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2011 Marketing Class Uo W
 

2011 Marketing Class Uo W

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Marketing Class at UoWisconsin School of Business

Marketing Class at UoWisconsin School of Business

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  • You introduce Falcon first and then yourself
  • Given that only 10% of all Commercial Real Estate is listed globally, the Private Equity industry with its on-going evolution is the perfect think-tank for the Commercial Real Estate world. Sophisticated leverage techniques developed either for buyouts or for venture capital in the industry inspire the Real Estate world from initial leverage, to hedging techniques to exit strategies, as both share a core intrinsic attribute: a lack of liquidity, tempered by an absence of volatility , but that still has to be offset by double digit IRR projections to attract investors.
  • We said earlier that the Commercial Real Estate market can be segmented into four main compartments: Public versus Private and Debt versus Equity. Here is a simple chart that attempt to position each of the four categories in a risk/reward perspective. Given that the debt, whether private or public offers the least degree of both risk and reward we will solely discuss the Public versus the Private Equity Commercial Real Estate investments during the rest of the presentation. It was still important to mention this positioning exercise of equity versus debt at this stage of the presentation to ensure we cover as much of an overview as we can during our 30 minutes together.
  • Given that the market value of listed real estate is so low in comparison to its non-listed cousin, it can be hard to distinguish between the two when statistics deal with combined real estate as seen in the previous slide. This slide will help us get a feel when comparing listed with non listed Real Estate. In the United States listed REITs have been around for about 50 years, so there is ample statistics available. The listed REITs in the US, whether equity REITs, debt REITs or Hybrid REITs, whether sector specific, region specific or diversified, in the US are compiled in an index called the NAREIT. The NAREIT on average is leveraged 50%. At the other end of the spectrum, the NCREIF index capitalizes the value of over 5,000 investment properties across the US for about $ 250 billion. The NAREIT reports its figure on an unleveraged basis. As we would expect the leveraged index delivers its share of higher positive returns but also sharp losses such as in 1998. This slides demonstrates that there is “Real Estate” and “Real Estate” alone in terms of expected returns
  • Before going into the Global Real Estate Market it is helpful to remind ourselves that there is a disconnect between the real economy and the financial markets, just as there can be a disconnect between the NAV of a REIT and the value of its underlying Real Estate assets. Warren Buffet in 2003 famously called the derivative markets the “Financial weapons of mass destructions”. Without even looking at the derivatives markets the Global GDP amounts to about $ 60 trillion while the traditional financial markets: money market, bonds and stocks are worth three times the amount. While we all appreciate the benefits of the financial markets, such as the broader access to capital from borrowers, or more efficient pricing etc. lately the securitization frenzy that led to excess leverage have exposed the entire financial system.
  • To put the real economy/financial market ratio into perspective, in 1990, according to a study done by McKinsey only 33 countries had a domestic market capitalization greater than their GDP against 72 in 2006. We all expect the trend to continue – which partially explains the reason why some prestigious Universities such as Harvard Endowment allocates 31% of its assets to “Hard assets” or why “sovereign funds” have over 70% in “hard assets”. Maybe the better part of the “Real Estate” market is in fact the word “Real”?
  • Here is an interesting pie chart that shows the current listed Real Estate securities are mostly to be found in the more mature economies, with the US accounting for half, Europe for a quarter and Japan for 10% totaling 80%. Having said that not all listed Real Estate can access cross border deals – for instance it is only in 2008 that J-REITs, Japanese REITs will be allowed to buy non Japanese Real Estate. But who are the most active investors in the REITs?
  • Another significant new trend in the world is the globalization of the real estate market. In the first half of 2007 alone over $ 115 bn worth of commercial real estate transactions were done between the Americas, Europe, the Middle-East and Asia.
  • Why do investors increasinglybother to go to other continents to invest in Privately held Real Estate with all the legal, tax, language complexity that such decisions entail? While few global statistics exist on the privately held commercial real estate track record, datas can be found in the listed REITs as shown here. These statistics were compiled by Morgan Stanley and show that between 1993 and 2006 investing in inter-regional real estate markets could have been rewarding. On the other hand risk adjusted return in Asia for instance in this period was particularly unattractive
  • In a similar fashion using correlation coefficient from real estate listed securities was key in optimizing efficient frontier models, beyond the domestic models we saw in the first part of the presentation. Every serious Institutional Investor today – allocate funds globally for the very reason of optimizing the efficient frontier – and Real Estate cross-border investments, unless we face a global pandemic or a World War III is only going to accelerate.
  • A third interesting trend is that will change the nature of Privately Held Real Estate funds in an increasingly global real estate market is the Luxembourg financial center. While listed securities such as REITs benefit from the market capitalization of the NYSE-Euronext, the Tokyo Stock Exchange or the London Stock Exchange, Privately-held real estate especially when structured in Private Equity fund are registered in Luxembourg. Luxembourg as you know is the second largest financial center in the world after the US for Mutual Funds. It totaled almost $ 2 trillion in market capitalization in 2007
  • Against this unique fund financial center backdrop, Real Estate funds have grown as well for the following reasons.Strong yet flexible RegulationCheaper for Fund Managers than the USReputation of locationCentre of sophisticated real estate investment fundsGlobal promoter baseGlobal investor baseTax efficiency and stability
  • The Reasons why the SIF is so popular is that it benefits from the ideal fund criteria – which are (read the text in red)
  • At Falcon we tested for one of our real estate fund and this was our experience. Maybe you want to talk about the umbrella concept, the leverage, the share classes, the dual currency registration and that is fitted for a Private Equity Real Estate Fund
  • In a nutshell the SIF is lightly regulated and ideal for diversified Real Estate funds involving several countriesa tax efficient vehicle, as Luxembourg has a growing list of countries signing double tax treaties simple and fast to incorporate giving fund manager additional flexibility to seize opportunities
  • And finally the SIF is increasingly accepted by the Pension fund communities throughout the world for the reasons cited earlier as well as for the “pool facilities” that Luxembourg custodian provide. This chart shows the so-called “Pension Pooling” .
