Valyrian Real Estate Partners: Strategic Summary Introduction to - - PowerPoint PPT Presentation

VALYRIAN CAPITAL

VALYRIAN CAPITAL – AN INTRODUCTION

23 JANUARY 2017

V

ALYRIAN CAPITAL

PROPRIETARY & CONFIDENTIAL

▪ U.S. commercial real estate remains strong and the sector has been well-insulated from broader global financial market weakness ▪ Significant capital has also been raised targeting more distressed opportunities that has yet to be deployed, helping mitigate downside risk ▪ High yield debt and value-add strategies provide a margin of safety, as they do not depend on further price appreciation ▪ The moderate growth, low global interest rate environment is especially supportive of high yield debt and other bespoke financing opportunities ▪ High yield debt offers a high level of current income with limited interest rate risk, given the short-term and/or floating-rate nature of the debt ▪ Additional accrued interest and equity conversion

• ptions on select projects, unique to Valyrian’s

strategy, provide additional upside

U.S. Real Estate is Well Insulated Margin of Safety High Current Income

Valyrian Real Estate Partners: Strategic Summary

• Pg. 1

▪ Valyrian Real Estate Partners is an opportunistic, multi-strategy private equity real estate firm headquartered in New York ▪ Valyrian takes a thematic, systemic and catalyst-driven approach to investing, seeking to compete on the basis of intellectual capital by targeting complex, bespoke financing opportunities that require creativity and flexibility ▪ Valyrian’s EB-5 Partners strategy is designed to work in concert with the high yield debt origination strategy and designed to provide foreign investors with access to a portfolio of major New York City development projects sponsored by leading developers ▪ The firm is also working with developers on a variety of EB-5 solutions, including multiple NYC EB-5 advisory mandates

Introduction to Valyrian and Investment Philosophy Investment Thesis and Outlook ▪ Acquire under- managed or under- capitalized assets ▪ Redevelopment or new development projects Valyrian Real Estate Partners I, L.P. Opportunity Set Value-Add / Development High Yield Debt Opportunistic Up to 75% Up to 50% Up to 35% ▪ Financing for transitional assets or construction projects ▪ Recapitalize over-levered assets ▪ Target opportunities with limited competition ▪ Distressed assets, restructurings and borrower workouts

V

ALYRIAN CAPITAL

PROPRIETARY & CONFIDENTIAL

Valyrian’s Core Investment Philosophies

Valyrian competes entirely on the basis of our Intellectual Capital, which is heavily influenced by our Investment Framework & Philosophy

EVERGREEN STRATEGIES MARKET DISTRESS & DISLOCATIONS SYNTHESIS OF COMPLEX SITUATIONS INEFFICIENCY

Valyrian is value-oriented and often pursues contrarian opportunities, targeting sectors where cash flows are being undervalued as a result of complexity, mismanagement, financial distress, capital markets dislocation

• r structural changes to the way assets are
• wned and operated

A broad investment mandate coupled with specialized capabilities allows the Fund to move in and out of sectors in search of best relative & absolute value, rather than limiting ourselves to a programmatic approach in a narrowly defined investment sector. This mandate facilitates the flexibility to move across the capital structure & adapt to the opportunities that are available in varying market environments and cycles Valyrian's strategy is broadly focused on the opportunities that have resulted from the unprecedented deleveraging of the capital markets and corresponding distress & dislocation in the real estate markets Market inefficiencies offer opportunities to profit from discrepancies between price & intrinsic

• value. More illiquid, less transparent &

less observed markets offer the greatest inefficiencies to exploit ABILITY TO MONETIZE The misperception among many investors that complexity always equals risk creates an opening for the few investors willing and able to assess the true intrinsic values and actual risks of the assets coming into the market today Valyrian targets complex transactions or those with information asymmetry under the belief that these

• pportunities lead to market

inefficiency and superior risk- adjusted returns because fewer investors are able to participate in these situations

• r to price them appropriately

Ability to capture these opportunities by identifying (i) the mispricings, (ii) the misunderstandings that create them, and (iii) the catalyst(s) that cause them to collapse and re-price

• Pg. 2

V

ALYRIAN CAPITAL

PROPRIETARY & CONFIDENTIAL

Valyrian Real Estate Partners Fund Structure

Foreclosed loans will be sold to the REO LLC

Valyrian’s fund structure was designed to allow investors the flexibility to customize their individual investment strategy, while optimizing for the unique needs of foreign investors

▪ The single strategy “Sub-Funds” co-invest along side the Master Fund ▪ Investors have the option to invest directly in a strategy-specific Sub-Fund  Provides flexibility to design and customize investments to the desired risk and return profile

