October 16, To our valued Strategic Property Fund clients,

Transcription

1 Anne S. Pfeiffer Managing Director Portfolio Manager Global Real Assets October 16, 2009 To our valued Strategic Property Fund clients, Over the past year, we have certainly experienced the worst of times in real estate. We ended fiscal year 2009 with additional depreciation across all sectors and posted a third quarter gross of fees return of -7.30%. Despite the prolonged economic uncertainty, the Fund s size, quality, property and geographic diversification, solid income, high occupancy, low lease rollover, conservative leverage profile and staggered debt maturities have softened the impact of further write-downs this quarter. Additionally, a couple of positive activities, which I will later elaborate on, position the Fund well as we head into Again, the persistent weakness of future market rents have continued to influence net operating income projections, which led to further valuation adjustments this quarter. The Fund experienced depreciation of 8.73% for the third quarter and depreciation of 34.80% over the trailing one year period. For a third consecutive quarter, the retail and office sectors were the largest contributors to the negative performance of the Fund with declines of 13.46% and 9.02%, respectively. Moreover, the industrial portfolio was down 6.29% and the residential portfolio was down 6.00%. On the positive front, the Fund s income return remains resilient and holds at 1.51% for the third quarter, and at 5.61% for the trailing one year period, which is slightly better than last quarter s trailing one year yield of 5.30%. The Fund s high quality assets continue to perform well at the operating level; and on the whole, are well-leased, with occupancy rates of 90.93% across our office, industrial, retail and residential properties with minimal near-term rollover. The forward 12-month income return estimate is approximately 6.25%. As a sign of confidence in the Fund, clients rescinded over $800 million of redemption requests during the quarter and nearly $900 million of redemption request rescissions year-to-date. With the recent distribution of $270 million on October 5, the Fund s redemption queue decreased significantly from $2.4 billion last quarter to $1.3 billion going into the fourth quarter. While the credit markets remain mostly illiquid, the Fund was able to secure financing and closed on a two-year credit facility with Wells Fargo for $270 million. The Fund s exposure to leverage continues to be very manageable and within our Fund guideline of 35%. Furthermore, consistent with our promise of ensuring a strong balance sheet, our cash position at quarter end remains strong at 7.10% of net asset value. The Fund s strong liquidity will allow us the flexibility to continue to reduce our remaining investor queue, manage upcoming debt maturities, which are low at 2.00% of the Fund s GAV over the next 12 months, and take advantage of accretive opportunities, when appropriate, for the long-term growth of the Fund. 245 Park Avenue, Floor 2, NY1-Q204, New York, NY Telephone: Facsimile: anne.pfeiffer@jpmorgan.com J.P. Morgan Investment Management Inc.

2 We believe that Strategic Property Fund is in strong shape as we wait for the market to stabilize. Once the clouds clear, we are positioned well for potential growth. Thank you for your continued support and confidence. We look forward to updating you on additional Fund information with the release of our 2009 fiscal year end report due out later this quarter. Please feel free to reach out to me or any of our investment or client service teams with any questions. Sincerely, Anne S. Pfeiffer Portfolio Manager The manager seeks to achieve the stated objectives. There can be no guarantee those objectives will be met. The commingled pension trust fund is a collective trust fund maintained by JPMorgan Chase Bank, NA. Only qualified employee benefit trusts and governmental plans that have appointed JPMorgan Chase Bank, NA as fiduciary are permitted to invest in the fund. Past performance is not indicative of future results. Performance includes the reinvestment of interests when applicable. Investment returns will fluctuate so that the redemption amount may be worth more or less than the original investment. Performance results are gross of investment management fees. The deduction of an advisory fee reduces an investor s return. Actual account performance will vary depending on individual portfolio security selection and the applicable fee schedule. Fees are described in Part II of the Advisor s ADV which is available upon request. (PLEASE SEE ACCOMPANYING FACT FOR NET RETURNS) The following is an example of the effect of compounded advisory fees over a period of time on the value of a client s portfolio: A portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum would grow to $259 million after 10 years, assuming no fees have been paid out. Conversely, a portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum, but paying a fee of 1% per annum, would only grow to $235 million after 10 years. The annualized returns over the 10 year time period are 10.00% (gross of fees) and 8.91% (net of fees). If the fee in the above example was 0.25% per annum, the portfolio would grow to $253 million after 10 years and return 9.73% net of fees. The fees were calculated on a monthly basis, which shows the maximum effect of compounding. Opinions and estimates constitute our judgment and are subject to change without notice. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all investors; if you have any doubts you should consult your J.P. Morgan Asset Management Client Adviser, Broker or Portfolio Manager. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal adviser about the issues discussed herein. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Real estate investing may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investing may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower. J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its subsidiaries worldwide. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management Inc. 245 Park Avenue, Floor 2, NY1-Q204, New York, NY Telephone: Facsimile: anne.pfeiffer@jpmorgan.com J.P. Morgan Investment Management Inc.

