EASTDIL SECURED CAPITAL MARKETS OVERVIEW February 24, 2016 Austin, Texas 0
What a start to a New Year! Global Equity Markets Change S&P 500 (9.2%) RMZ REIT Index (9.7%) Nikkei 225 (15.5%) Other Key Benchmarks WTI Crude Oil (Barrel) 10-Yr U.S. Treas Yield Change (23.7%) 54 bps VIX Index 45.8% Stoxx 50 (16.0%) Shanghai Composite (21.9%) 1
But with Unemployment @ 4.9% 695,000 jobs added past 3 months; 2.7 million in the past 12 months US Deficit @ $439B; a 7 year low 10 year @ 1.75% Multifamily Rent Growth Office Net Absorption CRE Absorption > New supply a real estate person would think we re in a great macro environment! 2
Volatility Concerns have Struck Markets Worldwide 25.0% Major Equity Indices in US and Europe Off Highs 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Source: Bloomberg -10.0% -15.0% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 S&P 500 RMZ EURO STOXX -10.0% -11.3% -13.0% 3
CRE Capital Market Questions Today Is 2016 the 7th year of the recovery like 2004 or 2006 in the cycle? Is volatility our friend or foe? Will we see more? If this volatility keeps up, are there any distressed sellers who may sell cheap? Will prospect of lower rates offset current volatility? How is recent volatility impacting offshore capital flows? How much of a game changer is the PATH Act of 2015 (FIRPTA) for US CRE? 4
Financing Availability Market Positives CRE Credit Spreads (quite wide with room to tighten) Global Flow of Capital to the U.S. Multiplier Effect for Major Markets Low Rates + Growth Absolute Size of US Economy is now 25% larger ($3.6 trillion on a nominal basis) vs. 2007 5
Market Positives (continued) Past experience with Fed rate increases Oil Prices Limited Supply Dynamic Treasury Yields Wage Growth Net Absorption & Rent Increases 6
Concerns What does the first month of 2016 predict for the year? Are public equity markets signaling a CRE correction? Are oil and the high yield bond market indicating a recession on the near term horizon? What are the impacts of growing regulation? 7
Concerns (continued) Will sustained low oil prices cause Middle Eastern investors to retrench? Could the Chinese government limit outflows to help manage their currency? We are a long way into this recovery. 8
$160 $140 Oil Typically Spikes Before a Recession Recession Weak Recovery $120 Crude Oil Price $/Barrel $100 $80 $60 October 1973 Embargo Saudi Production Increase Asian Financial Crisis $40 $20 $0 Cost 2015 $ / Barrel 9
Current Themes in the Equity Capital Markets Continuing global demand for U.S. real estate driving major/iconic asset transactions. Confidence in absorption & rent growth. Pricing is beyond 2007 pricing levels New supply still quite low. Spread between Tier I & Tier II markets/assets starting to widen with CMBS challenges and macro concerns 10
Billions $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 $67 $82 U.S. Sales & JV s Volume Transactions >$25 Million $158 $216 $245 $407 $340 $116 2015 Largest Ever; Excluding EOP $35 $93 $163 $245 $245 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $284 $367 Source: Real Capital Analytics 11
OFFSHORE CAPITAL TRENDS FOR U.S. REAL ESTATE 12
Eastdil Secured International Capital Placed in U.S. by Region January 2012-2015 Other Europe Middle East $9 Billion 10% $17 Billion 18% Asia $34 Billion 37% $92B+ TOTAL Germany $9 Billion 10% Canada $24 Billion 26% 13
Recent Changes to FIRPTA via PATH Act (December 2015) Expansion of FIRPTA Portfolio Investor Exception Increases the ownership stake public REIT from 5% to 10% Foreign Pension Fund Exemption Exempts Qualified Foreign Pension Funds from FIRPTA Impact on Real Estate AFIRE survey 76% of respondents said FIRPTA relief would have a major or positive impact on decision to invest in U.S. One estimate has an additional $20BN - $30BN of foreign investment into US commercial real estate. 14
Middle East Update 15
SWF Direct Investments Have Been Growing Deal Size ($ BN) 20 Total Direct Investments in Real Estate from MENA SWFs (*) 15 10 5-2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (*) By announcement date globally Source: Sovereign Wealth Center 16
Investments Continue Despite Oil Price Decline WTI ($ / bbl.) 120 Coroin Hotel Portfolio Manhattan West, New York Deal Size ($ MM) 4,000 2,400 100 Songbird Estates Plc. Exeter US Industrial Portfolio 2,000 80 60 Porta Nuova, Milan Hotel JV with New World Dvp. 1,600 1,200 40 20 Time Warner Center NY EDITION Hotel, 5 Madison Av. Mall of Switzerland, Lucerne Hines Pokrovsky 1, Ltd. State Tower Namsan, Seoul InterCont. Paris - Le Grand 0 0 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Source: Wells Fargo, Sovereign Wealth Center & Bloomberg The Savoy Hotel, London 8 Canada Square, London The Manhattan at Times Square Hotel Ecowest, Levallois- Perret, Paris USAA Industrial Property Portfolio The London NYC Napoleon European Hotel Portfolio 800 400 17
