BNY Mellon Investment Management Global Investment Conference

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1 FOR PROFESSIONAL CLIENTS ONLY, NOT TO BE DISTRIBUTED TO RETAIL CLIENTS THIS DOCUMENT SHOULD NOT BE REPRODUCED IN ANY FORM WITHOUT PRIOR WRITTEN APPROVAL BNY Mellon Investment Management Global Investment Conference Alex Veroude Commercial Real Estate Lending in Europe 17 October 2013

2 A once-in-a-cycle opportunity

In the news Europe has an insurmountable 1trn of property loans maturing by 2015. CoStar European landlords have 582.

com February 2012 CBRE Ellis September 2012 Bloomberg.com September 2012 Europe s banks in 20bn property loan sell-off. European Banks Dispose of 7.5bn property Loan Portfolios year to date.

3 In the news Europe has an insurmountable 1trn of property loans maturing by CoStar European landlords have billion Euros ($779 billion) of commercial property debt maturing by the end of 2013 at the same time regulators are urging banks to shrink their balance sheets. FT.com February 2012 CBRE Ellis September 2012 Bloomberg.com September 2012 Europe s banks in 20bn property loan sell-off. European Banks Dispose of 7.5bn property Loan Portfolios year to date. February 2012 ds ale suspen r é n é G té Socié nding. k property le Costar.co.u Eurohypo suspends new business. Propertyeu.info November November European banking rules to double real estate debt funding gap We now estimate a bn CRE financing gap IPE Morgan Stanley May 2012 November 2012

European commercial property loan market has a

due between 2013 and 2015 European CRE loans c.$2,600bn.

4 European commercial property loan market has a supply/demand imbalance The European commercial property loan market is valued at c.us$2.6trn with over US$950bn worth of loans expected to fall due between 2013 and 2015 European CRE loans c.$2,600bn. Source: DTZ Research Money into Property 2013, 2012 position Source: DTZ Research 2012.

Creating opportunities for new lenders to enter on favourable terms at a time when bank deleveraging is reducing traditional sources of finance Deloitte Bank Survey: divestments concentrated on

5 Creating opportunities for new lenders to enter on favourable terms at a time when bank deleveraging is reducing traditional sources of finance Deloitte Bank Survey: divestments concentrated on commercial real estate loans New lenders are able to enter the European lending market as has been the trend in the US Sources of funding Commercial real estate Corporate: other Corporate: asset finance & leasing Retail: secured Retail: unsecured Small & medium enterprises Other Corporate: public sector 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% % of respondents Source: Deloitte 2012 Bank Survey. Numbers are percentages of respondents answering core/very core component of divestment plan. Source: DTZ Research, 2013.

Commercial property loans: an overview Mezzanine loan fund manager 2

g. property companies, family offices, institutions) Rent Property (e.

6 Commercial property loans: an overview Mezzanine loan fund manager 2 Mezzanine loan fund manager 1 Senior loan secured holder 3 Senior loan secured holder 2 Insight client Loan Originator (e.g. banks) Coupon/ origination fee Owner/sponsor (e.g. property companies, family offices, institutions) Rent Property (e.g. retail, leisure, office, industrial) Tenants (e.g. multinationals, corporate entities, government entities)

7 Comparison commercial property loans versus investment grade corporate bonds Commercial property loans Investment grade corporate bonds Yield % 1.95% Interest rate Floating Fixed Covenant protection Strong None Information Detailed, mostly private Limited, public Security position Secured Unsecured Default risk A+ A- Recovery upon default 90% average 40% average Data as at June 2013.

75% premium 65 60 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Bloomberg, Insight

8 New investors can enter the lending market on favourable terms Attractive spreads and low LTVs Spreads on senior loans versus high quality corporate bonds Average maximum LTV ratio c1.75% premium Source: Bloomberg, Insight Investment as at 31 March Source: De Montfort University, Bank s Financial Stability Directorate, 2013.

9 A low risk investment alternative Case study: what could go wrong? Dutch commercial property prices have fallen dramatically since 2007, but property loans remained resilient where loans had a loan-to-value of 70% or less Dutch commercial property prices (indexed to 100) Dutch commercial property loan experience Source: Dutch Central Bank 2012.

10 Debt compelling alternative to equity in current conditions Property debt versus equity IRR 15% 10% 5% 0% -5% Real estate prices -10% -15% -20% -25% -30% Investor returns -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Property price return Property Returns* Senior Debt Returns- bank loan Note: Insight model for illustrative purposes. * Property purchased without debt.

