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Opportunistic Investing and Real Estate Private Equity Funds


Typical Areas of Investment Focus. Distressed Debt Loan to Own ... Sears continues to be picked off by Best Buy, Home Depot, Lowe's and apparel specialty stores. ... – PowerPoint PPT presentation

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Title: Opportunistic Investing and Real Estate Private Equity Funds

Opportunistic Investing and Real Estate Private
Equity Funds
Risk-Return Spectrum of Real Estate Investing
Security of Income Growth
  • Corporate Restructurings
  • Global Distressed Sellers
  • Recovery Capital
  • Growth Capital
  • Emerging Property Sectors
  • High-Yield / Subordinated Debt

Value Added
  • Property Leasing Strategies
  • Property Repositioning Strategies
  • Development / Re-Development

  • Fully Leased Multi-Tenant Property
  • Core Diversified Private Funds
  • Publicly Traded REITs

Typical Areas of Investment Focus
  • Distressed Debt Loan to Own
  • Real Property in Recovering/Growth Markets
  • Privatizations
  • Mezzanine Investments
  • U.S. Core Product
  • Portfolio Sale-Leaseback Transactions with Option
  • Wholesale-Retail

Total Opportunity Fund Equity Raised1988 - 2001
( in billions)
ofFunds 1 1 0 2 5 2 12 10 13 19 20 17 20 23
Source Ernst Young
Evolution of Investment Activities
  • Distressed debt opportunities driven by
    Resolution Trust Corporation (RTC) sales
  • Single asset and portfolio acquisitions from
    motivated sellers (e.g., RTC, lenders, etc.)
  • Investments made in economically depressed
    regions such as Texas
  • Early diversification in land, corporate deals
    and debt investments
  • Increased geographic diversification in U.S.
  • Start of California recovery
  • REIT growth phase private to public arbitrage
  • Development and new product strategies
  • Redevelopment and repositioning strategies
  • Mezzanine debt
  • Increased international focus

Opportunity Fund Fee Structure
  • Promote General Partner receives 20 of total
    profits against (versus above) a preferred return
    to the investor of 10
  • Catch-Up GP receives 60 to 100 of
    distributions after return of capital and 10
    preferred return until GP has received 20 of
    total profits (distributions thereafter pro rata)
  • Asset Management Fees typically 50 bps of costs
    under management (some funds charge 150 to 200
    bps on equity, either committed or invested)
  • Financing/acquisition fees typically 1 where

Typical Fund Economics
in millions Comments
General Terms Size of Fund 2,000 Equity
leveraged 31 equals 8.0 billion in
cost Sponsor Commitment 360 18 of total
equity Revenues to Sponsor Before
Expenses Profits from 20 Promote
400 Assumes 2.0 billion in equity doubles
to produce 2.0 billion in profits (4
years at 20 IRR 3 years _at_ 25 IRR) Profits
from Equity 288 18 of remaining 1.6 billion of
profit after 20 promote paid Asset
Management Fees 120 50 bps on 8.0 billion of
cost over weighted avg. three year
life Transaction Fees 80 Assumes 1 on 8.0
billion of cost from financings, selected
sales, etc. Total Revenues to Sponsor 888
Sample Fund Economics(Assumes Successful
Year 0 Year 1 Year 2 Year 3 Year 4 Totals
Investment of Capital (360 ) (360 ) Asse
t Management Fees 30 30 30 30 120Transactio
n Fees 20 20 20 20 80Profit on
Equity -- -- -- 288 288Promote --
-- -- 400 400Return of Invested Equity
-- -- -- 360 360 Total Cash
Inflows 50 50 50 1,098 1,248 Total Net
Revenues (360 ) 50 50 50 1,098
888 Internal Rate of Return Pre-Overhead 41 Mul
tiple of Invested Capital 3.5x
Typical Deal Structure
  • Shared Ownership Operating partner should have
    minimum 10 equity stake in the joint venture
  • Promote Structure 20 of profits above a 15
    IRR, 25 of profits above a 20 IRR
  • Asset Management Fees 50 basis points of cost
  • Property Management Fees 3 of gross revenues
  • Market leasing fees, development fees, and
    construction management fees vary considerably
    according to deal specifics

