6th western borrowers n investors mezz loans and distress debt 26 march09

By: Scott L. Podvin, Managing DirectorThe Crest at Waterford Lakes, [email protected]://www.linkedin.com/in/sp0dvinTel: (305) 793-5762; Fax: (305) 665-3971

Scott L. Podvin: Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed Real Estate Debt – April 27-28, 2009

UPDATE: TARP AND GOVERNMENT LIQUIDITY

FACILITIES9:45 Scrutinizing Government Bailout and Liquidity Facilities: What Will They Mean For Real Estate Mezzanine Financing?

• Examining the Treasury/Obama Administration's initiatives to relieve balance sheets and the capital markets. What signals have been given about the Administration's plans for managing the "rescue" funds? • Is a bailout for Commercial Real Estate a good or bad idea? Why? • Will TARP recipients begin shedding troubled loan assets in 2009? • Will the lack of credit encourage Opportunity Funds to originate mezzanine-like debt? • What will TARP ultimately mean for the Real Estate Mezzanine loan industry? • Fed Bad Bank: How will it operate? How will they deal with the bad paper? What is the time frame? Comparing and contrasting with the RTC • What will be the role of regulators in the new economic landscape? • Why are certain banks refusing TARP money? Are community banks discriminated against in favor of money-center banks when it comes to bailouts? • Why is credit so scarce after billions of TARP dollars were put to work? • How will an extended recession affect local, regional and money-center banks?

Moderator: Mark Grinis, Partner, Ernst & Young LLP

Panelists: Richard K. Hollowell, Managing Director, Alvarez & Marsal Real Estate Advisory Services, LLC Scott L. Podvin, Managing Director, The Crest At Waterford Lakes, LLC Mark Landau, Managing Director, GoldenBridge Advisors Jay N. Rollins, President, JCR Capital Chad Robins, CEO - North Amercia, Opportune Stuart Boesky, Chief Executive Officer, The Pembrook Group, LLC

• US deals drop from 154 to 99; UK deals fell from 74 to 50; FASB Revises rules

• Securitization trusts hold 1.5T of subprime and alt-A loans, $400B of which are delinquent

• Growth expected to resume early 2010, IF successful resolution to banking crisis

• 742,000 jobs cut in March and 706,000 in February.

• Mexico seeks $47Bn credit line from IMF

• Capital Markets are closed• European Recession Deepening and

UE rising: now at 8.5%• Europe's recession risks lasting into 2010• European Central Bank's revises down its

2010 growth forecast for eurozone from 1% to zero.

• 3 European governments have fallen - in Belgium, Latvia and Iceland, which is not a EU member but could soon apply to join – IMF called in for Hungary, Romania and Latvia.

• Europe needs a unified front on the economic crisis.

• WORLD BANK FOUND 17 OF THE G20 HAVE IMPLEMENTED 47 MEASURES SINCE LAST G20 SUMMIT WITH A PROTECTIONIST AGENDA

• IMF is expected to borrow $100Bn from Japan and may even issue bonds, an unprecedented step in its 64-yr history

• Russia to supervise a consolidation plan that would see the number of banks cut from 1,100 to 500.

• Global financial tsunami batters Hong Kong, as it falls into recession

DIRE OUTLOOK FOR WORLD ECONOMY

Scott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed Real Estate Debt -- April 27-28, [email protected]://www.linkedin.com/in/sp0dvin

3

12mm pple in US looking for work

BIG DEBT • By 2012, the ratio of gross public debt to gross

domestic product could be:• 117% in Italy; • 97% in the US; • 80% in France; • 79% in Germany; & • 75% in the UK. • 224% in Japan



*The chart (left) shows the flow of consumer credit by type in 2007 & 08. Securitized lending took a U-turn, $22Bn in ‘07 to $28Bn in ’08

*Lending by finance companies turned negative as well, -$7 billion in 2008.

*Tight credit conditions are the primary drag on consumer credit; and therefore, spending is collapsing.

