Ian Guthrie MD of Real Estate Business Support PI/PD North, CRE BSU. RREF 9 th Breakfast Forum 9 th February 2012

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1 Ian Guthrie MD of Real Estate Business Support PI/PD North, CRE BSU RREF 9 th Breakfast Forum 9 th February 2012

2 Agenda CRE BSU Outlook for 2012 Strategy Q&A

3 CRE BSU

4 Large and diverse portfolio being managed by property and banking expertise and led by Richard Dakin Key facts 6 specialist teams and a Property Solutions team LBG Property Loans: 70.24bn CRE BSU Property Loans: 23.76bn CRE BSU Impaired Loans: 16.21bn CRE BSU Impairments: 6.26bn CRE BSU c1,800 connections CRE BSU has >600 colleagues BSU has supported more than 2,000 business turnarounds since 2009, protecting over 50,000 UK jobs c 5bn of restructures completed in 2011 Net deleverage of c 4bn achieved in 2010 and c 1.8bn in H PI & PD North Ian Guthrie PI & PD South Chris Canham Hotels & Structured Real Estate Gordon More House Builders Aubrey Simpson- Orlebar SME & Mid Corporate Gary Middleton Ireland Derek McDonald Solutions Andrew Wilson - Property advisory - Portfolio MI / analysis - Asset management - Developing Strategy - Aggregation * Figures are for UK as at June 2011 unless stated otherwise

5 Outlook for 2012

6 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 capital growth, % FTSE Real Estate Equities capital growth, % IPD Monthly Index capital growth, % Outlook for UK Property Pricing 2012 Property industry predicting a significant drop in values in 2012 REIT prices dropped c20% in H Imminent drop of 10% in the IPD Monthly Index? Forecasts of IPD all property capital growth in 2012 Source: Various forecasters, IPD Progression of selected external forecasts REIT prices and the IPD Monthly Index Q Q Q Q PMA (Main) IPF Consensus CBRE Capital Economics FTSE Real Estate Equities IPD Monthly Index

7 million Market Capacity All property 40,000 35,000 33,832 30,000 26,590 25,000 20,000 18,275 15,000 13,283 10,000 9,679 5,000 4,000 1,800 5,375 0 CRE BSU 2010 CRE BSU H CRE BSU 2010 Share Market - All - Whole history Market - All - Exc Boom Market - All - Credit Crunch Market - Secondary - Whole history Market - Secondary - Exc Boom Market - Secondary - Credit Crunch 12% 15% 22% 30% 41% 75%

8 Strategy

9 CRE BSU Strategy Key Messages Supporting core customers through the cycle to maximise value for all stakeholders. We actively manage our book responsibly managing for value. Consensually work with our customers receivership is last resort. We have created a strategy that is flexible enabling us to adapt to a dynamic market and changing needs of LBG and its customers. We will continue to consider and structure innovative solutions, whilst seeking to ensure we achieve the best possible recovery.

10 Strategic Assessment - asset risk scoring key to strategic decision making at a portfolio and individual asset level The broad segment of the market that an asset falls in to (e.g. shops, offices, industrial) will have a considerable impact on performance. The outlook for each segment, and the volatility around that outlook, will vary considerably through time; different segments exhibit different capital and income characteristics at different points; and CRE BSU s exposure to each segment varies in absolute terms and relative to the market. The local market is of vital importance to performance. Both rent and yield are essentially a function of supply and demand the former of occupational stock, the latter of investment stock and while both will be driven by macro factors, micro factors such as amount of competing space and health of the underlying economy will drive capital and income performance. Current occupancy levels will have a significant influence on the value and income elements of a property, which will vary throughout the cycle. At present, market pricing is essentially initial yield driven; the value attributed to the reversionary potential of vacant space is low, and this is unlikely to change for as long as leasing markets remain at such historically weak levels. Strength of tenant is a key those with weaker covenant scores are more likely to default, meaning that income will fall. It is important to assess this on both a short- and long-term basis; short-term because this is more akin to the hold period of the CRE BSU; long-term because this is more akin to the evaluation period over which valuers and prospective investors will judge the security of an asset s income. There is a very strong relationship between yield and unexpired lease term (UXT) as UXT shortens, yield rises, and as lease expiry approaches, rate of yield rise quickens. With regards value, yields rising means value falling, and yields rising increasingly quickly implies value falling increasingly quickly. Some segments see sharper levels of rising yield as UXT shortens than others, so weaker capital performance during this time. Passing rent -v- ERV is a good indicator of whether a property is likely to suffer a decline in income. If rent passing is significantly greater than ERV, on lease expiry income may fall dramatically; if rent passing is significantly lower than ERV, on lease expiry income may rise significantly. Mitigating factors include length of lease and strength of covenant. Market Segment Micro Location Current Occupancy Covenant Strength Remaining UXT Over-Renting ASSET RISK SCORE

11 Strategic Initiatives - leading the pack Lloyds to recover value from Irish properties Lloyds to sell 1bn of bad property loans

12 Strategic Initiatives - being innovative. Property Week, 15/4/11 Property Week, 15/7/11 Lloyds picks Grainger for resi partnership 26 April 2011 By Nick Johnstone Grainger has been picked by Lloyds Banking Group to help it improve the value of non-performing residential property and development loans, as tipped by Property Week ( ).

13 Summary Support our core customers. Be realistic on value, options and prospects. We will not extent and pretend! Active portfolio and asset management. Continue to be innovative. Complementary skills.