Pension Funds: Why Real Estate?

Pension Funds: Why Real Estate? Proven performance of real estate over the past decade across all property types Need for higher yields due to aging baby-boomer population Worldwide appeal due to greater information and research, plus increased transparency Portfolio diversification and appreciation potential Consistent cash flow Source: Reznick Group

Private Equity Funds Fund Type Yield Expectations Core 7-10% Core-Plus 10-13% Value-Added 14-17% Real Estate Hedge Funds 12-15% Mezzanine Debt 15-18% Opportunistic 17-20% Sources: Ernst & Young, Reznick Group

Blackstone Currently raising in excess of $10 billion for a new opportunistic fund on the heels of raising $5 billion in In, acquired Carr America for $ 5.6 billion (equity and dept assumed) In, acquired Trizec Properties (with Brookfield Properties) for $8.9 billion In the past three years, has gobbled up more than $20 billion worth of hotel companies including MeriStar Hospitality, Wyndham International, La Quinta, Extended Stay and Boca Resorts Last month, acquired EOP for $39 billion (equity and dept assumed) and simultaneously sold off over $21 billion of the EOP portfolio Just recently, they filed to go public and sell a 10% stake in its management partnership, for $4 billion. Source: Reznick Group

An Interesting Perspective : A record 20 public REIT M&A deals totaling $34 billion and early : The total price paid for all eight REIT privatizations in (a record year) plus the Trizec Properties and Carr America transactions (closed in ) was slightly over $38 billion Last month: Blackstone acquired Equity Office Properties for $39 billion (equity and assumed dept) Prior to the EOP acquisition, the largest REIT M&A transaction on record was the General Growth acquiring Rouse Co. for $12.6 billion in Source: Reznick Group

Private Equity Funds Privatizing REITs Private Equity Fund Perspective: Larger targets; less competition Arbitrage between the value of a REIT s asset and its stock price Possible development pipelines for a value-added or opportunistic play REIT Management Perspective: Favorable time to sell high demand, high prices High Cost of compliance (Sarbanes-Oxley) Increased operating flexibility Ability to leverage up certain assets Source: Reznick Group

Other Significant Trends REITs Launching Private Equity Funds Prologis raised $1.85 billion from a global institutional client base AMB launched a $2.2 billion fund in Japan Globalization of Funds Opportunistic funds are seeking opportunities in Mexico, Latin America, India, Japan and China, where they can get better yields than in the U.S. Funds Going Public KKR raised money in a REIT IPO JER also created a REIT Fund sponsors like Blackstone and Fortress are going public at record multiples International REIT Acquisitions More than 20 countries have thus far passed their own REIT legislation Many funds are privatizing REITs outside the U.S. Source: Reznick Group

U.S. Real Estate Returns Average Annual Return, 1997 thru Percent 16 14 12 10 8 6 4 Source: CBRE U.S. Govt. Bonds NASDAQ S&P 500 Russell 2000 NCREIF (Private Real Estate) NAREIT (Public Real Estate)

Real Estate Investment Trusts Sector Net Acquisition of Financial Assets US$ Billions 400 300 200 100 0 1996 1997 1998 1999 2000 Source: Global Insight

Biggest REITs Before the Big Buyout* REIT/ Major Properties Prop. Type Recent Price Dividend Yield Net Assets (US$ Bill.) Simon Property Group Shopping Malls $113.5 2.7% $26.7 Vornado Realty Offices $123.6 2.8% $20.3 Equity Office Properties** Offices $54.7 2.4% $19.5 General Growth Properties Shopping Malls $60.7 3.0% $16.9 Equity Residential Apartments $55.6 3.3% $16.4 *Data as of Jan 30, 07 **Before Acquisition Sources: Forbes, Green Street Advisors

Small Size REITs Likely Targets for Takeover, According to Forbes* Recent Dividend Net Assets REIT/ Major Properties Prop. Type Price Yield (US$ Bill.) Home Properties Apartments $64.1 4.1% $3.0 Colonial Properties Apartments $50.1 5.4% $2.9 Maguire Properties Offices $43.2 3.7% $2.5 Sunstone Hotel Investors Hotels $27.5 4.6% $1.9 Felcor Lodging Hotels $21.9 4.6% $1.6 *Data as of Jan 30, 07 Sources: Forbes, Green Street Advisors

Overall Capitalization Rates By Property Type Rate 11.0 10.0 9.0 8.0 7.0 6.0 5.0 Industrial Suburban Retail CBD Office Apartment Source: CBRE

U.S. Vacancy Rates Industrial vs. Office Space Percent Vacant 18 16 14 12 10 8 Industrial Office 6 1997 1998 1999 2000 Sources: CB Commercial, Economy.com

U.S. Vacancy Rates Office Space Markets Percent Vacant 20 18 16 Downtown Metropolitan Suburban 14 12 10 8 6 4 1997 1998 1999 2000 Sources: CB Commercial, Economy.com

Industrial Space Demand Absorption vs. Availability SF (Millions) 300 200 100 0 Rate 12.0 11.5 11.0 10.5 10.0-100 -200 Absorption - L Availability Rate - R 9.5 9.0 Sources: CBRE