3 Snapshot J.P. Morgan Asset Management Strategic Property Fund Third Quarter 2009 Portfolio characteristics As of September 30, 2009 Gross asset value (000): $15,140,133 Net asset value (000): $10,195,169 Current leverage:* 33.9% Number of investments:** 141 Number of accounts: 292 * Fund share of debt at cost over gross asset value ** Direct RE only Diversification (NAV) Other 1.8% Retail 25.8% Residential 16.5% Geographic (direct real estate only) Midwest 7.3% West 34.4% Cash 7.1% Office 36.3% Industrial 12.5% East 30.7% South 27.6% Investment performance as of September 30, 2009 one Three Five Ten Since (%) Qtr YTD year years years years inception * Income Appreciation Total * Fund inception: January 1, 1998 Past performance is not indicative of future results. Performance shown above is gross of investment management fees. Total returns net of fees were: Qtr: -7.54%; YTD: ; One year: %; Three years: -6.41%; Five years: 3.02%; Ten years: 6.02%; Since inception: 7.15%. Net returns are based on the highest applicable fee rate for this strategy. Commentary Strategic Property Fund delivered a total third quarter return of -7.30% income of 1.51% and net depreciation of -8.73%. The Fund s trailing one year return was %. The quarter s total real estate depreciation of $917.1 million (834 bps) was primarily due to the prolonged weak market rent forecasts across all sectors impacting future net operating income. The retail and office sectors took the largest write-downs, $376.8 million (342 bps) and $327.4 million (298 bps), respectively. The residential and industrial sectors contributed an additional $110.3 million (100 bps) and $84.5 million (77 bps) of depreciation. Finally, marking debt to market accounted for a loss of $49.9 million (45 bps). The Fund completed one disposition during the quarter with the sale of Waterfront Corporate Center, a 521,410 square foot Class A office tower located in Hoboken, NJ for net proceeds of $144.6 million. Acquisition activity remained static. The Fund took in $1.5 million of new capital contributions this quarter and paid out $80 million in redemption requests on July 3 and $270 million in redemption requests on October 5. Coupled with over $800 million in redemption rescissions, the Fund s redemption queue has now been reduced to $1.3 billion. At quarter-end, the Fund s cash position remained strong at 7.1%. As a sign of continued confidence in the Fund while credit markets remain mostly frozen, the Fund closed on a two-year credit facility with Wells Fargo for $270 million. Leverage represented 33.9% of gross asset value. We look forward to updating you on additional fund information with the release of our 2009 fiscal year end report. Thank you for your continued support. Anne Pfeiffer, Portfolio Manager

4 Strategic Property Fund Acquisitions There was no acquisition activity during the third quarter Property type City State Sales price* Sq. ft/units Dispositions Property type City State Sales price* Sq. ft/units Waterfront Corporate Center Office Hoboken NJ $144.6mm 521,410 * Fund share of gross sale price. The manager seeks to achieve the stated objectives. There can be no guarantee those objectives will be met. The commingled pension trust fund is a collective trust fund maintained by JPMorgan Chase Bank, NA. Only qualified employee benefit trusts and governmental plans that have appointed JPMorgan Chase Bank, NA as fiduciary are permitted to invest in the fund. This information is intended to report solely on the investment strategies and opportunities of the J.P. Morgan Strategic Property Fund. Additional information is available upon request. Information herein is believed to be reliable but J.P. Morgan Asset Management does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment and are subject to change without notice. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all investors; if you have any doubts you should consult your J.P. Morgan Asset Management Client Adviser, Broker or Portfolio Manager. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal adviser about the issues discussed herein. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Real estate investing may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investing may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower. J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its subsidiaries worldwide. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management Inc. 245 Park Avenue, New York, NY JPMorgan Chase & Co. SNPSHT_SPF

