Marketing Class at UoWisconsin School of Business

1. The Marketing of Real Estate
Amaury de Parcevaux
April 8th 2011 Chief Marketing Officer

2. Short Profile on Firm and Speaker
A. Falcon Real Estate Investment Company, LP
• US Commercial Real Estate firm created in 1991 by Howard Hallengren and Jack Miller,
both from JPMChase. Offers comprehensive services to high-net-worth individuals and
institutional investors. 6 US Regional offices in the United States: New York, Washington
D.C., Miami, Chicago, Dallas and San Diego. $ 2 bn AUMs of US commercial real estate.
100% Out-performance vs. its benchmark (NCREIF) in 20 years.
B. Amaury de Parcevaux, Chief Marketing Officer (New York)
• Amaury de Parcevaux is Senior Vice President for Falcon and he is based in New York.
As Chief Marketing Officer, he has overall responsibility for the Global marketing strategy
of Falcon's direct and indirect investments platforms. Mr. de Parcevaux has had over 18
years experience in marketing to high-net-worth individuals, and comes to Falcon from
Morgan Stanley, where he was a First Vice President in the Wealth Management
department. Prior to that, he worked in the Private Banking department of Merrill Lynch, at
Citibank and Deutsche Bank in New York, and at Commerzbank and Deutsche Bank in
Frankfurt. Mr. de Parcevaux graduated in 1988 from the European Business School
(Oestrich-Winkel, Paris and London) with a Master’s Degree in Finance. In addition to
French and English, Mr. de Parcevaux is also fluent in German.
2

3. Class Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
3. Falcon’s Case Study
Conclusion
3

4. Class Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
3. Falcon’s Case Study
Conclusion
4

5. Traditional Global Asset Classes
A. Traditional
• Money Market
• Bonds (CMBS)
• Stocks (Listed Real Estate Investment Trusts: “REITs”)
B. Alternative
• Private Equity (“Private Equity funds”, “Private REITs” or “Club Deals”)
• Hedge Funds (“Sector Specific”: Real Estate and Macro)
• Structured Products (“Principal Protected” around RE indices or “REITs baskets”)
• Real Estate (Direct investment by one investor in one building or owner-occupied)
• Managed Futures
• Commodities
• Infrastructure
5

6. Traditional Global Real Estate Asset Classes
Private Public
GLOBAL REAL ESTATE
Direct Property Real Estate
Equity
Securities •$ 25 Trillion (50% US)
Investments $ 16 Investment Grade
$ 9 Non-Investment Grade
$ 23 Trillion ($ 10 pure investments)
$ 2 Trillion
•20% vs. Global Stock +
Bond Market Cap.
• 7 times bigger than
Debt
Whole Mortgage Structured Debt Hedge Funds
(CMOs, CLOs etc.)
• 12 times bigger than
Private Equity
6

7. Real Estate Evolves with Private Equity
1. Buyouts PIPE
Purchase of controlling interest Real Estate
Late Stage
with substantial borrowed capital Private/Public
Distress Mature Stage Company
Private/Public
Mezzanine Company
Growth Stage
Private/Public
Industry Company
Convertible Debt
Mezzanine Stage IPO Public/Private Debt
Private
Company Follow-on Offerings
Venture Stage
Private Traditional Bank Loans
Company
High Yield Debt & Equity
2. Venture Capital Funding
Focuses on investing in companies
with high growth rates
7

8. Class Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
3. Falcon’s Case Study
Conclusion
8

9. Positioning Debt/Equity vs. Public/Private
Risk / Return of Real Estate Investment Strategies
Equity
Opportunistic
Value-Added
Long/Short
Public Equity
Debt Core Property
Public Debt
Whole Mortgage
Risk Perception
Source: Fund Evaluation Group and Falcon Asset Management
9

10. Pre-2008 Crisis Headlines?
“US Housing Going down”
April 26th 2007
“ Foreign Real-Estate Funds Boom Firms Unveil
Scores of New Plays, Spurred by Strong Returns
and Growth in Overseas REITs”. July 7, 2007
“Euro soars to new high against U.S. dollar”
July 10, 2007
“Subprime poor practice risks
turning to malpractice”
July 4 2007
10

11. R. Bernstein: Merrill Lynch Chief US Strategist
11

12. Asset Allocation and Expected Return: 1
Security Selection Market Timing Other Factors
4.6% 1.8% 2.1%
Asset Allocation
91.5%
• 91.5% of long-term total account performance including Stocks, Bonds, Money Markets
resulted from asset allocation decisions (statistically tested over the past 20 years)
• Mitigate the necessity of secondary market - like in REITs
Source: Ibbotson Associates, Inc.
12

13. Risk Adjusted Returns (+ Standard Deviation): 2
HIGH
Private
Equity
Global
Real Estate
Hedge
Return %
MEDIUM Funds
Oil
Global Commodities
Stocks
Global Bonds
Gold
LOW Global
Money Markets
LOW MEDIUM HIGH
Risk % Source: 1995—2005 Source: BHF-BANK
13

14. US Public vs. US Private Real Estate Returns
US Public RE Benchmark (50% leveraged) vs. Private Benchmark (Unleveraged)
NAREIT NCREIF
Source: Falcon /NCREIF & NAREIT/ Columbia Business School
14

15. REIT NAV Premium vs. Underlying Assets
40
%
30% Long-term Average = 6.6%
20%
10%
0%
-10%
-20%
-
30%
Source: Green Street Advisors, Current as of May 2007
15

16. When Real Estate > Stock Market Volatility
S&P 500 120 Day Volatility
REITs 120 Day Volatility
1994 1996 1998 2000 2002 2004 2006 2008
Source: Bloomberg / RMS & SPX 120 Day Return Volatility
16

