aug
-08
Nov
-08
Feb
-09
May
-09
Aug
-09
Nov
-09
Feb
-10
May
-10
Aug
-10
-
50
100
150
200
250
Moody's REAL CPPI & Schiller 20-City Index
National All Properties Schiller 20-City Index
Commercial Property values still over 40% below Oct 2007 high
Source: AlixPartners analysis, public financial reports, thru 9/8/2010
25
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•Overview
•Commercial Real Estate
Debt & Equity
• Debt
• Equity
Outline
26
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Commercial Real Estate 2010: Sources of Capital
Banks, S&Ls, Mu-tual Sav-
ings Banks;
$1,735.4
Life In-surance;
$240.1
REIT Un-secured
Debt; $160.6
Pension Funds; $17.6
Comm Mortgage
Securities; $614.6
Govt Credit Agencies; $150.9
Mortgage REITs; $23.7
Debt Capital $2,994 Billion
Private Investors;
$454.2
Pension Funds; $184.0
Foreign Investors;
$95.2Life In-surance
Cos; $25.1
Priv Finan-
cial (REO); $46.3
REITs; $290.8 Public Untraded
Funds; $19.3
Equity Capital$1,114.9 Billion
Source: Emerging Trends in Real Estate 2011, PWC/Urban Land Institute, October 2010
27
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Debt Capital $2,994 Billion
Source: Emerging Trends in Real Estate 2011, PWC/Urban Land Institute, October 2010
28
Banks$1.7T
Life Insurance$240.1
REIT Unsecured Debt
$160.6
Pension Funds$17.6
CMBS$600B
Govt Credit Agencies$150.9
Mortgage REITs$23.7
Debt Capital $2,994 Billion
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Private Investors
$454.2
Pension Funds$184.0
Foreign Investors
$95.2
Life Insurance Cos
$25.1
Priv Financial (REO)$46.3
REITs$290.8
Public Untraded Funds$19.3
Equity Capital$1,114.9 Billion
Source: Emerging Trends in Real Estate 2011, PWC/Urban Land Institute, October 2010 29
Industry Estimates Are Expecting More Sales Transactions in 2011
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Source: Emerging Trends in Real Estate 2011, PWC/Urban Land Institute, October 2010
2011 Forecast
30
Sell
2004 2005 2006 2007 2008 2009 2010 20111
2
3
4
5
6
7
8
9
Emerging Trends Survey PWC/ULI
Buy Hold Sell
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•Overview
•Commercial Real Estate
•Debt & Equity
Debt
• Equity
Outline
31
Estimated Total Commercial Mortgage Maturities Are “Spiking” Over the Next Three Years, with Significant Amounts of “Amended and Extended” Loans Also Coming Due Again!
Source: Duetsche Bank, Trepp, Intex, Federal Reserve
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Q1-00
Q3-00
Q1-01
Q3-01
Q1-02
Q3-02
Q1-03
Q3-03
Q1-04
Q3-04
Q1-05
Q3-05
Q1-06
Q3-06
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
Q3-09
Q1-10
0
1
2
3
4
5
6
7
8
9
10
Commercial Real Estate Loans (All Banks) Loan Delinquency & Charge Off Rate
Delinquency %
% o
f lo
ans
CRE Bank Loan Delinquencies and Charge Offs Continue To Rise.
Source: Federal Reserve Board
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Commercial real estate loans include construction and land development loans, loans secured by multifamily residences, and loans secured by nonfarm, nonresidential real estate, booked in domestic offices only
33
CMBS Loan Delinquencies Also Have Been Rising (Until Recently)
www.alixpartners.com 34
Sep-0
8
Nov-0
8
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-0
9
Nov-0
9
Jan-
10
Mar
-10
May
-10
Jul-1
0$0
$10
$20
$30
$40
$50
$60
$70Monthly CMBS Delinquencies
($B)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
f
2011
f$0
$50
$100
$150
$200
$250
CMBS Securitization Vol. ($B)
Source: Realpoint Source: ING Clarion Research, Comm Mortgage Alerts
General Forecasts for 2011
range from $25 - $ 50
billion
Some Good News – CMBS Spreads Continue to Narrow and New Issuance is Trickling Back, in Spite Of All the Capital Market Issues Discussed
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Nov-0
9
Feb-1
0
May
-10
Aug-1
0
Nov-1
00
100
200
300
400
500
600
70010YR, AAA Spread Over Swaps
Nov-0
8
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-0
9
Nov-0
9
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep-1
0
Nov-1
00
2
4
6
8
10
12
Monthly Issuance ($B)
35
Source: Trepp, CMAlert.com
Some More Good News – Fed Loan Officers See Loosening Standards and Spreads; Demand Has Started to Move Up