METROPOLITAN REAL ESTATE EUROPE, LLP
OPPORTUNITIES IN DISTRESSED REAL ESTATE Jeremy Ford, Managing Director, Metropolitan Real Estate Europe, LLP APRIL 2013
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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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Your Daily Dose Of Distress “Lloyds reduces problem loan exposure by £5.35bn” PropertyWeek
“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 and AIB selling off their distressed property loans” The Independent
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There Are Distressed Properties
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And, There Are Distressed Owners A range of factors can create distress for otherwise institutional-quality assets Short lease terms Vacancy Low barriers-to-entry Needing refurbishment/redevelopment Poor tenant-mix
Blackpool (U.K.)
Debt maturity and/or overleverage Boston, MA (U.S.)
Minneapolis, MN (U.S.)
Tokyo (Japan) Helsinki (Finland)
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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
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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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We’ve Seen This Before A financial (structural) problem rather than a real estate problem (cyclical) ADVANCED ECONOMIES’ GDP GROWTH AND REAL ESTATE CYCLES (1970-2012)
% change
Early 1990s Recession
1980s Recession
1970s Oil Crisis
Early 2000s Recession
Dot Com Bubble
GFC
7 6 5
Demand/ supply matched 1998-99
Oversupply absorbed 1990-98
Undersupply 2011-13
4
RTC
3 Oversupply 1980-89
Oversupply 1970-75
2
1989-95 Oversupply 2000-03
1 0 -1 -2 -3 1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: FDIC, FDIC Structured Transaction Fact Sheet, IMF, 2009. FW Dodge, CB Commercial, BLS, Mueller.
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We’ve Seen This Before A financial (structural) problem rather than a real estate problem (cyclical)
RTC
TODAY
Inefficient
Efficient
Bulk sales (“Black box”)
Discrete portfolios and oneoffs
Retail flip Value created through active asset management
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Significant Increase In Lending Through 2007 With Loans Maturing Now EUROPEAN LENDING TO REAL ESTATE
300
(€ BILLION)
323% 250
€ Billion
200
€477B
150
Majority of European real estate debt exposure through direct balance sheet debt exposure (75%) and bank sponsored covered bonds (18%)
100
50
0 2001
2005
2009
2013
2017
U.S. CMBS SALES AND MATURITIES
300
($ BILLION)
250
206%
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
$ Billion
200
$320B
150 100 50 0 2001
2005
Lending
2009
2013
2017
Maturities
Source: CBRE, De Montfort University, January 2011. DTZ May 2011,.
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Faster Than Anticipated Reduction And More To Come PROGRAM OF ANNOUNCED SALES (TOTAL OF €296 BILLION)
Banks 37%
CMBS 17%
Pressures mounting on bank balance sheets as nonreal estate assets deteriorate
OEFs 11%
Banks ~20-25% through their revised deleveraging plans by mid-2012 (majority through repayment of loans and impairments, fewer disposals)
REITs 5% Government 30%
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)
60 50
£ Billion
40 30 20 10 0
4H09
2H10
4H10
2H11
4H 11
2H12
Source: Morgan Stanley, November 2012, J.P. Morgan Asset Management as of December 2012, J.P. Morgan Asset Management, February 2013.
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The Size of the Opportunity in Europe EXPECTED OPPORTUNISTIC SALES IN EUROPE (TOTAL OF €261 BILLION)
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
DISTRESSED SALES IN THE U.K., GERMANY AND FRANCE (SOURCES) (TOTAL OF €125.8 BILLION) Banks €77.1B
REITs €3.2B
Govt €24.5B
CMBS €14.3B OEFs €6.7B
Source: J.P. Morgan Asset Management, February 2013, CBRE Valuation Team, September 2012; J.P. Morgan, September 2012.
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Investors Can Access Distress Throughout The Capital Structure… Distressed Equity
Distressed Debt
Individual, non-core properties sold out of portfolios in need of active asset management
Opportunities include large portfolios as well as individual assets Complex transactions that require structuring capabilities
Properties in need of capital for renovations or tenant improvements held by capital constrained owners or “unnatural” owners (e.g., banks)
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
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
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…Utilizing Different Skill Sets Asset Transaction
Financial Transaction
Debt Transaction
Buy assets at a substantial discount to their intrinsic long-term value
Look at assets that are neglected due to capital constrained or “unnatural” owners
Buy distressed properties through “loan-to-own” situations
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
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Provide capital (i.e., loan origination, bridge financing, development financing, etc.)
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Restructure/recapitalize balance sheets on overleveraged assets Take advantage of illiquid debt environment to access segments of capital structure that are mispriced due to risk (i.e., mezzanine loans, etc.)
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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:
Viewed the asset as a noncore part of portfolio
Willing to take a write down
Short lease length
Prepared to provide new financing
MANAGER’S STRATEGY
-
Real estate knowledge and track record in Germany
-
Ability to asset manage and invest capital
Willing to sell substantially below replacement cost
Structured transaction
Value add
Value add
Tap into strength of single transaction market
Negotiate lease extension
Extend lease terms
Decrease vacancy
Lease vacant space
Secure financing
Exit via institutional market
Limit risk by receiving disposition fee senior to the senior lender
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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
Structured transaction
Structured transaction
Foreclosed at significant discount to prior owner’s basis
Recapitalized an overly leveraged, high quality asset
Sourced off-market through relationship with lender
Reposition as premier office address
High unlevered debt yield
Generating good income
Manage tenant rollover
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Loan acquired at significant discount to face value
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
Value add
Value add
Acquire performing loan at significant discount
Renovation
Manage near term lease rollover
In-place, contractual cash flow Reduce risk by using a leading hotel operator
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Reposition to boutique, managed office
Stabilize the portfolio
Increase rental rates
Secure financing
Exit to local, core-plus investor
Identify a buyer
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Keys To Success Real Estate Knowledge
Financial Know How
Operational Skills
Understand local/regional market dynamics
Utilize modest leverage and sound borrowing practices
Manage and increase property cash flow
Recognize real estate value
Achieve significant discounts through critical mass
Maintain and develop deep tenant relationships to enhance leasing and income
Remain cognizant of supply and demand dynamics
Understand complex financial structures Run an efficient bidding process Maintain credibility and have realistic pricing expectations
Improve control over outcome and cost through vertical integration with inhouse renovation, repositioning, and construction expertise Build relationships with lenders, buyer, and sellers
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