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Materials 2.18.09_v5.ppt\A2XP\18 FEB 2009\12:35 PM\1

UNC Kenan-Flagler Annual Real Estate Conference

Discussion Materials
19 February 2009

IT. Legal and administrative staff who fully support the real estate investing business as of November 30th 2 . Includes banking and investing professionals as well as Financial Controllers.UNC Kenan-Flagler Annual Real Estate Conference Morgan Stanley Real Estate Global Platform • Leading global real estate investment manager with $91Bn in real estate assets under management(RE AUM) – America ($36Bn). Europe ($29Bn) and Asia ($26Bn) – Core. preferred and equity underwriting Frankfurt New York London Stockholm Seoul Tokyo Moscow Dublin Boston Toronto San Francisco Paris Chicago Madrid Menlo Park Atlanta Milan Shanghai Taipei Hong Kong Los Angeles New Delhi Mexico City Mumbai Bangkok Houston Dubai São Paulo Singapore Sydney Munich Beijing Buenos Aires Johannesburg Melbourne Morgan Stanley Real Estate Global Platform Number of Offices Number of Professionals 22 815(1) Morgan Stanley Real Estate Offices Morgan Stanley Investment Banking Offices Countries with Morgan Stanley Hotel Investments Note 1. value-added and opportunistic investment vehicles • Industry leading global real estate investment banking franchise – Intermediated $400Bn in real estate M&A transactions over past decade – Public debt.

1 Trillion Financial Sector Writedowns (1) Banks: $825Bn / Insurance: $165 Bn / GSEs: $114Bn Americas: $758Bn / Europe: $315Bn / Asia: $31Bn Market capitalization of equity markets has declined significantly (2): • World: $59Tr to $28Tr (53% decline) • US: $19Tr to $10Tr (47% decline) 2. 2009 3 . MTMs/Losses in Financials 4. Bloomberg as of February 13.UNC Kenan-Flagler Annual Real Estate Conference Unprecedented Financial and Economic Times • Since September 2008: – Conservatorship of Fannie Mae and Freddie Mac – Bankruptcy of Lehman Brothers – Sale of Merrill Lynch. Repeat step 1 Notes 1. Impact on the Real Economy • Asia: $17Tr to $8Tr (53% decline) 7. De–leveraging / Reduction in Credit Availability 5. Wachovia and Washington Mutual – Collapse of AIG – Failure of numerous other financial institutions – Unparalleled global government intervention The Vicious Cycle 1. Asset writedowns and credit losses. Asset Price Declines • Europe: $18Tr to $8Tr (56% decline) 6. 2009 2. Losses on Leveraged Borrowing The Casualties $1. Deterioration in Credit Quality 3. FactSet aggregate market value calculations from October 2007 to February 12.

000 3.000 1.3%) • The public market decline price in significant cap rate expansion and weakening fundamentals Europe Index Price Performance since January 1. 2008 1. has declined (54.5%) • The primary Chinese equity index for domestic securities.S. the China A Share index.200 1.000 1.UNC Kenan-Flagler Annual Real Estate Conference Select Real Estate Public Market Declines U. Index Price Performance since January 1.000 4. 2009 Note 1.5%) – Japan: (41. 2008 • Since January 1.000 900 800 700 600 500 400 300 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 MSCI US REIT Index 2.600 1.800 1.200 2.500 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 China A-Share Index FTSE EPRA/NAREIT Japan Source FactSet as of February 17.050 950 850 750 650 550 450 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 5.500 2.500 4. 2008 China A-Shares Index Index Price Performance since January 1. global public real estate markets have declined – US: (60.000 2. 2008 1. 2008.500 3.000 800 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 FTSE EPRA/NAREIT Europe Japan(1) Index Price Performance since April 18.400 1.8%) – Europe: (56.500 5. Index data first made available in April 2008 4 .

