Morgan Stanley - Real Estate Pitch Book

 

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UNC Kenan-Flagle Kenan-Flaglerr Annual Real Estate Conference Conference

Discussion Materials 19 February 2009

 

UNC Kenan-Flag Kenan-Flagler ler Annual Real Estate Conference

Morgan Global PlatformStanley Real Estate • Leadin Leading g globa globall real real esta estate te investment manager with $91Bn in real estate estate assets assets

Frankfurt

under management(RE AUM)  – America ($36Bn), Europe ($29Bn) and Asia ($26Bn)  – Core, value-added and opportunistic investment vehicles • Ind Indust ustry ry leadi leading ng global global rea reall

New York

London

Seoul

Stockholm

Tokyo

Moscow

Dublin Beijing

Boston Toronto San Francisco

Munich

Paris Chicago Madrid

Shanghai

Milan

Atlanta

Menlo Park

estate investment banking franchise

Taipei Hong Kong

 – Intermediated $400Bn in real estate M&A transactions over past decade

Los Angeles

New Delhi Mexico City

Mumbai

Bangkok

 – Public debt, preferred and equity underwriting

Houston

Dubai

Sydney

Singapore

São Paulo

Buenos Aires

Johannesburg Melbourne

Morgan Stanley Real Estate Offices

 Morg an Stanley R eal E s tat tate e Global G lobal Platform Number of Offices Number of Professionals

22 815(1)

Morgan Stanley Investment Banking Offices Countries with Morgan Stanley Hotel In vestments

Note

1. Includes banking and investing professionals professionals as well as Financial Controller Controllers, s, IT, Legal and administrative strative staff who fully support the rreal eal estate investing business as of November 30th

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UNC Kenan-Flagler Kenan-Flagler Annual Real Estate Conference

Unprecedented Financial and Economic Times • Si Sinc nce e Sept Septem embe berr 2008 2008::  – Conservatorship of Fannie Mae and Freddie Mac  – Bankruptcy of Lehman Brothers  – Sale of Merrill Lynch, Wachovia and Washington Mutual

The Vicious Cycle

The Casualties $1.1 Trillion Financial Sector Writedowns (1)

1.

Losse Los ses s on on Lev Levera eraged ged Bor Borrow rowing ing

Banks: $825Bn / Insurance: $165 Bn / GSEs: $114Bn

2.

Deter Det erior iorat atio ion n in Cre Credit dit Qua Qualit lity y

Americas: $758Bn / Europe: $315Bn / Asia: $31Bn

 – Collapse of AIG 3. MT MTMs Ms/L /Los osse ses s in Fin Finan anci cial als s

Market capitalization of equity markets has declined significantly significantly (2):

 – Failure numerous other financialofinstitutions  – Unparalleled global government intervention

4.

De–lever De–lev eragi aging ng / Red Reduct uction ion in in Credit Credit Availability

• World: $59Tr to $28Tr (53% decline) • US: $19Tr to $10Tr (47% decline)

5. As Asse sett Pr Pric ice e De Decl clin ines es • Europe: $18Tr to $8Tr (56% decline)

6. Im Impa pact ct on th the e Rea Reall Eco Econo nomy my

7.

• Asia: $17Tr to $8Tr (53% decline)

R ep eat st ep 1

Notes

1. Asset writedown writedowns s and credit losses; losses; Bloomberg Bloomberg as of February February 13, 2009 2. FactSet aggregate market value calculations from October 2007 to February 12, 2009

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UNC Kenan-Flagler Kenan-Flagler Annual Real Estate Conference

Select Real Estate Public Market Declines • Since Since Janua January ry 1, 200 2008, 8, global global public real estate markets have declined  – US: (60.5%)  – Japan: (41.8%)  – Europe: (56.5%) • The pri primar mary y Chine Chinese se equi equity ty index for domestic securities, the China A Share index, has declined (54.3%) • The publ public ic marke markett declin decline e price price in significant cap rate expansion and weakening fundamentals

U.S.

Europe

Index Price Performance since January 1, 2008

Index Price Performance since January 1, 2008

1,000 900

2,200 2,000

800

1,800

700

1,600

600

1,400

500

1,200

400

1,000

300

800

Jan-08 Jan -08 Ma Mar-0 r-08 8 Ma May-0 y-08 8 JulJul-08 08 Sep Sep-08 -08 Nov-08 Nov-08 Feb Feb-09 -09 MSCI US REIT Index

Jan-08 Jan -08 Ma Mar-0 r-08 8 Ma May-0 y-08 8 Jul Jul-08 -08 Sep Sep-08 -08 Nov-08 Nov-08 Feb Feb-09 -09 FTSE EPRA/NAREIT Europe

Japan(1)

China A-Shares Index

Index Price Performance since April 18, 2008

Index Price Performance since January 1, 2008

1,050

5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500

950 850 750 650 550 450  Apr-08

Jun-08

Aug-08

Oct-08

FTSE EPRA/NAREIT Japan

Dec-08

Feb-09

Jan-08 Jan -08 Ma Mar-0 r-08 8 Ma May-0 y-08 8 Jul Jul-08 -08 Sep Sep-08 -08 Nov-08 Nov-08 Feb Feb-09 -09 China A-Share Index

Source FactSet as of February 17, 2009

Note

1. Index data data first made made available available in April 2008 2008

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UNC Kenan-Flagler Kenan-Flagler Annual Real Estate Conference

Stress in All Corners of the Market • Commod Commoditi ities es down down 59% 59% from from one year ago as of February 17, 2009

Volatility

• Emergi Emerging ng Mark Market et Equi Equitie ties s down 48% from one year ago as of February 17, 2009