  • Read the slide – or bring your own final words
  • Read the slide – or bring your own final words

2011 Marketing Class Uo W 2011 Marketing Class Uo W Presentation Transcript

  • The Marketing of Real Estate Amaury de ParcevauxApril 8th 2011 Chief Marketing Officer
  • Short Profile on Firm and SpeakerA. Falcon Real Estate Investment Company, LP • US Commercial Real Estate firm created in 1991 by Howard Hallengren and Jack Miller, both from JPMChase. Offers comprehensive services to high-net-worth individuals and institutional investors. 6 US Regional offices in the United States: New York, Washington D.C., Miami, Chicago, Dallas and San Diego. $ 2 bn AUMs of US commercial real estate. 100% Out-performance vs. its benchmark (NCREIF) in 20 years.B. Amaury de Parcevaux, Chief Marketing Officer (New York) • Amaury de Parcevaux is Senior Vice President for Falcon and he is based in New York. As Chief Marketing Officer, he has overall responsibility for the Global marketing strategy of Falcons direct and indirect investments platforms. Mr. de Parcevaux has had over 18 years experience in marketing to high-net-worth individuals, and comes to Falcon from Morgan Stanley, where he was a First Vice President in the Wealth Management department. Prior to that, he worked in the Private Banking department of Merrill Lynch, at Citibank and Deutsche Bank in New York, and at Commerzbank and Deutsche Bank in Frankfurt. Mr. de Parcevaux graduated in 1988 from the European Business School (Oestrich-Winkel, Paris and London) with a Master’s Degree in Finance. In addition to French and English, Mr. de Parcevaux is also fluent in German. 2
  • Class OutlineIntroduction1. Publicly vs. Privately Held Commercial Real Estate2. The International Perspective3. Falcon’s Case StudyConclusion 3
  • Class OutlineIntroduction1. Publicly vs. Privately Held Commercial Real Estate2. The International Perspective3. Falcon’s Case StudyConclusion 4
  • Traditional Global Asset ClassesA. Traditional • Money Market • Bonds (CMBS) • Stocks (Listed Real Estate Investment Trusts: “REITs”)B. Alternative • Private Equity (“Private Equity funds”, “Private REITs” or “Club Deals”) • Hedge Funds (“Sector Specific”: Real Estate and Macro) • Structured Products (“Principal Protected” around RE indices or “REITs baskets”) • Real Estate (Direct investment by one investor in one building or owner-occupied) • Managed Futures • Commodities • Infrastructure 5
  • Traditional Global Real Estate Asset Classes Private Public GLOBAL REAL ESTATE Direct Property Real EstateEquity Securities •$ 25 Trillion (50% US) Investments $ 16 Investment Grade $ 9 Non-Investment Grade $ 23 Trillion ($ 10 pure investments) $ 2 Trillion •20% vs. Global Stock + Bond Market Cap. • 7 times bigger thanDebt Whole Mortgage Structured Debt Hedge Funds (CMOs, CLOs etc.) • 12 times bigger than Private Equity 6
  • Real Estate Evolves with Private Equity 1. Buyouts PIPE Purchase of controlling interest Real Estate Late Stage with substantial borrowed capital Private/Public Distress Mature Stage Company Private/Public Mezzanine Company Growth Stage Private/Public Industry Company Convertible Debt Mezzanine Stage IPO Public/Private Debt Private Company Follow-on Offerings Venture Stage Private Traditional Bank Loans Company High Yield Debt & Equity 2. Venture Capital Funding Focuses on investing in companies with high growth rates 7
  • Class OutlineIntroduction1. Publicly vs. Privately Held Commercial Real Estate2. The International Perspective3. Falcon’s Case StudyConclusion 8
  • Positioning Debt/Equity vs. Public/Private Risk / Return of Real Estate Investment Strategies Equity Opportunistic Value-Added Long/Short Public Equity Debt Core Property Public Debt Whole Mortgage Risk Perception Source: Fund Evaluation Group and Falcon Asset Management 9
  • Pre-2008 Crisis Headlines? “US Housing Going down” April 26th 2007 “ Foreign Real-Estate Funds Boom Firms Unveil Scores of New Plays, Spurred by Strong Returns and Growth in Overseas REITs”. July 7, 2007 “Euro soars to new high against U.S. dollar” July 10, 2007 “Subprime poor practice risks turning to malpractice” July 4 2007 10
  • R. Bernstein: Merrill Lynch Chief US Strategist 11
  • Asset Allocation and Expected Return: 1 Security Selection Market Timing Other Factors 4.6% 1.8% 2.1% Asset Allocation 91.5% • 91.5% of long-term total account performance including Stocks, Bonds, Money Markets resulted from asset allocation decisions (statistically tested over the past 20 years) • Mitigate the necessity of secondary market - like in REITs Source: Ibbotson Associates, Inc. 12
  • Risk Adjusted Returns (+ Standard Deviation): 2 HIGH Private Equity Global Real Estate HedgeReturn % MEDIUM Funds Oil Global Commodities Stocks Global Bonds Gold LOW Global Money Markets LOW MEDIUM HIGH Risk % Source: 1995—2005 Source: BHF-BANK 13
  • US Public vs. US Private Real Estate Returns US Public RE Benchmark (50% leveraged) vs. Private Benchmark (Unleveraged) NAREIT NCREIF Source: Falcon /NCREIF & NAREIT/ Columbia Business School 14
  • REIT NAV Premium vs. Underlying Assets 40 % 30% Long-term Average = 6.6% 20% 10% 0% -10% -20% - 30% Source: Green Street Advisors, Current as of May 2007 15
  • When Real Estate > Stock Market Volatility S&P 500 120 Day Volatility REITs 120 Day Volatility 1994 1996 1998 2000 2002 2004 2006 2008 Source: Bloomberg / RMS & SPX 120 Day Return Volatility 16
  • Correlation Coefficients (+ covariance): 3 Falcon Performance Statistics vs. Benchmarks: January 1991 - June 2006 S&P 500 FTSE 100 NCREIF Index FALCON Total Quarters 62 62 62 62 Positive Quarters 67.74% 69.35% 87.10% 98.39% Negative Quarters 32.26% 30.65% 12.90% 1.61% Median Quarterly Return 2.41% 2.08% 2.36% 3.44% Average Quarterly Return 2.47% 2.27% 2.08% 3.74% Standard Deviation 7.43% 7.09% 1.84% 1.79% Best Quarter 20.87% 25.13% 5.43% 10.42% Worst Quarter -17.63% -17.80% -5.33% -0.14% Maximum Drawdown -45.60% -45.55% -9.66% -0.14% Sharpe Ratio* -0.04% -0.07% -0.37% 0.55% * Risk free rate is 2.75% (the average 5-yr T-Note from Jan 91 Š June 06 Correlation Matrix S&P 500 FTSE 100 NCREIF Index FALCON S&P 500 1.00 0.73 -0.04 -0.04 FTSE 100 1.00 0.01 0.02 NCREIF Index 1.00 0.77 FALCON 1.00 Source: Falcon 17
  • Steps 1+2+3 = Efficient Frontier 15.50 Efficient Frontier with 10% Efficient Frontier with 5% 15.00 Alternative Investments Alternative Investments 14.50 14.00Return % 13.50 Efficient Frontier without Alternative Investments 13.00 12.50 12.00 11.50 10.00 10.50 11.00 11.50 12.00 12.50 13.00 13.50 14.00 14.50 Risk % Source: 1980—2000 Source: Merrill Lynch Quantitative & Equity Derivatives Research 18