11 Risk and return Typical loan terms applied % bp Ave margin (RHS) Ave LTV (LHS) Source: Deutsche Bank, De Montfort and Insight. Data for Insight clients covers the period of January to August 2013.

12 Indicative yields demonstrate greatest expected return on regulatory capital Yields on direct property lending are between 3.5% and 5.5% for investment grade quality For the risk involved these are show up as the best loss adjusted risk/return Description Yield Rating Expected default Recovery Expected loss Loss adj. yield Capital charge** Yield per unit of capital** Real Estate Loan 3.50% AAA* 0.01% 90% 0.00% 3.50% 4.5% 0.78 Real Estate Loan 5.50% BBB* 0.36% 90% 0.04% 5.46% 12.5% 0.44 RMBS 1.00% AAA 0.01% 90% 0.00% 1.00% 35% 0.03 Covered Bond 0.50% AAA 0.01% 60% 0.00% 0.50% 3.5% 0.14 Corporate Bond 1.63% BBB+ 0.27% 40% 0.16% 1.47% 12.5% 0.12 Financial 1.96% A 0.12% 25% 0.09% 1.87% 7.0% 0.27 Corporate Bond 4.68% BB 1.35% 25% 1.01% 3.57% 22.5% 0.16 Corporate Bond 6.93% B 2.72% 25% 2.04% 4.89% 37.5% 0.13 Corporate Loan 5.10% B+ 1.77% 70% 0.53% 4.57% 37.5% 0.12 Source: Barclays and Credit Suisse March * Insight rated.**capital charge assumes all holdings are 5 year duration for comparability, standard formula stress module for publically rated issues and using internal rating for real estate loans. Reflects current Solvency II favourable treatment for covered bonds and latest capital charge for structured/ ABS which is subject to review.

13 North American direct lenders in the European market Fund Geographic focus Strategy Type of product Metlife UK Senior debt Direct lending GE Capital UK and Western Europe Senior debt Direct lending Cerberus (BAWAG) UK and Western Europe Senior debt Direct lending Mass Mutual (Cornerstone) UK Senior debt Direct lending AIG UK Senior debt Direct lending Canada Life UK Senior debt Direct lending Prudential US UK and Western Europe Senior debt Direct lending and syndication Source: Insight.

14 The range of strategies Loan types LTV Range (%) Target gross IRR return (%) Loan term Average loan size ( m) Senior debt strategy Senior loans Whole loan strategy Senior stretch Mixed debt strategy Loans & Securities Subordinated debt strategy Junior and mezzanine Low risk High risk Distressed debt strategy Distressed loans

15 Requirements for CRE Management 1. Real estate Local presence in Europe Ability to value buildings Ability to work out problems 2. Credit underwriting Corporate credit analysis ability Structuring and risk pricing ability 3. Documentation Ability to structure loan agreements Ability to monitor and enforce positions 4. Governance No conflicts of interest or management of them Unconstrained pipeline of deals

16 Process Filtering/origination STEP 1 Location Macro/micro location strength Take up by tenants Tenant requirements Vacancy rate and supply Development pipeline Underwriting STEP 2 Asset quality STEP 3 Tenant roll STEP 4 Borrower Building condition Environmental Lease length Strong history of managing real estate assets Tenure Quality vs competing space Rent versus estimated rental value Improving value of an asset Alternative uses Legal terms Diversity Track record of repaying loans STEP 5 Loan structure Loan-to-value Maturity Mezzanine rights Hedging Covenants Reserves Substitution rights Prepayment risks Legal documentation Closing Risk control/ portfolio mgmt

Case study Regional retail (+410bp strategy) Location Photos Acquisition financing: deal closed in

half the city retail offering with no major retail mall within an hour and a half drive of the subject

All tenants internally credit rated Institutional backing: strong motivated sponsor that is fully

17 Case study Regional retail (+410bp strategy) Location Photos Acquisition financing: deal closed in December 2012 with 65 million purchase price Dominant location: dominant centre in Cumbria, representing half the city retail offering with no major retail mall within an hour and a half drive of the subject property Strong cash flow: Highly diversified tenant roll with good leases and reversionary upside. All tenants internally credit rated Institutional backing: strong motivated sponsor that is fully incentivised through a material equity stake in the property Waiting List: Long waiting list including Primark and TK Maxx