Single Strategy Investment Vehicles Offer Investors Greater Flexibility

Investors Feeders Co-Investors Master Fund Strategies

Foreign Investors US Taxable Investors Valyrian Real Estate Partners I GP, LLC (“GP”) Valyrian Capital LLC (“Sponsor”) Valyrian Real Estate Partners I, LP (Cayman) Valyrian Real Estate Partners I (US), LP Valyrian Co-Investment Partnership I, LP (Delaware) Valyrian Real Estate Partners I, LP (Delaware) (“Master Fund”) Valyrian RE Value-Add Partners I Valyrian Tactical Opportunities Partners I Valyrian RE Debt Strategies I DC REIT / Lev Blocker Property LLC I DC REIT / Lev Blocker Property LLC II Property LLC III Distressed Debt LLC Distressed Loan I REO LLC High Yield Loan I

Real estate loans are exempt from FIRPTA, and thus do not require the use of a REIT or corporate blocker Carried Interest GP Capital Management Fee Investment Advisory Entities below the Sub-Funds are not currently established

• Pg. 3

Investment Environment

• Pg. 4

V

ALYRIAN CAPITAL

PROPRIETARY & CONFIDENTIAL

Understanding the Real Estate Cycle is Key for Success

• Pg. 5

The best portfolio results are achieved in real estate private equity by consistently avoiding mistakes, rather than winning big on a few trades. Investors need to be cautious of overpaying for perceived safety

• 25
• 20
• 15
• 10
• 5

5 10 15 20 25

• 25
• 20
• 15
• 10
• 5

5 10 15 20 25 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Market Liquidity Index Real Estate Total Return (%) Total Return Market Liquidity 1990-1992: Total Return

• 4.9% Annualized
• 9.6% Cumulative

2007-2009: Total Return

• 11.8% Annualized
• 22.2% Cumulative

Real Estate has Historically Provided Strong Returns. However, Investors Need to be Wary of Missteps

Capital markets oscillate between greed and fear. Savvy investors can achieve superior results by understanding how those forces shape markets and exploiting the resulting opportunities

1984-1990: Total Return 7.8% Annualized 57.2% Cumulative 1992-2007: Total Return 11.2% Annualized 390.7% Cumulative 2009-2014: Total Return 12.1% Annualized 77.3% Cumulative

V

ALYRIAN CAPITAL

PROPRIETARY & CONFIDENTIAL

Key Investment Themes in the Current Real Estate Cycle

• Pg. 6

Valyrian monitors both macroeconomic and property level trends to properly assess the real estate cycle. We believe value-added strategies are best positioned to capitalize on current opportunities

▪ In 2010-2013, investors were able to acquire assets that had suffered from under-investment from distressed banks and other financial institutions

Financial Institution Forced Sales

▪ Most sellers now are overleveraged property owners with fundamentally sound assets, but are unable to refinance ▪ Investors will require greater asset management expertise to fully capitalize on the opportunity

Overleveraged Property Owners Initial Dislocation Market Trough Significant Risk-Adjusted Real Estate Investment Opportunities 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Extreme Risk Aversion Central Bank Intervention Core Real Estate Overbid Real Estate Deleveraging

▪ Unprecedented central bank intervention in the US, UK, Europe and Japan has pushed bond yields near to historic lows ▪ Core real estate has become an attractive alternative for institutional investors ▪ Foreign investors have also flooded into core US real estate  Searching for excess yield  Looking to capitalize on US dollar appreciation ▪ Core real estate has lower perceived risk due to the supposed protection of stable cash flows and desirable location ▪ However, as interest rates rise from current levels, core investments may be at risk of substantial capital loss due to high cost basis and limited ability to grow income ▪ Value-add assets acquired at a discount, with the potential for income growth help mitigate risk ▪ Over $1 trillion of CRE debt is expected to mature in 2015-2017 ▪ Maturities will force an end to “extend and pretend” and drive investment opportunities going forward ▪ Regulatory issues and balance sheet constraints continue to limit traditional lenders ▪ Securitization markets have begun to recover but issuance remains below the previous peak ▪ Extreme risk aversion resulted in investors avoiding assets previously considered core ▪ Assets now need to be “grade A” in every aspect ▪ Traditional sources of lending withdrew from the market ▪ Securitization essentially stopped ▪ Regulators injected capital and created policies encouraging lenders to “extend and pretend.” However, the ability to extend is limited

Financial Crisis Global Hunt for Yield Perceived vs. Actual Risk The Funding Gap & Maturity Wall

V

ALYRIAN CAPITAL

Source: HFF Research

Core Commercial Real Estate is Overbought

▪ Since 2009, investors have flocked to stabilized core assets to the point that current yield is now overbought and total return assets are relatively underpriced  Due to the combination of a high cost basis and lack of opportunity for increased yield, stabilized core assets carry greater risk than is currently perceived ▪ In contrast, traditional value-add assets can be acquired at an attractive cost basis in today’s market because they are perceived to carry greater risk  In reality, the competitive cost advantage created through redevelopment or repositioning of these assets provides superior downside protection and less actual risk ▪ Therefore, we believe that acquiring transitional assets and executing a value-add strategy represents the best opportunity for creating value and reducing risk ▪ While 2008-2011 was largely an era of acquisition, in which lucrative opportunities were abundant for anyone with available capital, we are now in an era of execution where investors must create value and execute strategically to achieve attractive risk-adjusted returns

