METROPOLITAN R ESTATE EUROPE, LLP · METROPOLITAN REAL ESTATE EUROPE LLP PRIVATE & CONFIDENTIAL Experience Access Diversification 3 “Lloyds and AIB selling off their distressed

OPPORTUNITIES IN DISTRESSED REAL ESTATEJeremy Ford, Managing Director, Metropolitan Real Estate Europe, LLP

APRIL 2013

METROPOLITAN REAL ESTATE EUROPE, LLP

[email protected]+44-207-182-4777+44-207-182-4775

METROPOLITAN REAL ESTATEEUROPE LLP

PRIVATE & CONFIDENTIALAccessExperience Diversification 2

Disclaimer

THE INFORMATION PROVIDED HEREIN IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND SUCH INFORMATIONINCLUDES FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON CERTAIN ASSUMPTIONS. ANY PROJECTIONS, VIEWS, OUTLOOKS OR ASSUMPTIONS SHOULD NOT BECONSTRUED TO BE INDICATIVE OF THE ACTUAL EVENTS WHICH WILL OCCUR. CERTAIN INFORMATION CONTAINED HEREIN IS BEING PROVIDED MERELY TO SHOW THEGENERAL TREND IN THE REAL ESTATE MARKET IN THE PERIODS INDICATED ACCORDING TO THE STUDIES CONDUCTED BY OTHER PARTIES.

THIS DOCUMENT IS NOT INTENDED FOR PUBLIC USE OR DISTRIBUTION. WHILE ALL THE INFORMATION PREPARED IN THIS DOCUMENT IS BELIEVED TO BE ACCURATE,METROPOLITAN REAL ESTATE EUROPE LLP (“METROPOLITAN” OR “MRE”) MAKES NO EXPRESS OR IMPLIED WARRANTY AS TO THE COMPLETENESS OR ACCURACY OF THEDOCUMENT, NOR CAN IT ACCEPT RESPONSIBILITY FOR ERRORS APPEARING IN THE DOCUMENT. METROPOLITAN SHALL NOT HAVE ANY LIABILITY TO YOU OR ANY OTHERPARTY RESULTING FROM THE USE OF, OR RELIANCE ON, THE MATERIAL CONTAINED HEREIN.

THE INFORMATION PROVIDED HEREIN, INCLUDING, WITHOUT LIMITATION, INVESTMENT STRATEGIES, INVESTMENT RESTRICTIONS AND PARAMETERS, AND INVESTMENTAND OTHER PERSONNEL, MAY BE MODIFIED, TERMINATED OR SUPPLEMENTED AT ANY TIME WITHOUT FURTHER NOTICE.

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“Lloyds and AIB selling off their distressed property loans” The Independent

“Real estate becoming sweet spot for buyout firms”The Financial Times

“Investor risk appetite rises;Europe is now firmly on the radar of opportunistic investors”

The Financial Times

“Lloyds reduces problem loan exposure by £5.35bn” PropertyWeek

Your Daily Dose Of Distress

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PRIVATE & CONFIDENTIALAccessExperience Diversification

There Are Distressed Properties

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And, There Are Distressed Owners

5

Short lease terms

Vacancy

Low barriers-to-entry

Needing refurbishment/redevelopment

Poor tenant-mix

Debt maturity and/or overleverage

A range of factors can create distress for otherwise institutional-quality assets

Boston, MA (U.S.)

Blackpool (U.K.)

Tokyo (Japan)Helsinki (Finland)

Minneapolis, MN (U.S.)

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Less Competition And Anticipated Deal Flow Contributes To Market Dislocation…

1. Severe Market Dislocation

Opportunities to participate in restructuring and recovery

Recovery will be slow and uneven, might take several years

2. Fewer Buyers

Flight to quality

Assets neglected, need skill to assess and reposition

3. More Sellers

Distressed and unnatural owners

Greater inefficiency in process

Large supply of over-leveraged assets coming to market

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…Creating Interesting Opportunities For Buyers

Mispriced risk and local knowledge can create asymmetry

Lower basis, especially versus core, confers downside protection and leasing advantage

Yields potentially higher than core yields, more so on stabilization; reaffirms downside protection

