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Home My WebLink About2010 07 28 Other Quarterly Report Provided By CornerstoneDate: July 28, 2010 The following document was provided to the Board of Trustees at the July 28, 2010 Special Meeting. Cornerstone Patriot Fund Quarterly Report Period ended March 37, 2070 T CORNERSTONE Cornerstone Patriot Fund PORTFOLIO MANAGER COMMENTARY Many recent economic indicators suggest that recovery has HIGHLIGHTS started to take hold, and the possibility of a double -dip recession scenario has decreased. Even across the real estate Total Assets sectors, certain property types are showing improvement in net effective rents. First quarter apartment data indicates that both concessions have lessened and that occupancy has improved. Smith Travel Research has recently upgraded its hotel RevPAR forecast for 2010. These sentiments are detailed in Cornerstone Research's U.S Economic and Real Estate market Outlook found on page 6. The Patriot Fund's fundamental strategy is to own core investments with a barrier market focus, low leverage (currently 19.9 %), managed rollover exposure and investment in the prime real estate asset types (office, apartments, retail, industrial and hotel). This strategy has enabled the Fund to maintain its core occupancy at approximately 90 %, with a resulting strong cash flow leading to an annualized dividend payment of 4.1% since inception. The Fund has not had an exit queue during this current downturn, which has provided the ability to maintain a cash position to fund new investments as opportunities arise. The valuation of assets continues to be complicated by limited transaction data, however transactions do appear to picking up and have provided some evidence that there is strong demand for high quality, well located real estate properties. The re- pricing of real estate that has occurred over the last two years, within the Patriot Fund, has resulted in an aggregate property write -down of approximately 33 %, peak to trough. For the quarter, the Patriot Fund had a 1.78% total return (1.57% net), comprised of a 1.47% income return (1.26% net) and a 0.31% appreciation return. Over the past year, the Fund had a - 16.7% gross total return that was comprised of a 5.86% income return and a -21.61% appreciation return. The quarterly and one -year returns compared favorably to the benchmark NFI -ODCE index of 0.75% and - 18.02% for the quarter and one -year returns, respectively. Operationally, our focus over the last two years on the early renewal of tenants has had positive results in stabilizing portfolio income, with only 3% of the leases rolling over the remainder of 2010 and only 3% rolling in 2011. Additionally, leasing activity appears to be picking up, with more leases executed for occupancies later in the year. Net Assets Number of Investments Leased (core - commercial) Cash to Total Assets* Leverage Ratio (mv debt /total assets) $0.9 billion $0.7 billion 28 91% 8.7% 19.9% One Year Return (net as of 12/31/09) -17.4% *Excludes restricted cash of $2.2 million, includes Certificates of Deposit While it appears that the worse is over, the ride is not expected to be smooth. In order for real estate to feel the full benefit of a recovery on the real estate demand side, consistent job growth needs to occur, which is not expected until the latter half of the year. As always, I welcome any questions that you might have about the Patriot Fund. r Br an T. Murdy, Portfolio Manager 2 Cornerstone Real Estate Advisers LLC March 31, 2010 FUND OVERVIEW Fund Description: Cornerstone Patriot Fund is a commingled open -end real estate fund structured as a private REIT /operating partnership managed by Cornerstone Real Estate Advisers LLC. The Fund's investment objective is to achieve a long -term 5% real rate of return (gross of fees) and to meet or exceed the NCREIF Fund Index Open - End Diversified Core Equity, although there can be no assurance that this objective will be achieved. FUND PERFORMANCE Investment Strategy: The Patriot Fund is managed with Cornerstone's belief that through the application of our research findings along with ac- tive asset management, a return premium can be achieved. The Barrier Market focus of the Patriot Fund is a result of a Corner- stone Research study that indicates Barrier Markets have gener- ated higher returns over time. Another research driven strategy utilized by the Patriot Fund is that core property investment in Growth Markets at certain times in the cycle, can provide excess return. The Patriot Fund's investment style incorporates targeting core investments and applying this strategic research