  • How Much Alternative Investments? Cash Bond 50-60%* Equity Alternative Invest. *Real assets, which includes real estate and commodities, is the largest investment category with 31 cents of each Harvard endowment dollar. Source: Falcon 19
  • Synopsis of Private vs. Public Real EstatePublic Equity Advantages Private Equity Advantages Publicly traded (liquid) Access to broader array of investment opportunities Lower fees No minimum size (individual investors) Lower correlation to stock marketsPublic Equity Disadvantages Private Equity Disadvantages Theoretically, lower returns Illiquid due to liquidity premium Higher fees Performance often driven by capital flows and other non- real estate related factors Appraisal-based valuations Higher correlation to public stock markets Difficult to benchmark High dispersion of returns in value- added and opportunistic sectors 20
  • Class OutlineIntroduction1. Publicly vs. Privately Held Commercial Real Estate2. The International Perspective3. Falcon’s Case StudyConclusion 21
  • 2011: Global GDP $ 60 vs. $ 180 Trillion Listed Global Financial Markets (Excluding Derivatives) TOTAL Bank Deposits Government Debt Corporate Debt Equities• Financial Markets offer broader access to capital from borrowers• Financial Markets offer more efficient pricing• Financial Markets increase opportunities for sharing risk BUT…• Lately securitization has led to substantial increases in leverage and greater systemic risk for the entire financial system Source: McKinsey Global Institute 22
  • Real Economy/Financial Markets Decoupling• 1990: 33 countries have domestic market capitalization (excluding derivatives) > GDP• 2007: 72 countries – virtually all industrial economies and the largest emerging markets have financial markets that are two to three times the size of their GDP Source: McKinsey Global Institute 23
  • Listed Real Estate – Still in Infancy FTSE EPRA/NAREIT Countries Listed RE Vs. Stock Market Cap. % % Australia 30 10 Hong Kong/China 25 5 Singapore 25 10 Luxembourg 12 6 Sweden 10 4 Canada 8 3 United States 7 2 Netherlands 6 3 New Zealand 5 5 Austria 5 4 United Kingdom 4 1 Japan 4 2 France 3 1 Switzerland 3 0.6 Spain 3 2 Belgium 3 1.5 Finland 1.5 0.5 Norway 1.5 1 Poland 1.5 1.3 Denmark 1 0.6 Greece 1 0.5 Italy 1 0.8 Germany 0.5 0.5 South Korea 0.5 0.2 Hungary 0.2 0.2 Ireland 0.1 0.1 Portugal 0.1 0.1 Czech Republic 0.1 0.1 World 5.6 2.8 24
  • 2007: $ 2 Trillion Listed Real Estate Australia Hong Kong Australia Asia-Pacific Japan 9% Other Asian 25% France Hong Kong Germany 5% Italy Spain Netherlands Japan 11% Other Eurozone US 53% UK Euro zone Switzerland 10% Sweden C & E Europe Other UK 6% European US Canada Mexico Americas 57% Europe 18% Brazil Other Sources: EPRA/NAREIT, LaSalle Investment Management 25
  • Pre Crisis Global Real Estate Markets Flow •Mature/ Highly Mature: 83% •Maturing: 15% •Invested •Emerging: 2% stock $3.2 trillion •Investable stock Europe / Russia $6.1 trillion •Invested •Total stock stock $9.2 trillion $4.7 trillion Americas Total stock •$9.5 trillion •Investable stock Middle East / Asia $6.6 trillion •Invested •Total stock stock $5.9 trillion $1.9 trillion •Mature/ Highly Mature: 9% •Maturing: 1% •Emerging: 1% •Investable stock $3.5 trillion •Mature/ Highly Mature: 17% •Maturing: 72% •Emerging: 11%Pre-2008 Crisis Inter-regional capital flows of $115bn Sources: RREEF; DTZ; ULI; PwC 26
  • International RE Risk Adjusted Returns? Returns and risk for public real estate securities in various regions around the world can produce half of the returns for twice the risk and can produce twice the returns for half the risk depending what you targeted country allocation is. Returns for Asia were for instance lower than other regions due to problems the region has faced, including a weak Japanese real estate market for more than a decade and the SARS outbreak in 2003 Returns and Risk of Public Property Securities Markets (1993-2006, in U.S. dollars) Return Standard Deviation U.S. 13.60% 14.90% Europe 13.90% 14.40% Asia 7.40% 33.20% Australia 16.60% 18.20% Source: Morgan Stanley, Global Property Research 27
  • Correlation in International RE Markets? International diversification within public real estate equities is beneficial due to the low correlations of public real estate equities between various global regions Correlation of Public Property Securities Markets (1993-2006, in U.S. dollars) U.S. Europe Asia Australia U.S. 1 0.5 0.32 0.4 Europe 0.5 1 0.34 0.52 Asia 0.32 0.34 1 0.44 Australia 0.4 0.52 0.44 1 Source: Morgan Stanley, Global Property Research 28
  • Today’s Global Private Banking MarketLiquid Assets: USD 9,000 billion Liquid Assets: USD 9,000 billion Revenues: USD 63 billion Revenues: USD 81 billion Ratio = 0.7% Ratio = 0.9%Liquid Assets: USD 5,000 billion Liquid Assets: USD 7,000 billion Revenues: USD 65 billion Revenues: USD 63 billion Ratio = 1.3% Ratio = 0.9%• 7 Million People Own > USD 1 Million Liquid Assets (@ 0.1% World Population)• USD 30 (23 on shore / 7 off shore) Trillion Private Banking Market: + 2% p.a. 29
  • Public and Private Real Estate Room to Grow HNIs Real Estate Investments (2006) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Global North Latin Europe Asia- Middle America America Pacific East REIT Commercial Residential* * Secondary Residence Source: Merrill Lynch/Cap Gemini 30
  • The Luxembourg Fund Center Pre-2008 Crisis Worldwide Mutual Funds€ billions 9 000 Luxembourg is the second 8 000 largest fund center in the 7 000 world after the USA 6 000 1 839 5 000 8 426 4 000 3 000 4 542 2 000 2 176 1 000 0 USA Europe Asia & Pacific Sources: EFAMA & ICI 31
  • Luxembourg Real Estate Funds: Before the SIF AUM and Number of RE• Huge growth since 2004 Funds• Closed-end and Open-end funds and funds of funds 40 140 129 Number of subfundsReasons for success: 35 120 AUM USD bln 30• Strong yet flexible Regulation 100 25• Cheaper for Fund Managers than the US 80 80 20• Reputation of location 60• Centre of sophisticated real estate investment funds 15 48 40  Global promoter base 10 36 36  Global investor base 5 20• Tax efficiency and stability 0 0 02 03 04 05 06 AUM # (sub)funds 32
  • SIF: Market Overview Specialized investment funds launched since February 13, 2007 250 220 200 150 115 119 100 93 72 50 38 25 8 12 0 2007- 2007- 2007- 2007- 2007- 2007- 2007- 2007- 2007- 02 03 04 05 06 07 08 09 12 33