17. Correlation Coefficients (+ covariance): 3
Falcon Performance Statistics vs. Benchmarks: January 1991 - June 2006
S&P 500 FTSE 100 NCREIF Index FALCON
Total Quarters 62 62 62 62
Positive Quarters 67.74% 69.35% 87.10% 98.39%
Negative Quarters 32.26% 30.65% 12.90% 1.61%
Median Quarterly Return 2.41% 2.08% 2.36% 3.44%
Average Quarterly Return 2.47% 2.27% 2.08% 3.74%
Standard Deviation 7.43% 7.09% 1.84% 1.79%
Best Quarter 20.87% 25.13% 5.43% 10.42%
Worst Quarter -17.63% -17.80% -5.33% -0.14%
Maximum Drawdown -45.60% -45.55% -9.66% -0.14%
Sharpe Ratio* -0.04% -0.07% -0.37% 0.55%
* Risk free rate is 2.75% (the average 5-yr T-Note from Jan '91 Š June '06
Correlation Matrix S&P 500 FTSE 100 NCREIF Index FALCON
S&P 500 1.00 0.73 -0.04 -0.04
FTSE 100 1.00 0.01 0.02
NCREIF Index 1.00 0.77
FALCON 1.00
Source: Falcon
17

18. Steps 1+2+3 = Efficient Frontier
15.50
Efficient Frontier with 10% Efficient Frontier with 5%
15.00 Alternative Investments Alternative Investments
14.50
14.00
Return %
13.50
Efficient Frontier without
Alternative Investments
13.00
12.50
12.00
11.50
10.00 10.50 11.00 11.50 12.00 12.50 13.00 13.50 14.00 14.50
Risk %
Source: 1980—2000 Source: Merrill Lynch Quantitative & Equity Derivatives Research
18

19. How Much Alternative Investments?
Cash
Bond
50-60%*
Equity
Alternative
Invest.
*Real assets, which includes real estate and commodities, is the largest
investment category with 31 cents of each Harvard endowment dollar.
Source: Falcon
19

20. Synopsis of Private vs. Public Real Estate
Public Equity Advantages Private Equity Advantages
Publicly traded (liquid) Access to broader array of
investment opportunities
Lower fees
No minimum size (individual investors) Lower correlation to stock markets
Public Equity Disadvantages Private Equity Disadvantages
Theoretically, lower returns Illiquid
due to liquidity premium
Higher fees
Performance often driven by capital flows and
other non- real estate related factors Appraisal-based valuations
Higher correlation to public stock markets Difficult to benchmark
High dispersion of returns in value-
added and opportunistic sectors
20

21. Class Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
3. Falcon’s Case Study
Conclusion
21

22. 2011: Global GDP $ 60 vs. $ 180 Trillion Listed
Global Financial Markets (Excluding Derivatives)
TOTAL
Bank Deposits
Government Debt
Corporate Debt
Equities
• Financial Markets offer broader access to capital from borrowers
• Financial Markets offer more efficient pricing
• Financial Markets increase opportunities for sharing risk BUT…
• Lately securitization has led to substantial increases in leverage and greater systemic risk for the entire financial system
Source: McKinsey Global Institute
22

23. Real Economy/Financial Markets Decoupling
• 1990: 33 countries have domestic market capitalization
(excluding derivatives) > GDP
• 2007: 72 countries – virtually all industrial economies and the
largest emerging markets have financial markets that are two to
three times the size of their GDP
Source: McKinsey Global Institute
23

24. Listed Real Estate – Still in Infancy
FTSE EPRA/NAREIT Countries Listed RE Vs. Stock Market Cap.
% %
Australia 30 10
Hong Kong/China 25 5
Singapore 25 10
Luxembourg 12 6
Sweden 10 4
Canada 8 3
United States 7 2
Netherlands 6 3
New Zealand 5 5
Austria 5 4
United Kingdom 4 1
Japan 4 2
France 3 1
Switzerland 3 0.6
Spain 3 2
Belgium 3 1.5
Finland 1.5 0.5
Norway 1.5 1
Poland 1.5 1.3
Denmark 1 0.6
Greece 1 0.5
Italy 1 0.8
Germany 0.5 0.5
South Korea 0.5 0.2
Hungary 0.2 0.2
Ireland 0.1 0.1
Portugal 0.1 0.1
Czech Republic 0.1 0.1
World 5.6 2.8
24

25. 2007: $ 2 Trillion Listed Real Estate
Australia
Hong Kong
Australia Asia-Pacific
Japan
9% Other Asian
25%
France
Hong Kong Germany
5% Italy
Spain
Netherlands
Japan 11%
Other Eurozone
US 53% UK
Euro zone Switzerland
10% Sweden
C & E Europe
Other
UK 6% European US
Canada
Mexico
Americas 57% Europe 18% Brazil
Other
Sources: EPRA/NAREIT, LaSalle Investment Management
25

26. Pre Crisis Global Real Estate Markets Flow
•Mature/ Highly Mature: 83%
•Maturing: 15%
•Invested •Emerging: 2%
stock
$3.2 trillion
•Investable stock Europe / Russia
$6.1 trillion
•Invested •Total stock
stock $9.2 trillion
$4.7 trillion
Americas Total stock
•$9.5 trillion
•Investable stock Middle East / Asia
$6.6 trillion •Invested •Total stock
stock $5.9 trillion
$1.9 trillion
•Mature/ Highly Mature: 9%
•Maturing: 1%
•Emerging: 1% •Investable stock
$3.5 trillion
•Mature/ Highly Mature: 17%
•Maturing: 72%
•Emerging: 11%
Pre-2008 Crisis Inter-regional capital flows of $115bn
Sources: RREEF; DTZ; ULI; PwC
26

