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Home My WebLink About2010 07 28 Other Current Market Conditions And Core Manager Review Distributed By The Bogdahn GroupDate: July 28, 2010 The following document was distributed by Dave West, The Bogdahn Group at the Board of Trustees Special Meeting on July 28, 2010: Real Estate Current Market Conditions Ull Core Manager Review Second Quarter 2010 I ., WWW.BOGDAHNGROUP.COM THE BOGDAHN GRDUP simplifying your investment acrd fiduciary decisions Overview of the Market In Summary - Real Estate has more ground to make up than more liquid asset classes Real EstatefREITlstock prices Index level (111/1990 = 100) 500 450 400 300 300 250 200 150 100 50 0 90 91 Source: NCREIF, Bloomberg, JPMorgan 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Most Markets have Partially Rebounded — Not Real Estate Most other asset classes have experienced a partial recovery U.S. appraised core real estate is still experiencing write downs Valuations expected to be flat for remainder of 2010. Peak to trough total return a U] U7 W d5 —10 —4 3 M 0 0 0 —10 —20 (1) 0 4} 0] —17 C6 —30 M L 4] Q CO CO cD —40 Q LU _ —50 O —60 0 —70 C Cu 3 M � 0 O Q Q U 0 Q m 00 — 70 60 M 50 —32 40 —37 —38 30 —51 20 10 0 cn a, w oD 0 0 0 � M — w O] O] 0D { } 6 C6 4] CID 0 OJ Q { } w 0 [17 � Trough to year -end total return CO VS U] U7 W d5 w {p a� 3 M 0 0 0 Q (1) 0 4} 0] C6 M L 4] Q CO CO OS Q LU _ {� O 0 Source: Barclays, NCREIF, Bloomberg and JPMorgan Current Market Conditions roperty Revaluation Continues Trading capitalization rates expanded dramatically over last 18 months resulting in value declines >40% C� Valuations depend heavily on property type, market location and asset quality Write -downs continued in 1Q 2010 ( <5 %) but values are beginning to stabilize Transaction Activity Down r> Transaction volume down 90% from the level it was two years ago Market illiquidity remains an issue but expected to improve in latter half of 2010 Lenders extending & amending troubled loans - delaying foreclosure Financing More Difficult Banks and insurance companies now lending on stabilized properties with LTV's of 65 %, interest rates of 5 % -6.5% and 5 to 7 year terms Construction and land loan delinquencies are approaching 9% r Real Estate Downward Valuation NCREIF -ODCE Index appreciation write -down of 43% since Q3 2008 — steeper and faster than previous cycles Driven by cap rate expansion not oversupply of new product Real Estate Appreciation Cycles Annualized Total Returns 30% 20% ■ o 10 /o 0% 1 -10% -20% - 3 0'7o -40% Source: NCREIF, Bureau of Economic Analysis, Cornerstone Core Property Write Downs Slowing Quarterly change in unlevered values for properties held in core open -end commingled funds reporting to NCREIF 0% -2% -4% -6% _8% -10% -12% r Source: NCREIF /ODCE, JPMorgan Mar -08 Jun -08 Sep -08 Dec -08 Mar -09 Jun -09 Sep -09 Dec -09 Caa Rate Exaansion Eauals Attractive Yields Cap rates are showing signs of stability which creates attractive time to invest in real estate 7% 7% 6% 5% 6% A A n i Core Cap Rate Cycles Core properties trading at near 2003 yields (prices) Approaching historical cap rate peak for institutional properties r Income Yields Cyclical Behavior Transaction Activity Showing Signs of Improvement 300MM 1 250MM 200MM 150MM 100MM 50MM OMM CD 0 0 0 U c� (D 3 (} 0 � d Transaction volume (square feet), 3 month rolling average CV {y Q - ) Q'j 'T 1�r Uf7 Lrj CO CO w � 00 pp 67 pj 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -D d � d � d � d � d � d � d � d Source: RCA and JPMorgan Cap Rate Spread to 10 -Year Treasury Potential for total returns above long term average 5 Year forward total returns if invested at peak spreads 6% 5% 17 4% ------------------------------ ------------- ------------ ------ 4 a 20 -Year Average _ ■ ■ ■ iii ■ .. 