COMMERCIAL REAL ESTATE - A CHANGING LANDSCAPE

Murray Mccabe, Global Co-head, Real Estate Investment Banking

December 2009
STRICTLY PRIVATE AND CONFIDENTIAL
 Agenda

REIT market trends – What’s next? 1

Views from a commercial real estate lender – Is it getting better? 10

COMMERCIAL REAL ESTATE - A CHANGING LANDSCAPE

1
 Current state of the commercial real estate industry

Our current position appears to be at 6 o’clock–in the The next few years will be ugly…
midst of deleveraging and approaching the growth phase

Declines in property valuations will continue - likely to be more
severe than past cycles

Worsening operating fundamentals

Debt maturity problem is massive and refinancing will require

significant new equity
12

Banks are in de-leveraging mode and continue to write down
Frothy Decline phase/
valuation/ economic
assets
overleveraging/ uncertainty/job
speculation losses …refinancings and recapitalizations will be the theme…
phase
9 Systemic 3
decline in

Half of the maturing debt should be refinanceable through the
capital markets/ traditional debt markets—bank, CMBS, bond, insurance and GSE
Growth property values
phase

However, there may be up to $1 trillion of debt that will not qualify
REIT MARKET TRENDS – WHAT’S NEXT?

Deleveraging/ for refinancing, thus creating a potential $1 trillion ‘capital gap’

workout phase
6
March

This ‘capital gap’ will likely be filled through both permanent
2009
impairments and a massive re-equitization of the industry, which
will spur the creation of a new set of capital providers

… and the road to recovery has been delayed

November 2009

Wide disconnect exists between buyers and sellers

Creditors are pushing out maturity dates

Foreclosure process takes significant time with crowded courts

2
 A substantial recapitalization of the real estate industry is required

$500 billion of commercial real estate debt matures annually now through 2012

Banks remain over-committed to real estate, undercapitalized and limited ability to fill any re-financing gap

Half of the maturing debt should be refinanceable through the traditional debt markets—bank, CMBS, bond,
insurance and GSE

However, there may be up to $1 trillion of debt that will not qualify for refinancing, thus creating a potential $1
trillion ‘capital gap’
‘Capital Gap’ Solutions

This ‘capital gap’ will be filled

through permanent impairments Public PPIP
Equity SWF TALF
and a massive re-equitization of the
Follow-Ons Permanent
industry and spur the creation of a Impairment
new set of capital providers
New
IPO Opp Pension
Funds Entrants
REIT MARKET TRENDS – WHAT’S NEXT?

New Debt
Finance Blind
Companies Pool
Vehicles
$2 Trillion
Traditional
Debt Market
Permanent
Impairment Refinancing

3
 Opportunities

We’ve seen this movie before and know that one person’s distress is another’s opportunity

Further deleveraging required

Refinancing of existing debt

Buyside opportunities to emerge

Non-traditional financing markets are forming

An IPO wave?

Industry consolidation will occur

REIT MARKET TRENDS – WHAT’S NEXT?

4
 Balance sheet repair has been the name of the game

REIT
REIT Debt/EBITDA
Debt/EBITDA Real
Real estate
estate equity
equity issuance¹
issuance¹ ($bn)
($bn)
$18.2
$15.4
$12.6
7.6x $8.1 $9.2 $9.1
$7.2
7.5x $4.7

7.2x
7.0x 2002 2003 2004 2005 2006 2007 2008 2009TD
6.9x
Source: SNL
6.7x ¹ Excludes mortgage REITs

6.5x 6.5x
Real
Real estate
estate bond
bond issuance
issuance ($bn)
($bn)
$18.2
$15.8 $16.4
$12.4
$10.3
5.8x $8.7 $8.3
$3.4
5.6x

5.3x 2002 2003 2004 2005 2006 2007 2008 2009TD

REIT MARKET TRENDS – WHAT’S NEXT?