27. International RE Risk Adjusted Returns?
Returns and risk for public real estate securities in various regions around the world can
produce half of the returns for twice the risk and can produce twice the returns for half the
risk depending what you targeted country allocation is.
Returns for Asia were for instance lower than other regions due to problems the region
has faced, including a weak Japanese real estate market for more than a decade and the
SARS outbreak in 2003
Returns and Risk of Public Property Securities Markets
(1993-2006, in U.S. dollars)
Return Standard
Deviation
U.S. 13.60% 14.90%
Europe 13.90% 14.40%
Asia 7.40% 33.20%
Australia 16.60% 18.20%
Source: Morgan Stanley, Global Property Research
27

28. Correlation in International RE Markets?
International diversification within public real estate equities is beneficial due to the low
correlations of public real estate equities between various global regions
Correlation of Public Property Securities Markets
(1993-2006, in U.S. dollars)
U.S. Europe Asia Australia
U.S. 1 0.5 0.32 0.4
Europe 0.5 1 0.34 0.52
Asia 0.32 0.34 1 0.44
Australia 0.4 0.52 0.44 1
Source: Morgan Stanley, Global Property Research
28

29. Today’s Global Private Banking Market
Liquid Assets: USD 9,000 billion Liquid Assets: USD 9,000 billion
Revenues: USD 63 billion Revenues: USD 81 billion
Ratio = 0.7% Ratio = 0.9%
Liquid Assets: USD 5,000 billion Liquid Assets: USD 7,000 billion
Revenues: USD 65 billion Revenues: USD 63 billion
Ratio = 1.3% Ratio = 0.9%
• 7 Million People Own > USD 1 Million Liquid Assets (@ 0.1% World Population)
• USD 30 (23 on shore / 7 off shore) Trillion Private Banking Market: + 2% p.a.
29

30. Public and Private Real Estate Room to Grow
HNI's Real Estate Investments (2006)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Global North Latin Europe Asia- Middle
America America Pacific East
REIT Commercial Residential* * Secondary Residence
Source: Merrill Lynch/Cap Gemini
30

31. The Luxembourg Fund Center
Pre-2008 Crisis Worldwide Mutual Funds
€ billions
9 000
Luxembourg is the second
8 000 largest fund center in the
7 000 world after the USA
6 000 1 839
5 000
8 426
4 000
3 000
4 542
2 000
2 176
1 000
0
USA Europe Asia & Pacific
Sources: EFAMA & ICI
31

32. Luxembourg Real Estate Funds: Before the SIF
AUM and Number of RE
• Huge growth since 2004 Funds
• Closed-end and Open-end funds and funds of funds
40 140
129
Number of subfunds
Reasons for success: 35 120
AUM USD bln
30
• Strong yet flexible Regulation 100
25
• Cheaper for Fund Managers than the US 80 80
20
• Reputation of location 60
• Centre of sophisticated real estate investment funds 15 48
40
 Global promoter base 10 36
36
 Global investor base 5 20
• Tax efficiency and stability 0 0
02 03 04 05 06
AUM # (sub)funds
32

33. SIF: Market Overview
Specialized investment funds launched since February 13, 2007
250
220
200
150
115 119
100 93
72
50 38
25
8 12
0
2007- 2007- 2007- 2007- 2007- 2007- 2007- 2007- 2007-
02 03 04 05 06 07 08 09 12
33

34. SIF Launched in Feb. 07 is a Favored Structure
Profile of Luxembourg Investment Funds
Key criteria UCITS Non-UCITS SIF SICAR
Investment Restricted Flexible Flexible Moderate
restrictions (eligible
assets)
Risk diversification High Medium Low None
Ease of public High Medium Low Low
distribution
Supervisory Targeted to Targeted to retail More flexible More flexible
framework retail investor investor
protection protection
Time to establish Low - Medium Medium - High Very low Low
Target investors All All Institutional / Institutional /
HNWI HNWI
34

35. The SIF Features are Tailored for Real Estate
Key Features UCITs Non-UCITs SIF SICAR
Umbrella structures Yes Yes Yes Yes(1)
Share-classes Yes Yes Yes Yes
Debt financing No No Yes Yes
Leverage No Yes Yes Yes
Probable
Probable realization Probable
Valuation basis realization Fair value
value realization value
value
As per
Subscription/
NAV NAV offering NAV
redemption price
document
NAV frequency
Monthly Monthly Annual Annual (1)
(minimum)
Open or closed ended Open ended Both Both Both
Annual Report Yes Yes Yes Yes
Semi-annual report Yes Yes No No
Regulatory Reporting Yes Yes No No
35

36. The SIF: In a Nutshell
Criteria SIF
• Eligible investor base: Investment in a Regulated vehicle? Yes
SIF is reserved for “well-informed” Pre-approval by regulator? No
investors requiring a limited level of Other than local GAAP? Yes
protection and looking for investment REGULATORY Investment restrictions? No
flexibility suitable to their particular Investment in RE, PE, HF? All
Simplified prospectus
expertise and needs. Yes
regime?
• Investment flexibility: the range of Subscription tax? Yes
assets (nature of assets and/or Income tax? No
associated risks) eligible for a SIF is TAX
Access to DTT? Yes / No
broad and consequently includes, but is Withholding tax on dividends
paid? (residents / non No
not limited to, equities, bonds, residents)
derivatives, structured products, real Standard VAT rate? 15 %
estate, hedge funds and private equity Listing possible? Yes / No
type investments. The SIF should comply Maximum number of
No
investors?
with the general principle of risk
DISTRIBUTION Minimum investment
diversification. Min. € 125k
amount?
• Light supervision Minimum experience
Yes
required?
• Organisational adaptability Service providers / persons • Directors
• Efficient tax regime LICENSING subject to regulator's • Custodian
approval? • Auditor
36