2% 1 Standard DeN. atinri I% 0% ® a -1 ° fa •-- — •--� •--� � •--� T CV t'V t'"! C'•! t'V {"V CV N 1"V CV Source: NCREIF Commercial Mortgage Maturities Over $1 trillion must be refinanced by 2014 which results in strong demand for debt $350 $300 $250 $200 0 'm $150 $100 $50 $0 0 Commercial Multifamily Q�e Source: Federal Reserve, Foresight Analytics, Invesco O N M V U M [1- 00 O O N M V Ln M ti M M O_ _ N_ M_ V L(7 (O a0 O O M O O O M M M O O O O O O O O O O O O O N O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O N N N N N N N N N N N N N N N N N N N N N Commercial Mortgage Market is Recovering Spreads are down and loan activity is increasing Commercial mortgage spread over U.S. treasury yield 600 500 400 0 300 200 100 0 Dec -04 Dec -05 Dec -06 Dec -07 Dec -08 Dec -09 Commercial mortgage survey deal volume 4.00 3.50 3.00 r 2.50 E 2.00 1.50 1.00 0.50 250 200 150 1` D 0 100 50 0.00 0 01 Q2 03 Q4 01 Q2 03 Q4 2008 2009 Source: Giliberto -Levy Index, JPMorgan Current Commercial Mortgage Terms More conservative underwriting equals lower LTVs and higher debt service coverage Illiquidity has widened spreads Source: Cushman Wakefield, IDR, GE Real Estate Capital Current Market Fundamentals Vacancy and rental growth Vacancies continue to rise as absorption remains low Rental growth remains weak in all property types Supply of new construction is low New supply below 20 -year historic average Traditional lenders reluctant to provide construction financing Current transactions trading at 30% or greater discounts to replacement cost Real estate pricing has yet to rebound Most asset classes have experienced a partial recovery U.S. core appraised real estate is still experiencing write downs and is expected to be flat for remainder of 2010 r Vacancy Rates Vacancy Rates have Risen Above Long -Term Averages Decreased Demand for Space Causing Downward Pressure on Rents Vacancy By Property Type 20 18 16 14 12 10 R U R p U 2 0 19914 19934 19954 1991 13834 20014 20034 20054 20074 20094 19994 19924 19944 19984 19954 20004 20024 20044 20054 20054 Apartment Industrial Office Retail Source: NCREIF New Supply Analysis Most U.S markets do not have oversupply issues Construction material and labor costs are steadily increasing Financing is difficult to obtain and expensive 3.5 3.0 2.5 0 0 � 2.0 C O 1.5 1.0 0.5 0.0 Note: Long -Term Average Represents 20 Year Average ■ L ong -t,eim Average 3 -Yr. Forecast Offi ce Industrial Retail Source: TWR, REIS, Smith Travel Apartme nts Hotel Summary of Investment Strategies Investment Strategies Current Market Condition Operating, substantially leased ( >80 %) properties with lower leverage ( <30 %), experienced Core significant re- pricing (NPI write -down of 41% since 3Q 2008), NCREIF income 6% currently and current transaction cap rates 8.0 -8.5 %. Higher use of leverage (30% to 65 %), purchase at below replacement cost, greater risk Value -Added associated with capital raising, leasing newly refurbished space and final exit strategy. Multifamily strategies show promise. Highest risk strategies due to use of leverage, capital raising and execution. Often include large complex Wall St. based or distressed transactions that create execution and exit risk Opportunistic especially given current economic and illiquid conditions. Distressed sellers exist but are not being forced to sell by an agency (RTC) and banks are amending and extending loan terms instead of foreclosing. Potential for high returns, but existing risk remains high. Increasing demand for refinancing creating an supply imbalance resulting