RED INK OF A GREYER FUTURE


NATIONALIZING THE BANKING SYSTEM

Total losses now exceed impact of RTC

Scott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed

Real Estate Debt -- April 27-28, [email protected]

http://www.linkedin.com/in/sp0dvin

NATIONAL DEBT FORECASTS


BEAST OF BURDEN

US• US has seen forecasts for

its national debt as a share of gross domestic product in 2012 rise from 66 per cent to 97 per cent

BRITAIN• Britain has seen a bigger

increase in its forecast debt burden, from 43 per cent to 75 per cent


FORECAST FOR DEFAULTS AND BANKRUPTCIES

• Debt defaults increase at double-digit rate next 24 months

• 160 to 190 defaults in 2009• B/n 120 and 140 in 2010• Typically, 2 out of 3 to 3 out of 4 defaults end in

bankruptcies within 3 months. • Thus, we are looking at:

– 150 bankruptcies in 2009 and – 100 in 2010.

according to a bi-annual study in November 2008 by Bain Corporate Renewal Group.


ASSET BUBBLE W/ CRATERING VALUES

• U.S. home owners lost a cumulative $3.3T in home values in 2008, according to Zillow.

• Since 2006, more than $6.1T in "value" has evaporated.

Recipe for real estate bubble: slice of mbs into a bowl of cdos and (add) another layer of cdos on top


THE GRAND PLAN


Public Law 110-343/HR 1424

SON OF TARP IS BORNE• Effective October 3, 2008, this 169-

page law created a $700 billion dollar Troubled Assets Relief Program under the Emergency Economic Stabilization Act of 2008 (division A), and also enacted the Energy Improvement and Extension Act of 2008 (division B), Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (division C)


WHAT’S LEFT

• 81% of $700Bn in TARP is committed.• $135Bn of TARP funds available–$22Bn of which will go to auto industry


PARTIAL PAYMENTS COMING IN

• Four banks paid back TARP money:1. Signature Bank of NY repays $120MM2. Old National Bank of Indiana repays

$100MM3. Iberiabank of LA paid back $90MM4. Bank of Marin Bancorp of Novato, Calif

rapid $28MM


TALF• Of $700Bn of TARP money, $100Bn

earmarked for TALF; • NY Fed. Res. Bank uses $100Bn as

collateral on loans to be made to investors in asset backed securities (ABS) such as CMBS.

• Facility expires 12/31/2009.


TALF’S “ELIGIBLE BORROWERS”

Any U.S. Co. owning “eligible collateral” w/ primary dealer acct.

An entity is a U.S. company for TALF if: – (i) Business entity organized under US laws; or – (ii) U.S. branch or agency of foreign bank (other than a

foreign central bank) that maintains reserves with a Fed. Res. Bank; or

– (iii) U.S.-organized investment fund managed by US investment manager.

• NO entity controlled by a foreign gov’t or is mngd by an investment mngr controlled by a foreign gov’t.


WHAT IS AN “INVESTMENT FUND” FOR PURPOSES OF THE TALF “ELIGIBLE

BORROWER” DEFINITION?

An investment fund is any type of pooled investment vehicle, including a:

1. Hedge Fund, 2. Private Equity fund, and3. Mutual Fund, or 4. Vehicle that primarily or exclusively

invests in eligible collateral and borrows from the TALF.


TALF -- LOAN TERMS AND STRUCTURE

• Non-recourse loans • 3-yr term• Not subject to mark-to-

market or re-margining requirements.

• pre-payable (in whole or in part)

• No substitution of collateral


http://www.ft.com/cms/s/0/42f10f16-1a16-11de-9f91-0000779fd2ac.html

TALF: RAY OF HOPE ON TOXIC ASSETS

• To start the process, banks will identify to the FDIC the assets, typically a pool of loans, that they wish to sell.

• Assets eligible for purchase will be determined by the participating banks, including primary regulators– FDIC & Treasury.

• FDIC retains contractors to analyze loan pools and determine the level of debt to be issued by the PPIF that it is willing to guarantee.

