pension funds: why real estate? · sources: ernst & young, reznick group private equity funds...
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Source: Reznick Group
Pension Funds: Why Real Estate?
Proven performance of real estate over the past decadeacross all property types
Need for higher yields due to aging baby-boomerpopulation
Worldwide appeal due to greater information andresearch, plus increased transparency
Portfolio diversification and appreciation potential
Consistent cash flow
Sources: Ernst & Young, Reznick Group
Private Equity Funds
Fund Type Yield Expectations
Core 7-10%
Core-Plus 10-13%
Value-Added 14-17%
Real Estate Hedge Funds 12-15%
Mezzanine Debt 15-18%
Opportunistic 17-20%
Source: Reznick Group
Blackstone
Currently raising in excess of $10 billion for a new opportunistic fundon the heels of raising $5 billion in 2006
In 2006, acquired Carr America for $ 5.6 billion (equity and deptassumed)
In 2006, acquired Trizec Properties (with Brookfield Properties) for$8.9 billion
In the past three years, has gobbled up more than $20 billion worth ofhotel companies including MeriStar Hospitality, WyndhamInternational, La Quinta, Extended Stay and Boca Resorts
Last month, acquired EOP for $39 billion (equity and dept assumed)and simultaneously sold off over $21 billion of the EOP portfolio
Just recently, they filed to go public and sell a 10% stake in itsmanagement partnership, for $4 billion.
Source: Reznick Group
An Interesting Perspective
2004: A record 20 public REIT M&A deals totaling $34 billion
2005 and early 2006: The total price paid for all eight REITprivatizations in 2005 (a record year) plus the Trizec Propertiesand Carr America transactions (closed in 2006) was slightlyover $38 billion
Last month: Blackstone acquired Equity Office Properties for$39 billion (equity and assumed dept)
Prior to the EOP acquisition, the largest REIT M&A transactionon record was the General Growth acquiring Rouse Co. for$12.6 billion in 2004
Source: Reznick Group
Private Equity Funds Privatizing REITs
Private Equity Fund Perspective:
Larger targets; less competition
Arbitrage between the value of a REIT’s asset and its stock price
Possible development pipelines for a value-added or opportunisticplay
REIT Management Perspective:
Favorable time to sell – high demand, high prices
High Cost of compliance (Sarbanes-Oxley)
Increased operating flexibility
Ability to leverage up certain assets
Source: Reznick Group
Other Significant Trends
REITs Launching Private Equity Funds
Prologis raised $1.85 billion from a global institutional client base
AMB launched a $2.2 billion fund in Japan
Globalization of Funds
Opportunistic funds are seeking opportunities in Mexico, Latin America, India, Japanand China, where they can get better yields than in the U.S.
Funds Going Public
KKR raised money in a REIT IPO
JER also created a REIT
Fund sponsors like Blackstone and Fortress are going public at record multiples
International REIT Acquisitions
More than 20 countries have thus far passed their own REIT legislation
Many funds are privatizing REITs outside the U.S.
Source: CBRE
U.S. Real Estate Returns Average Annual Return, 1997 thru 2006
16
14
12
10
8
6
4
Percent
NAREIT (Public Real Estate)
NCREIF (Private Real
Estate)
Russell
2000NASDAQ S&P 500
U.S. Govt.Bonds
Real Estate Investment Trusts Sector Net Acquisition of Financial Assets
20062005200420032002200120001999199819971996
400
300
200
100
0
US$ Billions
Source: Global Insight
Biggest REITs Before the Big Buyout*
Sources: Forbes, Green Street Advisors
*Data as of Jan 30, ’07
**Before Acquisition
REIT/ Major Properties Prop. Type
Recent
Price
Dividend
Yield
Net Assets
(US$ Bill.)
Simon Property Group Shopping Malls $113.5 2.7% $26.7
Vornado Realty Offices $123.6 2.8% $20.3
Equity Office Properties** Offices $54.7 2.4% $19.5
General Growth Properties Shopping Malls $60.7 3.0% $16.9
Equity Residential Apartments $55.6 3.3% $16.4
Small Size REITs Likely Targets for Takeover, According to Forbes*
*Data as of Jan 30, ‘07
REIT/ Major Properties Prop. Type
Recent
Price
Dividend
Yield
Net Assets
(US$ Bill.)
