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Dec 07, 2023 44 likes •234 views

M ETROPOLITAN R EAL E STATE E UROPE, LLP O PPORTUNITIES IN D ISTRESSED R EAL E STATE Jeremy Ford, Managing Director, Metropolitan Real Estate Europe, LLP A PRIL 2013 jford@mreem.com +44-207-182-4777 +44-207-182-4775 Disclaimer THE INFORMATION

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OPPORTUNITIES IN DISTRESSED REAL ESTATE

Jeremy Ford, Managing Director, Metropolitan Real Estate Europe, LLP APRIL 2013 METROPOLITAN REAL ESTATE EUROPE, LLP jford@mreem.com +44-207-182-4777 +44-207-182-4775

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METROPOLITAN REAL ESTATE EUROPE LLP

PRIVATE & CONFIDENTIAL

Access Experience Diversification

2

Disclaimer

THE INFORMATION PROVIDED HEREIN IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND SUCH INFORMATION INCLUDES FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON CERTAIN ASSUMPTIONS. ANY PROJECTIONS, VIEWS, OUTLOOKS OR ASSUMPTIONS SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE ACTUAL EVENTS WHICH WILL OCCUR. CERTAIN INFORMATION CONTAINED HEREIN IS BEING PROVIDED MERELY TO SHOW THE GENERAL TREND IN THE REAL ESTATE MARKET IN THE PERIODS INDICATED ACCORDING TO THE STUDIES CONDUCTED BY OTHER PARTIES. THIS DOCUMENT IS NOT INTENDED FOR PUBLIC USE OR DISTRIBUTION. WHILE ALL THE INFORMATION PREPARED IN THIS DOCUMENT IS BELIEVED TO BE ACCURATE, METROPOLITAN REAL ESTATE EUROPE LLP (“METROPOLITAN” OR “MRE”) MAKES NO EXPRESS OR IMPLIED WARRANTY AS TO THE COMPLETENESS OR ACCURACY OF THE DOCUMENT, NOR CAN IT ACCEPT RESPONSIBILITY FOR ERRORS APPEARING IN THE DOCUMENT. METROPOLITAN SHALL NOT HAVE ANY LIABILITY TO YOU OR ANY OTHER PARTY RESULTING FROM THE USE OF, OR RELIANCE ON, THE MATERIAL CONTAINED HEREIN. THE INFORMATION PROVIDED HEREIN, INCLUDING, WITHOUT LIMITATION, INVESTMENT STRATEGIES, INVESTMENT RESTRICTIONS AND PARAMETERS, AND INVESTMENT AND OTHER PERSONNEL, MAY BE MODIFIED, TERMINATED OR SUPPLEMENTED AT ANY TIME WITHOUT FURTHER NOTICE.

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“Lloyds and AIB selling off their distressed property loans”

The Independent

“Real estate becoming sweet spot for buyout firms”

The Financial Times

“Investor risk appetite rises; Europe is now firmly on the radar of opportunistic investors”

The Financial Times

“Lloyds reduces problem loan exposure by £5.35bn”

PropertyWeek

Your Daily Dose Of Distress

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METROPOLITAN REAL ESTATE EUROPE LLP

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There Are Distressed Properties

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And, There Are Distressed Owners

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  • Short lease terms
  • Vacancy
  • Low barriers-to-entry
  • Needing refurbishment/redevelopment
  • Poor tenant-mix
  • Debt maturity and/or overleverage

A range of factors can create distress for otherwise institutional-quality assets

Boston, MA (U.S.) Blackpool (U.K.) Tokyo (Japan) Helsinki (Finland) Minneapolis, MN (U.S.)

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Less Competition And Anticipated Deal Flow Contributes To Market Dislocation…

1. Severe Market Dislocation

  • Opportunities to participate in restructuring and recovery
  • Recovery will be slow and uneven, might take several years

2. Fewer Buyers

  • Flight to quality
  • Assets neglected, need skill to assess and reposition

3. More Sellers

  • Distressed and unnatural owners
  • Greater inefficiency in process
  • Large supply of over-leveraged assets coming to market

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…Creating Interesting Opportunities For Buyers

  • Mispriced risk and local knowledge can create asymmetry
  • Lower basis, especially versus core, confers downside protection and leasing advantage
  • Yields potentially higher than core yields, more so on stabilization; reaffirms downside protection
  • Hard assets with meaningful upside potential in event of inflation or stronger economic outcome

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A financial (structural) problem rather than a real estate problem (cyclical)

