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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

Europe ($29Bn) and Asia ($26Bn) – Core. IT.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). Legal and administrative staff who fully support the real estate investing business as of November 30th 2 . 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. Includes banking and investing professionals as well as Financial Controllers. 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.

Deterioration in Credit Quality 3. MTMs/Losses in Financials 4.1 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. Asset Price Declines • Europe: $18Tr to $8Tr (56% decline) 6. Asset writedowns and credit losses. Bloomberg as of February 13. Wachovia and Washington Mutual – Collapse of AIG – Failure of numerous other financial institutions – Unparalleled global government intervention The Vicious Cycle 1. FactSet aggregate market value calculations from October 2007 to February 12. 2009 3 .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. Losses on Leveraged Borrowing The Casualties $1. Impact on the Real Economy • Asia: $17Tr to $8Tr (53% decline) 7. 2009 2. De–leveraging / Reduction in Credit Availability 5.

has declined (54. 2008. the China A Share index. 2008 1.8%) – Europe: (56.000 3.500 3. Index data first made available in April 2008 4 .200 1. 2008 1.000 2.000 4.600 1.500 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 17.000 800 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. 2008 China A-Shares Index Index Price Performance since January 1.UNC Kenan-Flagler Annual Real Estate Conference Select Real Estate Public Market Declines U. 2008 • Since January 1.050 950 850 750 650 550 450 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 5.000 1.3%) • The public market decline price in significant cap rate expansion and weakening fundamentals Europe Index Price Performance since January 1.200 2.500 5.5%) • The primary Chinese equity index for domestic securities.800 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 2.500 2.S. global public real estate markets have declined – US: (60.400 1. Index Price Performance since January 1.000 1. 2009 Note 1.5%) – Japan: (41.500 4.

0% 0.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)% Jan-07 May-07 Sep-07 Jan-08 May-08 Nov-08 Jan-09 Source FactSet as of February 17. 2009 • Emerging Market Equities down 48% from one year ago as of February 17.0)% (4.0)% (6. 2009 5 .0)% (8. 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 Hedge Fund Performance Credit Suisse Tremont Hedge Fund Index (Monthly Returns) % 4.com as of February 17. 2009 Source HedgeFundIndex. 2009 Source FactSet as of February 17.0% (2.

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. credit opportunities appear more favorable than equity opportunities 6 . 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. lower LTVs.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.

and uses the highest proportion of debt.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. 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. typically 20% or more. sometimes reaching 80% or more. Kingsley Associates Sources IREN. 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. Value-Added investing falls between core and opportunistic. Kingsley Associates Source 2009 Plan Sponsor Survey. Core investing seeks the lowest risk and often targets the NCREIF benchmark. For US Plan Sponsors Opportunistic investing seeks the highest returns. 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. Excludes a category called “Other”. Kingsley Associates Notes 1. seeking returns that typically range between 11% and 17% 2. Core investing typically uses debt between 0% and 40%.

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