Presentation to: Graaskamp on the Road Jeffrey N. Weber Senior Managing Director June 24, 2016 1
Resiliency – Reasons for Optimism Relative US economic performance 2 -2.5%, GDP growth, 200-250k per month job growth (except last month) Very few markets with supply issues Balance sheet strength among borrowers and tech companies Low oil prices are normally a good thing Strong demographics driven by millennials and Gen Z behind them 2
Risk – Reasons for Concern Cycle Risk – Length of current expansion vs. most recent cycles Capital Market Volatility: China, CMBS, Oil Transaction velocity/valuations Geopolitical: Isis, Currency Rate Wars Governmental – Gridlock, Regulatory, Entitlements 3
Global Bond Rates Japan Germany U.S. 1 Month -0.40% -0.60% 0.20% 5 Years -0.25% -0.45% 1.15% 7 Years -0.25% -0.30% 1.45% 10 Years -0.15% 0.05% 1.65% Source: Bloomberg, rounded to the nearest 5 bps 4
The Bond Markets Predict Low Rates for Some Time Source: Bloomberg 5
Yield Environment has Pushed Values for all Asset Classes – Just Less For CRE % Change in Index Feb. 2007* June 2016* Value S&P 500 1,445 2,069 +43% (Price Only) 10-Yr. 4.70% 1.80% +62% Treasury Green Street 100 124 +24% CPPI *30 day average 6
CIO Conundrum Today Annual Returns on $100 MM Invested Annual Annual Return (%) Return ($) 5 Year Treasury 1.15% $1.15 MM 10 Year Treasury 1.65% $1.65 MM AAA 10 year CMBS 2.75% $2.75 MM 1.7x T’s Class A Core Real Estate 6.00%* $6.00 MM 3.6x T’s (Unlevered) Class A Core Real Estate 8.00%* $8.00 MM 4.8x T’s (Levered) *IRR 7
US Sales & JV’s Volume Transactions >$25 Million 2015 Largest Ever; Excluding EOP $450 $407 $400 $367 EOP $350 $340 $284 $300 $245 $245 $245 Billions $250 $216 $200 $163 $158 $150 $116 $148 $106 $93 $100 $35 $50 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD May ‐ 16 Source: Real Capital Analytics 8
U.S. Office Sales & JV’s Volume by Buyer Type, Transactions >$200 Million $100 $94 Offshore Investment Accelerating… $90 2005 – 2007 In Particular on Larger Deals 9% Foreign By Vol. $80 2013 ‐ 2015 $70 $62 29% Foreign By Vol. $60 Billions $51 $50 $90 $44 $42 $40 $43 $39 $30 $23 $28 $37 $20 $20 $10 $19 $14 $12 $7 $4 $3 $0 2005 2006 2007 2013 2014 2015 Foreign Domestic Source: Real Capital Analytics 9
US Supply Fundamentals Remain Healthy New Supply is Generally Below Long-Term Averages All sectors (multifamily being one exception) are 30%+ below their long-term avg. supply levels Source: REIS 10
Population turning 18 from 1965 to 2015(P) 4.5 4.4 4.3 4.2 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.1 3.0 2.9 2.8 2.7 2.6 2.5 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 AVERAGE POPULATION TURNING 18 AVERAGE 1965 - 2015(P) Excl. 1990-1999 AVERAGE 1990-1999 Source: U.S. Census 11
Why Today’s Pricing Doesn’t Feel Like 2006 Capital Stack (2006) Capital Stack (2015) 2015 Capital Stack - 50% LTV 2006 Capital Stack - 80% LTV Debt Lev. Debt Lev. LTV Cap Rate DSC LTV Cap Rate DSC Cost COC Cost COC 6.00% 1.04x 1.00% 3.85% 2.40x 5.25% 80.00% 5.00% 50.00% 4.50% 12
Current Gross Income Levels vs CRE Pricing OFFICE CRE VALUE 2015 ($PSF) 2015 GDP PER CAPITA $151,822 $160,000 $900 $814 $800 $140,000 $116,009 $700 $120,000 $589 $600 $554 $93,321 $100,000 $84,773 $83,032 $500 $80,000 $69,545 $417 $65,544 $400 $348 $60,000 $296 $300 $225 $40,000 $200 $20,000 $100 $0 $0 Current Commercial Real Estate pricing PSF relative to per capita GDP in the Bay Area is approximately 36% lower than other major US markets. 13