approach, as well as a bottom -up active asset management and investment selection. The Fund also designates up to a 20% tac- tical allocation to traditional value -added investments, that are targeted to achieve returns that are in excess of those expected from core assets. The value -added strategies include lease -up, development, repositioning and to -be -built ventures. The cur- rent Fund leverage target is 20 % -25 %, with a maximum of 30% of Total Assets. Valuation Policy: The Patriot Fund uses a quarterly valuation process, with review and acknowledgement by PricewaterhouseCoopers ( "PwC ") as Valuation Consultant. Assets are externally ap- praised at least once annually in a staggered rotation with approximately 25% of the properties appraised each quarter. At the off - quarters, assets are marked -to- market through an in- ternal valuation process. Internal value recommendations and the supporting model are sent to Cornerstone's Vice President of Valuation ( "VPV ") an MAI, and then forwarded to PwC for their review against market transactions and peer valuations. With specific consideration of the major assumptions and asso- ciated rates of return, the VPV and PwC jointly and separately review the recommended internal valuation. With an acknowl- edgement from both theVPV and PwC that the recommended internal values are reasonable and consistent with the market, internal values are certified by the VPV. In the event that a valuation cannot be reconciled, PwC will prepare a Restricted appraisal of the property in the current quarter and/or the as- set will be externally appraised by a third party vendor in the period that follows. Debt is marked to market quarterly based upon an external analysis performed by US Realty Consultants. IQ 2010 1 Year 3 Years 5 Years Since Inception (7/1/04) ■ Patriot Fund Net ■ Patriot Fund Gross ■ NFI -ODCE* * NCREIF Fund Index- Open -End Diversified Core Equity returns (gross) Past performance is no guarantee of future results. There is no guarantee of principal or investment returns. See Performance Notes for further details. PROPERTY TYPE DISTRIBUTION Land Hotel 0.6% 9 ho/ Indust 15.9' Apartment 19.5% 24.5% )ffice 9.9% GEOGRAPHIC DISTRIBUTION Pacific 48.0% Mo Mideast 21.0% t North Central 6.2% Southwest Southeast North Central 2.1% 1.9% 3.7% All distributions are based on 3/31/10 Gross Market Value Cornerstone Real Estate Advisers LLC 3 Northeast 14.4% 0- 0 o 0 0 °° Cq O 0 0 0 O o N _ Investment Strategy: The Patriot Fund is managed with Cornerstone's belief that through the application of our research findings along with ac- tive asset management, a return premium can be achieved. The Barrier Market focus of the Patriot Fund is a result of a Corner- stone Research study that indicates Barrier Markets have gener- ated higher returns over time. Another research driven strategy utilized by the Patriot Fund is that core property investment in Growth Markets at certain times in the cycle, can provide excess return. The Patriot Fund's investment style incorporates targeting core investments and applying this strategic research approach, as well as a bottom -up active asset management and investment selection. The Fund also designates up to a 20% tac- tical allocation to traditional value -added investments, that are targeted to achieve returns that are in excess of those expected from core assets. The value -added strategies include lease -up, development, repositioning and to -be -built ventures. The cur- rent Fund leverage target is 20 % -25 %, with a maximum of 30% of Total Assets. Valuation Policy: The Patriot Fund uses a quarterly valuation process, with review and acknowledgement by PricewaterhouseCoopers ( "PwC ") as Valuation Consultant. Assets are externally ap- praised at least once annually in a staggered rotation with approximately 25% of the properties appraised each quarter. At the off - quarters, assets are marked -to- market through an in- ternal valuation process. Internal value recommendations and the supporting model are sent to Cornerstone's Vice President of Valuation ( "VPV ") an MAI, and then forwarded to PwC for their review against market transactions and peer valuations. With specific consideration of the major assumptions and asso- ciated rates of return, the VPV and PwC jointly and separately review the recommended internal valuation. With an acknowl- edgement from both theVPV and PwC that the recommended internal values are reasonable and consistent with the market, internal values are certified by the VPV. In the event that a valuation cannot be reconciled, PwC will prepare a Restricted appraisal of the property in the