5 Justin M. Murphy Managing Director Portfolio Manager Global Real Assets October 16, 2009 To our valued Special Situation Property Fund clients, Over the past year, we have certainly experienced the worst of times in real estate. We ended fiscal year 2009 with depreciation affecting most sectors, resulting in a third quarter gross of fees return of %. Despite the prolonged economic uncertainty, the Fund s size, property and geographic diversification, liquidity and the quality of our stabilized assets have mitigated the downward pressure on values. Additionally, a couple of positive events, which I will later elaborate on, position the Fund well as we head into The Fund experienced depreciation of 12.75% for the third quarter and depreciation of 48.32% over the trailing one year period. The residential portfolio contributed the largest decline of 18.37%. Elsewhere, the industrial portfolio was down 9.48%, the office portfolio was down 6.79% and the hotel portfolio was down 5.53%. Our smaller retail and land portfolios delivered appreciation of 0.66% and 3.63%, respectively. In particular, two mezzanine investments, The Edge and Aquabella, accounted for about 25% of the quarter s total depreciation. In both cases, the writedowns are valuation based versus realized, but do reflect the continued softness in the residential for sale market. On the positive front, the Fund s stabilized assets continue to generate solid income return against the headwinds of valuation declines. The Fund generated a positive income return of 1.03% for the quarter and 2.62% for the trailing one year period. Despite further write-downs, the Fund s income return not only remained resilient but also improved from last quarter s return of 0.88% for the quarter and 2.29% for the trailing one year period. The forward 12-month income return estimate is approximately 4.00%. As a sign of confidence in the Fund, clients rescinded $174 million of redemption requests during the quarter. With the recent distribution of $19 million on October 5, the Fund s redemption queue decreased significantly from over $300 million last quarter to $140 million going into the fourth quarter. Furthermore, consistent with our goal of ensuring a solid balance sheet, our cash position at quarter end remains strong at 12.04% of net asset value despite a continuing stagnant transaction market. The Fund s liquidity will afford us the flexibility to continue reducing our remaining investor queue, manage upcoming debt maturities (which are low at 15.05% of the Fund s GAV through 2010), invest in improvements to our existing assets, and take advantage of compelling acquisition opportunities, when appropriate, for the long-term growth of the Fund. 245 Park Avenue, 2nd Floor, NY1-Q214, New York, NY Telephone: Facsimile: justin.m.murphy@jpmorgan.com J.P. Morgan Investment Management Inc.

6 We believe that Special Situation Property Fund is in great shape as we wait for the markets to stabilize. Once the transaction markets normalize, the Fund s assets are positioned well for potential growth. Thank you for your continued support and confidence. We look forward to updating you on additional Fund information with the release of our 2009 fiscal year end report due out later in the calendar year. Please feel free to reach out to me or any of our investment or client service teams with any questions. Sincerely, Justin M. Murphy Portfolio Manager The manager seeks to achieve the stated objectives. There can be no guarantee those objectives will be met. The commingled pension trust fund is a collective trust fund maintained by JPMorgan Chase Bank, NA. Only qualified employee benefit trusts and governmental plans that have appointed JPMorgan Chase Bank, NA as fiduciary are permitted to invest in the fund. Past performance is not indicative of future results. Performance includes the reinvestment of interests when applicable. Investment returns will fluctuate so that the redemption amount may be worth more or less than the original investment. Performance results are gross of investment management fees. The deduction of an advisory fee reduces an investor s return. Actual account performance will vary depending on individual portfolio security selection and the applicable fee schedule. Fees are described in Part II of the Advisor s ADV which is available upon request. (PLEASE SEE ACCOMPANYING FACT FOR NET RETURNS) The following is an example of the effect of compounded advisory fees over a period of time on the value of a client s portfolio: A portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum would grow to $259 million after 10 years, assuming no fees have been paid out. Conversely, a portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum, but paying a fee of 1% per annum, would only grow to $235 million after 10 years. The annualized returns over the 10 year time period are 10.00% (gross of fees) and 8.91% (net of fees). If the fee in the above example was 0.25% per annum, the portfolio would grow to $253 million after 10 years and return 9.73% net of fees. The fees were calculated on a monthly basis, which shows the maximum effect of compounding. Opinions and estimates constitute our judgment and are subject to change without notice. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all investors; if you have any doubts you should consult your J.P. Morgan Asset Management Client Adviser, Broker or Portfolio Manager. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal adviser about the issues discussed herein. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Real estate investing may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investing may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower. J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its subsidiaries worldwide. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors Inc., Security Capital Research & Management = Incorporated and J.P. Morgan Alternative Asset Management Inc. 245 Park Avenue, 2nd Floor, NY1-Q214, New York, NY Telephone: Facsimile: justin.m.murphy@jpmorgan.com J.P. Morgan Investment Management Inc.