Income Growth vs CRE Value Growth GDP PER CAPITA GROWTH CRE VALUE GROWTH (CPPI) SINCE 2001 85% SINCE 2001 237% 250% 75% 75% 200% 65% 61% 153% 149% 58% 56% 136% 150% 55% 118% 51% 46% 45% 100% 45% 74% 57% 50% 35% 25% 0% Average Commercial Real Estate value growth relative to GDP per capita income appreciation in the Bay Area is approximately 26% lower than other major gateway metro 14
Profiling San Francisco’s Largest Tech Users Net Debt to TTM YE 2017 ADJ. ADJ. CASH RSF REV. PROJ. EBITDA EBITDA $9,839 $7,073 2.3M (39% Proj. Growth ) $2,031 $1,162 0.0x (35% YoY Growth) $2,377 $3,298 768K (28% Proj. Growth) $3,576 $583 (3.4x) (15% YoY Growth) $77,988 $100,025 727K (39% Proj. Growth) $73,450 $31,062 (2.1x) (25% YoY Growth) $3,214 $4,456 450K (39% Proj. Growth) $3,160 $819 (2.5x) (50% YoY Growth) (1) LTM Revenues are as of March 31, 2016 for LinkedIn, Alphabet and Twitter. LTM Revenues are as of April 30, 2016 for Salesforce. (2) YE Revenues are as of December 31 for LinkedIn, Alphabet and Twitter. YE Revenues are as of January 31 for Salesforce. (3) Adjusted EBITDA excludes stock based compensation and includes equity income from affiliates. 15
San Francisco Office Rents Relative to Replacement Cost Rents Avg. San Francisco Office Rent As Compared to Replacement Cost Rrnt 31% $120.00 66% Discount Premium 41% $100.00 Discount $80.00 $60.00 $40.00 $20.00 $0.00 Avg. Rent Replacement Cost Rents 19-year Average Discount to Replacement Cost Rents is 30% 16
National Class A & Trophy Pricing 50-100 BPS mark to market premium for San Francisco trophy assets 150+ BPS premium for San Francisco class A assets 17
It’s Extremely Hard to Time the Market… 80% of sales vol. for the past two recoveries occurred in the 2 nd half of the recovery $700,000 25.0% $600,000 15.0% $500,000 5.0% $400,000 $300,000 -5.0% $200,000 -15.0% $100,000 $0 -25.0% Investment Sales Volume (mm) NCREIF Total Return 2006 – 2014 Investment Returns 2006 – 2014 Investment Returns Cash Investment Real Estate Investment IRR Cash Investment Real Estate Investment IRR - 2006 - 2014 7.6% - 2007 - 2014 5.9% 2006 - 2010 2011 - 2014 4.7% 2007 - 2010 2011 - 2014 5.4% And in a 0% cash return environment, not necessarily profitable. [1] 2006-2014 NCREIF returns reflect actual returns. [2] Cash returns held at 0% to reflect current rate environment. [3] Sources: NCREIF and Real Capital Analytics 18
Private vs. Public Market Office CRE Valuation Large persistent public market discounts to NAV were a pretty good leading indicator for 2001 and 2008 downturns… however, recent data is not as conclusive. Not all economic downturns create significant discounted buying opportunities. 45.0% 120 40.0% 35.0% 100 30.0% 25.0% 20.0% 80 15.0% 10.0% 5.0% 60 2.9% 0.0% -5.0% 40 -10.0% -15.0% -17.9% -20.0% 20 -25.0% -30.0% -35.0% 0 Green Street Office CPPI NCREIF Office Return Office REIT Premium to NAV Cumulative National CPI Inflation Source: Green Street Advisors & NCREIF ; *Not adjusted for inflation; *bmv = NCREIF Quarterly Beginning Market Value; Green Street CPPI is indexed to 100 in August '07 19
Producing Better Spreads for Less Risk CMBS Capital Stack – 2006 vs. 2016 Source: Eastdil Secured 20
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