current quarter and/or the as- set will be externally appraised by a third party vendor in the period that follows. Debt is marked to market quarterly based upon an external analysis performed by US Realty Consultants. IQ 2010 1 Year 3 Years 5 Years Since Inception (7/1/04) ■ Patriot Fund Net ■ Patriot Fund Gross ■ NFI -ODCE* * NCREIF Fund Index- Open -End Diversified Core Equity returns (gross) Past performance is no guarantee of future results. There is no guarantee of principal or investment returns. See Performance Notes for further details. PROPERTY TYPE DISTRIBUTION Land Hotel 0.6% 9 ho/ Indust 15.9' Apartment 19.5% 24.5% )ffice 9.9% GEOGRAPHIC DISTRIBUTION Pacific 48.0% Mo Mideast 21.0% t North Central 6.2% Southwest Southeast North Central 2.1% 1.9% 3.7% All distributions are based on 3/31/10 Gross Market Value Cornerstone Real Estate Advisers LLC 3 Northeast 14.4% Cornerstone Patriot Fund PORTFOLIO MAP Portland 1.7% Sacramento 6.0% San Francisco 13.0% --1 Oakland 3.1% Los Angeles 13.9% Riverside 3.5 Orange Minneapolis 3.7% Dallas 2.1% All distributions based on 3/37/70 Gross Market Value INVESTMENT SUMMARY Washington 19.6% Raleigh 1.4% Atlanta 1.9% Chicago 6.2% ,Boston 6.8% �j Philadelphia 7.6% 4 Cornerstone Real Estate Advisers LLC Gross Market Market Value Net Market Value of Mortgage Value Investment Name Type MSA Size (3/31/10) (3/31/10) (3/31/10) Lakes of Schaumburg Apartments Chicago, IL 428 Units $35,200,000 $35,200,000 Promenade Oaks Apartments Minneapolis, MN 282 Units 31,500,000 31,500,000 Regatta Apartments Apartments Philadelphia, PA 338 Units 42,000,000 $35,000,000 7,000,000 The Ridge Apartments Boston, MA 264 Units 58,200,000 45,000,000 13,200,000 Hamilton Crowne Plaza Hotel Washington, DC 318 Rooms 81,600,000 81,600,000 Crossroads Distribution Center Industrial Atlanta, GA 322,780 14,850,000 14,850,000 Bellegrave Business Park Industrial Riverside, CA 505,406 25,900,000 25,900,000 Pureland VI Industrial Philadelphia, PA 597,232 23,000,000 14,399,544 8,600,456 Townsend Distribution Center Industrial Portland, OR 397,934 14,900,000 14,900,000 San Fernando Business Center A Industrial Los Angeles, CA 132,936 12,853,084 12,853,084 San Fernando Business Center B Industrial Los Angeles, CA 71,160 6,880,194 6,880,194 San Fernando Business Center C Industrial Los Angeles, CA 147,000 14,212,879 14,212,879 San Fernando Business Center D Industrial Los Angeles, CA 147,019 14,214,716 14,214,716 San Fernando Business Center E Industrial Los Angeles, CA 92,455 8,939,127 8,939,127 General Road Business Park Land Riverside, CA 20.8 Acres 4,000,000 4,000,000 Crossroads Land Land Atlanta, GA 10 Acres 1,500,000 1,500,000 Bayhill I & II Office San Francisco, CA 189,884 38,100,000 38,100,000 Chevy Chase Plaza Office Washington, DC 171,206 55,100,000 33,400,000 21,700,000 Waterway Tower Office Dallas -Ft Worth 221,941 18,000,000 18,000,000 Colonnade II Office Raleigh- Durham 126,926 11,900,000 11,900,000 Spear Street Terrace Office San Francisco, CA 246,563 72,700,000 72,700,000 The Atrium Office Orange County, CA 291,612 59,200,000 59,200,000 Promenade at Town Center Retail Los Angeles, CA 181,677 61,300,000 34,577,009 26,722,991 Red Top Plaza Retail Chicago, IL 151,840 17,800,000 17,800,000 Bridgeside Shopping Center Retail Oakland, CA 105,118 26,300,000 26,300,000 Renaissance Creek Retail Sacramento, CA 179,425 50,800,000 25,995,000 24,805,000 South Lakes Village Retail Washington, DC 105,527 31,000,000 31,000,000 University Park Retail Denver, CO 88,559 22,500,000 22,500,000 Totals $854,450,000 $188,371,553 $666,078,447 Chicago 6.2% ,Boston 6.8% �j Philadelphia 7.6% 4 Cornerstone Real Estate Advisers LLC March 31, 2010 FINANCING SUMMARY LEASING BY PROPERTY TYPE - CORE PORTFOLIO 120% 100% 80% 60% 40% 20% 0% 93% Principal 92% Maturity Investment Financed Balance Rate Date Promenade at Town Center �') 34,277,009 7.20% Jul -12 Regatta Apartments 35,000,000 4.72% Feb -11 Renaissance Creek ( z ) 25,995,000 variable Nov -11 The Ridge 45,000,000 5.78% Mar -17 Chevy Chase Plaza 35,000,000 5.44% Feb -16 Pureland VI 14,059,612 6.02% Aug -18 Portfolio Line of Credit (3) 0 variable N/A Total (4) 189,331,621 5.34% Debt in place at purchase, purchase price reduced to adjust for higher than market rate debt Z Call options every five years beginning 1112011 through 1112031 3 $125 million line of credit, with no funded amount at quarter -end 4 Total rate is a weighted average LEASING BY PROPERTY TYPE - CORE PORTFOLIO 120% 100% 80% 60% 40% 20% 0% 93% 92% 9P 88% 64% Apartment Hotel Industrial* Office* Retail Note: leasing for industrial, office and retail refers to actual economic leasing, for apartment