M ETROPOLITAN R EAL E STATE E UROPE, LLP O PPORTUNITIES IN D ISTRESSED R EAL E STATE Jeremy Ford, Managing Director, Metropolitan Real Estate Europe, LLP A PRIL 2013 jford@mreem.com +44-207-182-4777 +44-207-182-4775
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Your Daily Dose Of Distress “Lloyds reduces problem loan exposure by £5.35bn” PropertyWeek “Real estate becoming sweet spot for buyout firms” The Financial Times “Investor risk appetite rises; Europe is now firmly on the radar of opportunistic investors” The Financial Times “Lloyds and AIB selling off their distressed property loans” The Independent PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 3 E UROPE LLP
There Are Distressed Properties PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 4 E UROPE LLP
And, There Are Distressed Owners A range of factors can create distress for otherwise institutional-quality assets Short lease terms Vacancy Low barriers-to-entry Needing refurbishment/redevelopment Poor tenant-mix Blackpool (U.K.) Debt maturity and/or overleverage Boston, MA (U.S.) Minneapolis, MN (U.S.) Tokyo (Japan) Helsinki (Finland) PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 5 E UROPE LLP
Less Competition And Anticipated Deal Flow Contributes To Market Dislocation … 1. Severe Market Dislocation Opportunities to participate in restructuring and recovery Recovery will be slow and uneven, might take several years 2. Fewer Buyers Flight to quality Assets neglected, need skill to assess and reposition 3. More Sellers Distressed and unnatural owners Greater inefficiency in process Large supply of over-leveraged assets coming to market PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 6 E UROPE LLP
…Creating Interesting Opportunities For Buyers Mispriced risk and local knowledge can create asymmetry Lower basis, especially versus core, confers downside protection and leasing advantage Yields potentially higher than core yields, more so on stabilization; reaffirms downside protection Hard assets with meaningful upside potential in event of inflation or stronger economic outcome PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 7 E UROPE LLP
We’ve Seen This Before A financial (structural) problem rather than a real estate problem (cyclical) A DVANCED E CONOMIES ’ GDP G ROWTH AND R EAL E STATE C YCLES (1970-2012) Early 1990s Dot Com Early 2000s 1980s Recession % change 1970s Oil Crisis GFC Recession Bubble Recession 7 6 Dema De mand/ supply supply match matched 1998- 98-99 99 5 Oversupply Ov Und Under- absorbed abso supply supply 1990- 90-98 98 2011- 11-13 13 4 RT RTC 3 Oversupply Ov Ov Oversupply 2 1970- 70-75 75 1980- 80-89 89 1989-95 989-95 Oversupply Ov 1 2000- 00-03 03 0 -1 -2 -3 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: FDIC, FDIC Structured Transaction Fact Sheet, IMF, 2009. FW Dodge, CB Commercial, BLS, Mueller. PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 8 E UROPE LLP
We’ve Seen This Before A financial (structural) problem rather than a real estate problem (cyclical) RTC TODAY Inefficient Efficient Bulk sales (“Black box”) Discrete portfolios and one- offs Retail flip Value created through active asset management PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 9 E UROPE LLP
Significant Increase In Lending Through 2007 With Loans Maturing Now E UROPEAN L ENDING TO R EAL E STATE 300 (€ B ILLION ) 323% 250 200 € 477B € Billion 150 Majority of European real estate debt exposure 100 through direct balance sheet debt exposure (75%) and bank sponsored covered bonds (18%) 50 Most mortgages remain on banks’ books as they 0 2001 2005 2009 2013 2017 extend loan terms in hope values will improve U.S. CMBS S ALES AND M ATURITIES Lack of alternative funding when debt maturities 300 ($ B ILLION ) at their highest 250 206% 200 $ 320B $ Billion 150 100 50 0 2001 2005 2009 2013 2017 Lending Maturities Source: CBRE, De Montfort University, January 2011. DTZ May 2011,. PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 10 E UROPE LLP
Faster Than Anticipated Reduction And More To Come P ROGRAM OF A NNOUNCED S ALES (T OTAL OF €296 B ILLION ) Banks 37% CMBS 17% Pressures mounting on bank balance sheets as non- real estate assets deteriorate OEFs 11% Banks ~20-25% through their revised deleveraging REITs 5% plans by mid-2012 (majority through repayment of Government loans and impairments, fewer disposals) 30% Projected that by the end of 2015 a majority of the work-out will be completed I MPAIRMENTS MADE BY A U.K. B ANK TO NON - CORE PORTFOLIO (£ B ILLION ) 60 50 40 £ Billion 30 20 10 0 4H10 2H11 4H 11 2H12 4H09 2H10 Source: Morgan Stanley, November 2012, J.P. Morgan Asset Management as of December 2012, J.P. Morgan Asset Management, February 2013. PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 11 E UROPE LLP
The Size of the Opportunity in Europe E XPECTED O PPORTUNISTIC S ALES IN E UROPE (T OTAL OF €261 B ILLION ) Investment activity by opportunistic investors rose to 12% of all investment activity in Europe in 2012 (versus 6% average from 2007-11) Opportunistic segment of market expected to increase to ~15-20% of total capital invested D ISTRESSED S ALES IN THE U.K., G ERMANY AND F RANCE (S OURCES ) (T OTAL OF €125.8 B ILLION ) Banks €77.1B REITs CMBS €3.2B Govt €14.3B €24.5B OEFs €6.7B Source: J.P. Morgan Asset Management, February 2013, CBRE Valuation Team, September 2012; J.P. Morgan, September 2012. PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 12 E UROPE LLP
Investors Can Access Distress Throughout The Capital Structure… Distressed Equity Distressed Debt Individual, non-core properties sold out of Opportunities include large portfolios as well as portfolios in need of active asset individual assets management Complex transactions that require structuring capabilities Properties in need of capital for renovations or tenant improvements held by capital Illiquid debt environment creates mispriced constrained owners or “unnatural” owners segments in the capital structure (e.g., banks) Sources include banks, borrowers (owners), Opportunities to restructure balance sheets property developers; relationships with lenders and provide new capital and borrowers key to successfully sourcing transactions Acquire properties through “loan-to-own” situations Sources include forced sellers, including closed-ended funds, banks, open-ended funds, corporations, governments, REITs PRIVATE & CONFIDENTIAL M ETROPOLITAN R EAL E STATE Experience Access Diversification jford@mreem.com 13 E UROPE LLP
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