Home Properties Apartments $64.1 4.1% $3.0
Colonial Properties Apartments $50.1 5.4% $2.9
Maguire Properties Offices $43.2 3.7% $2.5
Sunstone Hotel Investors Hotels $27.5 4.6% $1.9
Felcor Lodging Hotels $21.9 4.6% $1.6
Sources: Forbes, Green Street Advisors
Source: CBRE
Overall Capitalization Rates By Property Type
200620052004200320022001
11.0
10.0
9.0
8.0
7.0
6.0
5.0
Rate
Industrial Suburban RetailCBD Office Apartment
U.S. Vacancy Rates Industrial vs. Office Space
2006200520042003200220012000199919981997
18
16
14
12
10
8
6
Percent Vacant
Industrial
Office
Sources: CB Commercial, Economy.com
U.S. Vacancy Rates
Office Space Markets
2006200520042003200220012000199919981997
20
18
16
14
12
10
8
6
4
Percent Vacant
DowntownMetropolitanSuburban
Sources: CB Commercial, Economy.com
Industrial Space Demand Absorption vs. Availability
Sources: CBRE
200620052004200320022001
300
200
100
0
-100
-200
12.0
11.5
11.0
10.5
10.0
9.5
9.0
SF (Millions) Rate
Absorption - LAvailability Rate - R
Office Space Demand Absorption vs. Vacancy
Sources: CBRE
200620052004200320022001
100
50
0
-50
-100
-150
17
16
15
14
13
12
SF (Millions) Rate
Absorption - LVacancy Rate - R
Interest Rates Fed Funds Rate and 10-year Government Bond
20072006200520042003200220012000199919981997
8
6
4
2
0
Percent
Fed Funds Rate10-year Government Bond
Source: Global Insight
Yield Curve
10-year Government Bond Minus Fed Funds Rate
20072006200520042003200220012000199919981997
4
3
2
1
0
-1
-2
Percent
Source: Global Insight
Corporate Spread
Moody’s Corporate Aaa Minus 10-year Treasury Bond
20072006200520042003200220012000199919981997
2.5
2.0
1.5
1.0
0.5
Percent
Source: Global Insight
Mortgage Rates
United States
20072006200520042003200220012000199919981997
9
8
7
6
5
4
3
Rate
30-Year Fixed
15-Year Fixed
1-Year ARM
Sources: Freddie Mac, Economy.com
1-Month LIBOR
London Interbank Offered Rate
20072006200520042003200220012000199919981997
7
6
5
4
3
2
1
0
Rate
Sources: Freddie Mac, Economy.com
Foreign Purchases of U.S. Securities Net Foreign Purchases
20072006200520042003200220012000199919981997
200
150
100
50
0
US$ Billions
Source: Global Insight
S&P 500 Yield Dividend / Price Ratio
0601969186
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Ratio
Source: Global Insight
Construction Put in Place
Private Residential vs. Private Nonresidential
20072006200520042003200220012000199919981997
30
20
10
0
-10
-20
-30
Percent Change, Year Ago
Residential ConstructionNonresidential Construction
Sources: U.S. Census, Economy.com
Travel Expenditures
Resident and International Travel for United States
0504030201009998979695949392
20
15
10
5
0
-5
-10
-15
Percent Change, Year Ago
U.S. Resident TravelInternational Travel
Sources: TIA, Economy.com
Hotel Occupancy Rate
Las Vegas
2006200520042003200220012000199919981997
92
90
88
86
84
82
80
78
76
Percent
Sources: Las Vegas Convention & Visitors Authority, Economy.com
Unsold Inventory Index
California
20072006200520042003200220012000199919981997
12
10
8
6
4
2
0
Months Supply
Sources: CAR, Economy.com
Sources: Wall Street Journal
Sources: Wall Street Journal
Highest Share of Subprime Loans Subprimes as a Percentage of All Loans
Metro Percent
McAllen, TX 26.8
Memphis, TN 24.0
Sharon, PA 23.1
Miami, FL 23.0
Richmond, VA 22.3
Brownsville, TX 21.6
Merced, CA 21.6
Sumter, SC 20.7
Bakersfield, CA 20.2
Jackson, TN 20.2
Sources: CNN Money, First American Loan Performance
Highest Share of Subprime Loans atLeast 60 Days Late Percentage of Delinquent Subprime Loans
Sources: CNN Money, First American Loan Performance
Metro Percent
Cleveland, OH 24.9
Detroit, MI 24.6
Jackson, MS 22.7
Jackson, MI 22.0
Youngstown, OH 21.8
Flint, MI 20.7
South Bend, IN 20.3
New Orleans, LA 20.1
Kankakee, IL 20.1
Akron, OK 19.7
Single-Family Housing Starts United States, SAAR
20072006200520042003200220012000199919981997
2.0
1.8
1.6
1.4
1.2
1.0
Millions
Sources: U.S. Census, Economy.com
Multi-Family Housing Starts United States, SAAR
20072006200520042003200220012000199919981997
500
450
400
350
300
250
200
Thousands
Sources: U.S. Census, Economy.com
Existing Single-Family Home Sales United States, SAAR
2006200520042003200220012000199919981997
6.5
6.0
5.5
5.0
4.5
4.0
3.5
Millions
Sources: NAR, Economy.com
Existing Condo & Co-op Sales United States, SAAR
070605040302010099
1000
900
800
700
600
500
400
Thousands
Sources: NAR, Economy.com
Existing Median Home Price Single Family Homes, United States
Sources: NAR, Economy.com
2006200520042003200220012000199919981997
240
220
200
180
160
140
120
100
14
12
10
8
6
4
2
0
US$ Thousands Percent Change, Year Ago
Home Price (L)% Change, Year Ago (R)
Real GDP Growth
United States, 2000 Prices
20062005200420032002200120001999199819971996
5
4
3
2
1
0
Percent Change, Year Ago
Sources: Global Insight
20072006200520042003200220012000199919981997
6.5
6.0
5.5
5.0
4.5
4.0
3.5
4
3
2
1
0
-1
-2
Percent Percent Change, Year Ago
Unemployment Rate - LCivilian Employment - R
U.S. Employment Picture
Unemployment Rate & Employment Growth
Source: Global Insight
Recent Transactions…….
Hospitality Real Estate
Source: Wall Street Journal, April 18, 2007
• Lightstone to buy Extended Stay Hotels fromBlackstone for $8 billion
• One of the biggest deals in noncasino hotel deals
• Blackstone took Extended Stay private back May2004 (paying $1.99 bill. + $1.13 bill. in debt )
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