  • SIF Launched in Feb. 07 is a Favored Structure Profile of Luxembourg Investment Funds Key criteria UCITS Non-UCITS SIF SICARInvestment Restricted Flexible Flexible Moderaterestrictions (eligibleassets)Risk diversification High Medium Low NoneEase of public High Medium Low LowdistributionSupervisory Targeted to Targeted to retail More flexible More flexibleframework retail investor investor protection protectionTime to establish Low - Medium Medium - High Very low LowTarget investors All All Institutional / Institutional / HNWI HNWI 34
  • The SIF Features are Tailored for Real Estate Key Features UCITs Non-UCITs SIF SICAR Umbrella structures Yes Yes Yes Yes(1) Share-classes Yes Yes Yes Yes Debt financing No No Yes Yes Leverage No Yes Yes Yes Probable Probable realization Probable Valuation basis realization Fair value value realization value value As per Subscription/ NAV NAV offering NAV redemption price document NAV frequency Monthly Monthly Annual Annual (1) (minimum)Open or closed ended Open ended Both Both Both Annual Report Yes Yes Yes Yes Semi-annual report Yes Yes No NoRegulatory Reporting Yes Yes No No 35
  • The SIF: In a Nutshell Criteria SIF• Eligible investor base: Investment in a Regulated vehicle? Yes SIF is reserved for “well-informed” Pre-approval by regulator? No investors requiring a limited level of Other than local GAAP? Yes protection and looking for investment REGULATORY Investment restrictions? No flexibility suitable to their particular Investment in RE, PE, HF? All Simplified prospectus expertise and needs. Yes regime?• Investment flexibility: the range of Subscription tax? Yes assets (nature of assets and/or Income tax? No associated risks) eligible for a SIF is TAX Access to DTT? Yes / No broad and consequently includes, but is Withholding tax on dividends paid? (residents / non No not limited to, equities, bonds, residents) derivatives, structured products, real Standard VAT rate? 15 % estate, hedge funds and private equity Listing possible? Yes / No type investments. The SIF should comply Maximum number of No investors? with the general principle of risk DISTRIBUTION Minimum investment diversification. Min. € 125k amount?• Light supervision Minimum experience Yes required?• Organisational adaptability Service providers / persons • Directors• Efficient tax regime LICENSING subject to regulators • Custodian approval? • Auditor 36
  • Pension Funds Pooling: Use Luxembourg British Irish Chilean Brazil British Irish Chilean Brazil Pension Pension Pension Pension Pension Pension Pension Pension Fund Fund Fund Fund Fund Fund Fund Fund Asset administrator Depositary bank Converted in Virtual or entity pension pooling Paying agent Administrative agent Investments Transfer agentInvestments Investments Investments Investments Real Auditors Shares Bonds Deposit Estate Law consultant Tax consultant • Quantitative benefits: Economies of scales at asset management & custodian bank level up to 0.70% savings • Qualitative benefits: Improve measurement/selection of service provider Enable consistent/centralized corporate governance. • Multinationals running pension funds in several countries have implemented pension pooling vehicle 37
  • Class OutlineIntroduction1. Publicly vs. Privately Held Commercial Real Estate2. The International Perspective3. Falcon’s Case StudyConclusion 38
  • a. Falcon Real Estate• Highlights • Falcon Offices• Organizational Chart • Institutional Relationships• The Founders • Falcon vs. NCREIF Property Index• An Advisory Firm • Current Diversified Portfolio 39
  • Highlights• Formed in 1991 by Howard Hallengren and Jack Miller to advise Non-U.S. investors• Directors with over 100 years combined experience in global real estate investing• 6 office locations: NYC, Chicago, Miami, Dallas, Washington D.C., San Diego• Company employs 17 professionals• Falcon has completed transactions totaling about US$ 7 billion and provides Asset Management services for commercial real estate in major markets throughout the United States.• Performance as of June 30th 2010, since inception in 1991*  13.9% average annual return vs. 6.8% NCREIF benchmark  Annual income return of 8.4%* based on NCREIF investment performance standards 40
  • Organizational Chart Howard Hallengren ChairmanManagement — Directors Chief Executive OfficerJack Miller Scott Sweeney Amaury de Parcevaux Ken Lorman Scott Bennett Norman Hill President Executive Vice President Senior Vice President Senior Vice President First Vice President First Vice President Head of Asset Management Chief Marketing Officer Senior Acquisition Officer Chief Operating Officer Chief Financial Officer Acquisitions & Accounting Marketing Asset Management Underwriting Reporting & TaxAmaury de Parcevaux Kenneth Lorman Scott Sweeney Norman Hill Senior Vice President Senior Vice President Executive Vice President First Vice President Chief Marketing Officer Senior Acquisition Officer Head of Asset Management Chief Financial Officer Europe, Asia, North America Eastern U.S. U.S. Scott Sweeney Laurence Dooley Scott Bennett Angela Bleckner Executive Vice President Vice President First Vice President Senior Accountant Middle-East Central U.S. U.S. Dan Stockalper Adam Doud Laurence Welsh Tamela Newton Vice President Vice President Vice President Accountant Middle-East Western U.S. Southeast & D.C. Daniel Epstein Daniel Epstein Carl Omark Vice President Vice President Vice President Latin America, Spain, Portugal Eastern U.S. East Coast & Midwest David Hill Timothy Puhek Vice President Certified Public Accountant Southwest & DC Western U.S. 41
  • The Founders Howard E. Hallengren Jack D. Miller Chairman President New York Office Chicago Office Mr. Hallengren is Chairman of Falcon Real Estate Mr. Miller joined Falcon after serving as Manager of the Investment Company, LP. Mr. Hallengren has been Real Estate Investment Division within Private Banking Chairman of Falcon since its inception and has overseen International at the Chase Manhattan Bank. In that role, he the growth of the company and the investment strategy had direct responsibility for property acquisition, property which has delivered the exceptional IRR’s. Prior to forming management and mortgage financing. Like Mr. Hallengren, Falcon, Mr. Hallengren was Chief Investment Officer and Mr. Miller also came to Chase from The First National Bank Product Manager for the International Private Banking of Chicago, where he served for ten years in the bank’s real Department of the Chase Manhattan Bank. In that estate investment division. He is a founding member of the capacity, he had overall responsibility for the bank’s real Accounting Standards Committee of the National Council of estate investments on behalf of non-U.S. investors. Before Real Estate Investment Fiduciaries, which is the joining Chase, Mr. Hallengren was Chief Investment Officer coordinating group that sets accounting standards for U.S. at The First National Bank of Chicago. During his tenure institutional investors. Mr. Miller received a Bachelor of there, he also served as Chairman of the Real Estate Science degree in accounting and a master of finance in Investment Committee, which supervised the Trust real estate from De Paul University, as well as a master’s Department’s real estate investments. Mr. Hallengren is a degree in business administration from the University of graduate of Princeton University and received his master’s Chicago. degree in business administration from the University of Chicago. 42