1970s Oil Crisis 1980s Recession Dot Com Bubble Early 1990s Recession Early 2000s Recession GFC

% change

ADVANCED ECONOMIES’ GDP GROWTH AND REAL ESTATE CYCLES

(1970-2012)

Und Under- supply supply 2011- 11-13 13 Ov Oversupply 1980- 80-89 89 Ov Oversupply 2000- 00-03 03 Ov Oversupply abso absorbed 1990- 90-98 98 De Dema mand/ supply supply match matched 1998- 98-99 99 Ov Oversupply 1970- 70-75 75

  • 3
  • 2
  • 1

1 2 3 4 5 6 7 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

We’ve Seen This Before

8

Source: FDIC, FDIC Structured Transaction Fact Sheet, IMF, 2009. FW Dodge, CB Commercial, BLS, Mueller.

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RT RTC

1989-95 989-95

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We’ve Seen This Before

9

A financial (structural) problem rather than a real estate problem (cyclical) TODAY

  • Efficient
  • Discrete portfolios and one-
  • ffs
  • Value created through active

asset management RTC

  • Inefficient
  • Bulk sales (“Black box”)
  • Retail flip

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50 100 150 200 250 300 2001 2005 2009 2013 2017

Significant Increase In Lending Through 2007 With Loans Maturing Now

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Source: CBRE, De Montfort University, January 2011. DTZ May 2011,.

  • Majority of European real estate debt exposure

through direct balance sheet debt exposure (75%) and bank sponsored covered bonds (18%)

  • Most mortgages remain on banks’ books as they

extend loan terms in hope values will improve

  • Lack of alternative funding when debt maturities

at their highest

U.S. CMBS SALES AND MATURITIES

($ BILLION)

EUROPEAN LENDING TO REAL ESTATE

(€ BILLION)

2001 2005 2009 2013 2017 50 100 150 200 250 300

Lending Maturities

€ Billion $ Billion

€477B $320B 323% 206% jford@mreem.com

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Source: Morgan Stanley, November 2012, J.P. Morgan Asset Management as of December 2012, J.P. Morgan Asset Management, February 2013.

Faster Than Anticipated Reduction And More To Come

  • Pressures mounting on bank balance sheets as non-

real estate assets deteriorate

  • Banks ~20-25% through their revised deleveraging

plans by mid-2012 (majority through repayment of loans and impairments, fewer disposals)

  • Projected that by the end of 2015 a majority of the

work-out will be completed

IMPAIRMENTS MADE BY A U.K. BANK

TO NON-CORE PORTFOLIO (£ BILLION)

10 20 30 40 50 60

4H09 2H10 2H11 4H 11 2H12 4H10 £ Billion

PROGRAM OF ANNOUNCED SALES

(TOTAL OF €296 BILLION) Banks 37% CMBS 17% OEFs 11% Government 30% REITs 5% jford@mreem.com

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The Size of the Opportunity in Europe

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  • Investment activity by opportunistic investors

rose to 12% of all investment activity in Europe in 2012 (versus 6% average from 2007-11)

  • Opportunistic segment of market expected to

increase to ~15-20% of total capital invested

EXPECTED OPPORTUNISTIC SALES IN EUROPE

(TOTAL OF €261 BILLION)

DISTRESSED SALES IN THE U.K., GERMANY AND FRANCE (SOURCES)

(TOTAL OF €125.8 BILLION)

Source: J.P. Morgan Asset Management, February 2013, CBRE Valuation Team, September 2012; J.P. Morgan, September 2012.

Banks €77.1B CMBS €14.3B OEFs €6.7B Govt €24.5B REITs €3.2B jford@mreem.com

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Investors Can Access Distress Throughout The Capital Structure…

  • Individual, non-core properties sold out of

portfolios in need of active asset management

  • Properties in need of capital for renovations
  • r tenant improvements held by capital

constrained owners or “unnatural” owners (e.g., banks)

  • Opportunities to restructure balance sheets

and provide new capital

  • Acquire properties through “loan-to-own”

situations

  • Sources include forced sellers, including

closed-ended funds, banks, open-ended funds, corporations, governments, REITs

Distressed Equity Distressed Debt

  • Opportunities include large portfolios as well as

individual assets

  • Complex transactions that require structuring

capabilities

  • Illiquid debt environment creates mispriced

segments in the capital structure

  • Sources include banks, borrowers (owners),

property developers; relationships with lenders and borrowers key to successfully sourcing transactions

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…Utilizing Different Skill Sets

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  • Buy assets at a substantial

discount to their intrinsic long-term value

  • Focus on non-core (“B”)

assets which can be “returned to core”

  • Purchase income – target

assets with relatively high current yields and attractive risk adjusted returns

Asset Transaction

  • Look at assets that are

neglected due to capital constrained or “unnatural”

  • wners
  • Provide capital (i.e., loan
  • rigination, bridge financing,

development financing, etc.)

