urban land institute – fall 2010

Urban Land Institute – Fall 2010

Deleveraging and Recapitalization of Commercial Real Estate

November 4, 2009

2

ULI – Deleveraging Commercial REULI – Deleveraging Commercial RE

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2009E 2010E 2011E 2012E

$ b

illio

ns

Banks Insurance Co's CMBS Total*

$290.0$322.8

$353.6

$397.0

Best Case

Originations1

Cumulative Shortfalls 2009-2012: $629 billion

$106.4b

Shortfall

$139.2b

Shortfall

$170.0b

Shortfall

$213.4b

Shortfall

High Volume of Near Term Debt Maturities

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.

Source: Wachovia, Commercial Mortgage Alert

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.

3


Aggressive Underwriting Standards of the Past Pose Significant Challenges

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

$5.67 $5.68 $5.94 $6.45 $6.88 $7.23$8.32

$10.14

$12.78$14.38

$17.11

$20.30

$24.52

$37.05

$40.53

$47.87$49.92

6.15%5.84%

4.96%

4.49%

2.95%

2.48%

2.04%1.71%

1.51%1.20%

0.97%0.85%0.80%0.75%0.69%0.65%0.65%

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

($ in

Billi

ons)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

UPB % of CMBS

Source: RealpointSource: Wachovia Securities

Cumulative 2004-08:

$122 billion

4


The Need to Deleverage May Force Sales and Recapitalizations

Original Equity: $20MM (gone)

Debt Written Off: $15MM

Swap Breakage Cost: ?

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

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% (+/-).

5


Rebound of RMZ Helping REITs Recapitalize

MS PRICE Index (RMZ) 2007 - 2009

300

400

500

600

700

800

900

1000

1100

1200

1300

Jan-0

7

Mar

-07

May

-07

Jul-0

7

Sep-0

7

Nov-07

Jan-0

8

Mar

-08

May

-08

Jul-0

8

Sep-0

8

Nov-08

Jan-0

9

Mar

-09

May

-09

Jul-0

9

Sep-0

9

1 Assumes 45% leverage at January 2007.Source: Bloomberg

~45% Leverage

~60% Leverage

51.3%

28.2%Asset Value1

RMZ

98.5% Increase from March

300

400

500

600

700

800

900

1000

1100

1200

1300

Jan-0

7

Mar

-07

May

-07

Jul-0

7

Sep-0

7

Nov-07

Jan-0

8

Mar

-08

May

-08

Jul-0

8

Sep-0

8

Nov-08

Jan-0

9

Mar

-09

May

-09

Jul-0

9

Sep-0

9300

400

500

600

700

800

900

1000

1100

1200

1300

Jan-0

7

Mar

-07

May

-07

Jul-0

7

Sep-0

7

Nov-07

Jan-0

8

Mar

-08

May

-08

Jul-0

8

Sep-0

8

Nov-08

Jan-0

9

Mar

-09

May

-09

Jul-0

9

Sep-0

9

1 Assumes 45% leverage at January 2007.Source: Bloomberg

~45% Leverage

~60% Leverage

51.3%

28.2%Asset Value1

RMZ

98.5% Increase from March

$521

$2,838 $4,445 $3,428$2,644

$1,145

$2,025 $890

$650

$6,004

$4,448

$3,294

$1,145

$2,319

$1,902$440$1,141 $642

$4,703

$13,375

$2,319

$491

$533

$580

$175

$14,388

$5,335

$7,137

$817

Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09(QTD)IPOs FOs Converts

REITS have raised approx. $23.8 billion of public equity capital YTD.

Real Estate Equity Issuance Volume by Offering Type1

6


9.8%

8.8%8.3%8.5%

7.1%

8.3%

6.2%

7.7%

7.4%7.5%

8.4%

9.6%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

CBL MAC SPG SKT TCO WDC

Private Market Estimate Implied Trading Cap Rate

With the increase in REIT prices over the past several months an arbitrage between public and private valuations has developed.

Especially for companies in the upper quartile, implied cap rates based on current trading prices are significantly below the estimated private cap rates.

REITs are building substantial currency to take advantage of upcoming opportunities.

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

Public vs. Private Valuation Arbitrage

Source: Green Street Advisors.

Public vs. Private Market Cap Rates

8.5% 8.6%8.6%

7.3%

9.3%

8.3%

8.6%

8.0%

7.2%7.6%

8.2%

7.1%6.8%

7.8%

6.0%

7.0%

8.0%

9.0%

10.0%

Mall

Apartm

ent

Health C

are

Indu

stria

l

Office

Self S

tora

ge

Strip C

ente

r

Private Market Estimate Implied Trading Cap Rate 9.9% 9.9%

8.9%

9.7%9.3%

8.0%

9.3%

7.8%

6.7%

8.4%

7.8%

8.3%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

DDR EQY FRT KIM REG WRI

Private Market Estimate Implied Trading Cap Rate

Average: 8.5%

Average: 7.5%

Average: 9.3%

Average: 8.0%

Average: 8.5%

Average: 7.8%

7


Real Estate Equity Capital Markets Remain Attractive for Issuers

REIT Forward FFO Multiples

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

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

Average: 11.0x

1997 2001 2002 2003 2004 2006 200720051998 1999 2000 2008 2009

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.

Real Estate Funds Flows

$6.8

$1.9

$6.4

$1.0

$4.7

$1.3

$0.0

$2.0

$4.0

$6.0

2004 2005 2006 2007 2008 2009 (YTD) N

et F

und

Flo

ws

($ b

illio

ns)

0

200

400

600

800

1,000

1,200

RM

Z

RE Fund Flows RMZ

8


5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

Yie

ld (

%)

REIT Unsecured Spreads & Issuance

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

Yie

ld (

%)

Source: Barclays Capital Live, Bloomberg.

DRE 15s, 7.50% Yield

PLD 14s, 7.75% YieldCLI 19s, 7.875% Yield

HPT 14s, 8.125% Yield

DRE 19s, 8.375% Yield

Yield curve based on Modified Adjusted Duration of 4.7 years

AVB 20s, 6.119% Yield

AVB 17s, 5.717% Yield

KIM 19s, 6.897% Yield

BDN 15s, 7.625% Yield

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.

The REIT Unsecured Market has Reopened

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

9


Rising Cap Rates for Core Assets?

8.7%

6.4%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

Jan-

08

Unlevered Returns (IRRs)

Long-term Baa

Unlevered Return Expectations on Real Estate vs Baa Rates

-100 bps

0 bps

100 bps

200 bps

300 bps

400 bps

Return Premium on Real Estate

Unlevered IRR Expectations Minus Baa Rate

As of 10/13/09

Ch

eapP

ricey

10


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

$46 $62 $75

$133

$198$236

$366

$81

$16

$0

$50

$100

$150

$200

$250

$300

$350

$400

2001 2002 2003 2004 2005 2006 2007 2008 2009YTDRetail Other

Source: Real Capital Analytics.

Limited US Sales Volume

40-50% of Post 9/11 &

Post Dot Com Bust Volume

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.

urban land institute – fall 2010

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