  • An Advisory FirmWe offer a complete real estate investment We act as our Client’s Agent and Representative in themanagement platform, including advice on purchases, United Statesfinancing, and sales, as well as a comprehensive assetmanagement service We have a fiduciary responsibility to the Client, which means that we act according to the Client’s We customize our approach to meet our best interest and instructions clients’ goalsAs the Client’s Advisor on Direct Real Estate Falcon’s Asset Management team selects andacquisitions, we receive property submissions from supervises local leasing and property managementevery Brokerage Firm in the country and maintain agents, monitors and controls all receipts andclose relationships with many of the country’s most disbursements, and provides comprehensive quarterlyimportant real estate owners and operators reports on each property. Our decades-long close relationships with We customize every Asset Management Brokerage Firms and Ownership provides Clients strategy and budget with the insight required to successfully bid on propertiesFalcon Real Estate is an investment manage-ment Falcon is not related to any other entity of any kind inadvisory firm – not a Brokerage Firm the real estate industry in the United States We represent our clients as buyers or sellers in a Therefore, we are totally independent and focused transaction independent of the Brokerage Firm on meeting the objectives of our clients. 43
  • Falcon OfficesBroad Coverage of U.S. Market New York City Chicago Washington D.C. San Diego Dallas Miami 6 Falcon Offices Current Asset Management Assignments 44
  • Institutional RelationshipsBNP Paribas, Global (U.S. Alliance Partner)Generali Immobiliare, Paris (U.S. Investment Advisor)Credit Suisse Private Bank, Zürich (Invested on Behalf of Clients)HSBC Amanah, New York (Managed Real Estate Fund)Citi Private Bank, London, Abu Dhabi and Geneva (Invested on Behalf of Clients)Kuwait Finance House, Kuwait (Managed Real Estate Fund)Capital Trust, London (Advised on Purchase of Properties)Deutsche Bank Realty Advisors, New York (Advised on Purchase of Properties)FT Sirius Fund, Hong Kong (Created FT Falcon Asia Ltd. Joint Venture) 45
  • Track Record: Falcon vs. NCREIF Property Index Annual Returns of Falcon vs. NCREIF Property Index As of June 30, 2010 * Inception Date — January 1, 1991 Source: Falcon Asset Management The NCREIF Property Index is a commercial real estate index consisting of 6,066 privately held investment properties with a market cap of $234.5 Billion. 46
  • Current Diversified Portfolio Falcon Portfolio (Market Value) Falcon Portfolio (Square Feet) Market Value Sq. Ft. Office: Multi-Tenant $401,009,827 24.51% Office: Multi-Tenant 1,805,822 14.01% Office: Single-Tenant 395,835,487 24.19% Office: Single-Tenant 2,090,588 16.21% Retail 98,007,836 5.99% Retail 396,922 3.08% Residential / Development 459,500,000 28.07% Residential / Development 1,061,327 8.23% Industrial 282,060,184 17.24% Industrial 7,538,969 58.47% Totals as June 30, 2010 $1,636,413,335 100.00% Totals as of June 30, 2010 12,893,628 100.00% Office: Industrial Office: Multi-tenant 17.24% Multi-tenant 14.01% 24.51% Industrial 58.47% Office: Single-tenant 16.21% Retail Office: 3.08%Residential/ Single-tenantDevelopment 24.19% 28.07% Residential/ Development Retail 8.23% 5.99% Source: Falcon Asset Management 47
  • b. Investment Process • Highlights • Acquisition Process - Acquisition Process Time Line • Asset Management - Asset Management Duties • Accounting and Reporting • Case Studies 48
  • Highlights ASSET ACCOUNTING & ACQUISITION MANAGEMENT REPORTING Falcon Sourcing Ongoing Oversight Financial Statements Due Diligence Risk Management Tax Optimization Exit Strategy 49
  • Acquisition Process Property summary and location overview Rationale for purchase and exit strategy Acquisition Committee Full valuation and earnings projections YES NO Analysis of market, location, tenant creditworthiness and debt coverage Letter of Intent / Engage attorneys NegotiationsReview third party reports from lenders, appraisers, engineers, and zoning & environmental agencies YES NO Inspect property Select on-site team Due Diligence Lock-in financing and leasing strategies Insurance review Finalize pro forma YES NO ASSET MANAGEMENT Closing 50
  • Acquisition Process Time Line*Third Party Reports Include: Appraisal, Environmental Inspection, Engineering Report,Zoning Report, Survey, and Other/Misc. ReportsSNDA - Subordination and Non-disturbance Agreement 51
  • Asset Management• Falcon Asset Management team has managed properties throughout the United States• Falcon’s Asset Management team establishes an overall strategy and budget for each property, selects and supervises local leasing and property management agents, monitors and controls all receipts and disbursements, and provides quarterly reports• Capabilities in all 6 offices allowing us to benefit from local market knowledge and relationships• Group consists of 5 senior Asset Managers with strong expertise in all areas of Asset Management• Review committee insures best practices to each property• Argus software expertise allows for detailed and flexible financial projections 52
  • Asset Management Duties• Establish overall strategy for each property • Secure appropriate casualty and liability insurance coverage• Select and supervise local leasing and property management agents as required • Negotiate lease terms and work with outside legal counsel to document such• Create annual operating and capital leases budgets • Implement a property renovation or capital• Review actual financial results against improvement program budgets on a monthly basis • Carry-out property site inspections at least• Monitor and control all receipts and on a quarterly basis disbursements • Coordinate with outside accounting and• Make debt service payments as required legal firms all tax filings and audits• Make real estate tax payments or confirm • Provide client with a detailed quarterly payment as required report with financials 53