UNC Kenan-Flagler Annual Real Estate Conference Stress in All Corners of the Market Volatility CBOE Volatility Index of S&P 500 90 80 70 60 50 40 30 20 10 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 • Commodities down 59% from one year ago as of February 17.0% (2.0)% (6. 2009 5 .0)% (4.0)% Jan-07 May-07 Sep-07 Jan-08 May-08 Nov-08 Jan-09 Source FactSet as of February 17. 2009 Commodities Indexed to 100 140 120 100 80 60 40 20 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 Emerging Markets Index MSCI Emerging Markets Index Indexed to 100 110 100 90 80 70 60 50 40 Dec-07 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 GSCI Commodity Index Source Bloomberg as of February 17. 2009 Source FactSet as of February 17.com as of February 17. 2009 Source HedgeFundIndex. 2009 Hedge Fund Performance Credit Suisse Tremont Hedge Fund Index (Monthly Returns) % 4.0% 0.0% 2. 2009 • Emerging Market Equities down 48% from one year ago as of February 17.0)% (8.

opportunistic assets and (ii) prime vs. secondary availability Opportunities • Distressed situations – Lender driven – Borrower driven • Corporate restructurings – Focus on core businesses – Sale-leasebacks on occupational real estate • Real estate company distress – Bankruptcies – Growth capital • Currently. retail pricing Big spreads between (i) stabilized vs. reversion to historical norms would require a real estate price decline of 25% • Declining operations/fundamentals – Global recession is slowing rent growth and vacancies are projected to rise with corporate bankruptcies and unemployment • • Wholesale vs. conforming DSCR • All asset classes have been impaired – Cap rates significantly wider – Real estate yields are at historic lows versus corporate bond yields. credit opportunities appear more favorable than equity opportunities 6 .UNC Kenan-Flagler Annual Real Estate Conference Summary of Real Estate Environment and Opportunities • We expect the best distressed / opportunistic environment we have seen since the early 90s • Distressed opportunities globally will come from: – Failed / stressed financial institutions that will be forced sellers – Corporate restructurings and non-core asset sales to generate liquidity and solidify balance sheets – Public real estate companies needing to deleverage – Overleveraged borrowers and bank debt sales • Timing of market stabilization is still unclear – need to be patient and not enter the market prematurely Environment • • The credit crisis remains intense and has resulted in a dramatic re-pricing of risk Lack of credit/financing – Scarcity of capital – Less flexible debt. lower LTVs.

seeking returns that typically range between 11% and 17% 2. Core investing typically uses debt between 0% and 40%. Excludes a category called “Other”. and uses the highest proportion of debt. For US Plan Sponsors Opportunistic investing seeks the highest returns. Kingsley Associates Notes 1. due to current distress • Real estate averages 10% of Plan Sponsor target allocations • Expected real estate commitments are down 31% from 2008 Real Estate Capital Flows ($Bn) 80 70 60 50 40 30 20 10 0 71 59 59 46 60 42 29 Existing Allocation by Risk Preference(1) Expected New Allocations by Risk Preference(1. Kingsley Associates Source 2009 Plan Sponsor Survey. Value-Added investing falls between core and opportunistic. Core investing seeks the lowest risk and often targets the NCREIF benchmark. sometimes reaching 80% or more. which has historical average returns in the 8%–10% range.UNC Kenan-Flagler Annual Real Estate Conference Institutional Investor Approach to Real Estate • Existing portfolios are concentrated in core investments • However. which represents 3% 7 . new investments are heavily skewed to value added and opportunistic – Investors are likely anticipating that near-term vintage years will be strong ones.2) Existing Allocation to Non-Core 49% New Allocation to Non-Core 84% Foreign Investment 14% REITS 1% REIT 9% Opportunistic (US) 19% Core 16% Foreign Investment 3% Core (US) 51% Value-Added (US) 18% Opportuistic (US) 35% Value-Added (US) 34% 2006 2007 Actual Capital Flows 2008 2009 Expected Capital Flows Source 2009 Plan Sponsor Survey. Kingsley Associates Sources IREN. typically 20% or more.

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