Click to edit Master subtitle style Enterprise Improvement Corporate Turnaround and Restructuring...

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Enterprise Improvement Corporate Turnaroundand Restructuring

Financial AdvisoryServices

Information ManagementServices

Commercial Real EstateThe 2010 Window of OpportunityJanuary 26, 2010

Dennis P. YeskeySenior Advisor

[email protected]

This report was prepared by AlixPartners LLP (“AlixPartners”) for general information and distribution on a strictly non-reliance basis. No one in possession of this report may rely on any portion of this report. The recipients of the report accept that they will make their own investigation, analysis and decision relating to any possible transactions and/or matter related to such and will not use or rely upon this report to form the basis of any such decisions.

This report may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. Those differences may be material. Items which could impact actual results include, but are not limited to, unforeseen micro or macro economic developments and/or business or industry events.

This report may contain certain statements which are or could be considered to be forward-looking statements. Such statements are not guarantees of future performance and involve risks and uncertainties which are not possible to predict. Actual results and trends may differ materially from those described in such statements.

The information in this report reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the report to reflect events, circumstances or changes that occur after the date the report was prepared. In preparing this report, AlixPartners has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise provided to us. AlixPartners has not audited or verified the data reviewed in connection with the preparation of this report.

AlixPartners makes no representation or warranty regarding any actions the Company may take in reliance on or in reference to matters presented in this report. To the extent that it is lawfully able to do so, no liability or responsibility whatsoever is accepted by AlixPartners for any loss howsoever arising from any use of, or in connection with, the Report.

Neither this report nor any of its contents may be copied, reproduced, disseminated, quoted or referred to in any presentation, agreement or document with attribution to AlixPartners, at any time or in any manner other than for the internal use of the Company, without the express, prior written consent of AlixPartners.

Disclaimer – Important Information Regarding This Report

Commercial Real Estate – What Lies Ahead?

www.alixpartners.com

3

While economists carefully hint that perhaps the worst is over, there is a difference between a “technical recovery” and recovery in the consumer mindset.

We should be careful about declaring a premature end to current economic distress. While there are green shoots to be found, skeletons lurk in our economic closet. Residential real estate continues to bounce along the bottom and may not

recover until 2010-2011. Consumer confidence is battered; unemployment is at record high levels – and expected to rise further. For an economy so dependent

on consumer spending the situation remain tenuous.

As for Commercial Real Estate specifically, what will drive that market back into prosperity? The eventual recovery in CRE is more likely to be driven by capital market momentum than improvement in traditional fundamentals, and it may

not happen until 2011 or even 2012. Things may get worse before getting better and we are suffering through a period with historically bad fundamentals, but still the current situation presents the largest single opportunity we’ve seen in some

time for investors buying distressed debt and commercial real estate.

• The Economy• The Government• The Fundamentals• The Debt Markets• The Equity Markets

Agenda


Executive Summary – Economy

1. Economy recovers very slowly, with setbacks; long cycle gets extended longer!• Lack of “Topline” Growth? Earnings? Cost cutting at end?• Residential markets take longer – into 2011/beyond• Retail recovering very slowly, selectively; consumer spending still in question• Creation of “quality” jobs, not just jobs; unemployment remains high• Wall Street has bounced back strongly; consumer credit creeping back into

markets

Issue: Lack of Business Investment?

Executive Summary – Government Intervention

2. Government intervention “stays,” no “exits”!• Economy still requires government spending/interventions/second stimulus

package (?)• Financial chaos avoided; now what?• “New” financial regulation happens, but Wall Street is ready; moral hazard!• Interest rates remain low (according to FRB) – Huge benefit to banks!• Growing worry of increasing deficits and inflation? Taxes? Jobs?

Issues: Commercial vs. Investment Banking/Trading? Regulations catch up to reality?

Executive Summary – Fundamentals

3. CRE Fundamentals get slightly worse through 2010; lag catches up to reality• Cash flows decrease significantly in 2010; costs continue to increase• Very slow absorption beginning late 2010, more likely 2011 turnaround• Value declines might have bottomed, and increasing sales will prop up

prices in 2H 2010; two markets exist today! • Price recovery more likely to be driven by capital market momentum than

fundamentals• Critical to perform operationally, in terms of NOI, CapEx and profitability;

only good operators will be able to restructure debt successfully and emerge with buyside opportunities in later 2010, 2011!