Office Space Demand Absorption vs. Vacancy SF (Millions) 100 Rate 17 50 0 16 15-50 14-100 -150 Absorption - L Vacancy Rate - R 13 12 Sources: CBRE

Interest Rates Fed Funds Rate and 10-year Government Bond Percent 8 6 Fed Funds Rate 10-year Government Bond 4 2 0 1997 1998 1999 2000 2007 Source: Global Insight

Yield Curve 10-year Government Bond Minus Fed Funds Rate Percent 4 3 2 1 0-1 -2 1997 1998 1999 2000 2007 Source: Global Insight

Corporate Spread Moody s Corporate Aaa Minus 10-year Treasury Bond Percent 2.5 2.0 1.5 1.0 0.5 1997 1998 1999 2000 2007 Source: Global Insight

Mortgage Rates United States Rate 9 8 7 30-Year Fixed 15-Year Fixed 1-Year ARM 6 5 4 3 1997 1998 1999 2000 2007 Sources: Freddie Mac, Economy.com

1-Month LIBOR London Interbank Offered Rate Rate 7 6 5 4 3 2 1 0 1997 1998 1999 2000 2007 Sources: Freddie Mac, Economy.com

Foreign Purchases of U.S. Securities Net Foreign Purchases US$ Billions 200 150 100 50 0 1997 1998 1999 2000 2007 Source: Global Insight

S&P 500 Yield Dividend / Price Ratio Ratio 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 86 91 96 01 06 Source: Global Insight

Construction Put in Place Private Residential vs. Private Nonresidential Percent Change, Year Ago 30 20 10 0-10 -20-30 1997 Residential Construction Nonresidential Construction 1998 1999 2000 2007 Sources: U.S. Census, Economy.com

Travel Expenditures Resident and International Travel for United States Percent Change, Year Ago 20 15 10 5 0-5 -10 U.S. Resident Travel International Travel -15 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Sources: TIA, Economy.com

Hotel Occupancy Rate Las Vegas Percent 92 90 88 86 84 82 80 78 76 1997 1998 1999 2000 Sources: Las Vegas Convention & Visitors Authority, Economy.com

Unsold Inventory Index California Months Supply 12 10 8 6 4 2 0 1997 1998 1999 2000 2007 Sources: CAR, Economy.com

Sources: Wall Street Journal

Sources: Wall Street Journal

Highest Share of Subprime Loans Subprimes as a Percentage of All Loans Metro Percent McAllen, TX 26.8 Memphis, TN 24.0 Sharon, PA 23.1 Miami, FL 23.0 Richmond, VA 22.3 Brownsville, TX 21.6 Merced, CA 21.6 Sumter, SC 20.7 Bakersfield, CA 20.2 Jackson, TN 20.2 Sources: CNN Money, First American Loan Performance

Highest Share of Subprime Loans at Least 60 Days Late Percentage of Delinquent Subprime Loans Metro Percent Cleveland, OH 24.9 Detroit, MI 24.6 Jackson, MS 22.7 Jackson, MI 22.0 Youngstown, OH 21.8 Flint, MI 20.7 South Bend, IN 20.3 New Orleans, LA 20.1 Kankakee, IL 20.1 Akron, OK 19.7 Sources: CNN Money, First American Loan Performance

Single-Family Housing Starts United States, SAAR Millions 2.0 1.8 1.6 1.4 1.2 1.0 1997 1998 1999 2000 2007 Sources: U.S. Census, Economy.com

Multi-Family Housing Starts United States, SAAR Thousands 500 450 400 350 300 250 200 1997 1998 1999 2000 2007 Sources: U.S. Census, Economy.com

Existing Single-Family Home Sales United States, SAAR Millions 6.5 6.0 5.5 5.0 4.5 4.0 3.5 1997 1998 1999 2000 Sources: NAR, Economy.com

Existing Condo & Co-op Sales United States, SAAR Thousands 1000 900 800 700 600 500 400 99 00 01 02 03 04 05 06 07 Sources: NAR, Economy.com

Existing Median Home Price Single Family Homes, United States US$ Thousands 240 220 200 180 160 140 120 Home Price (L) % Change, Year Ago (R) Percent Change, Year Ago 14 12 10 8 6 4 2 100 1997 1998 1999 2000 0 Sources: NAR, Economy.com

Real GDP Growth United States, 2000 Prices Percent Change, Year Ago 5 4 3 2 1 0 1996 1997 1998 1999 2000 Sources: Global Insight

U.S. Employment Picture Unemployment Rate & Employment Growth Percent 6.5 6.0 5.5 5.0 4.5 4.0 Unemployment Rate - L Civilian Employment - R Percent Change, Year Ago 4 3 2 1 0-1 3.5 1997 1998 1999 2000 2007-2 Source: Global Insight

Recent Transactions. Hospitality Real Estate Lightstone to buy Extended Stay Hotels from Blackstone for $8 billion One of the biggest deals in noncasino hotel deals Blackstone took Extended Stay private back May (paying $1.99 bill. + $1.13 bill. in debt ) Source: Wall Street Journal, April 18, 2007