90 80

Hedge Fund Performance

CBOE Volatility Index of S&P 500

Credit Suisse Tremont Hedge Fund Index (Monthly Returns)

% 4.0% 2.0%

70 0.0%

60 50

(2.0)%

40

(4.0)%

30 (6.0)%

20 10

(8.0)%

Jan-08 Jan-08 Mar-0 Mar-08 8 May-08 May-08 Jul-08 Jul-08 Sep-0 Sep-08 8 Nov-0 Nov-08 8 Feb-0 Feb-09 9 Source FactSet as of February 17, 2009

Jan-0 Jan-07 7 May-07 May-07 Sep-0 Sep-07 7 Jan-08 Jan-08 May-0 May-08 8 No Nov-0 v-08 8 Jan-0 Jan-09 9 Source HedgeFundIndex.com as of February 17, 2009

Commodities

Emerging Markets Index

Indexed to 100

MSCI Emerging Markets Index Indexed to 100 110 100

140 120

90

100

80

80

70

60

60

40

50

20 JanJan-08 08

MarMar-08 08 Ma Mayy-08 08

Ju Jull-08 08

SepSep-08 08 No Novv-08 08 FebFeb-09 09

GSCI Commodity Index

Source Bloomberg as of February 17, 2009

40 Dec Dec-0 -07 7 Ma Mar-0 r-08 8 Ma May-0 y-08 8

Source

Jul-08 Jul-08

Sep-0 Sep-08 8 No Nov-0 v-08 8 Fe Feb-0 b-09 9

FactSet as of February 17, 2009

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UNC Kenan-Flagler Kenan-Flagler Annual Real Estate Conference

Summary of Real Estate Environment and Opportunities • We expec expectt the the best dis distre tresse ssed d/ opportunistic environment we have seen since the early 90s • Distre Distresse ssed d oppor opportun tuniti ities es globally will come from:  – Failed / stressed financial institutions that will be forced sellers

Environment •

The cre credit dit crisi crisiss rema remains ins intens intensee aand nd has resulted in a dramatic re-pricing of risk 

•

La Lack ck of cred credit it/f /fin inan anci cing ng  – Scarcity of capital

•

 – Public real estate companies needing to deleverage

All All aass sset et ccla lass sses es h hav avee been been imp impai aire red d  – Cap rates signifi significantly cantly wider   – Real estate yields are at historic lo lows ws versus corporate bond yields; reversion to historical norms would require a real estate price decline of 25%

 – Overleveraged borrowers and bank debt sales • Timing Timing of mark market et stabi stabiliza lizatio tion n is still unclear unclear – need to be be patient and not enter the market prematurely

•

•

Decl Declin inin ing g oper operat atio ions ns/f /fun unda dame ment ntal alss

Dist Distre ress ssed ed si situ tuat atio ions ns  – Lender driven  – Borrower driven

•

 – Less flexible deb debt; t; lower LTVs, conforming DSCR 

 – Corporate restructurings and non-core asset sales to generate liquidity and solidify balance sheets

Opportunities

Co Corp rpor orat atee re rest stru ruct ctur urin ings gs  – Focus on core busines businesses ses  – Sale-leasebacks on occu occupational pational real estate

•

Re Real al eest stat atee comp compan any y di dist stre ress ss  – Bankruptcies  – Growth capital

•

Curren Currently tly,, credi creditt op oppor portun tuniti ities es aappe ppear ar more more favorable than equity opportuniti opportunities es

 – Global recession is slowing rent growth and vacancies are projected to rise with corporate bankruptcies and unemployment •

Wh Whol oles esal alee vs. vs. reta retail il pric pricin ing g

•

Big Big sp spre read adss betw betwee een n (i) (i) stab stabil iliz ized ed v vs. s. opportunistic assets and (ii) prime vs. secondary availability

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UNC Kenan-Flagler Kenan-Flagler Annual Real Estate Conference

Institutional Investor Approach to Real Estate • Existi Existing ng port portfol folios ios are concentrated in core investments

Existing Allocation by Risk Preference(1)

• Howeve However, r, new new invest investmen ments ts are are heavily skewed to value added and opportunistic

Existing Allocation to Non-Core 49%

 – Investors are likely anticipating that near-term vintage years will be strong ones, due to current distress

REIT 9%

Opportunistic (US) 19%

• Real Real estate estate ave averag rages es 10% 10% of Plan Sponsor target allocations

Expected New Allocations by Risk Preference(1,2)

New Allocation to Non-Core 84%

Foreign Investment 14% REITS 1%

Foreign Investment 3%

• Expec Expecte ted d real real estat estate e commitments are down 31% from 2008 Core (US) 51%

Real Estate Capital Flows

Value-Added (US) 18%

Opportuistic (US) 35%

($Bn) 80

Core 16%

Value-Added (US) 34%

71

70

59 59

60 50

60 46

40

42 29

30 20 10 0 2006 2007  Actual Capital Flows   Source

2008 2009 Expected Capital Flows

2009 Plan Sponsor Survey, Kingsley Associates

Source

2009 Plan Sponsor Survey, Kingsley Associates

Sources IREN, Kingsley Associates

Notes 1. For US Plan Sponsors Opportunistic investing seeks the highest returns, typically 20% or more, and uses uses the highest proportion of debt, sometimes reaching 80% or more. Core investing seeks the lowest risk and often targets the NCREIF benchmark, which has hist orical average returns in the 8%–10% range. Core investing typically uses debt between 0% and 40%. Value-Added investing falls between c ore and opportunistic, seeking returns that typically range between 11% and 17% 2. Excludes a category called “Other”, which represents 3%

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