• $10MM -- min. loan amt

• NY Fed assesses admin fee = 5 bps of loan amt


TALF’S ELIGIBLE COLLATERAL• ABS with AAA ratings • Eligible small business loan of ABS. • ABS cleared through Depository Trust Company.• Substantially all credit exposure exposed to U.S.-

domiciled obligors.


ELIGIBLE COLLATERAL CONT.-Underlying credit exposures of eligible ABS must be: (1) auto loans, (2) student loans, (3) credit card loans, (4) equipment loans, (5) floor-plan loans, (6) small business loans fully guaranteed by the U.S. SBA, or(7) receivables related to residential mortgage servicing

advances (servicing advance receivables).


TIME FOR A MARKET STABILITY REGULATOR


Addressing The First Component of Regulatory Reform: Systemic Risk

• A Single Independent Regulator With Responsibility Over Systemically Important Firms and Critical Payment and Settlement Systems

• Higher Standards on Capital and Risk Management for Systemically Important Firms

• Registration of All Hedge Fund Advisers With Assets Under Management Above a Moderate Threshold

• A Comprehensive Framework of Oversight, Protections and Disclosure for the OTC Derivatives Market

• New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals


Doing Deals Today & Devising Your Business Strategy For The Next 12 Months

• A Borrowers' Perspective– Among the questions to be discussed: – Who are you borrowing from? – What Real Estate are you investing in? – How did you get Lenders interested in your

deal? – What terms and pricing are you seeing? – What do you want to see that will

realistically increase returns? – Where do you see terms/pricing going in the

next year? Mezzanine or equity: Which is easier?

– What are the key issues and barriers for prospective Borrowers at this time?

– What are your business plans for the next 12 months?

– How does this compare to the last 12 months?

– What deals are you actively seeking?

• Moderator: Norman Radow, President, The RADCO Companies

• Panelists: • Michael F. Severson, VP, A&D,

Bixby Land Co • Scott L. Podvin, Managing

Director, The Crest at Waterford Lakes

• Bob Sonnenblick, CEO, Sonnenblick Del Rio

• Christopher Bley, Principal, Turnkey Group


http://208.177.25.4/photos/38601/38601-002-028f.jpg

NOW IS THE TIME TO RAISE A FUND


VULTURES CIRCLING – EYEING THEIR PREY

• In 2008, $87Bn was raised by 87 opportunistic or debt and distressed debt focused funds.

• Of the $87Bn, U.S. accounted for $47Bn and Europe for $15.8Bn

• $56.25Bn raised in 2006• $73.75Bn raised in 2007

• Benson Elliot Real Estate Partners III, a pan-European distressed real estate fund. The fund managed to raise around €510 million, officials at the firm said.


FUND RAISING TIME• Invista, w/ £8.7Bn of AUM, launched

distressed property fund• MGPA, owned in part by Australia’s

Macquarie Bank, secured $3.9Bn in equity, giving it $15.6Bn of potential buying power.

• MGPA committed $2.2Bn to investments in:– Singapore, - Japan, – China and -Thailand.


OTHERS ARE WAITINGON THE SIDELINES

COMPELLING STORYConsider explosive growth of RE-oriented private equity: • Apollo• Blackstone• Colony Capital• Carlyle Group• Ramius• Bain Capital• SAC Capital• Recent Deals• London Opportunity Fund• Stamford’s Opportunity Fund– Source: Kingsley Associates and Institutional Real Estate, IncScott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed Real Estate Debt -- April 27-28, [email protected]://www.linkedin.com/in/sp0dvin

REITS RAISING MONEY TOO:DON’T BE THE LAST ONE TO THE PARTY

• 2 BIG DEALS1. Simon Property Group, Inc. (“SPG”) announces:

1. closed equity and debt offerings. 2. underwriters of the equity offering exercised their over-

allotment option in full. 3. Sold 17,250,000 shares of common stock at $31.50 per share. 4. SPG’s operating partnership completed its offering of $650

million aggregate principal amount of its 10.35% senior unsecured notes due 2019.