37. Pension Funds Pooling: Use Luxembourg
British Irish Chilean Brazil British Irish Chilean Brazil
Pension Pension Pension Pension Pension Pension Pension Pension
Fund Fund Fund Fund Fund Fund Fund Fund Asset administrator
Depositary bank
Converted in Virtual or entity pension pooling
Paying agent
Administrative agent
Investments Transfer agent
Investments Investments Investments Investments
Real Auditors
Shares Bonds Deposit Estate
Law consultant
Tax consultant
• Quantitative benefits:
Economies of scales at asset management & custodian bank level up to 0.70% savings
• Qualitative benefits:
Improve measurement/selection of service provider
Enable consistent/centralized corporate governance.
• Multinationals running pension funds in several countries have implemented pension
pooling vehicle
37

38. Class Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
3. Falcon’s Case Study
Conclusion
38

39. a. Falcon Real Estate
• Highlights • Falcon Offices
• Organizational Chart • Institutional Relationships
• The Founders • Falcon vs. NCREIF Property Index
• An Advisory Firm • Current Diversified Portfolio
39

40. Highlights
• Formed in 1991 by Howard Hallengren and Jack Miller to advise Non-U.S. investors
• Directors with over 100 years combined experience in global real estate investing
• 6 office locations: NYC, Chicago, Miami, Dallas, Washington D.C., San Diego
• Company employs 17 professionals
• Falcon has completed transactions totaling about US$ 7 billion and provides
Asset Management services for commercial real estate in major markets throughout
the United States.
• Performance as of June 30th 2010, since inception in 1991*
 13.9% average annual return vs. 6.8% NCREIF benchmark
 Annual income return of 8.4%
* based on NCREIF investment performance standards
40

41. Organizational Chart
Howard Hallengren
Chairman
Management — Directors Chief Executive Officer
Jack Miller Scott Sweeney Amaury de Parcevaux Ken Lorman Scott Bennett Norman Hill
President Executive Vice President Senior Vice President Senior Vice President First Vice President First Vice President
Head of Asset Management Chief Marketing Officer Senior Acquisition Officer Chief Operating Officer Chief Financial Officer
Acquisitions & Accounting
Marketing Asset Management
Underwriting Reporting & Tax
Amaury de Parcevaux Kenneth Lorman Scott Sweeney Norman Hill
Senior Vice President Senior Vice President Executive Vice President First Vice President
Chief Marketing Officer Senior Acquisition Officer Head of Asset Management Chief Financial Officer
Europe, Asia, North America Eastern U.S. U.S.
Scott Sweeney Laurence Dooley Scott Bennett Angela Bleckner
Executive Vice President Vice President First Vice President Senior Accountant
Middle-East Central U.S. U.S.
Dan Stockalper Adam Doud Laurence Welsh Tamela Newton
Vice President Vice President Vice President Accountant
Middle-East Western U.S. Southeast & D.C.
Daniel Epstein Daniel Epstein Carl Omark
Vice President Vice President Vice President
Latin America, Spain, Portugal Eastern U.S. East Coast & Midwest
David Hill Timothy Puhek
Vice President
Certified Public Accountant
Southwest & DC Western U.S.
41

42. The Founders
Howard E. Hallengren Jack D. Miller
Chairman President
New York Office Chicago Office
Mr. Hallengren is Chairman of Falcon Real Estate Mr. Miller joined Falcon after serving as Manager of the
Investment Company, LP. Mr. Hallengren has been Real Estate Investment Division within Private Banking
Chairman of Falcon since its inception and has overseen International at the Chase Manhattan Bank. In that role, he
the growth of the company and the investment strategy had direct responsibility for property acquisition, property
which has delivered the exceptional IRR’s. Prior to forming management and mortgage financing. Like Mr. Hallengren,
Falcon, Mr. Hallengren was Chief Investment Officer and Mr. Miller also came to Chase from The First National Bank
Product Manager for the International Private Banking of Chicago, where he served for ten years in the bank’s real
Department of the Chase Manhattan Bank. In that estate investment division. He is a founding member of the
capacity, he had overall responsibility for the bank’s real Accounting Standards Committee of the National Council of
estate investments on behalf of non-U.S. investors. Before Real Estate Investment Fiduciaries, which is the
joining Chase, Mr. Hallengren was Chief Investment Officer coordinating group that sets accounting standards for U.S.
at The First National Bank of Chicago. During his tenure institutional investors. Mr. Miller received a Bachelor of
there, he also served as Chairman of the Real Estate Science degree in accounting and a master of finance in
Investment Committee, which supervised the Trust real estate from De Paul University, as well as a master’s
Department’s real estate investments. Mr. Hallengren is a degree in business administration from the University of
graduate of Princeton University and received his master’s Chicago.
degree in business administration from the University of
Chicago.
42

43. An Advisory Firm
We offer a complete real estate investment We act as our Client’s Agent and Representative in the
management platform, including advice on purchases, United States
financing, and sales, as well as a comprehensive asset
management service We have a fiduciary responsibility to the Client,
which means that we act according to the Client’s
We customize our approach to meet our best interest and instructions
clients’ goals
As the Client’s Advisor on Direct Real Estate Falcon’s Asset Management team selects and
acquisitions, we receive property submissions from supervises local leasing and property management
every Brokerage Firm in the country and maintain agents, monitors and controls all receipts and
close relationships with many of the country’s most disbursements, and provides comprehensive quarterly
important real estate owners and operators reports on each property.
Our decades-long close relationships with We customize every Asset Management
Brokerage Firms and Ownership provides Clients strategy and budget
with the insight required to successfully bid on
properties
Falcon Real Estate is an investment manage-ment Falcon is not related to any other entity of any kind in
advisory firm – not a Brokerage Firm the real estate industry in the United States
We represent our clients as buyers or sellers in a Therefore, we are totally independent and focused
transaction independent of the Brokerage Firm on meeting the objectives of our clients.
43