Hard assets with meaningful upside potential in event of inflation or stronger economic outcome

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A financial (structural) problem rather than a real estate problem (cyclical)

1970s Oil Crisis 1980s RecessionDot Com Bubble

Early 1990s Recession

Early 2000sRecession GFC% change

ADVANCED ECONOMIES’ GDP GROWTH AND REAL ESTATE CYCLES(1970-2012)

Under-supply

2011-13

Oversupply1980-89

Oversupply2000-03

Oversupply absorbed1990-98

Demand/supply

matched 1998-99

Oversupply1970-75

-3

-2

-1

0

1

2

3

4

5

6

7

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

We’ve Seen This Before

8

Source: FDIC, FDIC Structured Transaction Fact Sheet, IMF, 2009. FW Dodge, CB Commercial, BLS, Mueller.

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RTC

1989-95



We’ve Seen This Before

9

A financial (structural) problem rather than a real estate problem (cyclical)

TODAY

Efficient

Discrete portfolios and one-offs

Value created through active asset management

RTC

Inefficient

Bulk sales (“Black box”)

Retail flip

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0

50

100

150

200

250

300

2001 2005 2009 2013 2017

Significant Increase In Lending Through 2007 With Loans Maturing Now

10

Source: CBRE, De Montfort University, January 2011. DTZ May 2011,.

Majority of European real estate debt exposurethrough direct balance sheet debt exposure (75%)and bank sponsored covered bonds (18%)

Most mortgages remain on banks’ books as theyextend loan terms in hope values will improve

Lack of alternative funding when debt maturitiesat their highest

U.S. CMBS SALES AND MATURITIES($ BILLION)

EUROPEAN LENDING TO REAL ESTATE(€ BILLION)

2001 2005 2009 2013 20170

50

100

150

200

250

300

Lending Maturities

€B

illio

n$

Bill

ion

€477B

$320B

323%

206%

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Source: Morgan Stanley, November 2012, J.P. Morgan Asset Management as of December 2012, J.P. Morgan Asset Management, February 2013.

Faster Than Anticipated Reduction And More To Come

Pressures mounting on bank balance sheets as non-real estate assets deteriorate

Banks ~20-25% through their revised deleveragingplans by mid-2012 (majority through repayment ofloans and impairments, fewer disposals)

Projected that by the end of 2015 a majority of thework-out will be completed

IMPAIRMENTS MADE BY A U.K. BANKTO NON-CORE PORTFOLIO

(£ BILLION)

0

10

20

30

40

50

60

4H09 2H10 2H11 4H 11 2H124H10

£ B

illio

n

PROGRAM OF ANNOUNCED SALES(TOTAL OF €296 BILLION)

Banks 37% CMBS 17%

OEFs 11%

Government 30%

REITs 5%

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The Size of the Opportunity in Europe

12

Investment activity by opportunistic investorsrose to 12% of all investment activity in Europein 2012 (versus 6% average from 2007-11)

Opportunistic segment of market expected toincrease to ~15-20% of total capital invested

EXPECTED OPPORTUNISTIC SALES IN EUROPE(TOTAL OF €261 BILLION)

DISTRESSED SALES IN THE U.K., GERMANY ANDFRANCE (SOURCES)

(TOTAL OF €125.8 BILLION)

Source: J.P. Morgan Asset Management, February 2013, CBRE Valuation Team, September 2012; J.P. Morgan, September 2012.

Banks €77.1B

CMBS €14.3B

OEFs €6.7B

Govt€24.5B

REITs €3.2B

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Investors Can Access Distress Throughout The Capital Structure…

Individual, non-core properties sold out of portfolios in need of active asset management

Properties in need of capital for renovations or tenant improvements held by capital constrained owners or “unnatural” owners (e.g., banks)

Opportunities to restructure balance sheets and provide new capital

Acquire properties through “loan-to-own” situations

Sources include forced sellers, including closed-ended funds, banks, open-ended funds, corporations, governments, REITs

Distressed Equity Distressed Debt

Opportunities include large portfolios as well as individual assets

Complex transactions that require structuring capabilities

Illiquid debt environment creates mispriced segments in the capital structure

Sources include banks, borrowers (owners),property developers; relationships with lenders and borrowers key to successfully sourcing transactions

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…Utilizing Different Skill Sets

14

Buy assets at a substantial discount to their intrinsic long-term value

Focus on non-core (“B”) assets which can be “returned to core”

Purchase income – target assets with relatively high current yields and attractive risk adjusted returns

Asset Transaction

Look at assets that are neglected due to capital constrained or “unnatural” owners

Provide capital (i.e., loan origination, bridge financing, development financing, etc.)