DEALMAKERS

2.AMB Property Corp. (AMB) priced 41.25 million shares, with an option to purchase up to 6.1 million, at $12.15 per share. Proposed closing date is May 30th.

• Both Simon and AMB are selling equity at heavily depressed prices – AMB is trading near 8-year lows and SPG near 10-year lows.


http://seekingalpha.com/symbol/amb

WHO IS SELLING• SWFs• HEDGE & OPPORTUNITY FUNDS• REITS• PRIVATE EQUITY FIRMS• PENSION FUNDS• ENDOWMENTS• SPECIAL SERVICERS/MASTER SERVICERS• REAL ESTATE COMPANIESScott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed Real Estate Debt -- April 27-28, [email protected]://www.linkedin.com/in/sp0dvin

SIZE OF SWFS

-AUM of SWFs reaches $3.8Tr

-Add’l $5.5Tr in other sovereign investment vehicles

-$6.1Tr official foreign exchange reserves.


SUPER SEVEN SWF FUNDS:

1. Abu Dhabi Invest Authority ($875 Bn);2. Gov’t Pension Fund Norway ($350Bn); 3. Singapore Investment Corp. ($330 Bn); 4. Kuwait Investment Authority ($250 Bn); 5. China Investment Corp. ($200 Bn); 6. Singapore's Temasek Holdings ($159.2

Bn); and 7. Stabilisation Fund of the Russian Fed.Scott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed Real Estate Debt -- April 27-28, [email protected]://www.linkedin.com/in/sp0dvin

HEDGE FUND CENTRAL

2008• 200 hedge funds hold assets worth

more than $1Bn• 22,350 distinct investment vehicles

– 15,150 single manager hedge funds

– 7,200 funds of hedge funds• Total assets $1,330Bn

2007• 350 hedge funds held asssets worth

moreh than $1Bn • 22,640 distinct investment vehicles

– 15,250 single manager hedges– 7,400 funds of hedge funds

• Total assets $1,760Bn

• Per Trac Financial Solutions


HEDGE FUND LIQUIDATIONS• Industry Managed approx. $2.5T• No. of hedge funds managing more than

$1Bn fell by more than 40%• 1,471 funds, or roughly 15% of the hedge

fund industry, were liquidated• More than 775 funds closed in the final

quarter of 2008• Per Trac Financial Solutions


THE GREAT LIQUIDATION

• $200Bn to be withdrawn in 2009

• $155Bn was taken out in 2008

• This cycle will likely see more liquidations than in the last three combined, said Steven Smith, global head of leveraged finance at UBS in NY.


WHO IS LIQUIDATING

• Drake Management, • Centaurus Capital, • London Diversified Fund Management • Basso Capital, • Ferox Capital Management• Norwich Union’s £2.8Bn unit-linked vehicle forced

to close• The Man Group, the world’s largest publicly

traded hedge fund manager, said net outflows by institutions were about $4.2Bn


HARD TIMES HIT HEDGES

• Fortress Investment Group places restrictions on redemptions.

• Blackstone• Och-Ziff Capital Management • Cerberus and • Citadel are facing tougher times, as well.


WHO IS GROWING THEIR ARMY

• Highbridge Capital Management, once the world’s biggest hedge fund, had a $1Bn of net inflows this year, including $225MM from JPMorgan –ends qtr with $20Bn AUM


TARGET PRACTICEHIT THE HEDGE

Funds without independent admins1) ESL Investments, run by

Eddie Lampert2) Renaissance Technologies, run

by billionaire Jim Simons3) Chicago Citadel, run by Ken Griffin4) SAC CAPITAL, run by

billionaire Steven Cohen5) Cerberus6) HBK Capital, Dallas, Tx7) Caxton Associates, run by

billionaire Bruce Kovner

These are the targets!!!