44. Falcon Offices
Broad Coverage of U.S. Market
New York City
Chicago
Washington D.C.
San Diego
Dallas
Miami
6 Falcon Offices
Current Asset Management Assignments
44

45. Institutional Relationships
BNP Paribas, Global (U.S. Alliance Partner)
Generali Immobiliare, Paris (U.S. Investment Advisor)
Credit Suisse Private Bank, Zürich (Invested on Behalf of Clients)
HSBC Amanah, New York (Managed Real Estate Fund)
Citi Private Bank, London, Abu Dhabi and Geneva (Invested on Behalf of Clients)
Kuwait Finance House, Kuwait (Managed Real Estate Fund)
Capital Trust, London (Advised on Purchase of Properties)
Deutsche Bank Realty Advisors, New York (Advised on Purchase of Properties)
FT Sirius Fund, Hong Kong (Created FT Falcon Asia Ltd. Joint Venture)
45

46. Track Record: Falcon vs. NCREIF Property Index
Annual Returns of Falcon vs.
NCREIF Property Index As of June 30, 2010
* Inception Date — January 1, 1991
Source: Falcon Asset Management
The NCREIF Property Index is a commercial real estate index consisting of 6,066 privately
held investment properties with a market cap of $234.5 Billion.
46

47. Current Diversified Portfolio
Falcon Portfolio (Market Value) Falcon Portfolio (Square Feet)
Market Value Sq. Ft.
Office: Multi-Tenant $401,009,827 24.51% Office: Multi-Tenant 1,805,822 14.01%
Office: Single-Tenant 395,835,487 24.19% Office: Single-Tenant 2,090,588 16.21%
Retail 98,007,836 5.99% Retail 396,922 3.08%
Residential / Development 459,500,000 28.07% Residential / Development 1,061,327 8.23%
Industrial 282,060,184 17.24% Industrial 7,538,969 58.47%
Totals as June 30, 2010 $1,636,413,335 100.00% Totals as of June 30, 2010 12,893,628 100.00%
Office:
Industrial Office: Multi-tenant
17.24% Multi-tenant 14.01%
24.51%
Industrial
58.47%
Office:
Single-tenant
16.21%
Retail
Office: 3.08%
Residential/ Single-tenant
Development 24.19%
28.07% Residential/
Development
Retail 8.23%
5.99%
Source: Falcon Asset Management
47

48. b. Investment Process
• Highlights
• Acquisition Process
- Acquisition Process Time Line
• Asset Management
- Asset Management Duties
• Accounting and Reporting
• Case Studies
48

49. Highlights
ASSET ACCOUNTING &
ACQUISITION
MANAGEMENT REPORTING
Falcon Sourcing Ongoing Oversight Financial Statements
Due Diligence Risk Management Tax Optimization
Exit Strategy
49

50. Acquisition Process
Property summary and location overview
Rationale for purchase and exit strategy
Acquisition Committee
Full valuation and earnings projections YES NO
Analysis of market, location, tenant
creditworthiness and debt coverage
Letter of Intent /
Engage attorneys
Negotiations
Review third party reports from lenders, appraisers,
engineers, and zoning & environmental agencies YES NO
Inspect property
Select on-site team
Due Diligence
Lock-in financing and leasing strategies
Insurance review
Finalize pro forma
YES NO
ASSET MANAGEMENT Closing
50

51. Acquisition Process Time Line
*Third Party Reports Include: Appraisal, Environmental Inspection, Engineering Report,
Zoning Report, Survey, and Other/Misc. Reports
SNDA - Subordination and Non-disturbance Agreement
51

52. Asset Management
• Falcon Asset Management team has managed properties throughout the United States
• Falcon’s Asset Management team establishes an overall strategy and budget for each
property, selects and supervises local leasing and property management agents, monitors
and controls all receipts and disbursements, and provides quarterly reports
• Capabilities in all 6 offices allowing us to benefit from local market knowledge
and relationships
• Group consists of 5 senior Asset Managers with strong expertise in all areas
of Asset Management
• Review committee insures best practices to each property
• Argus software expertise allows for detailed and flexible financial projections
52

53. Asset Management Duties
• Establish overall strategy for each property • Secure appropriate casualty and liability
insurance coverage
• Select and supervise local leasing and
property management agents as required • Negotiate lease terms and work with
outside legal counsel to document such
• Create annual operating and capital
leases
budgets
• Implement a property renovation or capital
• Review actual financial results against
improvement program
budgets on a monthly basis
• Carry-out property site inspections at least
• Monitor and control all receipts and
on a quarterly basis
disbursements
• Coordinate with outside accounting and
• Make debt service payments as required
legal firms all tax filings and audits
• Make real estate tax payments or confirm
• Provide client with a detailed quarterly
payment as required
report with financials
53

54. Asset Management Controls
• Asset Management Review Committee reviews each property on a regular basis and
approves all major property decisions to insure best practices
• Approval of annual operating budgets
• Review and approval of all major property decisions (e.g. sale, financing/re-financing, a major
tenant lease or capital expenditure)
• Review actual results compared to annual budget
• Update on leasing activity and property strategy
• Discussion of major issues regarding each property
• Other Asset Management Controls
• All proposed lease transactions and contracts require approval from Head of Asset
Management
• The only authorized signers to a lease document or contract are the Chairman, President,
Executive Vice President or Senior Vice President
• The handling of all cash receipts and disbursements are subject to formal cash management
policies and procedures
54