18 A case study: the loan Loan information Loan amount at closing 42,300,000 Upfront fee 0.75% Asset type First mortgage loan Index FRN 3m L Coupon L +410 Hedging 5% interest rate swap Initial maturity date 4 years Extension options NA Prepayment Yr1-4%, Yr2-3%, Yr3-2% Amortisation type Contractual Appraised value 65,000,000 Loans per NSF 102 Facility documentation LMA Syndicated loan agreement Property information Property type Retail Location Carlisle, United Kingdom Number of properties 1 Year built 1981 Freehold/leasehold Leasehold NSF 415,100 Occupancy 100% Major tenants (by GRI) Diversified Capital structure Tranche Tranche size Cumulative loan amount % of total debt Cumulative per SF/unit LTV A note 42,300,000 42,300, % %/58.5% Equity 22,700,000 Total 65,000,000

Conclusions Once-in-a-cycle opportunity to invest in high quality secured transactions at an excellent rate of return: attractive returns: 3.5% to 5.

19 Conclusions Once-in-a-cycle opportunity to invest in high quality secured transactions at an excellent rate of return: attractive returns: 3.5% to 5.5% yields for AAA to BBB ¹ secured loans resilient deal structures: credit metrics remain robust even in stress scenarios Good fit for investors seeking to match duration liabilities and discretionary liabilities enables greater control over overall matching strategy and the timing of expected returns Who are the winners in this situation? Clearly anyone with money to lend against property, who can pick up unprecedented risk adjusted returns in the sector (wider spreads, lower LTVs). Deutsche Bank June 2012 improved likelihood of being able to meet long term liability payments attractive capital treatment relative to comparable instruments Important attributes to look for in an investment manager: ability to tailor to your risk, return and capital requirements: term, fixed, floating, inflation-linked strong track record with focus on rigorous credit risk management ¹ Insight rated.

Regulatory disclosures This is not intended as investment advice. The information provided within is for use by professional investors and should not be relied upon by retail investors.

20 Regulatory disclosures This is not intended as investment advice. The information provided within is for use by professional investors and should not be relied upon by retail investors. Material in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any security. Any views and opinions contained in this document are those of Pareto Investment Management Limited ( Pareto ) at the time of going to print and are not intended to be construed as investment advice. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. Past performance is not a guide to future performance. The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. An investor should consider the portfolio strategy s investment objectives, risks, charges and expenses carefully before investing. Portfolios are subject to investment risks, including possible loss of the principal amount invested. No warranty is given to the accuracy or completeness of the information and no liability is accepted for errors or omissions in such information. The performance shown is for the stated time period only; due to market volatility, each account s performance may be different. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. Where an investment is made in foreign currency other than the base currency, changes in the rate of exchange between currencies may cause the value of the investment to diminish or increase. In relation to any investment in a Future, Option, or Contract for Differences, these markets can be volatile and a relatively small adverse movement in the market may result not only in the loss of the original investment, but also in unquantifiable further loss exceeding the original investment and requiring that additional funds be paid later.. Pareto Investment Management Limited is a UK limited company registered in England and Wales with the Company No ; previously known as Pareto Partners, a UK partnership. Its registered office is The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA, United Kingdom. Pareto is a subsidiary of Insight Investment Management Limited, a wholly owned subsidiary of The Bank of New York Mellon Corporation. Pareto Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FCA) with FRN in the United Kingdom and is registered with the Securities and Exchange Commission (SEC) in the United States as an Investment Adviser; the Ontario Securities Commission (OSC), Alberta Securities Commission (ASC), British Columbia Securities Commission (BCSC), Manitoba Securities Commission (MSC), Nova Scotia Securities Commission (NSSC), Authorities des Marches Financiers and Saskatchewan Financial Services Commission (SFSC) in Canada and the Financial Services Agency in Japan. Pareto Australia Pty Limited is regulated by the Australian Securities & Investments Commission (ASIC) with AFSL Pareto New York LLC is registered as an investment adviser with the Securities and Exchange Commission (SEC). Pareto Investment Management Limited will be marketed in North America and Australasia under the brand name of "Insight Pareto" and in Europe as "Insight Investment". BNY Mellon Asset Management is the umbrella organization for BNY Mellon s affiliated investment management firms and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York Mellon Corporation or any of its affiliates. The Bank of New York Corporation assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith.

FUND PROFILE SECURED FINANCE

FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL. PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT. FUND PROFILE SECURED FINANCE OPPORTUNITY Long-term