BOOM IN SECONDARY MARKET FOR HEDGE FUNDS

• 100s of funds freeze withdrawals• Investors need cash• Investors offer stakes at deep discounts• PERMAL, hedge fund specialist w/ €25Bn AUM,

ready to snap up secondhand stakes at a discount

• HFX Capital Mngmnt and VEGA Asset Mngmnt raising $1Bn fund to purchase secondary stakes in hedges


CDS CLEANING SERVICE


MASSIVE SALES1.RBS Hires Ubs To Sell £500mm Of Invstmnts In Private

Equity Funds2.$134bn Of Private Equity Assets On The Balance

Sheet 5 Of 6 Big Money Banks And Aig3.AIG selling Tokyo landmark near Imperial

Palace. 4.GE is a seller5.Japanese companies start selling properties to

meet financing needs, says Eiji Sakaguchi, head of real estate banking at Morgan Stanley in Japan

Source: super return conference Berlin, GermanyScott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed Real Estate Debt -- April 27-28, [email protected]://www.linkedin.com/in/sp0dvin

Private Equity Fund Diagram


http://upload.wikimedia.org/wikipedia/commons/a/a3/Private_Equity_Fund_Diagram.png

MATURING & ROBUST 2DRY MARKETFOR SELLERS OF PRIVATE EQUITY ASSETS

• Types of Secondary Transactions

2.1 Sale of Limited

Partnership Interests

2.2 Sale of Direct Interests


FOUR POCKETS OF DEMAND1.Opportunity Funds that have been established to

buy real estate equity2.Newer Opp. Funds that have been created as

dedicated debt investors3.Private Equity looking at real estate debt4.Real Estate Companies buy back their own debt

or debt of others


REITS UNLOAD

• REITS among 1st to sell properties

• Dow Jones Equity ALL REIT Total Return Index, which tracks 113 stocks, posted a negative total return of 32% in first quarter of 2009.

• Hotel Reits – down 38%• Retail REITs down 39%• Health Care REITS down

28%• Self Storage REITs down

32%


BLUE HORESHOE LOVES DISTRESS

• Consider the dramatic tilt in institutional investors’ (2007) allocations:– $44.5 billion targeted to domestic real

estate– $36.3 billion to private real estate• $24.7 billion to non-core (i.e., value-added and opportunistic),• $11.6 billion to core (i.e., stabilized apartment, industrial, office & retail)



THIS FUND SHALL FOCUS ON PURCHASING THE FOLLOWING TYPES OF ASSETS/DEBT:

City-CoreDevelopment

Projects

Strategically located developments, located in the centre of a city, being large-scale and multi-phase developments typically consisting of residential, hospitality, office, retail, entertainment and cultural properties with a blend of historic restoration and modern architecture.

Integrated Residential

Development Projects

Large-scale multi-family residential communities in secondary and tertiary markets located on main and main where we can implement a capital improvement program to push the rents. We will be prepared to purchase asset/debt on an all cash basis, but once the community has been stabilized, we shall lever it or dispose of the asset, triggering a repayment event.

PODVIN DEVELOPMENT GROUPRAISING $$100MM FUND TO

PURCHASE REAL ESTATE, DISTRESSED/OPPORTUNISTIC ASSETS

Broken Condos & Conversions or

Partially Constructed

Communities

There will be tremendous opportunities in busted condos and conversions while value add plays will also be easy to find. Likewise, there will be many projects with incomplete construction that we will be able to pick up on the cheap, complete construction and reposition the asset to create a vibrant working, walkable (with bike paths and all), sustainable and living community for working class people.

WE ARE NOW RAISING A $100,000,000 FUND TO PURCHASE DISTRESSED SELLER’S ASSETS

Scott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed Real Estate Debt April 27-28, [email protected]://www.linkedin.com/in/sp0dvin

Investors1. Institutional Investors 2. Pension funds 3. Insurance companies 4. Endowments 5. Investment Banks 6. Commercial Banks 7. Fund of funds 8. Hedge Funds9. High net worth individuals 10. Family offices

11. Sovereign wealth funds


Our Preferred Shares pay cumulative preferential cash distributions at an annual rate of 9%.

