9. Vulture Culture
Anticipation Phase
By 2007 distressed
asset fundraising was
already up by 207%
By 2009, 35% of
ALL RE fundraising
focused on distressed
assets!
In 3 years, “Vulture
Funds” raised $75B
Source: Prequin – Private Equity Real Estate
Distressed and Debt Market Report: April 2010
10. Vulture Culture
“Concentration of Risk in a Small Space”
79% of these funds
targeted North America
As of April 2010, $61B
additional was still being
actively marketing for
deployment in …North
America
Currently, 74% of
currently marketing funds
target distressed
investment.
The Vulture perch is
crowded!
Source: Prequin – Private Equity Real Estate
Distressed and Debt Market Report: April 2010
11. Vulture Culture
“Inexperience compelled by Fees”
Source: Prequin 4/2010 Distressed RE Report
70% of Vulture Fund sponsors were First-Time Managers of
distressed and debt vehicles.
Hedge fund fees in distressed sector among highest in the
industry!
Source: Prequin – Private Equity Real Estate Distressed and Debt
Market Report: April 2010
12. Vulture Culture
Why Didn’t the REITS get Hit?
$25 1,800
1,600
Reason #1
$20
1,400
Proceeds (in billions)
Shares (in millions)
1,200
$15
$10
1,000
Wall Street’s 2009
“Recapitalization Rally!”
800
600
$5
400
REITs issued over 1.5B shares
[worth $18.7B] of new stock
$0 200
2004 2005 2006 2007 2008 2009
equity in 2009!
Equity REITs only. Consists of follow -on offerings and private placements only.
Proceeds Shares Issued
Sources: NAREIT, SNL Financial, Stifel Nicolaus
REIT issued more shares in
2009 than in any of the
previous 10 years!
What did REITs want to buy
with all this money?
DISTRESSED ASSETS!
13. Vulture Culture
Why didn’t the REITs get hit?
Reason #2
REITS were NET SELLERS into the Valuation Peak!
Effectively, they were “re-calibrating” their balance sheets.
15. The Government Boostrap
Why isn’t this woman smiling?
Possible Answers:
– “Sheila’s on First”
– She is looking at the
next charts
– Her Boss puts her on
“hold” every time she
calls
Sheila Bair: Head of the FDIC
16. The Government Bootstrap
“Exactly where does it hurt, Sheila?”
87% of CRE risk is
concentrated in local and
regional banks with <$1B
in assets.
Average commercial loan
held by those banks is only
$8M*
US Money-Money Center
banks are NOT at Tier-1 risk
(thanks to TARP)!
What size deals are Vulture
Funds targeting with $120B?
*Mortgage Bankers Association, Press Release 2/5/2010
18. The Government Bootstrap
Disturbing Facts vs. Disturbing Realities
As of May 2010, the Deposit In the next 12 months, the FDIC
Insurance Fund, or DIF, had is expecting to spend “$40
a negative balance of billion” closing troubled banks.
$20.7 billion.
Commercial banks hold $1.5T of
The FDIC has $46 billion in CRE mortgage debt outstanding
three years of prepaid
deposit insurance CRE Loan Losses at banks alone
premiums and $17 billion in could be $200-$300B*
cash for a grand total of $63
billion in “liquid resources”
to close insolvent banks. Potential CRE bank loss exposure
is 697% of current “net” FDIC
Deducting the $20B DIF resources available today.
deficit, there’s $43B in
“net” liquid assets.
* Source: Congressional Oversight Panel, February
Oversight Report: “Commercial Real Estate Losses and
the Risk to Financial Stability” Feb 10, 2010
19. Government Bootstrap
The Trend is NOT the FDIC’s Friend
2008:
– $14.9B
– 25 banks
– $596M/bank
2009:
– $36.4B loss
– 140 banks
– $260M/bank
June 2010:
– $17B loss (first 6 months!)
– 81 banks
– $321M/bank
Annualized 2010 Projection
– 162 failures
– $277M/bank (avg)
(avg)
– $45B estimate total liability for 2010
Current Trend: Chart on the lower
left – the ORANGE line
21. The Government Bootstrap
Politics trumps Economics
What’s Washington’s political motivation to
accelerate Tier-1 loss defaults into bank
failures prior to November?