and for hotels leasing refers to average quarterly occupancy. *Leasing for industrial and office including value -added properties is 59% and 80% respectively 1 Q APPRECIATION CONTRIBUTIONS The Ridge (Boston - apartment): 0.87% Promenade at Town Center (Los Angeles - retail): 0.17% San Fernando Business Center (Los Angeles - industrial) 0.12% Hamilton Crowne Plaza (Washington DC- hotel): -0.18% Spear Street Terrace (San Francisco - office): -0.60% Debt Valuation: 0.19% *Top contributors to performance (positive or negative) on an absolute basis to the fund for the quarter F: Illustration: Bellegrave Business Park, Riverside, CA TRANSACTION SUMMARY 1 Q 2010 Acquisition (forward commitment): Property: Bellegrave Business Park Type: 505,406 square foot industrial development complex Acquired: February 26, 2010 for $50.8 million (all cash). The Fund had taken a $24.9 million reserve on this property during 3Q /4Q 2009 Location: Riverside, CA Cornerstone Real Estate Advisers LLC 5 Cornerstone Patriot Fund U.S. ECONOMIC AND REAL ESTATE MARKET OUTLOOK - AS OF MAY 4, 2010 Economy and Employment The emerging US expansion registered its third consecutive quarter of growth at a 3.2% annualized pace in the first quarter. While this represents a slowdown from the previous two quarters and headwinds persist on several fronts from rising foreclosures to Eurozone concerns, the expansion is broadening its roots and the possibility of a "double dip" later this year have diminished over the past ninety days. The Conference Board Index of Leading Economic Indicators has now advanced for twelve consecutive months, and in March grew at its fastest pace in over twenty years! An encouraging surge in consumer spending, continued inventory building, and increased capital investment by businesses all contributed to growth, providing evidence that this recovery is broadening. Slower government spending and a decline in homebuilding activity dampened growth from the fourth quarter's strong 5.6% pace, and we expect these trends to continue through 2010 as the economy slows but maintains positive momentum. The recovery appears to be following script with private sector activity slowly ramping up as government spending winds down through the course of the year. Despite weak hiring and persistent unemployment, consumer activity and business investment is up across all regions of the country. Manufacturing remains in the forefront of the expansion. Nationally, capacity utilization is back to 70 %, the highest in two years, and regional manufacturer's surveys from New York to California are uniformly posting strong gains. Auto sales and production are reasonably vigorous despite Toyota's travails. Construction activity however is still a drag on the economy, and housing remains a concern with prices again being pressured by mounting foreclosures. Ultimately businesses must begin hiring for housing to recover and the broader recovery to advance, and news from the labor markets seems more like a "glass half full" of late with a decidedly improved tone in each successive monthly employment report since January. March's preliminary report estimated 162,000 new jobs were created in the month, the largest monthly gain in three years. In addition to the steadily expanding government and health service sectors, manufacturing has added jobs for three consecutive months, construction actually managed its first monthly gain in three years, and many service sector industries are tentatively growing their payrolls. With unemployment hovering near 10% and forecast to increase in coming months as discouraged workers reenter the workforce, wage pressures (and near term inflation concerns) are negligible. No Quick Recovery in the Housing Market x 250 v v c 200 1 0 150 x v s 100 v `U 50 Case Shiller Home Price Index (20 -city metro) FHA Loans Past Due I N 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Case- Shiller, Mortgage Bankers Association V v v 14 m CL 12 0 a x LL 10= 0 8 Real Estate Capital Markets Transactions activity remained sluggish in the first quarter, but data continues to suggest commercial real estate pricing is near a cyclical low Moody's /REAL CPPI monthly repeat sales price index decreased 2.6% in February after increasing for three consecutive months as more distressed asset sales are being factored into the index. This price index is up 3.4% from the October 2009 trough, and down 41.8% since peaking in October 2007. The more narrowly focused MIT Transaction Based Index, produced by the MIT Center for Real Estate and derived from property sales within the NCREIF Property index, has exhibited a similar pattern over