  • Asset Management Controls• Asset Management Review Committee reviews each property on a regular basis and approves all major property decisions to insure best practices • Approval of annual operating budgets • Review and approval of all major property decisions (e.g. sale, financing/re-financing, a major tenant lease or capital expenditure) • Review actual results compared to annual budget • Update on leasing activity and property strategy • Discussion of major issues regarding each property• Other Asset Management Controls • All proposed lease transactions and contracts require approval from Head of Asset Management • The only authorized signers to a lease document or contract are the Chairman, President, Executive Vice President or Senior Vice President • The handling of all cash receipts and disbursements are subject to formal cash management policies and procedures 54
  • Accounting / Reporting• Accounting function is centralized in our Dallas office• Accounting group consists of 4 experienced accounting professionals including Certified Public Accountants (CPAs)• Experienced in fund management accounting and the audit process• MRI accounting software, the industry standard, is used• Financial statements and cash account reconciliations are completed on a monthly basis• Financial statements are presented to clients on a quarterly basis• Provides support to third party accountants for tax return preparation and audits 55
  • Accounting / Reporting Audited Financial Statements Annually Tax Returns Operating Budgets and Annual Financial Quarterly Reports Reporting & Analysis Monthly Balance Sheet & Income Statements with Budget Comparisons Bank Account Reconciliations Loan Balances & Escrow Account Reconciliation 56
  • Case Studies2 Rodeo, Beverly Hills, CAACQUISITION STRATEGY• Premier global retail destination• Undercapitalized by previous owners• Retail spaces were outdated and inadequate for premier tenantsFALCON ASSET MANAGEMENT VALUE-ADD• Engaged prime leasing agents and consultants to re-position the property as a pre-eminent retail center with smaller boutique-like spaces• Detailed marketing and merchandising strategy and renovation to implement quality standards for appropriate tenant mix and shopper profile• Retained Tiffany & Co. as anchor tenant with 20 year lease renewal• Attracted additional exclusive new tenants such as Versace and GucciRESULT• Purchased for $143 MM in 2000, and sold in 2007 for $275 MM• Investor IRR 15.8% p.a. over 7 years 57
  • Case Studies1201 and 1225 New York Avenue, Washington, D.C.ACQUISITION STRATEGY• Attractive, adjoining new buildings four blocks from the White House• Strong, growing Washington D.C. office market• Separate owners; management, tenant and space allocation inefficienciesFALCON ASSET MANAGEMENT VALUE-ADD• Purchased 1201 in 1999 and 1225 in 2000 joining and greatly expanding tenant space• Extensive property refurbishment and modernizing• Major re-tenanting with entire building leased to tenants such as U.S. Department of Homeland Security, Federal Elections Commission, and Office of Government EthicsRESULT• Total purchase concluded at $112 MM in 2000, sold in 2005 for $215 MM• Investor IRR 12.0% p.a. over 6 years 58
  • Class OutlineIntroduction1. Publicly vs. Privately Held Commercial Real Estate2. The International Perspective3. Falcon’s Case StudyConclusion 59
  • ConclusionA. Privately Held vs. Publicly Held Real Estate • Each have their own merit, even if the Privately-held RE is likely to continue to dominate • Clearly Commercial Real Estate in all its forms will continue to grow for all the reasons we discussedB. International Perspective • Trend # 1: Hard Assets logic inescapable • Trend # 2: The Global Real Estate market will continue to integrate • Trend # 3: The Luxembourg Real Estate Funds will continue to growC. Falcon’s Case Study • Add Value with RE Professionals and preserve value for your clients and yourself • Stream-line and diversify your business model • Embrace the win-win religion 60
  • Career’s Feedback• First and foremost: Carpe Diem• Additional Feedback • Resume – spotless like a new building • Interview – search the “win-win”… so sell yourself • Companies to target  RE Companies  Banks (BNP Paribas Real Estate, Morgan Stanley) • RE Teams • Private Bank / Wealth Management  Insurance Companies (Allianz, AXA)  Sovereign Wealth Funds (ADIA) • GREM – perfect G L O B A L platform: US-LatAm-Europe-Asia • Does Falcon Hire? 61
  • Questions & Answers Amaury de Parcevaux Chief Marketing Officer Falcon Real Estate Investment Management, Ltd. 570 Lexington Avenue, New York, NY 10022 Tel: (212) 271-5445 E-mail: adeparcevaux@falconreal.com www.falconreal.com 62
  • Appendix 1a. Falcon Current View on Real Estate Marketb. Our Quarterly Office Market Research / www.falconreal.com 63
  • a. Real Estate Market Overview • U.S. Commercial Real Estate Market • Why Invest Now? • How to Succeed In Today’s Competitive Market • Investment Strategy • Conclusion 64
  • U.S. Commercial Real Estate Market: Overview Market Overview  Improving real estate fundamentals in most markets • Increased demand and a reduction in sublease availability have led to the stabilization of net effective rents (asking rents plus concessions) and vacancies • Lack of overbuilding in major markets has supported market fundamentals and should provide opportunities for long-term investors  The U.S. economy continues to show clear signs of improvement with declining unemployment, 2010 GDP growth of 2.8% and 2011 GDP growth forecasted at 3.2%- 3.6%  Investment activity is increasing, particularly in the 6 major CBD markets (New York, Washington D.C., Boston, Chicago, San Francisco, and Los Angeles)  Excellent opportunities exist in larger second-tier cities and satellite markets due to investor focus on the 6 major CBD markets  Competitive debt financing is once again available for quality properties 65