Issues: Debt service/leasing/TI funding costs, etc.? Operational effectiveness? Value enhancement plans?

Executive Summary – Debt Markets

4. CRE Debt’s massive “stalemate” eases into later 2010• Liquidity returning to many markets, except commercial real estate; still in

“pre-insolvency” stage• “Snow-plowing” debt issues into 2010-2012; “Amend-Extend-Pretend”• Healthy/quasi-healthy banks do more “real” debt/equity workouts (based

upon capital adequacy); need to be deemed “good” operator to restructure• “Uncovered” regional banks/operators suffer the most• Gradual increase in transactions – “distressed” sales increase• Something happens in CMBS re-structuring stalemate – legal settlements• Situation presents huge buyside opportunity for established/new players;

debt and equity

Issues: Winners/Losers emerge? Selective middle markets? Debt restructurings?

Executive Summary – Equity Markets

5. CRE “Wall of Equity” increases even more from already unprecedented higher levels than previous downturns• Equity, who are still waiting for bank writedowns to occur, will get more

buyside opportunities from healthy/quasi-healthy financial institutions (along with FDIC sales)

• New/additional equity capital likely to become available in 2010 and 2011• Funds deal successfully with “Good-Bad-Ugly” situation; “Buy High – Sell

Higher” is gone, as are carried interests of 2004 to 2008 investors; REITs well positioned (?)

• More global; more foreign investment; more new buyers into USA• Activity already in multifamily, hospitality, selected others (e.g. debt

buybacks)• Prices will not be as heavily discounted as currently anticipated

Issue: Pricing “snapbacks”/“bubbles” not justified by speed of economic recovery

• The Economy The Government The Fundamentals The Debt Markets The Equity Markets


Agenda

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U.S. Economy has been heavily dependent on consumer – not business – spending…

Source: U.S. Bureau of Economic Analysis

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Green shoots starting to appear as the U.S. Economy tries to stabilize – Dow has crossed 10,000


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Businesses and individuals struggle to keep their heads above water

Source: The Deal Pipeline Source: Federal Reserve Board

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Consumer Confidence Begins to Improve but Remains Historically Low

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Unemployment Rate Still at 10% With No Relief In Sight

Source: U.S. Bureau of Labor Statistics

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Consumer Price Index – No Serious Inflationary Trends…Yet

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…but basic fundamentals continue to deteriorate

Source: Office of the Comptroller of the Currency (www.occ.treas.gov) Source: U.S. Census Bureau

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http://www.occ.treas.gov/

Consumer Credit Outstanding; Still Struggling to Recover

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Total Consumer Credit OutstandingYOY % Change

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U.S. Census Bureau Retail SalesYOY and Monthly Sales Change

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Retail Sales ChangeYOY and Previous Month Sales Change