Oil around $30: Is it Beginning of the End For the Middle East? Tough Times, But Not Quite Doomsday Middle East vs. GCC Availability of Fiscal & Monetary Policy Tools The Gulf Cooperation Council ( GCC ) has been the mainstay of international investments GCC = Qatar, United Arab Emirates, Kuwait, Saudi Arabia, Oman and Bahrain Loss of oil revenue mitigated by: Removal of oil and utility subsidies Introduction of VAT / Sales Tax on certain products Issuance of sovereign debt Reduction/stoppage of certain non-core development projects Privatisation programmes / asset disposals Source: Wells Fargo, Zawya, The World Population Review 18
Asia Update 19
2015 Recap Another Banner Year for Asian Outbound Capital 20
Asia Outbound Capital by Destination 2013 2015 $70.0 $60.0 $50.0 9BN Other $ Billions $40.0 $30.0 4BN 5BN 14BN Other Europe UK $20.0 $10.0 $0.0 15BN 11BN 36BN 2BN 3BN 6BN 4BN 4BN 3BN 2BN 5BN 6BN 11BN 14BN 2010 2011 2012 2013 2014 2015 $9BN $12BN $14BN $30BN $32BN $59BN US Source: Real Capital Analytics 21
2015 Recap Major Observations SWFs in Singapore, China and Korea continue to dominate in terms of capital invested China Insurers proved much more active than China developers, driven by portfolio and currency diversification needs in light of volatility Sector preference Industrial Assets have been the most favored, followed by Office and Hotels Continued interest in key gateway markets, but also expanding into other large metropolitan markets selectively e.g. Seattle, Philadelphia Key question is Japan 22
The Good Increasing SWF RE Allocation Asian SWFs remain to be the largest capital source, with total AUM of $2.7TN Meaningful mismatch remains between current RE allocation and target allocation for SWFs Major Asian SWFs have indicated to us their intention to further increase RE allocation over the short to medium term Source: 2015 Preqin Sovereign Wealth Fund Review 23
Asia SWF Direct RE Investment Growth Deal Size ($ BN) 18.0 16.0 14.0 12.0 Total Direct Investments in Real Estate from Asia SWFs 16.6BN $ BN 10.0 8.0 6.0 4.0 2.0 1.7BN 6.2BN 5.1BN 2.0BN 1.3BN 3.8BN 6.0BN 7.7BN 7.8BN 0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Wells Fargo & Sovereign Wealth Center 24
The Good Chinese Insurers Outbound Flow China insurers have enjoyed significant AUM increases ( 26% CAGR in the last 2 years) and scaled up their deployment of capital Chinese government has continued to approve additional insurers to invest outbound Approved Shanghai Insurance Co. as recently as early Jan 2016 Driven by lack of attractive safe investment alternatives as well as decreasing interest rate environments at home Source: CRIC CAGR: 2013-2015*, 2015 total AUM as of Nov. 2015 25
Select ES 2015 U.S. Transactions 26
ES - U.S. Transactions Placed with Offshore Investors - 2015 Property Name Waldorf Astoria Property Name Boston Properties Office Portfolio Location: New York, NY Location: New York, NY & Boston, MA Buyer Region: Asian Insurer Buyer Region: European Sovereign Wealth Value: $1.95 Billion Value: $4.06 Billion Structure: Property Sale Structure: JV/Recap 27
ES - U.S. Transactions Placed with Offshore Investors - 2015 Property Name Indcor Industrial Property Name IIT Portfolio Location: National Location: National Buyer Region: Asian SWF Buyer Region: China Value: $8.1 Billion Value: $4.55 Billion Structure: Property Sale Structure: Property Sale 28
SUNBELT ACTIVITY MAP 29
2015 SUNBELT EXPERIENCE $4.5 BILLION 61 BUILDINGS 20 CITIES 20.75M RSF 30
Recent Austin Transactions Placed with Offshore Investors 31
AUSTIN FASTEST GROWING CITY IN THE COUNTRY (4th Year in a row by Forbes) UNEMPLOYMENT DOWN to 3.4% compared to Texas (4.7%) and nationally (5.0%) SILICON VALLEY AT HALF THE COST Although more like 2/3 the cost now QUALITY OF LIFE IS A HUGE FACTOR FOR EMPLOYERS SPACE REVOLUTION MORE about the 25 year old than the 45 year old TECHNOLOGY DRIVING MARKET FUNDAMENTALS MARKET-WIDE RELATIVELY SMALL OFFICE MARKET THAT FUNCTIONS LIKE A MUCH LARGER MARKET CLASS A CBD RENTS HAVE INCREASED 30%+ IN LAST 24 MONTHS 32
AUSTIN AMAZING DEPTH FROM THE DOMESTIC AND OFFSHORE INSTITUTIONAL INVESTORS wide variety of foreign capital sources available as well Can be difficult to accumulate scale; creates scarcity premium for assets of size and quality which are pricing to perfection Monitoring the small "tech ripple" in the bay area but no impact so far as California is quietly (and sometimes not so quietly) moving to Texas THE COOL FACTOR IS WORTH 50 TO 75 BPS ON THE CAP RATE AND 100 TO 150 BPS ON THE IRR. RENTS HAVE INCREASED $1 PSF since you arrived! 33
EASTDIL SECURED CAPITAL MARKETS OVERVIEW February 24, 2016 Austin, Texas 34