Core assets are currently expensive due to investor risk aversion and demand for alternative assets with bond-like cash flows, creating investment opportunities for value-add strategies

Investors have Flocked to Core Assets Required NOI Growth to Maintain Value for Core Assets Pre-crisis core markets

Post- crisis core markets

Assets need to be grade A in every aspect Extreme risk aversion has left behind assets which fall just short of the highest grade 5 10 15 20 25 30 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 Required NOI growth (%) Cap rate at acquisition (%)

Required NOI growth to maintain value if cap rates widen by 100 bps

Current Core Cap Rates Current Value-Add Cap Rates

The NOI growth rate required to maintain a property’s value, given a 100 bps widening in cap rates, increases exponentially as the entry cap rate falls

Value Trap

7

V

ALYRIAN CAPITAL

PROPRIETARY & CONFIDENTIAL

132 167 171 180 148 167 156 186 196 210 236 50 100 150 200 250 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Jun-16

Dry Powder ($bn)

Source: Preqin

The Opportunistic Space is also Crowded

12 9 7 2 2 1 5.1 28.2 2.8 0.7 0.5 0.3 5 10 15 20 25 30 Value Added Opportunistic Debt Distressed Core Core-Plus

• No. of Funds Closed

Aggregate Capital Raised ($bn)

• Pg. 8

Significant capital has been raised to invest in the most distressed assets that offer the potential for high yields, resulting in greater competition for a declining universe of assets

Closed-End Private Real Estate Fundraising in 3Q 2015 by Primary Strategy Closed-End Private Real Estate Dry Powder at an All-Time High

Opportunistic funds continue to raise capital, even as markets begin to normalize Capital needs to be put to work

V

ALYRIAN CAPITAL

PROPRIETARY & CONFIDENTIAL

50 100 150 200 250 300 350 400 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 CRE debt maturities ($ bn) CMBS Banks Insurance company Other

Source: Federal Reserve, Real Capital Analytics, Trepp

However, Ongoing Deleveraging Should Create Opportunity

9

US commercial real estate has delevered following the financial crisis and lending has begun to re-emerge. However, delinquent inventory and approaching maturities pose a risk but provide opportunities for flexible capital

CRE Debt as % of GDP Remains well Below the Peak Over $1 Trillion of Bubble-Era Loans Maturing in 2015-2017

Distressed Inventory Work-Out Process Continues

CMBS Maturities Increasingly Challenging in 2016-2017

14 16 18 20 22 24 26 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CRE debt as a % of GDP (%) CRE debt as a % of GDP has remained constant post-crisis 100 200 300 400 500 '08 '09 '10 '11 '12 '13 '14 Distressed inventory ($bn) Troubled REO Restructured Resolved Peak maturities

• f $377 bn
• ccurred in 2013

2015-2017 Peak maturities total over $1 Trillion 50 100 150 200 250 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Issuance and maturities ($bn) CMBS issuance CMBS Maturities Substantial Capital Shortfall / Funding Gap

V

ALYRIAN CAPITAL

PROPRIETARY & CONFIDENTIAL

CRE Funding Gap Creates Opportunities for Flexible Capital

10

Significant headwinds remain for traditional providers of commercial real estate debt, which decreases capital availability, increases costs to borrowers and creates greater opportunities for private lenders

▪ The need for private capital is near historic highs, with less capital and competition pursuing market dislocations, due to:  Regulatory restrictions (e.g. Volcker Rule, Basel III) imposed by an evolving regulatory framework  Constrained balance sheets of traditional participants  Retreat of traditional lending sources  Reduced use of leverage ▪ Financial institutions continue to reduce assets to adapt to new enforcement of regulations and capital constraints  Dodd-Frank imposes additional burden on business models ₋ New guidelines and restrictions on banking activity will force banks to de-risk their business activities ₋ Increasingly stringent risk retention requirement for issuers  Basel III continues to have a large impact on the financial industry ₋ Significantly higher capital requirements on banks ₋ Proposed liquidity rules are expected to cause additional balance sheet restructuring  Given the current standing of many financial institutions, banks will be forced to either issue new equity, increase their retained earnings or reduce their risk weighted assets to be come compliant

Investment Opportunities from Multiple Sources

Asset Disposition Reduced Balance Sheet Capacity Risk Transfer

Distressed Performing Loans Non-Performing Senior Loans Bridge Loans Junior Mortgage Origination Small Balance Commercial High Quality Warehouse Lending Distressed Credit CRE Mezzanine / Preferred Equity Construction & Development Loans

Market Pressures and Expectations Regulatory and Capital Requirements Basel III Dodd-Frank, Volcker Rule and Risk Retention Leverage Lending Guidance Risk Aversion