in attractive Debt lending terms for first mortgage origination: floating rate structure, lower LTV's, and wider spreads. REITs trade like small cap stocks. REITs raised significant equity last year to improve REITs balance sheets but many remain highly leveraged. Sector priced at implied 6.0 -6.5% cap rate and 15% premium to NAV, more expensive than private commercial real estate. Real Estate Risk Spectrum Real estate supply /demand fundamentals and development needs impact the risk and return potential of the asset class. Core — Lower Risk 4% - 6% Real Return Operating assets substantially leased Traditional property types and markets Leverage <25% Core Plus — Additional Risk C, Operating assets Traditional property types and tertiary markets Leverage 25 -40% Value Added — Higher Risk 9% - 11% Real Return Was repositioning, Now is distressed debt Includes alternative property types (e.g.; medical office, student housing) Leverage 40 -60% r Cor Fund Manager Re Subject Categories Size UBS Trumbull Property Fund $8.6 billion gross J.P. Morgan Strategic Property Fund $14.9 billion gross Cornerstone Real Estate Advisors Cornerstone Patriot Fund LP $1.0 billion gross Morgan Stanley Prime Property Fund $5.9 billion gross ING Clarion Lion Properties Fund $4.4 billion gross American Realty Advisors Core Property Fund $1.7 billion gross Intercontinental Real Estate Corporation U.S. Real Estate Fund $893 million gross $7.1 billion net $9.9 billion net $800 million net $3.9 billion net $2.1 billion net $1.4 billion net $384 million net Inception 2008' 1998 2006 1978 2000 2003 2001 Open -end Commingled Open -end Commingled Open -end Commingled Open -end Commingled Open -end Commingled Open -end Commingled Open -end Commingled Fund REIT based Fund (Delaware Limited Fund (Delaware Limited Fund (Delaware LLC) Fund (Delaware LLC) Fund (Delaware LLC) Fund (Delaware LLC) Structure Delaware Limited Partnership) Partnership) Partnership Number of 141 Investments in 28 Investments in 16 210 Investments, 66% of 57 Investments in Properties 164 Investments 1,333 Buildings markets which are in 7 markets 141 Investments 78 Buildings 27 Investments Office 30% Office 40.4% Office 29.9% Office 32.5% Office 28.5% Office 36.7% Office 43.8% Industrial 12% Industrial 12.8% Industrial 15.9% Industrial 10.6% Industrial 16.8% Industrial 23.3% Industrial 12.3% Residential 28% Residential 18.4% Residential 19.5% Residential 26.1% Residential 22.7% Residential 25.7% Residential 12.2% Retail 24% Retail 28.5% Retail 24.5% Retail 19.9% Retail 19.0% Retail 14.3% Retail 19.0% Hotel 6% Hotel 0% Hotel 9.6% Hotel 4.2% Hotel 10.9% Hotel 0% Hotel 1.8% Property Type Land 0.6% Storage 5.6% Storage 0.9% Senior Living 10.9% Diversification Land 1.1% Land 1.2% Highest exposure to High exposure to Office High exposure to hotels. High exposure to Relatively low Office and Large position in Large position Office Residential than other with little investment in Residential high Hotel exposure Industrial and equity funds. Industrial. Residential East 38% East 29.2% East 35.4% East 33.8% East 35.5% East 32.8% East 27.5% Midwest 11% Midwest 7.0% Midwest 9.9% Midwest 14.5% Midwest 11.9% Midwest 12.0% Midwest 39.8% South 20% South 29.2% South 4.0% South 23.1% South 13.5% South 26.5% South 10.8% Geographic West 31% West 34.6% West 50.7% West 28.6% West 39.1% West 28.7% West 21.8% Diversification High concentration in Similar concentration in High concentration in High concentration in High concentration in Lowest position in High concentration in East & West East, South and West West and virtually none East and West East and West. Midwest Midwest in South 17.6% of total fund with 34.0% of total fund 19.9% of