  • U.S. Commercial Real Estate Market: Declining Cap Rates Annual CMBS Issuance and U.S. Cap Rates 250 9% 200 8% 150 USD Billions 7% 100 6% 50 0 5% 1990 1993 1994 1995 1996 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 1991 1992 1997 1998 2004 2010 CMBS Issuance (billions) Cap Rates  Capitalization rates (net operating income divided by purchase price) are declining in many markets due to greater demand, especially from international investors, limited supply of properties available for purchase, increased availability of financing, the low interest rate environment, and expectations of rising rental rates  Cap rates in the six major CBDs have declined from their high point in 2009 to near 2007 levels while cap rates in satellite markets have declined to a lesser degree  While CMBS issuance has not recovered from the levels at the market peak, insurance companies and some banks have partially filled the void Source: Commercial Mortgage Alert, PPR, NCREIF, Moody’s Economy.com, PricewaterhouseCoopers, Falcon estimates 66
  • U.S. Commercial Real Estate Market: Historical Prices Moody’s/REAL Commercial Property Price Index 67
  • Why Invest Now?: SummaryFalcon believes this is an historic opportunity to purchase high-qualityproperties at attractive prices and yields Current Favorable Market Characteristics for Buyers: 1. Market Fundamentals 2. Unique Timing 3. Growing Economy 68
  • Why Invest Now?: Market Fundamentals Market Fundamentals Are Improving in Most Markets  Vacancy rates and net effective rents have bottomed out in many markets • Three consecutive quarters of positive net absorption have been recorded on a national basis • Rental rates in some core CBD markets such as Washington D.C., New York, San Francisco, and Boston are starting to increase • Landlord concessions have stabilized and are declining in some markets • As corporate demand begins to return, rental rates should increase more broadly  Most markets are not suffering from the overbuilding that plagued past downturns • Limited new construction is expected over the next 3-4 years • Major markets are generally facing vacancy rates of 10-20%  The economy, which is a leading indicator for the real estate market, is recovering slowly but steadily 69
  • Why Invest Now?: Market Fundamentals Office Vacancy Rates Construction as a Percentage of Existing Inventory25% 8%20% 7% 6%15% 5%10% Office 4% 5% Retail 3% Logistics 0% 2% 2011* 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1% 0% Suburban Downtown 1980-89 1990-99 2000-07 2008-2010* Source: Torto Wheaton, Falcon estimates* 70
  • Why Invest Now?: Unique Timing Unique Opportunity To Invest As The U.S. Market Recovers  There is currently an opportunity to acquire quality properties at an attractive basis relative to historical pricing benchmarks  Potential for capital appreciation due to expectations of future rental rate growth  Real estate investments have traditionally been an effective hedge against inflation  International investors are targeting the U.S. real estate market • According to an AFIRE survey, foreign investors believe the U.S. offers the best market for capital appreciation • AFIRE’s 2010 survey ranks New York and Washington, D.C. ahead of London and Paris • International investors view the U.S. as a stable market in times of economic or political uncertainty  Foreign buyers have dominated recent acquisition activity in the major cities • Falcon began in 1991 during a real estate crisis and advised foreign investors to take advantage of discounted prices resulting from that crisis Source: University of Wisconsin School of Business James A. Graaskamp Center for Real Estate, Association of Foreign Investors in Real Estate (AFIRE) 71
  • Why Invest Now?: The Economy is GrowingRecent Economic Indicators Suggest That The U.S. Economy Has BeenShowing Steady Improvement  GDP has grown for 6 consecutive quarters led by increased U.S. consumer spending  The S&P 500 has nearly doubled from the lows reached in March 2009  The unemployment rate has fallen to 9.0% from a high of 10.1% in November 2009  The banking sector has regained strength after surviving the recent crisis  Housing prices appear to have bottomed out in many areas of the country  The federal government’s economic stimulus has contributed to improved consumer sentiment 72
  • How to Succeed in Today’s Competitive MarketAcquiring Properties In the Major Cities Is Very Competitive  Established credibility and a track record with sellers and brokers is crucial to winning a bidding process • Buyers are selected based on price, reputation, and ability to close in a timely manner  Falcon has forged a 20+ year relationship with the brokerage community  Falcon’s successful track record advising investors is widely known  Investors need to make rapid decisions during a bidding process • Timely internal approval process and open communication with Falcon • Important to rely on Falcon’s expertise during the acquisition process  Rapid analysis of a large amount of information  Determination of appropriate pricing and bidding strategy  Financial, tax, and legal structuring  Coordination of due diligence  Buyers of trophy properties in major cities may need to conduct upfront due diligence to increase their odds of winning a bidding contest 73
  • Investment Strategy: Offices Focus on Class A Single and Multi-Tenant Office • Offers attractive risk-adjusted returns and long-term stability • Highest potential for appreciation with additional value enhancement through Falcon’s Asset Management expertise • JV partnerships with major operators are a method to access quality properties • Tenancy  Investment grade single-tenants with long-term leases in critical use properties and contractual rent escalations  Multi-tenant with dispersed lease expirations and diversified tenant base • Location  Central Business District locations in cities with growing population, a relatively strong economy and transportation links  Satellite locations with growing nearby population centers and expanding local economy with high concentration of office buildings and barriers to new construction 74
  • Retail, Apartments, Logistics, MOB  Retail  Focus on high-traffic in-fill locations with high income, high land costs, and restrictive planning controls  Neighborhood and community centers with recession-resistant anchor tenants and minimal in-line shop space  Select high-end retail within top markets  Rental Apartments  Well-located rental apartments are particularly attractive  Collapse of housing and condo markets has led to rising rents and occupancy rates for apartments  Few rental apartments built in recent years due to emphasis on condominiums  Higher availability of financing  Logistics  Located in distribution hubs (e.g. rail, airports, seaports)  Modern and flexible design  Single or multi-tenant  Medical Office Buildings  Long-term leases to investment grade hospitals in a sector with strong demand 75
