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2008 Fourth Quarter Real Estate Commentary

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2008 Fourth Quarter Real Estate Commentary

  1. 1. Real Estate Commentary 4th Qtr January 2009
  2. 2. Global REIT Markets 2008 Theme: flight to safety, de-leveraging. Global REITs showed signs of a bottom November 20, 2008 as credit turmoil and economic slowdown fears may have peaked. U.S. REITs lead the rise from November (+16%). Economists believe the U.S. economy began the downturn and may lead other regions in an upturn sometime in 2009. NAREIT U.S. +16.39% Dec -37.7% 2008 stimulus help, began the downturn, may lead upside EPRA NAREIT Asia +4.82% Dec -52.48% 2008 economy slowing and investors reduce risk EPRA NAREIT Europe +7.64 Dec -51.13% 2008 weakening economy, UK heavy in financial industry Major EPRA NAREIT Indexes YTD 12/31/08 2008 Total Return U.S. REITS were up YTD Sept. Global -9.26% Lehman (key provider of credit to RE) Files Bankruptcy September Bear Stearns bailout CDS Market sent into turmoil January 22 U.S. Equity REIT Index leads the Bear Stearns bailout December bounce. +16% March ‘08 CMBS still frozen Global REIT Index +9.66% Dec. November 21, ’08 NAREIT U.S. Equity REIT European REIT Index +7.64% Dec. Index Dividend yield reaches Asia REITS +4.82% Dec. 12% was 5% in Sept.
  3. 3. Index returns YTD December 31, 2008 with World Major Indexes Global Deleveraging and Commodity Weakness brought a re-pricing of Risk Mostly in Q4 ‘08
  4. 4. U.S. REIT Value vs NAV at historic levels Q4 ’08 market “bottomed” November 20 2008
  5. 5. European and UK REIT Equities Companies reach historic Discount to NAV not seen since the “value” days of 2002 Worst performance for Global REITS were in Norway and Spain both down over 70% xxxxxxxxxx xxxxxxx
  6. 6. U.S. REITs U.S. REIT Index 2008 Mostly, had One Bad Quarter in 2008 one bad quarter 500 450 400 350 300 250 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
  7. 7. New Credit Supply to Real Estate Mostly from Insurance Companies and Pension Funds Lending standards have improved and focus is on refinancing of their existing loans Hedge Funds are opening up to lend and securitize, but in early stages. GIC reportedly funded a new fund with $1.5 Billion for Commercial RE loans and CMBS. Corporate Bonds Issued by RE Companies and REITS reached 14% Yield Q4 ’08, was 7% June ‘08 CMBS Issuance ($billion) 300 250 236 200 $ (Billion) 150 CMBS Issuance ($billion) 100 92 50 26 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 CMBS issuance nil for 2008 Real Estate Corporate Bond Spreads widen $235 billion in 2006 S&P changes criteria for REIT credit ratings. Preferred Stock now considered Debt for leverage calculation Source: Bloomberg (Source: ML index 12/31/08)
  8. 8. Structured Finance is a Foundation ... not Cheap until Q4 Quote from Blackrock CIO: There is quot;unbelievable valuequot; in triple-A-rated commercial mortgage-backed securities, or CMBS, the global Chief Investment officer for fixed income at New York money management firm BlackRock said Q1 2008 BlackRock’s income was reduced by investment losses of $91m from investing its own capital in in real estate products.
  9. 9. Structured Finance is the Foundation ... it is frozen No. Industry U.S. Avg Rating Avg Price Avg Yield Avg OAS Real Estate Baa2 $ 71.52 14% 1,240 1 CMBS AAA $ 77.42 13% 1,173 2 Banking A+ $ 90.51 654 8% 3 Consumer Cyclical A- $ 91.11 584 8% 4 Energy Baa2 $ 93.52 556 7% 5 Brokerage A+ $ 94.39 527 7% 6 Technology & Electronics A- $ 95.08 527 7% 7 Telecommunications A- $ 97.67 476 7% 8 Utility Baa1 $ 97.23 454 7% 9 Consumer Non-Cyclical A- $ 101.91 378 6% 10 Residential MBS Agency AAA $ 103.58 180 3% 11 Agency AAA $ 99.51 97 2% 12 Treasury AAA $ 120.17 0 2% 13 (Source: Merrill Lynch Agg and CMBS Indexes Jan 15, 2009)
  10. 10. Cap Rates seem headed for 9% Source: Rosen Consulting
  11. 11. Good News: U.S. Office Vacancies ok Washington DC is perhaps best for 2009. Prices off about 20%, Vacancy better Office Vacancy 18 U.S. vs DC 16 14 12 DC 10 % US 8 6 4 2 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 Source: CBRE Office Vacancy Index
  12. 12. Good News: Libor Improved dramatically 3 Mo Libor Rate % 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 2002 2003 2004 2005 2006 2007 2009 Source: Bloomberg to Jan 9, 2009
  13. 13. Good News: Strategia allocation to defensive strategies has done well Global L/S allocation exceeded market by 14% U.S. L/S allocation exceeded U.S. market by 32% European L/S allocation exceeded Europe market by 58% Strategia’s Funds: WRELF 2008 return exceeded EPRA/NAREIT Global Index by 13.38% USPF 2008 return exceeded US NAREIT Index by 25.99%
  14. 14. Real Estate Commentary 2009 Outlook: until the global economy and investor sentiment improves Defense/Liquidity REIT: Company balance sheet strength and liquidity should drive returns for 1 or 2 more quarters. Weakest balance sheets of companies exposed to fundamental weakness such as in General Growth Properties should result in a bankruptcy that could lead to an opportunity to buy strong REITs All could suffer from the market digesting of bad news. REITS globally have “value” as measured by NAV and other metrics, but investors should be patient to add exposure when “cheap”. Cheap implies values skewed to high reward and lower or quantifiable risks. Best case would be if the CMBS market were to function well again. Direct Commercial Property: Uncertainty of financing, tenant strength, and occupancy could lead to the best results in NNN buildings and Apartments. Weakest results could be in Hotels and Office portfolios dependent on tenants from the financial industry. Opportunity funds might buy REITs. CMBS: Fixed income opportunities could reward investors well vs REITs and Direct as it can now offer Higher current Cash Flow, Liquidity, more senior position in capital structure/risk. Long/Short: Until economic conditions become clearer and credit markets flow to RE again, the best opportunities will be to strategies that can get long in severe drops and short severe rallies. Volatility can be taken advantage in hedge funds. Also, there are opportunities for 2009 in separate accounts as a vehicle to add Transparency and Liquidity.

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