total fund 40.9% of total fund. 52.3% of total fund 23% of total fund 72.4% of total fund a weighted average Credit line of $312 mil interest of 5.32% has $0 balance Target 20% / Max 30% Leverage Maturities: Maturities: Maturities: Maturities: Maturities Maturities: Maturities: $23 mil in 2010 $242 mil in 2010 $26 mil in 2010 $560 mil in 2011 $51.6 mil in 2010 $65 mil in 2010 $13.8 mil in 2010 $1.25 bil in 2011 $34 mil in 2012 $60.7 mil in 2011 $6 mil in 2011 $144.9 mil in 2011 $491 mil in 2012 $398.2 mil in 2012 $124.0 mil in 2012 '2008 for fund, 1978 for sep. accts. in conversion �Z4I Cor Fund Man Re Subject Categories UBS Trumbull Property Fund 92.3% leased across J.P. Morgan Strategic Property Fund 89.4% across total Cornerstone Real Estate Advisors Cornerstone Patriot Fund LP 91% leased excluding Morgan Stanley Prime Property Fund 90% leased excluding ING Clarion Lion Properties Fund 89.6% leased across American Realty Advisors Core Property Fund 92% leased across total Intercontinental Real Estate Corporation U.S. Real Estate Fund 86.9% leased across total portfolio as of 1Q10 portfolio as of 1Q10 hotel hotel total portfolio as of 1 Q1 0 portfolio as of 1 Q1 0 total portfolio as of 1Q10 Occupancy 75% including hotel as 75% including hotel as of 1Q10 of 1Q10 6.75% to 7.25% for 6% for 2010 4.5% current one -year 4.0% dividend yield for 6.8% to 7.2% for income 5.0% in 2010 7.0% current yield 2010 income yield as of 1 Q1 0 2010 in 2010 Income Total return of 5.75% to Income target is 6.0% to 6.0% to 6.5% Projected 8.25% for 2010 8.0% but only 2.8% YTD distributable cash return through 2Q10 for 2010 $0 -$10 mil 2.6% $0 -$5 mil 0.1% $0 -$5 mil 0.6% $0 -$5 mil 1.2% $0 -$5 mil 1.2% $0 -$25 mil 28.2% $0 -$5 mil 0% $10 -$20 mil 4.8% $5 -$10 mil 1.0% $5 -$10 mil 1.9% $5 -$10 mil 5.4% $5 -$10 mil 3.5% $25 -$50 mil 46.9% $5 -$10 mil 0% $20 -$50 mil 23.9% $10 -$20 mil 6.4% $10 -$20 mil 13.9% $10 -$20 mil 8.2% $10 -$20 mil 12.3% $50 -$100 mil 24.9% $10 -$20 mil 9.8% $50 -$100 mil 27.7% $20 -$50 mil 11.4% $20 -$50 mil 32.2% $20 -$50 mil 18.4% $20 -$50 mil 27.1% $20 -$50 mil 60.2% >$ mil 41.0% $50 -$100 mil 18.2% $50 -$100 mil 51.4% $50 -$100 mil 14.8% $50 -$100 mil 27.5% $50 -$100 mil 30.0% Investment >$100 mil 62.9% >$100 mil 0% >$100 mil 52.0% >$100 mil 28.4% >$100 mil 0% Size Over 68% of portfolio is Over 62% invested in The fund is invested in The fund is mostly The Fund has a broad Approximately 75% of invested in properties properties greater than smaller properties. invested in large mix of small, mid and portfolio is invested in $50 mil or greater in size $100 mil. JPM in mostly properties. large size properties properties less than $50 large properties mil in size Office Ind Retail Total Office Ind. Retail Office Ind Retail Office Ind Retail Office Ind Retail Office Ind Retail 2010 6% 9% 3% 2010 9.0% 2010 8% 1% 2% 2010 3% 5% 5% 2010 4% 3% 4% 2010 3% 10% 1% 2010 10% 3% 9% 2011 11% 9% 5% 2011 8.5% 2011 5% 2% 3% 2011 8% 12% 12% 2011 6% 10% 7% 2011 2% 13% 1% 2011 15% 29% 7% 2012 7% 7% 7% 2012 10.9% 2012 26% 11% 17% 2012 7% 20% 8% 2012 7% 19% 12% 2012 2% 11% 1% 2012 13% 16% 18% 2013 17% 11% 7 % 2013 9.1% 2013 6% 27% 7% 2013 11% 3% 9% 2013 7% 12% 9% 2013 2% 8% 1% 2013 12% 5% 13 Lease Rollover 2014 5% 6% 5% 2014 9.2% 2014 9% 12% 4% 2014 4% 11% 5% 2014 4% 10% 8% 2014 4% 4% 2% 2014 9% 8% 5% Less than 20% of leases About 20% of leases Industrial properties About 30% of leases expire in the next 2 expire in the next 2 have lease exposure in rollover in next 2 years years years 2011 & 2012 Office 6.6% Office 6.7% Office 7.3% Office 5.6% Office 7.4% Office 8.1% Office 7.5 Industrial 5.8% Industrial 6.5% Industrial 7.6% Industrial 6.1% Industrial 8.0% Industrial 