7 Snapshot J.P. Morgan Asset Management Special Situation Property Fund Third Quarter 2009 Portfolio characteristics As of September 30, 2009 Gross asset value (000): $3,492,991 Net asset value (000): $1,382,689 Current leverage:* 61.8% Number of investments:** 84 Number of accounts: 126 * Fund share of debt at cost over gross asset value ** Direct RE only Diversification (NAV) Lodging 5.1% Industrial 22.6% Residential 25.0% Geographic (direct real estate only) Midwest 8.0% West 29.1% Cash 12.0% Other 2.6% Office 28.1% Retail 4.6% East 36.9% South 26.0% Investment performance as of SEPTEMBER 30, 2009 One Three Five Ten Since (%) Qtr YTD year years years years inception * Income Appreciation Total * Fund inception: January 1, 1998 Past performance is not indicative of future results. Performance shown above is gross of investment management fees. Total returns net of fees were: Qtr: %; YTD: %; One year: %; Three years: %; Five years: -3.48%; Ten years: 1.29%;Since inception: 3.04%. Net returns are based on the highest applicable fee rate for this strategy. Commentary Special Situation Property Fund produced a total third quarter return of % with an income return of 1.03% and % of depreciation. The Fund s trailing one year return was %. Direct real estate valuation activity for the period resulted in total depreciation of $148.8 million (948 bps). The residential sector experienced the largest write-down of $86.3 million (550 bps). The industrial and office portfolios followed with depreciation of $33.2 million (211 bps) and $22.9 million (146 bps), respectively. The Fund s hospitality portfolio contributed an additional $7.2 million (46 bps) of depreciation. A $0.8 million increase in value of the retail portfolio (5 bps) helped marginally offset the Fund s overall depreciation, while marking debt to market had no material impact on quarterly performance. Regarding specific assets, two mezzanine investments, The Edge and Aquabella, accounted for about 25% of the quarter s total depreciation. In both cases, the write-downs are valuation based versus realized, but do reflect the continued softness in the residential for sale market. The continuing lack of activity in the transaction markets, coupled with our focus on preserving the Fund s liquidity position, prohibited any significant acquisition or disposition activity during the quarter. At the end of the third quarter, the Fund s cash position stood at 12.0%. The excess liquidity will allow us to continue to reduce our remaining investor redemption queue, manage upcoming debt maturities, and take advantage of potential buying opportunities at or near the market bottom. The Fund took in $0.1 million of new capital contributions and paid out $25.0 million of redemption requests in July to cover second quarter 2009 distributions. An additional $0.1 million of new capital was received on October 5th, and $19.0 million was redeemed from the fund for third quarter distributions. At quarter-end, the Fund s leverage position, or loan-to-value ratio was 61.8% of gross asset value. We look forward to sharing further information with you with the release of our 2009 fiscal year end report towards the end of the calendar year. Thank you for your continued support. Justin Murphy, Portfolio Manager

8 Special Situation Property Fund Acquisitions Property type City State Sales price Sq. ft/units There were no acquisitions during the third quarter of 2009 Dispositions Property type City State Sales price Sq. ft/units There were no dispositions during the third quarter of 2009 The manager seeks to achieve the stated objectives. There can be no guarantee those objectives will be met. The commingled pension trust fund is a collective trust fund maintained by JPMorgan Chase Bank, NA. Only qualified employee benefit trusts and governmental plans that have appointed JPMorgan Chase Bank, NA as fiduciary are permitted to invest in the fund. This information is intended to report solely on the investment strategies and opportunities of the J.P. Morgan Special Situation Property Fund. Additional information is available upon request. Information herein is believed to be reliable but J.P. Morgan Asset Management does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment and are subject to change without notice. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all investors; if you have any doubts you should consult your J.P. Morgan Asset Management Client Adviser, Broker or Portfolio Manager. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal adviser about the issues discussed herein. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Real estate investing may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investing may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower. J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its subsidiaries worldwide. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management Inc. 245 Park Avenue, New York, NY JPMorgan Chase & Co. SNPSHT_SSPF