the past year, increasing 4% in 3Q09 and decreasing 4.9% in 4Q09 (first quarter data has yet to be released). The first quarter NCREIF Property Index shows a -0.9% appreciation return (compared to -3.7% last quarter) and a -9.6% change in values over the past year. With the outlook for real estate fundamentals slowly improving and more properties coming to market, we are near the bottom in pricing; however we see no significant pressure on pricing in the near term. Real Capital Analytics (RCA) reports show transaction volume continues to slowly increase but remains at depressed levels, with quality core assets commanding very competitive pricing. First quarter sales activity totaled $15.4 billion, increasing activity in all regions and property types, and sharply competitive pricing for core properties. Transactions volume has now increased for four consecutive quarters, and broker expectations are for both offerings and deal flow to accelerate markedly as we enter the second half of the year. Office The economy's manufacturing -led first quarter growth did little to ease office sector pain as vacancy climbed another 30 bps to reach a six -year high 16.6% nationally. There are however 6 Cornerstone Real Estate Advisers LLC March 31, 2010 a few hints of stabilization after two years steadily worsening trends in our top -tier markets, and Class A space may finally be stabilizing after two years of declining trends. Class A vacancy did increase 30bp to 16.1% but has now registered positive net absorption for three consecutive quarters. Absorption trends show tenants continue to take advantage of weak conditions to upgrade the quality and location (C1assB /C vacancy is already at a record high). Nationally, downtown vacancy increased 40 basis points to 12.9 %, while suburban vacancy was up 30 basis points to 18.7 %. A rapidly closing office supply pipeline will moderate the quarterly climb in vacancies through the balance of 2010. Current multitenant construction represents less than 1% in new supply and construction will remain near record low levels for several years. Nevertheless, the "slow- growth" macro forecast implies generally slack office market fundamentals will prevail this year and we still do not expect to see improvement in the national metrics before 2012. Major markets with vacancy above 20% and lackluster near term job growth forecasts will lag the national recovery. These include Phoenix, Detroit, Las Vegas, Tampa and San Jose. In contrast, several barrier markets with average -to -above average employment growth have much better near term outlooks (New York, Washington DC, Boston and Philadelphia). Office Supply and Demand Fundamentals Should Turn Favorable 2% 1% 0% -1% -2% Supply Growth as a Percent of Total Stock Demand Change as a Percent of Total Stock O '3 Ok O OHO O'� O� O� .�O 11 ,�'1. '�� 1 1� Source: CBRE -EA Apartments Apartment vacancy may have peaked ahead of our forecast with CBRE -EA reporting a significant 80bp improvement in overall occupancy to 93.4 %. Improvement is becoming more widespread with 75% of surveyed markets gaining ground (compared to 50% last quarter). A few notable exceptions include Charlotte, Dallas and Houston, where supply is still active. Stabilizing labor markets and improving consumer confidence are helping spur household formations, and while this first quarter data is encouraging, further improvement hinges on job growth in the broader economy. As with the office sector, regional trends are rapidly becoming evident with several West Coast markets showing significant year- over -year gains (Bay Area, San Diego, Seattle) followed by perhaps surprising improvment in the Southeast Florida markets. In addition to the California markets, most Northeast markets continue to rank among the tightest nationally and we expect even modest job growth here will help landlords begin to dial back concessions and free rent. ISI Research's weekly apartment rent survey reports weekly gains in effective rents for several weeks, almost entirely in the form of reduced concessions. Industrial As expected last quarter, recovering export activity, growing consumer demand, and an almost complete lack of new construction are helping finally to stabilize the nation's industrial space market. The total availability rate for US industrial space increased 10bp in the first quarter to 14% and is likely near its cyclical peak, with some improvement in overall occupancy possible later this year. Recovery in rents however will be slow to materialize; vacancies are at record levels nationally and in most major markets and there is considerable slack to be absorbed