INVESTORS


http://en.wikipedia.org/wiki/File:2005_Penny_Obv_Unc_D.png

http://en.wikipedia.org/wiki/File:Crystal_Clear_app_kspread.png

WHAT WE DO

• We identify real estate opportunities that generate superior risk-adjusted returns while ensuring capital preservation.



CORE BUSINESS FOCUS

1. Identification;2. Acquisition; 3. Ownership; and 4. Operation of multi-family residential and

hospitality real estate properties.



TYPES OF INVESTMENTWE MAKE THE FOLLOWING TYPES OF INVESTMENTS:

• single assets and portfolios;

• development or redevelopment projects;

• real estate operating platforms; and

• structured loans and partnerships.

DEAL SIZE• The ideal deal size will

start at US$2-25MM, with a minimum equity investment of US$5 million.

• We have capacity for large transactions as a result of co-investment and partnerships with our broad institutional client base.


Investment Objectives(1)acquire neglected multi-family

residential &/or hospitality properties; and

(2) increase profitability thru: (a) providing superior property management, (b) improving appearance & environment;(c) implementing renovation strategies; and,(d) cross-selling ancillary services


INVESTMENT APPROACH

• Conduct thorough and comprehensive research • Perform ongoing review• Commit to strong on-the-ground presence• Add value by applying focused leasing & expense

reduction strategy • Undertake development or redevelopment plans• Create a tailored plan for each investment• Identify key milestones and profit drivers to achieve the

targeted result. • Capital and financial structuring.



OUR PHILOSOPHY• DO THE RIGHT THING: Our core ethos is to "do the

right thing” -- responsible investment. • ALIGNING INTERESTS: To deliver results, we

strategically structure the organization and employment compensation plans.

• PARTNERING: Working together (within our business and with clients & service providers), we achieve far more than on our own.

• DELIVERING INVESTMENT EXCELLENCE: delivering investment excellence lies at the heart of building client confidence.



OUR STRATEGY

• Attract and retain investors;• Continuous research and innovation;• Deliver stable platform for growth;



REAL ESTATE FUNDS – THE ANATOMY OF THE DEAL




What to Look for in a REAL ESTATE FUND

• Experience• Skills• Contacts• Practical problem solving• Reputation• Team • Capacity• $$ Balance Sheet $$

Scott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed

Real Estate Debt -- April 27-28, [email protected]



Alignment of Interests: FUND & REAL ESTATE COMPANY

• Fund Objectives• Fund Life• Leverage and Financing • Guarantees• Management Style and Control• Tax Considerations• Dealing with Unexpected Issues

Scott L. Podvin: IMN’s 6th Annual Western Borrowers & Investors Forum on Real Estate Mezzanine Loans & Distressed Real Estate Debt -- April 27-28, 2009

[email protected]://www.linkedin.com/in/sp0dvin

THE CHEMISTRY COUNTS


ABOUT US• PDG is an independently managed private equity real estate

investment advisory company focused on real estate investment in the U.S., Europe and Asia.

• Our managed investments include development and redevelopment projects, joint-ventures and real estate operating companies in the office, retail, industrial, residential and hotel sectors.

• We combine local knowledge of our real estate professionals with broad global perspectives to develop our strategies and identify investment opportunities.

• Our team of real estate professionals come from diverse backgrounds, with the full range of skills required to invest in and manage real estate and advise real estate funds. Our specialists apply their skills to ensure that we drive every one of our investments to perform at its optimum.

• PDG is independent of any broader financial services group. We can invest funds on behalf of a number of different organizations, including pension funds, insurance companies, government entities and financial institutions, as well as charities and endowments.


Take Care of Your Family

• Scott L. Podvin, Managing Director of The Crest at Waterford Lakes, LLC

• www.TheCrestLife.com• [email protected]• Cell: (305) 793-5762• Fax: (305) 665-3971

6th western borrowers n investors mezz loans and distress debt 26 march09

Documents

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