5.1x
Source: SNL

4.8x
Real
Real estate
estate convert
convert issuance
issuance ($bn)
($bn)

$11.8
$7.6

$1.7 $1.5 $1.9 $2.0 $2.2

LTM 2009
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

$0.4

2002 2003 2004 2005 2006 2007 2008 2009TD

Source: SNL Source: SNL

Note: LTM as of 06/30/2009

5
 REIT follow-on issuance has been the primary source of capital

U.S. 1
U.S. REIT
REIT follow-on
follow-on issuance
issuance 2009YTD
2009YTD1 Marketing
Marketing type
type
Volume ($bn) Wall-crossed (19%)
$5,674 2+-days (5%)
Avg deal size ($mm): $548
Avg deal size ($mm): $98
% mkt cap: 31%
% mkt cap: 53%
ADTVx: 8x
ADTVx: 69x
$3,656 % file/offer: -7.0%
% file/offer: -13.0%

$1,912
$1,387 $1,624
$1,154
$642
$286 $123
$101
1-day (22%) Overnight (54%)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Avg deal size ($mm): $180 Avg deal size ($mm): $250
# of deals 2 1 3 15 13 6 1 6 10 3 % mkt cap: 44% % mkt cap: 20%
Avg deal size ($mm): $143 $101 $462 $378 $281 $319 $123 $192 $162 $214 ADTVx: 33x ADTVx: 13x
% of mkt cap 13% 5% 26% 23% 36% 28% 99% 16% 34% 21% % file/offer: -13.0% % file/offer: -7.3%
% dis. file/offer -6.1% -1.9% -8.2% -6.0% -10.9% -11.1% -13.5% -7.3 -9.8% -7.6%
% offer/30-day -14.1% -28.3% 35.5% 15.6% 8.1% -5.5% 23.2 8.3% 0.1% 2.5%

Price 2 3
Price performance
performance comparison
comparison2 Key
Key issuance
issuance statistics,
statistics, 2009YTD
2009YTD3
REIT MARKET TRENDS – WHAT’S NEXT?

All offerings > 25% mkt cap <25% mkt cap
Large size – Average of 25% of market cap
issued

33.1%
High demand – Average deal upsize of 28%

28.4% 25.4%

Tight discount – Average file to offer discount
11.3%
8.9% 5.6% of 8%

Institutional subscription – Average of only

-9.0% -6.9% 15% retail
-11.8%

Limited market risk – 54% were overnight
File/offer Offer/current RMZ-adj. offer/current placements

Source: Dealogic as of 10/30/09
Positive price impact – Average of 10% plus

1
Excludes offerings <$40mm, block trades, closed-end funds, units, and mortgage REITs
2
Price performance excludes index inclusion trades price appreciation post issuance
3
Based on J.P. Morgan estimate

6
 $18 billion of equity issuance, more will follow

$18 billion of common (10% of the sector’s market cap) across 60 deals, representing most property types

While dilutive, issuers have enjoyed 1x-2x FFO multiple expansion

De-leveraging to date is a positive, but there is more to go

Current Target Conclusion

Debt/EBITDA: 8x Debt/EBITDA: 4-6x 25% reduction in leverage or $40–60bn new equity

Select
Select REIT
REIT equity
equity issuances
issuances
Pricing Performance Valuation Debt / Market Cap
Implied Current Pro
Pricing Size % mkt Discount Offer/Current Cap Rate Implied Pre- Forma
Date Issuer ($mm) cap (File/Offer) (RMZ adj) at Issue1 Cap Rate1 Offer at Offer Current
10/22/09 Macerich Co 400 17 -2.7 7.0 8.5 8.4 73.8 69.5 70.5
09/15/09 Cousins Properties Inc. 334 88 -10.7 -11.8 10.0 9.5 64.2 48.3 49.7
09/01/09 Health Care REIT 372 8 -5.4 10.1 7.8 7.4 35.0 32.4 30.3
06/09/09 CBL & Associates 400 82 -20.6 51.5 10.2 9.8 85.0 82.4 72.7
06/05/09 Boston Properties Inc 863 14 -5.7 25.3 7.3 6.6 53.2 46.7 45.6
05/27/09 Brandywine Realty Trust 254 46 -8.8 67.8 10.9 9.4 79.3 73.4 65.7
05/12/09 SL Green Realty Corp 406 34 -5.8 103.3 8.9 7.5 79.4 74.9 64.0
REIT MARKET TRENDS – WHAT’S NEXT?