Whitehall Funds Overview
  • Description
  • Family of opportunistic real estate funds
    sponsored and managed by Goldman Sachs. The
    Funds invest in real estate companies, projects,
    loan portfolios, debt recapitalizations and
    direct property.
  • Since its 1991 inception, Goldman Sachs has
    raised approximately 11.6 billion of equity in
    nine funds, including its latest fund, Whitehall
    2001, which has committed capital of 2.3
  • Goldman Sachs has committed approximately 2.2
    billion to the Whitehall Funds since inception
    with nearly 400 million committed to Whitehall
    2001. GS employees have committed an aggregate
    of 594 million since inception (approximately
    200 million to Whitehall 2001).
  • Since inception investments of approximately 66
    billion in total cost across 20 countries
    including U.S., Canada, U.K., France, Italy,
    Germany, Brazil, Sweden, Spain, Portugal, Hong
    Kong and Thailand.

GS Commitment
As of June 30, 2003
The Whitehall FundsHistorical Equity Raised
The Whitehall Funds are the largest series of
real estate opportunity funds in the world with
over 11.5 in equity across nine funds
(1) Represents aggregate commitments to Whitehall
3 and Whitehall 3-S. Whitehall 3-S was a
supplemental fund offered only to investors in
Whitehall 3.
The Whitehall Funds Product Stratification by
Americas (54)
Asia (8)
Europe (38)
Remaining cost by region. Actual figures as of
June 30, 2003.
The Whitehall FundsGeographic Stratification by
3.9 billion, or 58 of remaining investment
level distributions are concentrated within the
Americas, while European and Asian activity are
dominated by Italian/French and Japanese
holdings, respectively.
Americas (58)
Europe (32)
Asia (10)
Note All distributions are at the investment
level prior to all fund level expenses and the
impact of any fund level financing. Actual
figures as of June 30, 2003.
The Whitehall FundsInvestment Activity by Year
( in millions)
Total Fund Cost Purchased
Fund Equity Invested (1)
65.7 billion Total Cost 37.8 billion Fund
Cost 28,800 Total Assets
11.6 billion Total Fund Equity 304 Total
Investments 101 Operating Partners
2003 YTD
  • Represents equity funded does not include equity
    committed to identified transactions or platform
    basket commitments to unidentified transactions.

Investor Makeup of the Whitehall FundsContinuing
Shift towards Private Client Investors
  • Goldman Sachs is sponsor and largest investor in
    each Whitehall Fund, typically committing 18 to
  • The remainder of the funds consist of
    institutional investors and high net worth

Raised 1991 - 1997
Raised 1998 - 2001
Current Trends in Real Estate Markets
  • Flight to quality and near-term yield
  • Contractual cash flow tied to strong credit
  • Minimal near-term lease expirations
  • Increasing allocations towards real estate
  • Pension fund industry is 80 trillion industry
    which is allocated 2 towards real estate
  • Public REIT market is similarly sized (179
  • Less appealing alternative investments
  • Limited number of solid markets to invest in
  • Focus on Midtown Manhattan, Washington D.C. and
    Southern California

Current Investment Profile for Opportunistic
  • Domestic opportunities are sparse given economic
    uncertainty yet minimal distress
  • Great time to be a seller of stabilized assets
    record pricing levels for well-leased,
    well-located, high quality product
  • Looming maturities particularly in tech centric
    markets and hospitality sector could create new
    found distress
  • Market recovery and restructuring opportunities
    continue to persist in Europe
  • Large corporate restructurings and divestitures
    (e.g. telecoms)
  • Public to private opportunities given depressed
    real estate public equity values
  • Economic distress continues to drive investment
    activity in Asia
  • Distressed debt and wholesale-to-retail
  • Corporate restructurings (e.g., golf) and

The Retail Fund Flows Phenomenon
  • Morgan Stanley REIT index trading at all time
    high despite overall weak underlying fundamentals
    (now at avg. 6 dividend).
  • Public market forward multiple on AFFO now 12.5x
    vs. historic 10.5x.
  • Compared to avg. SP forward multiple of 17.5
    times, ratio now gt70 vs. historical 50 ratio.
  • Syndicators focused on low leverage, income
    driven acquistions raised 4.0 billion last year
    and will likely raise 6 to 8 billion this year.
  • Wells raising up to 250mm of equity per month,
    with 2.5bn raised in 2003, with promise of
    delivering 7 current yield.
  • Investor paying 15 load, with 10 going to
    broker and 5 (or 125 million) going to Wells
    with subsequent annual 50 bps AM fee