Dec-09 Nov-09 Oct-09

Mass Merchandisers 1.8% -1.6% -0.1%

Target 1.8% -1.5% -0.1%

Department Stores 1.0% -4.1% -0.9%

Dillard's -7.0% -11.0% -8.0%

JC Penney -3.8% -5.9% -4.5%

Kohl's 4.7% 3.3% 1.4%

Macy's 1.0% -6.1% -0.8%

Neiman Marcus 4.5% -7.5% -6.0%

Nordstrom 7.4% 2.2% 6.5%

Saks Fifth Avenue 9.9% -26.1% 0.7%

Drug Stores -0.7% 2.4% 3.5%

Walgreen Co -0.3% 3.9% 4.9%

Rite Aid -1.8% -0.8% -0.5%

Club Stores 2.1% 0.1% 3.1%

Costco (US Stores, excl fuel) 2.0% 0.0% 3.0%

BJ's Wholesale (excl. fuel) 2.7% 1.0% 3.7%

Retail Comp Sales - AlixPartners Weighted Monthly Index *


1.9% -0.2% 2.0%


Specialty Apparel 0.1% -1.2% -0.7%

Abercrombie & Fitch -19.0% -17.0% -15.0%

Aeropostale 10.0% 7.0% 3.0%

American Apparel (Retail Stores) -5.0% -11.0% -6.0%

American Eagle Outfitters 7.0% -2.0% -5.0%

Buckle 6.6% 1.4% 4.3%

The Children's Place 4.0% -13.0% -2.0%

Destination Maternity -1.2% -11.6% -5.2%

GAP, Inc. 2.0% 0.0% 4.0%

Gap (N.A.) 1.0% -4.0% -6.0%

Banana Republic (N.A.) -3.0% -4.0% 5.0%

Old Navy (N.A.) 7.0% 6.0% 14.0%

Hot Topic -10.9% -11.7% -2.6%

Limited Brands -2.0% 3.0% -4.0%

Victoria's Secret -6.0% 3.0% -6.0%

Bath & Body Works 4.0% 4.0% 2.0%

Wet Seal -4.6% -5.0% -1.3%

Discount Apparel 12.9% 7.4% 9.2%

Ross Stores 12.0% 8.0% 9.0%

Stein Mart Inc. -2.0% -7.2% -4.9%

Goldman Sachs/ICSC Weekly Sales Index

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Please read and review the important information contained in the disclaimer on page 2 of this report

Monthly Retail Weighted Comp Sales Index

Source: AlixPartners analysis

Retail Comp Sales Index is a weighted index comprised of retailers reporting monthly sales in Specialty & Discount Apparel, Club, Department, Mass Merchandise, Pharmacy segments

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Monthly Same Store SalesSpecialty Apparel, Discount Apparel & Department Stores

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Retail Comp Store SalesRetail Apparel and Dept Stores


Monthly Same Store Sales Summary by Retail Segment

* Retail Comp Sales Index is a weighted index comprised of retailers reporting monthly sales in Specialty & Discount Apparel, Club, Department, Mass Merchandise, Pharmacy segments

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Retail Comparable Store Sales - Monthly Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08

Retail Comp Sales - AlixPartrners Weighted Monthly Index * 1.9% -0.2% 2.0% 1.5% -1.9% -3.4% -3.4% -2.8% -0.9% -2.9% -2.6% -2.9% -3.1%

Specialty Apparel Total (retailers reporting monthly) 0.1% -1.2% -0.7% -0.3% -5.7% -8.7% -10.6% -6.3% -3.0% -9.1% -7.6% -14.1% -10.4%

Specialty Apparel 0.9% -2.3% 0.3% -0.6% -6.2% -9.3% -10.3% -6.2% -2.9% -9.2% -8.7% -17.0% -10.8%

Women's Apparel -1.6% 1.7% -3.6% 0.7% -4.2% -7.0% -11.2% -6.6% -3.5% -8.8% -5.2% -8.6% -9.6%

Discount Apparel 12.9% 7.4% 9.2% 6.8% 4.8% 3.7% 2.7% 4.5% 3.0% 2.1% -0.3% -4.1% -0.5%

Mass Merchandisers 1.8% -1.6% -0.1% -1.5% -2.9% -6.4% -6.0% -5.9% 0.5% -6.0% -3.8% -3.2% -4.0%

Department Stores 1.0% -4.1% -0.9% -1.5% -7.0% -9.2% -9.0% -8.9% -9.2% -10.4% -9.4% -12.0% -7.4%

Drug Stores -0.7% 2.4% 3.5% 3.8% 0.7% 1.3% 2.3% 0.9% 4.6% 0.9% -1.6% 0.6% 3.6%

Club Stores 2.1% 0.1% 3.1% 3.3% 0.3% -1.6% -0.5% -0.4% -1.1% 3.7% 4.5% 4.4% 2.5%


The Economy• The Government The Fundamentals The Debt Markets The Equity Markets


Agenda




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Government intervention appears to have helped (apart from any political views), especially for banks and residential

New Administration Plans Other Reforms:

• Job Creation • Deficit Reduction • Climate Change• Infrastructure• Foreclosure Rescue ($75b)• Healthcare• Education • Ethics• Transparency• Auto Industry• Regulatory Oversight