  • Investment Strategy: U.S. Office Markets Boston, Massachusetts Overview  Seventh largest metropolitan area in the U.S. with 24-hour city environment  Strong tenant base and high barriers to entry  Key industries include finance, technology, biology, education, and healthcare  Economy entered recession later than the rest of the U.S. and has been impacted by decrease in equipment and software investment  Small tenants leasing an average of 10,000 square feet dominate the market Investment Rationale/Opportunities  Downturns tend to be short and market fundamentals usually reverse quickly and dramatically once business conditions improve  Cambridge sub-market with recession resistant biotechnology companies is particularly attractive 76
  • Investment Strategy: U.S. Office Markets Chicago, Illinois Overview  Second largest office market in the U.S.  Location at the center of the U.S. makes it a key transportation and distribution hub  Home to the largest concentration of corporate headquarters in the U.S., including sixty-seven Fortune 500 companies Investment Rationale/Opportunities  Low amount of new development with some speculative properties nearing delivery  Higher capitalization rates present opportunities  Solid corporate tenant roster and location is favorable for future demand growth 77
  • Investment Strategy: U.S. Office Markets Los Angeles County, California (excluding downtown) Overview  Fifth largest office market in the U.S. and most populous county in the U.S.  Headquarters for seventeen Fortune 500 companies  Just about every industry sector is a major contributor to the economy  Recession resulted in increased unemployment Investment Rationale/Opportunities  Limited speculative development  With the employment picture beginning to improve, tenant activity should increase, providing stability to investors  Historically stable office market should become more attractive as the economy continues to improve, providing upside to new investors 78
  • Investment Strategy: U.S. Office Markets San Francisco, California Overview  Fifth largest metropolitan area in the U.S.  Diverse range of industries including technology, biotechnology, and finance  Headquarters for many of the world’s leading technology companies (i.e. Google, Yahoo!, Cisco) and one of the largest oil companies, Chevron  Unemployment rate below the national and state of California average Investment Rationale/Opportunities  Low amount of speculative development  High-growth technology companies provide future upside 79
  • Investment Strategy: U.S. Office Markets Washington, D.C. Overview  Area is home to the U.S. Federal government  Fourth largest metropolitan in the U.S. and highest median household income  Diverse range of industries including government, defense, travel, and education  Unemployment rate below the national average due in large part to the stability provided by the U.S. government Investment Rationale/Opportunities  Relatively more stable market fundamentals  Attractive destination for domestic and foreign capital 80
  • Investment Strategy: U.S. Office Markets Atlanta, Georgia Overview  9th largest population center in the U.S., referred to as “Capital of the South”  Home to 22 Fortune 1000 companies including Coca-Cola, Home Depot, AT&T, and CNN  Significant population and employment growth over the past decade  Speculative properties scheduled for delivery in the next two years Investment Rationale/Opportunities  Institutional buyers may pass over the market in favor of larger markets, creating pricing opportunities  Focus on properties with longer-term leases 81
  • Investment Strategy: U.S. Office Markets Miami, Florida Overview  International city serving as the headquarters of Latin American operations for numerous multinational corporations, especially banking institutions and television headquarters  The Port of Miami is one of the largest U.S. cargo ports and also services a huge cruise ship industry  Economy has been adversely impacted by the housing downturn  Unemployment above the national average Investment Rationale/Opportunities  Relatively low contraction in rental rates and increase in vacancies  Demand from European and South American investors should support future prices  Suburban markets, such as Coral Gables, with development constraints, are particularly attractive  New properties with solid tenant rosters 82
  • Investment Strategy: U.S. Office Markets Northern New Jersey (suburban New York) Overview  Sixth largest office market in the U.S. and 18th largest economy in the world  State with the third highest number of corporate headquarters in the U.S. (54 Fortune 500 companies)  Key industries include pharmaceuticals, telecommunications, insurance, and finance  Recession impacted tenants in the finance, insurance, and real estate sectors Investment Rationale/Opportunities  Serves as a back office area for Wall Street, benefiting from corporations’ paring back more expensive space in New York  Larger corporate submarkets have fared particularly well and present opportunities  Reduction in property prices and lack of new development is positive  Sale and leaseback opportunities may arise as corporations seek to monetize their portfolio of real estate holdings 83
  • Investment Strategy: U.S. Office Markets Seattle, Washington Overview  Major port city with relative proximity to Japan and China  Headquarters for companies including Microsoft, Starbucks, Amazon, and Costco  Rapidly growing population during the last two decades  Significant amount of speculative properties under construction Investment Rationale/Opportunities  One of the highest historical rates of job growth  Diverse economic base  Highly educated workforce  Migration of employers to more dense districts favors investment downtown 84
  • Conclusion Now is an Ideal Time to Invest in U.S. Commercial Real Estate:  The economy has been growing for the last 6 quarters  U.S. real estate market fundamentals have stabilized • Vacancy rates have bottomed out in most markets • Net effective rental rates are stabilizing in most markets and are poised for future growth • New construction is limited  Pricing today is below replacement cost • Potential for value appreciation when the market returns to equilibrium  Recovery in credit markets has begun  Excellent buying opportunities are surfacing today for long-term investors 85