The Stabilized/Value Add Spread Phenomenon
(Tale of Two Cities within 6 Blocks in Chicago)
Evolution of RE Pricing and Impact of Leverage
Historical One-Month LIBOR Rates
Evolution of RE Pricing and Impact of Leverage
The Retail Fund Flows Phenomenon
  • Will retail investors investing with Wells, CNL,
    Inland, etc. ultimately get what they thought
    they were getting?
  • Will spread between stabilized and value-add
    continue? If not, how will spread be narrowed?
  • Will higher valuations lead to more IPO/merger
  • Will lower cap rates/interest rates lead to more
    build-to-suit activity, giving more benefit of
    current environment to tenant vs. 100 accruing
    to owner of stabilized product?

Why Today is Considered Good if not Great
  • 1.8 million housing starts nationwide
  • Substantial refinancing activity lowering costs
    and increasing real estate equity valuations
  • Record 75bn of CMBS originated in 2003
    increased aggressiveness in mezzanine lending
    lower spreads
  • Substantial defense spending greater tenant
    demand (D.C., S. California)
  • Imports from China and outsourcing to India
    lowering overall costs and dampering inflation
  • Tremendous retail flows into stabilized real
    estate REITs trading at all time high prices and
    historically low dividend yields
  • Corporate profits up 20 NASDAQ up 77 SP up
  • Retail and auto sales holding up
  • Substantial fiscal stimulus easiest monetary
    system in recent memory

Troubling Concerns
  • Lack of job growth declining office
    rents/negative absorption
  • Continuing poor MF fundamentals
  • 300k units built in 03, consistent with last 6-7
  • of population renting vs. owning down from 36
    to 32 since 94 however, couples getting
    married now avg. 28 yrs. vs. 22 and should
    benefit 24/7 cities such as NY, Chicago, etc.
  • Hospitality industry remains under pressure
    ADRs 20 to 40 below 2000 peaks
  • CMBS delinquency rates up to 2.4 6.9 for
    senior housing and 5.4 for hotels
  • Weak value added sales activity creating huge
    spreads for well-leased vs. lease-up assets
  • Huge deficits, both in trade and at local and
    national levels
  • Lack of progress in educational system given
    funding concerns and need to retrain workers
    being displaced by outsourcing

Other Factors to Consider
  • Real GDP growth of 3.3 in 2Q03 vs. 1.4 in 1Q03
  • Last quarter of negative GDP growth was 3Q01,
    resulting in 24 months of recovery with no job
  • Unemployment at 6.1 unlikely to fall materially
    when job growth returns as currently disgruntled
    unemployed return to market and growing echo baby
    boomers enter market for first time
  • Consumer almost 2/3rds of economy confidence
    remains weak and will likely remain so until real
    job growth returns
  • Stocks trading at low 20s P/E ratios, down from
    40 at peak
  • Private sector debt now at 1.5 of GDP, highest
    level since 1964
  • U.S. deficit will reach 450bn in 2003, 600bn in
    2004. Largest prior level was 350bn in 1992.
  • Now importing 140bn and exporting 25bn to China
    from almost 0 in 1985

What Do Next 12 Months Look Like?
Retail Trends(Generally in Equilibrium but
Tremendous Shifts)
  • Discount department stores, warehouse clubs and
    supercenters now control gt70 of retail market
    share (vs. only 20 for traditional department
    stores) versus just 50 of the market 15 years
  • Wal-Marts market capitalization of 241 billion
    is over eight times the 29 billion market
    capitalization of all traditional department
    stores combined (i.e. Sears, Nordstrom,
    Federated, Saks, May Co. and J.C. Penny).
  • Community center and power retailers reflected
    4 same store sales growth over the last 24
    months mall anchors and specialty retailers
    declined 2.5 over same period.
  • Traditional grocers market share of U.S. grocery
    sales dropped from 85 in 1992 to lt40 ten years
    later, with supercenter and wholesale clubs now
    at 30.
  • Wal-Marts supercenter sales represented 95
    billion (nearly 40 of total Wal-Mart sales),
    making it the largest grocery retailer in the
    country with almost twice the sales of its
    largest competitor (Kroger at 52 billion).