ZERO!
22. The Government Bootstrap
Sticky issue: FDIC Funding in 2011??
November Elections
“Bail-Out” Political Backlash
State Budget Meltdowns (CA)
Record-setting Federal deficits
“Hello Sheila? No… it’s not a
good time to talk about this…
can I put you on hold?”
25. The Government Bootstrap
“If you only remember one thing…”
The US
Government
controls the
distressed
asset market
because they
regulate the
key player:
the banks.
27. Disappointment in
2010
“Today I’m sitting with $125M in cash that I can’t find investment
for”
Stephen Richter, CFO – Weingarten Realty Investors
“The volume of properties that are truly distressed and will be sold in
a distressed fashion will be significantly less than had initially
been thought”
Bob Steers, Co-Chief Executive Cohen & Steers, Inc.
“Funds are fighting over a slim group of available deals”
Mark Edelstein, Real Estate Group Head, Morrison & Foerster, LLP
28. What Happened and
Why
Only 17.5% actually transacted
59% of investors targeted un-levered
IRRs north of 16%
49% sought leverage of 50% or
greater. (ie, levered IRRs >30%)
Resulting Bid-Ask spreads too wide for
sellers (banks)
FDIC handed the banks an option:
refusal of low-ball offers.
Charts: Ernst & Young, US Distressed Real Estate Loans Invstor Survey, April 2010
29. Throwing in the Towel?
A total of 19 private-
equity real-estate
funds have either
returned or plan to
return more than $6
billion of capital to
investors. WSJ, “Dearth of
Properties Spurs Fund Givebacks” May 26th,
2010
30. Where Are We, Watson?
[2011-2017]
Sleuthing for Clues At the Scene of
the Crime
31. Mysterious Footprints
Bank Maturities
peak in 2010-
2013?
Not quite - 3
year workouts
suggest our
villain will return
in 2013-2016.
But Holmes –
look at CMBS!!
32. Another set of Footprints
leading to….
Right you are, Watson!
A second set of footprints – CMBS – leads to
the same exact destination: 2014-2017!
But that’s preposterous, Holmes! What then…?
Source: Goldman Sachs and Trepp
33. Death by Blunt Instrument
[the Re-fi Gap!]
100
90
80
70
60 Others lenders
($ Billions)
Banks (Construction Loans)
50
Banks (Income producing CRE)
40 CMBS
30
20
Source: Morgan Stanley, MBA,
FDIC, FFIEC, Intex, PPR, and
10
Jones Lang LaSalle
-
2010 2011 2012 2013 2014
Difference between debt outstanding upon maturity and debt that is
sustainable today based on normalized LTVs (~65%)
Bank extensions are shifting these maturities three years forward!
2010 shifts to 2013 ! CMBS maturities peak in 2015-2017
34. Critical Impact:
Re-fi Rates in 2013?
A 3.3% 10-year treasury rate is way below
our 30 year average! (why?)
35. An Extraordinary Puzzle!
INVERSE correlation
between debt and
interest rates. More
debt = lower rates!
Counter-intuitive?
Convenient?
Conspiracy?
We borrow more
when rates are low,
why shouldn’t Uncle
Sam?
Excludes Public debt
(Soc Security, et. al.)
36. But …what about Public
debt?
Public debt is off-
balance sheet liability.
Guarantied (but not
serviced) by US Govt.
Bad trend in net
foreign purchases of
US Treasuries!
38. But EVENTS (not rates) are
defining demand
[The most interesting chart of the morning!
39. Clues to watch in the next
12 months!
Higher rate indicators
– Net drop in Treasury purchases by central banks
– More bail-outs/guarantees by US Government
– Stock market drop below 9600 on DOW (Fibonnaci 38.2% retracement
support.
– Increase in residential foreclosures after November (perceived loss of
economic virility devalues fiat-based $ resultingMBA, increasing interest
Source: Morgan Stanley, in
rates to lure investment back into T-bills.Intex, PPR, and
FDIC, FFIEC,
Jones Lang LaSalle
Lower rate indicators
– Environment of political or economic crisis (Euro PIIGS, Iran, N. Korea,
Mexico)
– Dow regains 11,136 (unlikely – 61.8% Fibonnaci)
THANK YOU!