8.6% Industrial 7.4% Residential 6.0% Residential 7.0% Residential 6.8% Residential 6.2% Residential 5.8% Residential 6.4% Residential 6.8 Valuation Retail 5.7% Retail 6.3% Retail 7.5% Retail 6.4% Retail 7.8% Retail 7.2% Retail 7.6% Cap Rates Hotel 5.5% Hotel N/A Hotel 6.3% Hotel 1.9% Hotel 8.4% Blended 7.6% Senior Housing 8.0% Blended 6.3% Blended 6.7% Blended 7.2% Storage 7.2% Blended 7.3% Blended 7.4 Blended 5.9% 1Q10 1.9% lulu 6% 1Q10 -0.1% 1Q10 1.6% 1Q10 1.6% 1Q10 0.7% 1Q10 1.8% 1 -Year -11.6% 1 -Year -14.3% 1 -Year -16.7% 1 -Year -20.4% 1 -Year -24.2% 1 -Year -20.2% 1 -Year -5.2% Returns 3 -Year -6.9% 3 -Year -8.6% 3 -Year -8.7% 3 -Year -9.9% 3 -Year -15.1% 3 -Year -9.7% 3 -Year -10.7 5 -Year 2.4% 5 -Year 1.5% 5 -Year 1.8% 5 -Year 1.3% 5 -Year -3.5% 5 -Year -0.1% 5 -Year N/A 10 -Year 6.5% 10 -Year 6.1% 10 -Year N/A 10 -Year 5.7% 10 -Year 3.2% 10 -Year N/A 10 -Year N/A R Core Fund Man Re Subject Categories UBS Trumbull Property Fund No redemption queue J.P. Morgan Strategic Property Fund No redemption queue Cornerstone Real Estate Advisors Cornerstone Patriot Fund LP No redemption queue Morgan Stanley Prime Property Fund $242 mil as of June 30, ING Clarion Lion Properties Fund No redemption queue American Realty Advisors Core Property Fund No redemption queue Intercontinental Real Estate Corporation U.S. Real Estate Fund $1 million but has $110 2010. $50 mil was paid million of undrawn Redemptions n June. Remainder will investor commitments be paid by end of 2010 Management Fee: Management Fee: Management Fee: Management Fee: Management Fee: Management fee: Management fee: (based on commitment) 1.00% Of investor (based on commitment) 0.90% based On Net (based on commitment) (based on commitment) (tiered) 0.955% <$10 mil commitment 1.15% <$15 mil Asset Value 1.25% <$10 mil 1.10% <$25 mil 1.10% first $25 mil 0.825% $10 -$15 mil 1.00% $15 -$25 mil 1.00% $10 -$25 mil 0.95% $25 -$75 mil 1.00% next $25 mil 0.15% for cash in 0.90% $25 -$75 mil 0.85% >$25 mil. 0.85% >$75 mil 0.85% next $50 mil excess of a 7.5% cash 0.80% > $75 mil 0.75% > $100 mil reserve at the fund level Incentive Fee: Fees Incentive Fee: Incentive Fee: After the preferred return 0% to 0.25% 5% of Net Operating of 8%, 80% to investors set at a 0.15% fulcrum Income capped at and 20% to the Fund and adjusted by 0.075% 0.0045% per year. for every 1 % the Fund's No catch -up or claw - performance is above or back provision below the hurdle of CPI +5% 1. Large index -like fund 1. Large index -like fund 1. Strong performance 1. Large index -like fund 1. High current cash yield 1. Conservative core 1. Firm has grown (12% of ODCE) (17% of ODCE) relative to ODCE (10% of ODCE) of 6.0% to 6.5% for strategy that is well significantly with 2.Welldiversified by 2.Welldiversified by 2. Low leverage 2.Welldiversified by 2010 diversified institutional assets property type and property type and 3. High concentrations on property type and region 2. Strategy includes some 2. Performance closely 2. Investment strategy region region East and West coast 3. Accepting new value -add qualities due mirrors the ODCE Index targets small to mid -size 3.Strong performance with 3.Strong performance with positioned for growth commitments without to leverage, property 3. Properties have already properties Pros low leverage low leverage 4. Lower concentration in investment queue type and size mix been written down 3. Existing properties have 4. $1 mil minimum 4. Calling $451 million of Office which takes 4. $1 mil minimum 3. High concentrations on 4. Invested in growth already been written investment and is a new investment in longest to recover investment and is a East and West coast areas of country down given current fiduciary August deal flow 5. Conservative valuations fiduciary positioned for growth market given cap rates 4. Lower concentration in Office which takes longest to recover 1. $2 Billion investment 1. $10 million minimum 1. Highly concentrated on 1. High leverage ration of 1. High leverage ratio of 1. High concentration in 1. More of a Core -plus queue investment (may take East and West coast. 