Retail Trends (contd)
  • Wal-Marts supermarket/pharmacy-related sales
    projected to grow gtfive times faster than other
    industry competitors.
  • Avg. Wal-Mart store has grown from 128k sf to
    gt200k sf
  • Pricing competitiveness tremendous advantage
    Wal-Marts supercenter prices 22 below overall
    market avg. for sample basket of goods and almost
    30 below prices quoted by Kroger, Safeway and
  • Retail sales have grown at CAGR of over 5 over
    last 11 years growing at faster rate per capita
    than retail sf per capita.
  • Over 600 Wal-Marts and Targets are being built
    per year vs. only a handful of department stores.
  • Occupancies remain high good malls and life
    style centers holding up primary risk remains
  • General perceptions
  • K-Mart will have difficulty coming out of BK due
    to severe talent drain
  • Sears continues to be picked off by Best Buy,
    Home Depot, Lowes and apparel specialty stores.

Hospitality Trends
  • North-South travel much better than East-West
    given weak dollar relative to Euro and Yen and
    international perception, at least for time
    being, that U.S. more dangerous place to travel
    post 9/11.
  • SARS had tremendous negative impact on Canada and
    Asia at height of crisis, occupancies fell as
    low as 3 in Hong Kong, 22 in Beijing and 15 in
    Toronto. U.S. cancellations due to disapproval
    of Canada and France opposing the Iraqi war also
    had impact.
  • Consumers booking much later, causing great
    degree of difficulty for hoteliers in pushing
    rate through yield management and controlling
    variable expenses.
  • Internet (particularly Expedia, which dominates
    the market) has had real impact on pricing given
    occupancy and booking trends, putting rates under
    meaningful pressure.
  • Big evolving trend remains developing luxury
    properties with timeshare or residential

Offshoring Phenomenon
  • 2mm manufacturing jobs lost to offshoring from
  • Pct. of offshore inputs in US manufactured goods
    grew from 10 to 16 from 87 to 97 and from 26
    to 38 in high-tech manufacturing
  • Replaced by 36mm new services job, raising
    overall std. of living (however, Silicon Valley
    negative absorption of 6mm sf annually for last
    two years has given back some of these gains)
  • 210k non-mgf. jobs exported annually,
    conservatively expected to reach cumulative 3.3mm
    by 2015
  • U.S. talks about allocation of capital in India,
    its allocation of people
  • Bangalore produces gt30k engineers/yr. with
    English-speaking college grads available at
    3k/yr. and MBAs at 5k/yr.
  • GE has 20k people in India GS moving 5 of
    workforce there.
  • Substantial outsourcing also being driven by
    desire to increase market share in developing
    countries (China, eastern Europe, etc.)

Offshoring Phenomenon (contd)
  • Typical attribute of jobs outsourced
  • No face-to-face customer servicing requirement
  • High information content
  • Work process is telecommutable and internet
  • High wage differential
  • Low setup barriers
  • Low social networking requirement
  • 11 of U.S. occupations judged to be at risk
    given these factors
  • Outsourcing of servicing easier (and thus
    faster) than in manufacturing in terms of
    resources, space, equipment requirements
  • Regional analysis indicates Atlanta, Boston,
    Chicago, Detroit, Houston, New York, L.A., S.F.,
    and San Jose above national avg. in terms of at
    risk jobs

Offshoring Phenomenon (contd)
Outsourcing Phenomenon (contd)
  • Using conservative estimate of 3.3mm jobs lost by
  • _at_250 sf/job 825mm sf (6.3 of 13bn sf U.S.
    office inventory)
  • _at_500 sf/job 1.6bn sf (12.6 of national
  • Sam Zell of EOP recently quoted that outsourcing
    to countries like India will render commodity
    back office space obsolete
  • Will U.S. economy evolve and be able to retrain
    displaced workers into higher paying services
    jobs, negating impact on office market?
  • What will interim impact be?
  • Is our educational system up to the task?
  • Will political pressure against globalization
    result in protectionist measures?
  • Will interim domestic outsourcing (moving from
    high cost states such as NY and California to low
    cost states such as Texas and Florida) be a
    result, especially if protectionist efforts
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