Financial Transaction

  • Buy distressed properties

through “loan-to-own” situations

  • Restructure/recapitalize

balance sheets on

  • verleveraged assets
  • Take advantage of illiquid

debt environment to access segments of capital structure that are mispriced due to risk (i.e., mezzanine loans, etc.)

Debt Transaction

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Distress Can Be Sourced From Banks And Borrowers

LOCATION Berlin & Northern Germany London, U.K. Western Germany ASSET TYPE NPL portfolio secured by residential properties Office building Small portfolio of retail assets SELLER Consortium of European banks Diversified fund manager Two German banks SELLER’S RATIONALE

  • Seeking long term partner

with:

  • Real estate knowledge and

track record in Germany

  • Ability to asset manage and

invest capital

  • Viewed the asset as a non-

core part of portfolio

  • Short lease length
  • Willing to sell substantially

below replacement cost

  • Willing to take a write

down

  • Prepared to provide new

financing MANAGER’S STRATEGY Structured transaction

  • Tap into strength of single

transaction market

  • Limit risk by receiving

disposition fee senior to the senior lender Value add

  • Negotiate lease extension
  • Decrease vacancy
  • Secure financing

Value add

  • Extend lease terms
  • Lease vacant space
  • Exit via institutional

market

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Creatively Structured Transactions

LOCATION Boston, MA Minneapolis, MN Washington, D.C. ASSET TYPE Loan-to-own office building Mortgage collateralized by Class-A retail asset Mezzanine loan SELLER Two banks Asset manager Bank SELLER’S RATIONALE Loan maturity; loan couldn’t be repaid in full Borrower defaulted on payment and went into foreclosure Senior and mezzanine loans went into maturity default MANAGER’S STRATEGY Structured transaction

  • Foreclosed at significant

discount to prior owner’s basis

  • Reposition as premier
  • ffice address
  • Manage tenant rollover

Structured transaction

  • Recapitalized an overly

leveraged, high quality asset

  • High unlevered debt yield

Structured transaction

  • Sourced off-market through

relationship with lender

  • Loan acquired at significant

discount to face value

  • Generating good income
  • Additional upside in

residential development rights

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Debt And Equity Opportunities

LOCATION Tokyo, Japan Hong Kong, China Tokyo, Japan ASSET TYPE Loan acquisition with access to large hotel portfolio with sale-leaseback structure Underperforming office building Small portfolio of mixed-use assets SELLER Japanese bank Hong Kong listed property development and investment company Distressed seller SELLER’S RATIONALE Selling performing loan after borrower was unable to refinance the loan Rebalancing of assets for balance sheet purposes Bank forced sale of highly leveraged asset and provided financing to higher quality borrower MANAGER’S STRATEGY Structured transaction

  • Acquire performing loan at

significant discount

  • In-place, contractual cash

flow

  • Reduce risk by using a

leading hotel operator Value add

  • Renovation
  • Reposition to boutique,

managed office

  • Increase rental rates
  • Exit to local, core-plus

investor Value add

  • Manage near term lease

rollover

  • Stabilize the portfolio
  • Secure financing
  • Identify a buyer

jford@mreem.com

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Keys To Success

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  • Understand local/regional

market dynamics

  • Recognize real estate value
  • Remain cognizant of supply

and demand dynamics Real Estate Knowledge

  • Utilize modest leverage and

sound borrowing practices

  • Achieve significant discounts

through critical mass

  • Understand complex

financial structures

  • Run an efficient bidding

process

  • Maintain credibility and have

realistic pricing expectations Financial Know How

  • Manage and increase

property cash flow

  • Maintain and develop deep

tenant relationships to enhance leasing and income

  • Improve control over
  • utcome and cost through

vertical integration with in- house renovation, repositioning, and construction expertise

  • Build relationships with

lenders, buyer, and sellers Operational Skills

jford@mreem.com

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METROPOLITAN REAL ESTATEEUROPE, LLP

jford@mreem.com +44-207-182-4777 +44-207-182-4775