55. Accounting / Reporting
• Accounting function is centralized in our Dallas office
• Accounting group consists of 4 experienced accounting professionals including
Certified Public Accountants (CPAs)
• Experienced in fund management accounting and the audit process
• MRI accounting software, the industry standard, is used
• Financial statements and cash account reconciliations are completed on a
monthly basis
• Financial statements are presented to clients on a quarterly basis
• Provides support to third party accountants for tax return preparation and audits
55

56. Accounting / Reporting
Audited Financial Statements
Annually
Tax Returns
Operating Budgets and Annual Financial
Quarterly
Reports
Reporting & Analysis
Monthly
Balance Sheet & Income Statements
with Budget Comparisons
Bank Account Reconciliations
Loan Balances & Escrow Account
Reconciliation
56

57. Case Studies
2 Rodeo, Beverly Hills, CA
ACQUISITION STRATEGY
• Premier global retail destination
• Undercapitalized by previous owners
• Retail spaces were outdated and inadequate for
premier tenants
FALCON ASSET MANAGEMENT VALUE-ADD
• Engaged prime leasing agents and consultants to re-position
the property as a pre-eminent retail center with smaller
boutique-like spaces
• Detailed marketing and merchandising strategy and renovation
to implement quality standards for appropriate tenant mix and
shopper profile
• Retained Tiffany & Co. as anchor tenant with 20 year lease
renewal
• Attracted additional exclusive new tenants such as Versace and
Gucci
RESULT
• Purchased for $143 MM in 2000, and sold in 2007 for $275 MM
• Investor IRR 15.8% p.a. over 7 years
57

58. Case Studies
1201 and 1225 New York Avenue, Washington, D.C.
ACQUISITION STRATEGY
• Attractive, adjoining new buildings four blocks from the White
House
• Strong, growing Washington D.C. office market
• Separate owners; management, tenant and space allocation
inefficiencies
FALCON ASSET MANAGEMENT VALUE-ADD
• Purchased 1201 in 1999 and 1225 in 2000 joining and greatly
expanding tenant space
• Extensive property refurbishment and modernizing
• Major re-tenanting with entire building leased to tenants such
as U.S. Department of Homeland Security, Federal Elections
Commission, and Office of Government Ethics
RESULT
• Total purchase concluded at $112 MM in 2000, sold in 2005
for $215 MM
• Investor IRR 12.0% p.a. over 6 years
58

59. Class Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
3. Falcon’s Case Study
Conclusion
59

60. Conclusion
A. Privately Held vs. Publicly Held Real Estate
• Each have their own merit, even if the Privately-held RE is likely to continue to
dominate
• Clearly Commercial Real Estate in all its forms will continue to grow for all the
reasons we discussed
B. International Perspective
• Trend # 1: Hard Assets logic inescapable
• Trend # 2: The Global Real Estate market will continue to integrate
• Trend # 3: The Luxembourg Real Estate Funds will continue to grow
C. Falcon’s Case Study
• Add Value with RE Professionals and preserve value for your clients and yourself
• Stream-line and diversify your business model
• Embrace the win-win religion
60

61. Career’s Feedback
• First and foremost: Carpe Diem
• Additional Feedback
• Resume – spotless like a new building
• Interview – search the “win-win”… so sell yourself
• Companies to target
 RE Companies
 Banks (BNP Paribas Real Estate, Morgan Stanley)
• RE Teams
• Private Bank / Wealth Management
 Insurance Companies (Allianz, AXA)
 Sovereign Wealth Funds (ADIA)
• GREM – perfect G L O B A L platform: US-LatAm-Europe-Asia
• Does Falcon Hire?
61

62. Questions & Answers
Amaury de Parcevaux
Chief Marketing Officer
Falcon Real Estate Investment Management, Ltd.
570 Lexington Avenue, New York, NY 10022
Tel: (212) 271-5445
E-mail: adeparcevaux@falconreal.com
www.falconreal.com
62

63. Appendix 1
a. Falcon Current View on Real Estate Market
b. Our Quarterly Office Market Research / www.falconreal.com
63

64. a. Real Estate Market Overview
• U.S. Commercial Real Estate Market
• Why Invest Now?
• How to Succeed In Today’s Competitive Market
• Investment Strategy
• Conclusion
64

65. U.S. Commercial Real Estate Market: Overview
Market Overview
 Improving real estate fundamentals in most markets
• Increased demand and a reduction in sublease availability have led to the
stabilization of net effective rents (asking rents plus concessions) and vacancies
• Lack of overbuilding in major markets has supported market fundamentals and
should provide opportunities for long-term investors
 The U.S. economy continues to show clear signs of improvement with declining
unemployment, 2010 GDP growth of 2.8% and 2011 GDP growth forecasted at 3.2%-
3.6%
 Investment activity is increasing, particularly in the 6 major CBD markets (New York,
Washington D.C., Boston, Chicago, San Francisco, and Los Angeles)
 Excellent opportunities exist in larger second-tier cities and satellite markets due to
investor focus on the 6 major CBD markets
 Competitive debt financing is once again available for quality properties
65

