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GLOBAL FINANCIAL CRISIS IMPACT ON COMMERCIAL REAL ESTATE

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IMPACT ON COMMERCIAL REAL ESTATE University of Connecticut Center for Real Estate Alumni Panel Discussion November 19, 2008 Alumni Presenters Denise Rowe Stake Vice ... – PowerPoint PPT presentation

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Title: GLOBAL FINANCIAL CRISIS IMPACT ON COMMERCIAL REAL ESTATE


1
GLOBAL FINANCIAL CRISISIMPACT ONCOMMERCIAL REAL
ESTATE
  • University of Connecticut Center for Real Estate
    Alumni Panel Discussion
  • November 19, 2008

2
Alumni Presenters
  • Denise Rowe Stake
  • Vice President, Portfolio Management
  • Cornerstone Real Estate Advisors
  • UConn Class of 1990 (BS), 1997 (MA)
  • Thomas Kelley
  • Managing Director
  • Babson Capital Management, LLC
  • UConn Class of 1977 (BS)
  • Frank Sataline
  • Senior Managing Director
  • Cigna Investment Management
  • UConn Class of 1983 (BS), 1998 (MBA)

3
Real Estate Equity
  • Denise Rowe Stake

4
Why Invest in Real Estate?
Investment Total Returns
September 30, 2008
Past performance is absolutely no guarantee of
future performance, especially in the short-term
and maybe not in the long-term
5
Top 200 Pension Fund Allocations
Uh-oh!
Real Estate Allocation to Total Assets
Source Pensions and Investments, UBS Research, Cornerstone Research
2008 is estimated based on a 20 decline in total assets and constant real estate dollars allocated
6
Commercial Real Estate Sales Activity
Monthly Sales Volume by Property Type
Portfolio deals, REIT buyouts fueled peak
activity in 2007, transactions fall to 5-year low
in 2008
Source Real Capital Analytics, Cornerstone
Research 8-28-2008
7
Commercial Real Estate Valuation
Cap Rates Disconnect
Source NCREIF, Cornerstone Research 8-28-2008
8
Real Estate Fundamentals
  • Office 2008Q3 13.5 vacancy, up 30 basis points
    for quarter
  • Suburban vacancy up 40bp to 15.5, CBD steady at
    9.7
  • Financial sector job cuts will push up CBD
    vacancy
  • Industrial 2008Q3 10.7 availability, up from
    10.3 in Q2
  • Supply should react quickly to slower demand
  • Multifamily 94.3 occupancy in Q3, down from
    94.4 in Q2
  • Reflecting weak employment and shadow supply in
    some markets
  • Hotels Full Service Chain occupancy near 70 but
    is stressed
  • Leisure/transient business travel were sharply
    off this summer
  • Diminished airlift and corporate travel cuts will
    challenge 2009
  • Retail Most challenged sector near-term
  • Weak October retail sales a precursor to
    disappointing holiday sales
  • Accelerated retail chain consolidation hurts
    marginal players and locations

9
Real Estate Debt
  • Thomas Kelly

10

Increasing Leverage, Decreasing Coverage through
2007 Vintage
() Fitch Stressed LTV Current Balance / (Fitch
NCF / Fitch Stressed Cap Rates)
() Fitch Stressed DSCR is calculated based by
using a blend of the Fitch term DSCR (Fitch
NCF/Actual Debt Service) and Fitch constant DSCR
(Fitch NCF/Fitch Constant Debt Service)
() Moodys Stressed DSCR Moody's NCF /
9.25 Stressed Rate X Loan Balance
() Moodys Stressed LTV Current Balance /
(Moody's NCF / Moody's Cap Rates)
Source Rating Agency Presales
This presentation is provided for informational
purposes only and should not be considered
investment advice or an offer for a particular
security or securities. The views and opinions
expressed by the speaker are his own and do not
necessarily represent the views of Babson Capital
Management, LLC.  Please consult your tax or
financial advisor for additional information
concerning your specific situation
11
Subordination Levels
As of 10/9/08 13.55
11.31 8.56
5.22 3.14 2.22
As of 10/9/07 12.08
10.04 7.59
4.21 2.45 1.64
As of 10/4/06 12.01
9.98 7.45
4.19 2.32 1.50
() 10-Yr AAA subordination level is derived from
the junior AAA tranche to facilitate
comparisons to recent structural changes.
Source Rating Agency Presales
This presentation is provided for informational
purposes only and should not be considered
investment advice or an offer for a particular
security or securities. The views and opinions
expressed by the speaker are his own and do not
necessarily represent the views of Babson Capital
Management, LLC.  Please consult your tax or
financial advisor for additional information
concerning your specific situation
12

Loan Maturity Risk
This presentation is provided for informational
purposes only and should not be considered
investment advice or an offer for a particular
security or securities. The views and opinions
expressed by the speaker are his own and do not
necessarily represent the views of Babson Capital
Management, LLC.  Please consult your tax or
financial advisor for additional information
concerning your specific situation
13

This presentation is provided for informational
purposes only and should not be considered
investment advice or an offer for a particular
security or securities. The views and opinions
expressed by the speaker are his own and do not
necessarily represent the views of Babson Capital
Management, LLC.  Please consult your tax or
financial advisor for additional information
concerning your specific situation
14

This presentation is provided for informational
purposes only and should not be considered
investment advice or an offer for a particular
security or securities. The views and opinions
expressed by the speaker are his own and do not
necessarily represent the views of Babson Capital
Management, LLC.  Please consult your tax or
financial advisor for additional information
concerning your specific situation
15
Real Estate Portfolio Management
  • Frank Sataline

16
Overview
  • Answer the question, Why real estate?
  • How real estate fits into CIGNAs investment
    strategies and portfolio
  • Where do we go from here?

17
Why Real Estate?
  • PPRs August 08 Publication
  • Why Real Estate Now?
  • Long-term considerations
  • Market neutral
  • Return enhancement
  • Risk reduction
  • Cash flow
  • Hedging

18
Investment Strategy (Fixed Income)
  • Maximize after tax returns
  • Produce high/stable investment income
  • Minimize impact of credit losses
  • Maintain appropriate asset liability mgmt.
  • Pursue primarily through buy and hold
  • Bottom-up, relative value driven investment
    selection
  • Portfolio diversification
  • Emphasize private asset classes

19
Risky Asset Investment Strategy
  • Maximize economic returns
  • Optimize risk-adjusted net investment income
  • Leverage CIMs underwriting and sourcing
    capabilities in core asset classes

20
Real Estate in CIGNAs Portfolio?
  • Employee Benefits Portfolio
  • 15.6 billion
  • Predominantly a fixed income investor
  • plus real estate mezzanine and equity and private
    mezzanine and private equity
  • Commercial mortgages
  • 3.5 billion or 22 of assets - at target
  • Equity real estate
  • .4 billion or 2.5 of assets - at only 1/3 of
    target

21
Where Do We Go From Here?
  • Commercial real estate is a lagging indicator
  • Prices going lower through 09, volume off 75-80
    YTD!
  • Searching for a bottom. Hit it in 2010?
  • Down 20-30 from peak
  • Whats attractive now? Best relative value?
  • Cash (i.e. capital preservation)?
  • High yield public bonds
  • AAA CMBS, REIT bonds?
  • Real estate debt vs. equity

22
QUESTIONS?Thank you alumni speakers.All are
invited to a reception!
  • University of Connecticut Center for Real Estate
  • Alumni Panel Discussion
  • November 19, 2008
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