05/07/09 Simon Property Group 1,150 9 -8.8 37.7 8.9 7.6 59.3 56.9 51.1
05/05/09 HCP, Inc. 440 8 -7.9 41.0 8.1 6.6 58.9 57.0 40.3
04/24/09 Host Hotels & Properties 500 14 -7.0 60.2 7.8 7.9 61.4 56.1 49.9
04/22/09 Vornado Realty Trust 742 11 -8.5 41.3 8.6 7.4 63.1 61.7 54.4
04/21/09 Regency Centers 325 14 -4.7 10.9 9.3 8.1 51.6 49.2 46.6
04/17/09 Weingarten Realty 459 37 -9.1 44.2 10.1 8.2 63.7 57.4 44.9
04/16/09 Duke Realty Corporation 575 51 -9.4 55.9 11.0 9.5 67.1 60.1 57.3
04/08/09 ProLogis 1,154 65 -3.2 89.8 10.1 8.4 83.7 72.7 67.3
04/07/09 Ventas Inc 312 9 -6.0 67.7 9.1 7.0 44.1 44.0 29.3
04/03/09 Kimco Realty Corp 747 39 -5.2 92.4 11.1 8.6 73.5 64.2 55.5
03/25/09 AMB Property Group 576 48 -7.7 90.9 11.1 8.1 71.3 64.1 47.7
03/20/09 Simon Property Group 543 7 -8.4 118.5 10.3 7.6 69.6 68.1 51.1
Mean – All Deals YTD2 276 28% -9.0% 33.8% 9.4% 8.1% 65.1% 60.0% 52.3%
Source: Dealogic as of 10/23/09; excludes offerings <$40mm, block trades, closed-end funds, units and mortgage REITs
1 J.P. Morgan estimate

7
 Looking ahead at the REIT market

2010
2010 year
year of
of transition
transition
Fundamentals
Fundamentals expected
expected to
to remain
remain challenging
challenging Property
Property values
values to
to bottom
bottom ~40%
~40% below
below peak
peak
Same
Same Store StoreinGrowth
Growth in (%)
REIT NOI REIT NOI Property value transaction indices [December 2000 = 100]
7%
CPPI/RCA repeat-sales index
5% 200 MIT transaction-based index

3% 175
150 (40)%
1%
125
(1)%
100
(3)% 75
(5)% 50
2003

2004

2005

2006

2007

2008

2009
1999

2000

2001

2002

2010F

2011F
1984 1989 1994 2000 2005 2010

Source: FactSet, SNL Financial Source: Real Capital Analytics, MIT

Strongest
Strongest balance
balance sheets
sheets positioned
positioned for
for success
success RMZ
RMZ likely
likely to
to trade
trade flat
flat
REIT Debt-to-EBITDA ratios
REIT MARKET TRENDS – WHAT’S NEXT?

Median NTM 25th percentile Historical performance Current price

NTM 75th percentile NTM 90th percentile
11x 1,400
Solvency
10x issues are 1,200
9x paramount
1,000
8x Mgmt. still
7x playing 800 50% decline
defense 600 (+10%)
6x 600 from 01/01/07 543
Sustainable
5x 420 (-22%)
leverage: 400
4x mgmt. on the
3x offensive 200
225 (-59%)
2x 0
1999 2001 2003 2005 2007 2009 Jan-07 Oct-07 Aug-08 May-09 Mar-10 Dec-10

Source: FactSet Source: FactSet

8
 On the verge of a REIT IPO wave?

Historical 1
Historical real
real estate
estate IPOs
IPOs (1980–Present)
(1980–Present)1
Capital raised ($mm) NCREIF capital appreciation index
Total capital raised from real estate IPOs Capital appreciation index NCREIF
Economic downturn NAREIT price index
Number of US IPOs > $50mm
0 0 1 2 2 14 11 8 7 0 0 3 6 48 37 12 14 29 15 1 1 0 6 8 34 11 8 8 0 1
10,000 325

9,048

8,912
9,000 300

8,000 275

6,527

6,468
7,000 250

6,000 225

5,000 200

3,946
3,609
4,000 175

3,128
REIT MARKET TRENDS – WHAT’S NEXT?