66. U.S. Commercial Real Estate Market: Declining Cap Rates
Annual CMBS Issuance and U.S. Cap Rates
250 9%
200
8%
150
USD Billions
7%
100
6%
50
0 5%
1990
1993
1994
1995
1996
1999
2000
2001
2002
2003
2005
2006
2007
2008
2009
1991
1992
1997
1998
2004
2010
CMBS Issuance (billions) Cap Rates
 Capitalization rates (net operating income divided by purchase price) are declining in many
markets due to greater demand, especially from international investors, limited supply of
properties available for purchase, increased availability of financing, the low interest rate
environment, and expectations of rising rental rates
 Cap rates in the six major CBDs have declined from their high point in 2009 to near 2007
levels while cap rates in satellite markets have declined to a lesser degree
 While CMBS issuance has not recovered from the levels at the market peak, insurance
companies and some banks have partially filled the void
Source: Commercial Mortgage Alert, PPR, NCREIF, Moody’s Economy.com, PricewaterhouseCoopers, Falcon estimates
66

67. U.S. Commercial Real Estate Market: Historical Prices
Moody’s/REAL Commercial Property Price Index
67

68. Why Invest Now?: Summary
Falcon believes this is an historic opportunity to purchase high-quality
properties at attractive prices and yields
Current Favorable Market Characteristics for Buyers:
1. Market Fundamentals
2. Unique Timing
3. Growing Economy
68

69. Why Invest Now?: Market Fundamentals
Market Fundamentals Are Improving in Most Markets
 Vacancy rates and net effective rents have bottomed out in many markets
• Three consecutive quarters of positive net absorption have been recorded
on a national basis
• Rental rates in some core CBD markets such as Washington D.C., New
York, San Francisco, and Boston are starting to increase
• Landlord concessions have stabilized and are declining in some markets
• As corporate demand begins to return, rental rates should increase more
broadly
 Most markets are not suffering from the overbuilding that plagued past downturns
• Limited new construction is expected over the next 3-4 years
• Major markets are generally facing vacancy rates of 10-20%
 The economy, which is a leading indicator for the real estate market, is recovering
slowly but steadily
69

70. Why Invest Now?: Market Fundamentals
Office Vacancy Rates Construction as a Percentage
of Existing Inventory
25% 8%
20% 7%
6%
15%
5%
10% Office
4%
5% Retail
3%
Logistics
0% 2%
2011*
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1%
0%
Suburban Downtown
1980-89 1990-99 2000-07 2008-2010*
Source: Torto Wheaton, Falcon estimates*
70

71. Why Invest Now?: Unique Timing
Unique Opportunity To Invest As The U.S. Market Recovers
 There is currently an opportunity to acquire quality properties at an attractive basis relative
to historical pricing benchmarks
 Potential for capital appreciation due to expectations of future rental rate growth
 Real estate investments have traditionally been an effective hedge against inflation
 International investors are targeting the U.S. real estate market
• According to an AFIRE survey, foreign investors believe the U.S. offers the best
market for capital appreciation
• AFIRE’s 2010 survey ranks New York and Washington, D.C. ahead of London
and Paris
• International investors view the U.S. as a stable market in times of economic or
political uncertainty
 Foreign buyers have dominated recent acquisition activity in the major cities
• Falcon began in 1991 during a real estate crisis and advised foreign investors to take
advantage of discounted prices resulting from that crisis
Source: University of Wisconsin School of Business James A. Graaskamp Center for Real Estate, Association of Foreign Investors in Real Estate (AFIRE)
71

72. Why Invest Now?: The Economy is Growing
Recent Economic Indicators Suggest That The U.S. Economy Has Been
Showing Steady Improvement
 GDP has grown for 6 consecutive quarters led by increased U.S. consumer spending
 The S&P 500 has nearly doubled from the lows reached in March 2009
 The unemployment rate has fallen to 9.0% from a high of 10.1% in November 2009
 The banking sector has regained strength after surviving the recent crisis
 Housing prices appear to have bottomed out in many areas of the country
 The federal government’s economic stimulus has contributed to improved consumer sentiment
72

73. How to Succeed in Today’s Competitive Market
Acquiring Properties In the Major Cities Is Very Competitive
 Established credibility and a track record with sellers and brokers is crucial to winning a
bidding process
• Buyers are selected based on price, reputation, and ability to close in a timely
manner
 Falcon has forged a 20+ year relationship with the brokerage community
 Falcon’s successful track record advising investors is widely known
 Investors need to make rapid decisions during a bidding process
• Timely internal approval process and open communication with Falcon
• Important to rely on Falcon’s expertise during the acquisition process
 Rapid analysis of a large amount of information
 Determination of appropriate pricing and bidding strategy
 Financial, tax, and legal structuring
 Coordination of due diligence
 Buyers of trophy properties in major cities may need to conduct upfront due diligence to
increase their odds of winning a bidding contest
73

74. Investment Strategy: Offices
 Focus on Class A Single and Multi-Tenant Office
• Offers attractive risk-adjusted returns and long-term stability
• Highest potential for appreciation with additional value enhancement through Falcon’s Asset
Management expertise
• JV partnerships with major operators are a method to access quality properties
• Tenancy
 Investment grade single-tenants with long-term leases in critical use properties and
contractual rent escalations
 Multi-tenant with dispersed lease expirations and diversified tenant base
• Location
 Central Business District locations in cities with growing population, a relatively
strong economy and transportation links
 Satellite locations with growing nearby population centers and expanding local
economy with high concentration of office buildings and barriers to new construction
74

75. Retail, Apartments, Logistics, MOB
 Retail
 Focus on high-traffic in-fill locations with high income, high land costs, and restrictive
planning controls
 Neighborhood and community centers with recession-resistant anchor tenants and
minimal in-line shop space
 Select high-end retail within top markets
 Rental Apartments
 Well-located rental apartments are particularly attractive
 Collapse of housing and condo markets has led to rising rents and occupancy rates for
apartments
 Few rental apartments built in recent years due to emphasis on condominiums
 Higher availability of financing
 Logistics
 Located in distribution hubs (e.g. rail, airports, seaports)
 Modern and flexible design
 Single or multi-tenant
 Medical Office Buildings
 Long-term leases to investment grade hospitals in a sector with strong demand
75