40.9 %. 52.3% Office properties than Value -added return 2. May take over 1 year to $7.5 mil) 2. Higher exposure to 2. Relatively low dividend 2. Greater volatility in 2. Slightly underperformed fund get commitment 2. Market like performance Hotels than others yield of 4.0 %. returns due to leverage ODCE in the rolling 1 2. Existing portfolio's invested 3. Higher level of leverage 3. Smaller fund 3. Highly concentrated on mark to market year greatest property type 3. Market like performance 34% may increase 4. Slightly different East and West coast. 3. Highly concentrated on 3. Depending on exposure is 47% office Cons given size volatility. strategy than just an 4. Higher exposure East and West coast commitment size may and 19% retail, often the 4. Charges a small 4. Has $1.39 bil of index like core fund alternative property 3. Highest exposure to take 6 to 12 months to last to recover from incentive fee but has unallocated new types (10 %) to Hotel, Hotels than others get invested. recession lower management fee commitments ($451 mil Storage and Land. 4. Slightly different 3. Currently 70% being called in August) 5. Lowest blended cap rate strategy than just an leveraged of 5.9% index 4. Charges Value -add type fees Index Comparison NCREIF Property Index NFI-ODCE Fund Index The NCREIF Property Index is a quarterly time series The NFI -ODCE (NCREIF Fund Index -Open End Diversified composite total rates of return measure of investment Core Equity) is the first of the NCREIF Fund Database performance of a very large pool of individual commercial products and is an index of investment returns reporting on real estate properties acquired in the private market for both a historical and current basis. It represents the results of investment purposes only. 26 open -end commingled funds pursuing a core investment strategy, some of which have performance histories dating back to the 1970s. The NFI -ODCE Index is capitalization- weighted and is reported and calculate by NCREFI gross of fees. Characteristics & Considerations Characteristics & Considerations -Non- leveraged - Captures the impact of leverage -Non- managed property index - Provides for investable managed product comparison - Biased by the largest properties -Cap weight biased by largest funds -Not investable as an index -Not investable as an index - Formally not publically available Source: NCREIF Index Comparison Calendar Year Performance: As of March 2010 20% 10% E 0% 3 d -10% -20% -30% Zephyr StyIeADVISOR: The Bogdahn Group, LLC TD 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 19E ■ NCREIF - ODCE ■ NCREIF - NPI Calendar Year Performance ( %): As of March 2010 YTD 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 NCREIF -ODCE 0.75 -29.76 -10.00 15.96 16.32 21.40 13.07 9.28 5.54% 5.63% 14.28% 13.17% 16.41% 15.10% 11.70% 7.11% 6.14% 0.55% -5.50% -6.25% 1.42% NCREIF -NPI 0.76 -16.86 -6.46 15.84 16.59 20.06 14.48 8.99 6.74% 7.29% 12.24% 11.36% 16.24% 13.90% 10.31% 7.54% 6.39% 1.38% -4.26% -5.59% 2.30% THE BOGDAHN {_ k GROUP simplifying your investment and fiduciary decisions Chicago 4320 Windfield Road Suite 200 Warrenville, Illinois 60555 Orlando 4901 Vineland Road, Suite 600 Orlando, Florida 32811 Milwaukee 250 E. Wisconsin Ave Suite 1800 Milwaukee, Wisconsin 53202 866.240.7932