before any upward pressure on rents materializes (this sector's long -run average availability rate is below 10 %). Los Angeles (8.1 %), Houston (10.5 %) and Kansas City (10.3 %) stand out with low relative vacancy rates and could well recover ahead of the pack. At the other end of the spectrum are Detroit (20.3 %), Memphis (19.9 %), and Phoenix (19.8 %). Retail Consumers have proven resilient with retail sales improving almost in lockstep with a more stable labor market. Consumer spending bottomed in December and has outperformed expectations on a monthly basis with the Census Bureau reporting steady growth each month since the start of the year. Chain store sales tracked by ICSC posted an impressive 9% gain in March. While the Easter holiday and seasonal adjustments skewed year -ago comparisons, this still represents the strongest showing in over ten years and retail chains are raising their earnings projections as a result. Consumers have begun to ramp up discretionary spending despite weak household finances and high unemployment, underlining a dramatic shift in behavior if not sentiment since the end of last year. Consumer confidence surveys have been mixed, suggesting that despite concerns about the broader economy many consumers are feeling more upbeat regarding their personal prospects. Cornerstone Real Estate Advisers LLC 7 Cornerstone Patriot Fund CBRE -EA reports first quarter neighborhood and community shopping center vacancy rate was up 20bp to 12.8% with expectations for peak vacancies over the next two quarters. The Bay Area metro markets, Washington DC, Miami and metro New York report the lowest shopping center vacancies (all below 10% in Q1), and these markets stand to gain as employment and income growth gains traction towards year end. Weakness is persistent in Dallas and several Ohio metro areas where vacancies average in the upper teens. Hotels The increase in business activity evidenced in GDP growth has begun to improve hotel market metrics and the freefall in hotel demand ended in the first quarter with three consecutive monthly gains helping stabilize occupancy, though room rates are still declining. Smith Travel Research (STR) reports year -to- date occupancy was 51.9% in March, up from 50.8% last year. Overall room rates are down 4.3% year -to -date. Upper Upscale chains reported the highest occupancy rate (63.7 %) among the chain scales. Among Smith Travel's "top 25" markets, Miami (77.9 %), Oahu (76.2 %) and New York (72 %) led in occupancy, though only Miami managed to increase average room rate during the first quarter ( +4 %). Lodging Econometrics and Dodge Pipeline data both show a rapid slowdown in supply activity, and our own forecast suggests total annual supply growth will fall below 1% later this year (as we've already seen in the other property sectors). Markets with significant amounts of late -cycle deliveries include New York, Austin, Indianapolis and Dallas. Hotel Occupancy and Rate Trends are Improving (All Hotels, 12 -month trailing) m Summary While risks remain to our recovery outlook, the possibility of a "double dip" recession has diminished through early 2010 and the economy is on the cusp of a self- sustaining economic expansion, albeit a slow employment recovery by historical standards. Headwinds to this outlook include an expected increase in home foreclosures, overseas sovereign debt concerns, stubbornly high unemployment, public sector budget pressures and maturing commercial real estate debt. Nevertheless the outlook continues to improve, particularly in light of where the economy was one year ago. Fueled initially by last year's fiscal stimulus and manufacturing rebound, employers are shifting gears with an eye towards expansion and appear ready to begin hiring. The change in sentiment has helped firm investment activity, spurred apartment leasing and business travel, and will eventually lead towards broader recovery in real estate market fundamentals. Real estate transaction volume has begun to increase and pent -up investor demand is driving competitive pricing in some recent sales. This should encourage more investment opportunities into the market over the next few quarters, with investors increasingly focused on regional and sectoral market fundamentals. Michael Gately, Managing Director Cornerstone Research 8 Cornerstone Real Estate Advisers LLC 12 Jan 00 Jan O1 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 1( March 31, 2010 F I NANCIAL JTATEMEI% Statement of Net Assets March 31, 2010 (unaudited) Assets: Real estate investments at fair value (cost of $1,017,423,760) $854,450,000 Cash, cash equivalents and Certificates of