……Plus Federal Reserve Actions

*Source: Federal Reserve Board, 8/17/09

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Notwithstanding the billions spent in the original bailout actions, the “debris” resulting from the economic disaster moved the Fed to take further measures

Public-Private Investment Program

• $75 to $100 billion of TARP/FSP capital• With financing from the FDIC and Federal Reserve,

leverage $500 billion with potential to expand to $1 trillion of purchasing power

Legacy Loans Program

CapitalPublic-Private Investment Funds

• Combines USG and private capital

FinancingFunds Will Raise FDIC

Guaranteed Debt• FDIC will guarantee

debt• Leverage up to 6:1

Legacy Securities Program

CapitalPublic-Private Investment Funds

• Combines private capital with USG capital and potential USG Leverage

FinancingLeverage from Federal Reserve

• Builds on existing TALF framework

Source: US Treasury

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"Wall Street has not worked, so it's going to be a substantial overhaul. We're going to have better enforcement, better oversight, better disclosure, increased transparency."

"We're going to have to look at this alphabet soup of agencies and figure out how do we get them to work together more effectively. We've got to update the whole system to meet the needs of the 21st century."

"And to ensure that a crisis of this magnitude never happens again, I ask Congress to move quickly on legislation that will finally reform our outdated regulatory system. It is time to put in place tough, new common-sense rules of the road so that our financial market rewards drive and innovation, and punishes short-cuts and abuse."

-Barack Obama

Government intervention, while likely a key factor in keeping us from another Great Depression, has raised concerns for many

GDP 2008$14.3 Trillion

$10 Trillion + Government Commitments

$3.6 Trillion

$1.6 Trillion Projected Federal Deficit 20091

Obama Budget 2010

$12 Trillion National Debt (est. as of Aug. 2009)

The Cost of Government Intervention

Source: Congressional Budget Office, Aug. 2009

The Economy The Government• The Fundamentals The Debt Markets The Equity Markets


Agenda

Commercial real estate is in freefall and looking at worst downturn in recent memory

Source: © Real Capital Analytics www.rcanalytics.com


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Property values have declined almost 44% since Oct 2007 high



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By Q2-09 all sectors had escaped the “red zone”

Average Cap Rate Spreads to 10-year Treasury Yields Have Improved


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Office Vacancy Peaked at 19.2% in Q2 1991

Commercial Real Estate Fundamentals Bad and Not Expected to Recover Short Term (Office)

Source: REIS

Forecast


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Commercial Real Estate Fundamentals Bad and Not Expected to Recover Short Term (Retail)

Source: REIS

Forecast

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Commercial Real Estate Fundamentals Bad and Not Expected to Recover Short Term (Apartments)

Source: REIS

Forecast


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Commercial Real Estate Fundamentals Bad and Not Expected to Recover Short Term (Industrial)

Source: REIS

Forecast

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Commercial Real Estate Fundamentals at Historically Low Levels And Not Expected to Recover Short Term

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Forecast

Forecast

Forecast

Forecast

The Economy The Government The Fundamentals• The Debt Markets The Equity Markets


Agenda

Sources of Real Estate Debt Capital

Source: Mortgage Bankers Association, Q3 Databook, 12/17/09

Total Debt Outstanding = $3.43 trillion


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Global CMBS Issuance shows little activity currently; Fed Loan Officers see loosening standards and spreads but needle has yet to move

Sources: Commercial Mortgage Alert, Trepp

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Capital markets are in “stalemate”…maturing CRE debt remains a huge stumbling block…“AMEND-EXTEND-PRETEND”

Source: Morgan Stanley Research

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Loan delinquencies and charge offs continue to rise

Source: Federal Reserve


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The Economy The Government The Fundamentals The Debt Markets• The Equity Markets


Agenda




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Transaction volumes very low for commercial real estate

Source: © Real Capital Analytics www.rcanalytics.com


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Nevertheless, there is an unprecedented amount of equity waiting to pounce on real estate bargains…both residential and commercial

Global Private Equity Fundraising

Fund Type

2008 Q3-2009

# Funds Raised

Aggregate Raised

($ bn)

# Funds Raised

Aggregate Raised

($ bn)