76. Investment Strategy: U.S. Office Markets
Boston, Massachusetts
Overview
 Seventh largest metropolitan area in the U.S. with 24-hour city environment
 Strong tenant base and high barriers to entry
 Key industries include finance, technology, biology, education, and healthcare
 Economy entered recession later than the rest of the U.S. and has been impacted by
decrease in equipment and software investment
 Small tenants leasing an average of 10,000 square feet dominate the market
Investment Rationale/Opportunities
 Downturns tend to be short and market fundamentals usually reverse quickly and
dramatically once business conditions improve
 Cambridge sub-market with recession resistant biotechnology companies is
particularly attractive
76

77. Investment Strategy: U.S. Office Markets
Chicago, Illinois
Overview
 Second largest office market in the U.S.
 Location at the center of the U.S. makes it a key transportation and distribution hub
 Home to the largest concentration of corporate headquarters in the U.S., including
sixty-seven Fortune 500 companies
Investment Rationale/Opportunities
 Low amount of new development with some speculative properties nearing delivery
 Higher capitalization rates present opportunities
 Solid corporate tenant roster and location is favorable for future demand growth
77

78. Investment Strategy: U.S. Office Markets
Los Angeles County, California (excluding downtown)
Overview
 Fifth largest office market in the U.S. and most populous county in the U.S.
 Headquarters for seventeen Fortune 500 companies
 Just about every industry sector is a major contributor to the economy
 Recession resulted in increased unemployment
Investment Rationale/Opportunities
 Limited speculative development
 With the employment picture beginning to improve, tenant activity should increase,
providing stability to investors
 Historically stable office market should become more attractive as the economy
continues to improve, providing upside to new investors
78

79. Investment Strategy: U.S. Office Markets
San Francisco, California
Overview
 Fifth largest metropolitan area in the U.S.
 Diverse range of industries including technology, biotechnology, and finance
 Headquarters for many of the world’s leading technology companies (i.e. Google, Yahoo!,
Cisco) and one of the largest oil companies, Chevron
 Unemployment rate below the national and state of California average
Investment Rationale/Opportunities
 Low amount of speculative development
 High-growth technology companies provide future upside
79

80. Investment Strategy: U.S. Office Markets
Washington, D.C.
Overview
 Area is home to the U.S. Federal government
 Fourth largest metropolitan in the U.S. and highest median household income
 Diverse range of industries including government, defense, travel, and education
 Unemployment rate below the national average due in large part to the stability provided by
the U.S. government
Investment Rationale/Opportunities
 Relatively more stable market fundamentals
 Attractive destination for domestic and foreign capital
80

81. Investment Strategy: U.S. Office Markets
Atlanta, Georgia
Overview
 9th largest population center in the U.S., referred to as “Capital of the South”
 Home to 22 Fortune 1000 companies including Coca-Cola, Home Depot, AT&T, and CNN
 Significant population and employment growth over the past decade
 Speculative properties scheduled for delivery in the next two years
Investment Rationale/Opportunities
 Institutional buyers may pass over the market in favor of larger markets, creating pricing
opportunities
 Focus on properties with longer-term leases
81

82. Investment Strategy: U.S. Office Markets
Miami, Florida
Overview
 International city serving as the headquarters of Latin American operations for
numerous multinational corporations, especially banking institutions and television
headquarters
 The Port of Miami is one of the largest U.S. cargo ports and also services a huge
cruise ship industry
 Economy has been adversely impacted by the housing downturn
 Unemployment above the national average
Investment Rationale/Opportunities
 Relatively low contraction in rental rates and increase in vacancies
 Demand from European and South American investors should support future prices
 Suburban markets, such as Coral Gables, with development constraints, are
particularly attractive
 New properties with solid tenant rosters
82

83. Investment Strategy: U.S. Office Markets
Northern New Jersey (suburban New York)
Overview
 Sixth largest office market in the U.S. and 18th largest economy in the world
 State with the third highest number of corporate headquarters in the U.S. (54 Fortune
500 companies)
 Key industries include pharmaceuticals, telecommunications, insurance, and finance
 Recession impacted tenants in the finance, insurance, and real estate sectors
Investment Rationale/Opportunities
 Serves as a back office area for Wall Street, benefiting from corporations’ paring back
more expensive space in New York
 Larger corporate submarkets have fared particularly well and present opportunities
 Reduction in property prices and lack of new development is positive
 Sale and leaseback opportunities may arise as corporations seek to monetize their
portfolio of real estate holdings
83

84. Investment Strategy: U.S. Office Markets
Seattle, Washington
Overview
 Major port city with relative proximity to Japan and China
 Headquarters for companies including Microsoft, Starbucks, Amazon, and Costco
 Rapidly growing population during the last two decades
 Significant amount of speculative properties under construction
Investment Rationale/Opportunities
 One of the highest historical rates of job growth
 Diverse economic base
 Highly educated workforce
 Migration of employers to more dense districts favors investment downtown
84

85. Conclusion
Now is an Ideal Time to Invest in U.S. Commercial Real Estate:
 The economy has been growing for the last 6 quarters
 U.S. real estate market fundamentals have stabilized
• Vacancy rates have bottomed out in most markets
• Net effective rental rates are stabilizing in most markets and are poised for
future growth
• New construction is limited
 Pricing today is below replacement cost
• Potential for value appreciation when the market returns to equilibrium
 Recovery in credit markets has begun
 Excellent buying opportunities are surfacing today for long-term investors
85