Deposit* 84,174,712 Other 5,958,438 Total assets 944,583, Liabilities: Mortgages 188,371,553 Other 13,303,759 Total liabilities 201,675, 312 Net assets : Net assets - Cornerstone Patriot Fund 742,657,838 Non - controlling interests 250,000 Total net assets $742,907,838 Leverage (mortgages and line of credit to total assets) 19.94% Cash as a percent of total assets* 9.85% Cash as a percent of total assets before restrictions and payment obligations 8.68% *includes restricted cash and cash reserved for payment obligations of.. $2,204,720 Statements of Operations Quarter Ended Quarter Ended March 31, 2010 March 31,2009 (unaudited) (unaudited) Investment income $24,899,591 $28,897,849 Investment expenses (14,191,537) (14,332,349) Net investment income (loss) 10,708,054 14,565,500 Net unrealized gain (loss) on investments in real estate 1,109,781 (92,553,418) Net unrealized gain (loss) on mortgage loans payable 1, 4 1 5,935 ( 1,1 53,3 1 3 ) Net unrealized gain (loss) 2,525,716 (93,706,731 Net increase (decrease) in net assets from operations 13,233,770 (79,141,231) Portion attributable to non - controlling interests (191,921) 12,938 Increase (decrease) in net assets attributable to Cornerstone Patriot Fund $13,041,849 $(79,128,293 Amounts attributable to Cornerstone Patriot Fund: Net investment income 10,757,637 14,563,681 Net unrealized gain (loss) 2,2 ( 93,69 1, 974 ) Increase (decrease) in net assets attributable to Cornerstone Patriot Fund $13,041,849 $(79,128,293) Cornerstone Real Estate Advisers LLC 9 Cornerstone Patriot Fund PERFORMANCE NOTES March 31, 2010 1. Gross returns include both income and appreciation elements, but do not reflect the deduction of management fees. Net returns reflect the deduction of management fees. 2. All returns, with the exception of those for the current quarter are annualized. They are time - weighted and calcu- lated as follows: Investment Income + Appreciation - Depreciation Beginning Net Asset Value + Time - Weighted Contributions - Time- Weighted Distributions 3. For annualized returns, the sum of the return components may not equal the gross return due to the chain - linking of quarterly returns. 4. Investment Income is based on accrual accounting. The NCREIF NFI -ODCE is the National Council of Real Estate Fiduciaries NCREIF Fund Index - Open -End Diversified Core Equity. The NFI -ODCE is a fund -level capitalization weighted, time - weighted return index and includes property investments at ownership share, cash balances and leverage (i.e., returns reflect the fund's actual asset ownership positions and financing strategy. 6. Inflation is measured by the Consumer Price Index as reported by the U.S. Department of Labor. The information herein does not constitute an offer or solicitation with respect to the purchase or sale of any security, which can be made only in a formal Confidential Private Offering Memorandum. Investment in the Cornerstone Patriot Fund involves certain risks, including those associated with real estate investing generally, such as liquidity, diversification, taxation, leverage, and other risks as disclosed in the Confidential Private Offer- ing Memorandum. The Confidential Private Offering Memorandum should be requested and carefully reviewed by persons interested in investing in the fund as it is the sole document on which a potential investor is entitled to rely in evaluating such an investment. All security transactions involve risk of loss. Past performance is no guarantee of future results. 10 Cornerstone Real Estate Advisers LLC For additional information on the Cornerstone Patriot Fund please contact: Brian Murdy Portfolio Manager 860.509.2279 bmurdy @cornerstoneadvisers.com Denise Stake Portfolio Manager 860.509.2311 dstake @cornerstoneadvisers.com Pamela McKoin Vice President, Business Development 860.509.2230 pmckoin @cornerstoneadvisers.com Cornerstone Real Estate Advisers LLC CORPORATE HEADQUARTERS U.S. DEBT OFFICES INTERNATIONAL Cornerstone Real Estate Advisers Debt - Northeast Region Protego Real Estate Investors LLP 1 Financial Plaza 180 Glastonbury Blvd. 30 Old Burlington Street Suite 1700 Suite 200 London Hartford, CT 06103 -2604 Glastonbury, CT 06033 W1 S 3AR Telephone: (860) 509 -2200 Telephone: (860) 368 -2806 United Kingdom Fax: (860) 509 -2222 +44 (0)20 7297 0900 Debt -Washington DC Office 1919 M Street, NW Protego Real Estate Investors LLP U.S. EQUITY OFFICES Suite 300 Beurs - World Trade Center Washington, D.C. 20036 Beursplein 37 Equity Securities Management Telephone: (202) 775 -7400 3011 AA Rotterdam 333 Ludlow Street Toll Free: (800) 610 -7343 P.O. 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