Buyout 170 $216.1 17 24.29

Real Estate 166 $116.8 17 4.87

Venture 217 $49.4 33 5.18

Fund of Funds 81 $28.0 5 0.59

Mezzanine 26 $29.4

Infrastructure 23 $26.2

Distressed Private Equity 23 $42.5 2 0.59

Secondaries 2 1.89

Other 62 $45.4 3 0.410

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All Property Demand & Supply Index MIT Center for Real Estate (1984-1=100)

Source: PreqinSource: MIT Center for Real Estate


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REIT Market Capitalization (all REITs) and Annual CMBS Issuance

Source: NAREIT


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All REITs Experienced the Ugly Side of Capital Markets But Are Now Starting to See Performance Improvement

Source: NAREIT (REIT.com)


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REIT Dividend Yields

Source: NAREIT, U.S. Federal Reserve


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REIT Returns – Equity vs. Mortgage

Source: NAREIT, totals through 12/31/09


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Stock markets have rebounded as real estate investment under performed; real estate market starting to turn

Asset Class 2005 2006 2007 2008 2009

Gold 35.56% 24.01% 29.09% -27.80% 44.72%

NASDAQ 1.37% 9.52% 9.81% -40.54% 43.89%

Private Equity -13.67% -65.96% 30.20%

Equity REITS 12.16% 35.06% -15.69% -37.73% 27.99%

All REITS 8.29% 34.35% -17.83% -37.34% 27.24%

Russell 2000 4.55% 17.00% -2.75% -34.80% 25.22%

Hedge Funds 7.85% 11.40% 11.23% -19.83% 24.85%

S&P 500 4.91% 15.79% 5.49% -37.00% 23.45%

Dow Jones Industrial Average -0.61% 16.29% 6.43% -33.84% 18.82%

Commodities 17.55% -2.71% 11.08% -36.61% 18.72%

iShares S&P GSCI Commodity-Indexed Trust -18.64% 31.62% -45.75% 11.22%

Barclays Aggregate Bond 2.20% 4.50% 6.90% 5.70% -0.97%

U.S. Dollar 11.02% -8.25% -8.98% 5.94% -3.29%


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Global Locations

London20 North Audley Street

London W1K 6WEUnited Kingdom

+44.20.7098.7400

Chicago

300 N. LaSalle Street

Suite 1900

Chicago, IL 60654

312.346.2500

Dallas

2100 McKinney Ave.

Suite 800

Dallas, TX 75201

214.647.7500

Detroit

2000 Town Center

Suite 2400

Southfield, MI 48075

248. 358.4420

Los Angeles

515 S. Flower Street

Suite 3050

Los Angeles, CA 90071

213.437.7100New York

40 West 57th Street

New York, NY 10019

212.490.2500

MilanCorso Matteotti 9

20121 MilanItaly

+39.02.360.12000

MunichMauerkircherstr. 1 a

81679 MunchenGermany

+49.89.20.30.40.00

DüsseldorfKönigsallee 59 a40215 Düsseldorf

Germany+49.211.97.55.10.00

TokyoMarunouchi Building 24F

2-4-1 MarunouchiChiyoda-ku

Tokyo 100-6324 Japan+81.3.5533.4800

ShanghaiSuite 6111

Plaza 66 Building I1266 Nan Jing West RoadShanghai, 200040 China

+8621.6171.7555

Paris49/51 Avenue George V

75008 ParisFrance

+33.1.76.74.72.00

San Francisco4 Embarcadero Center31st Floor, Suite 3110

San Francisco, CA 94111415.848.0283

AlixPartners is ready to field a team of relevantexperts whenever andwherever they are needed.Our professionals workfrom 14 global offices inmore than a dozen differentcountries. They speak morethan 50 languages, andhave experience in everycorner of the world. Call us; we’ll be there when it really matters.

Washington, DC

1602 L Street, NW

Suite 300

Washington, DC 20036

202.756.9000

AlixPartners is ready to field a team of relevant experts whenever

and wherever they are needed. Our professionals work from 14

global offices in more than a dozen different countries. They speak

more than 50 languages, and have experience in every corner

of the world. Call us, we’ll be there when it really matters.

© AlixPartners, LLP, 2009

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