2,637
2,286
3,000 150
1,991

2,109
1,381

1,177
2,000 125
1,064

834
914

341
610

1,000 100

200
175
134
158
110

133

0 75
1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
Source: SDC Data, NCREIF.
¹ Represents all US IPOs in the real estate sector greater than $50mm; excludes mortgage REITs

9
 Agenda

REIT market trends – What’s next? 1

Views from a commercial real estate lender – Is it getting better? 10

COMMERCIAL REAL ESTATE - A CHANGING LANDSCAPE

10
 The banking industry is highly vulnerable to the downturn in the commercial real
estate market

$1.9trn of U.S. CRE and construction loans will require refinancing through 2012

The market will support some level of refinancing
VIEWS FROM A COMMERCIAL REAL ESTATE LENDER – IS IT GETTING BETTER?

Loan
Loan maturities
maturities by
by year
year ($bn)
($bn)
Bank Permanent Bank Construction Life Insurer CMBS Other
$600

$496 $478
$500
$466
$65 $451
$66
$63
$36 $60
$400 $43
$31 $55
$32 $57
$29
$27
$300 $128
$117
$109 $103

$200

$237 $221
$100 $211 $205

$0
2009F 2010F 2011F 2012F

Sources: Trepp, Giliberto-Levy, Federal Reserve, FDIC, PPR

11
 Bank balance sheet capacity has eroded significantly, as much as $10 trillion…

Global
Global financials¹
financials¹ –
– reduction
reduction in
in asset
asset base
base ($bn)
($bn)
VIEWS FROM A COMMERCIAL REAL ESTATE LENDER – IS IT GETTING BETTER?

6,300
4,300 4,700

Total reduction in Capacity further reduced

49,300 47,300 42,600
capacity of $2,000bn at a 9% capital ratio

Asset base Impact of Impact of Asset base (current) Impact of delevering at 9% Asset base @ 9% cap ratio
$510bn raising $350bn
w rite-dow n capital

Sources: Bloomberg; J.P. Morgan

¹ Includes the 75 largest global banks/brokers by announced write-downs; Assumes current core capital ratio of 8.1% for the selected firms

12
 …as a result, non-traditional financing markets are forming

Banks remained over-exposed to real estate and undercapitalized and will not be capable of filling the $1 trillion
‘capital gap’

A new “shadow” lending market will form

VIEWS FROM A COMMERCIAL REAL ESTATE LENDER – IS IT GETTING BETTER?

New finance REITs like Starwood Finance and private funds like Ladder Capital have been formed to take
advantage of the distress in real estate credit

Given value declines and tighter underwriting standards, many refinancings will require equity infusions

Filed
Filed Mortgage
Mortgage REITs
REITs
Target/Actual
Company Strategy Manager Proceeds ($mm)
Commercial
Starwood Property Commercial Loans Starwood Capital $932 Closed 8/11
Brookfield Realty Capital Commercial Loans Brookfield $500
Ladder Capital Realty Commercial Loans TowerBrook/GI Partners $400
Colony Financial Commercial Loans Colony Capital $250 Closed 9/23
Petra Real Estate Commercial Loans Petra Capital $200
CWCapital Realty CMBS CW Financial Services $250
Transwestern Realty CMBS/Commercial Loans Transwestern $500
Apollo Commercial CMBS/Commercial Loans Apollo $200 Closed 9/23
CreXus Investment CMBS/Commercial Loans Annaly $200 Closed 9/16

Residential/Commercial
AG Financial RMBS/CMBS Angelo Gordon $300
Bayview Mortgage RMBS/CMBS/Loans Bayview/Blackstone $500
Foursquare Capital RMBS/CMBS/Loans AllianceBernstein $500

Note: Does not include Residential Mortgage REITs

13
 Commercial real estate lending will be slow to heal
VIEWS FROM A COMMERCIAL REAL ESTATE LENDER – IS IT GETTING BETTER?

1–2 years 3–4 years 5 years

Lender workouts
New money loans from
New lending returns from most
become active broader market underway participants

Refinancings with
Significant trading of assets as
Construction lending returns

existing lenders loans come due

CMBS market re-functioning in

Impairments take shape
Highly active capital market "new form"

Limited new money loans
Financing structures

evolve again

Equity resurfaces

Asset prices start to find parity

14