Financial Transaction

Buy distressed properties through “loan-to-own” situations

Restructure/recapitalize balance sheets on overleveraged assets

Take advantage of illiquid debt environment to access segments of capital structure that are mispriced due to risk (i.e., mezzanine loans, etc.)

Debt Transaction

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Distress Can Be Sourced From Banks And Borrowers

LOCATION Berlin & Northern Germany London, U.K. Western Germany

ASSET TYPE NPL portfolio secured by residential properties

Office building Small portfolio of retail assets

SELLER Consortium of European banks

Diversified fund manager Two German banks

SELLER’S RATIONALE

Seeking long term partner with:

- Real estate knowledge and track record in Germany

- Ability to asset manage and invest capital

Viewed the asset as a non-core part of portfolio

Short lease length

Willing to sell substantially below replacement cost

Willing to take a write down

Prepared to provide new financing

MANAGER’S STRATEGY

Structured transaction

Tap into strength of singletransaction market

Limit risk by receiving disposition fee senior to the senior lender

Value add

Negotiate lease extension

Decrease vacancy

Secure financing

Value add

Extend lease terms

Lease vacant space

Exit via institutional market

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Creatively Structured Transactions

LOCATION Boston, MA Minneapolis, MN Washington, D.C.

ASSET TYPE Loan-to-own office building Mortgage collateralized by Class-A retail asset

Mezzanine loan

SELLER Two banks Asset manager Bank


Loan maturity; loan couldn’t be repaid in full

Borrower defaulted on payment and went into foreclosure

Senior and mezzanine loans went into maturity default



Foreclosed at significant discount to prior owner’s basis

Reposition as premier office address

Manage tenant rollover


Recapitalized an overly leveraged, high quality asset

High unlevered debt yield


Sourced off-market through relationship with lender

Loan acquired at significant discount to face value

Generating good income

Additional upside in residential development rights

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Debt And Equity Opportunities

LOCATION Tokyo, Japan Hong Kong, China Tokyo, Japan

ASSET TYPE Loan acquisition with access to large hotel portfolio with sale-leaseback structure

Underperforming officebuilding

Small portfolio of mixed-use assets

SELLER Japanese bank Hong Kong listed property development and investment company

Distressed seller


Selling performing loan after borrower was unable to refinance the loan

Rebalancing of assets for balance sheet purposes

Bank forced sale of highly leveraged asset and provided financing to higher quality borrower



Acquire performing loan at significant discount

In-place, contractual cash flow

Reduce risk by using a leading hotel operator

Value add

Renovation

Reposition to boutique, managed office

Increase rental rates

Exit to local, core-plus investor

Value add

Manage near term lease rollover

Stabilize the portfolio

Secure financing

Identify a buyer

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Keys To Success

18

Understand local/regional market dynamics

Recognize real estate value

Remain cognizant of supply and demand dynamics

Real Estate Knowledge

Utilize modest leverage and sound borrowing practices

Achieve significant discounts through critical mass

Understand complex financial structures

Run an efficient bidding process

Maintain credibility and have realistic pricing expectations

Financial Know How

Manage and increase property cash flow

Maintain and develop deep tenant relationships to enhance leasing and income

Improve control over outcome and cost through vertical integration with in-house renovation, repositioning, and construction expertise

Build relationships with lenders, buyer, and sellers

Operational Skills

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METROPOLITAN REAL ESTATE EUROPE, LLP

[email protected]+44-207-182-4777+44-207-182-4775

METROPOLITAN R ESTATE EUROPE, LLP · METROPOLITAN REAL ESTATE EUROPE LLP PRIVATE & CONFIDENTIAL Experience Access Diversification 3 “Lloyds and AIB selling off their distressed

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