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UNC Kenan-Flagler Annual Real Estate Conference

Discussion Materials

19 February 2009
 UNC Kenan-Flagler Annual
Real Estate Conference

Morgan Stanley Real Estate

Global Platform

• Leading global real estate

investment manager with Frankfurt
$91Bn in real estate assets
under management(RE AUM) New York
Seoul Tokyo
London Stockholm
– America ($36Bn), Europe
($29Bn) and Asia ($26Bn) Moscow
Dublin
– Core, value-added and Boston Beijing
Toronto
Munich
opportunistic investment San Francisco
Paris
Chicago
vehicles
Madrid
Shanghai
• Industry leading global real Atlanta
Milan
Menlo Park Taipei
estate investment banking
franchise Hong Kong

– Intermediated $400Bn in real Los Angeles

estate M&A transactions over New Delhi

Mexico City Mumbai
past decade
Bangkok Sydney
– Public debt, preferred and Dubai Singapore
Houston
equity underwriting São Paulo

Buenos Aires
Johannesburg
Melbourne

Morgan Stanley Real Estate Global Platform Morgan Stanley Real Estate Offices

Morgan Stanley Investment Banking Offices

Number of Offices 22
Number of Professionals 815(1) Countries with Morgan Stanley Hotel Investments

Note
1. Includes banking and investing professionals as well as Financial Controllers, IT, Legal and administrative staff who fully support the real estate
investing business as of November 30th 2
 UNC Kenan-Flagler Annual
Real Estate Conference

Unprecedented Financial and Economic Times

• Since September 2008:

The Vicious Cycle
– Conservatorship of Fannie
Mae and Freddie Mac
– Bankruptcy of Lehman
Brothers
– Sale of Merrill Lynch,
Wachovia and Washington
Mutual
– Collapse of AIG
– Failure of numerous other
financial institutions
– Unparalleled global
government intervention
The Casualties
$1.1 Trillion Financial Sector Writedowns (1)
1. Losses on Leveraged Borrowing
Banks: $825Bn / Insurance: $165 Bn / GSEs:
$114Bn
2. Deterioration in Credit Quality
Americas: $758Bn / Europe: $315Bn / Asia:
$31Bn
3. MTMs/Losses in Financials
Market capitalization of equity markets has
declined significantly (2):
4. De–leveraging / Reduction in Credit
Availability • World: $59Tr to $28Tr (53% decline)

• US: $19Tr to $10Tr (47% decline)

5. Asset Price Declines
• Europe: $18Tr to $8Tr (56% decline)

6. Impact on the Real Economy • Asia: $17Tr to $8Tr (53% decline)

7. Repeat step 1

Notes
1. Asset writedowns and credit losses; Bloomberg as of February 13, 2009
2. FactSet aggregate market value calculations from October 2007 to February 12, 2009 3
 UNC Kenan-Flagler Annual
Real Estate Conference

Select Real Estate Public Market Declines

• Since January 1, 2008, global U.S. Europe

Index Price Performance since January 1, 2008 Index Price Performance since January 1, 2008
public real estate markets have
declined
1,000 2,200
– US: (60.5%) 900 2,000
– Japan: (41.8%) 800 1,800
700 1,600
– Europe: (56.5%)
600 1,400
• The primary Chinese equity 500 1,200
index for domestic securities, 400 1,000
the China A Share index, has 300 800
declined (54.3%) Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09
• The public market decline price MSCI US REIT Index FTSE EPRA/NAREIT Europe

in significant cap rate

expansion and weakening
fundamentals Japan(1) China A-Shares Index
Index Price Performance since April 18, 2008 Index Price Performance since January 1, 2008

1,050 5,500
950 5,000
4,500
850 4,000
750 3,500
650 3,000
2,500
550 2,000
450 1,500
Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09
FTSE EPRA/NAREIT Japan China A-Share Index

Source FactSet as of February 17, 2009

Note
1. Index data first made available in April 2008 4
 UNC Kenan-Flagler Annual
Real Estate Conference

Stress in All Corners of the Market

• Commodities down 59% from Volatility Hedge Fund Performance

CBOE Volatility Index of S&P 500 Credit Suisse Tremont Hedge Fund Index (Monthly Returns)
one year ago as of February
%
17, 2009
90 4.0%
• Emerging Market Equities 80 2.0%
down 48% from one year ago 70
as of February 17, 2009 60 0.0%

50 (2.0)%
40 (4.0)%
30
20 (6.0)%

10 (8.0)%
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 Jan-07 May-07 Sep-07 Jan-08 May-08 Nov-08 Jan-09

Source FactSet as of February 17, 2009 Source HedgeFundIndex.com as of February 17, 2009

Commodities Emerging Markets Index

MSCI Emerging Markets Index
Indexed to 100 Indexed to 100

110
140
100
120
90
100
80
80
70
60
60
40
50
20
40
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09
Dec-07 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09
GSCI Commodity Index

Source Bloomberg as of February 17, 2009 Source FactSet as of February 17, 2009

5
 UNC Kenan-Flagler Annual
Real Estate Conference
• We expect the best distressed /
opportunistic environment we
have seen since the early 90s
• Distressed opportunities
globally will come from:
– Failed / stressed financial
institutions that will be forced
sellers
– Corporate restructurings and
non-core asset sales to
generate liquidity and solidify
balance sheets
– Public real estate companies
needing to deleverage
– Overleveraged borrowers
and bank debt sales
• Timing of market stabilization is
still unclear – need to be
patient and not enter the
market prematurely
Summary of Real Estate Environment and Opportunities
Environment Opportunities
• The credit crisis remains intense and has • Distressed situations
resulted in a dramatic re-pricing of risk – Lender driven
• Lack of credit/financing – Borrower driven
– Scarcity of capital • Corporate restructurings
– Less flexible debt; lower LTVs, – Focus on core businesses
conforming DSCR
– Sale-leasebacks on occupational real
• All asset classes have been impaired estate
– Cap rates significantly wider • Real estate company distress
– Real estate yields are at historic lows – Bankruptcies
versus corporate bond yields; reversion
to historical norms would require a real – Growth capital
estate price decline of 25% • Currently, credit opportunities appear more
• Declining operations/fundamentals favorable than equity opportunities
– Global recession is slowing rent
growth and vacancies are projected to
rise with corporate bankruptcies and
unemployment
• Wholesale vs. retail pricing
• Big spreads between (i) stabilized vs.
opportunistic assets and (ii) prime vs.
secondary availability
6
 UNC Kenan-Flagler Annual
Real Estate Conference

Institutional Investor Approach to Real Estate

• Existing portfolios are Existing Allocation by Risk Preference(1) Expected New Allocations by Risk Preference(1,2)
concentrated in core
investments
• However, new investments are
heavily skewed to value added Existing Allocation to New Allocation to
and opportunistic Non-Core Non-Core
49% 84%
– Investors are likely
anticipating that near-term Foreign
vintage years will be strong REIT Opportunistic Investment Core
ones, due to current distress 9% (US) 14% 16%
19% REITS
• Real estate averages 10% of 1%
Plan Sponsor target allocations Foreign
Investment
• Expected real estate 3%
commitments are down 31%
from 2008
Value-Added
Opportuistic
(US) Value-Added
Core (US) (US)
Real Estate Capital Flows 18% (US)
51% 35%
34%
($Bn)
80 71
70
59 59 60
60
50 46 42
40
29
30
20
10
0
2006 2007 2008 2009
Actual Capital Flows Expected Capital Flows
Source 2009 Plan Sponsor Survey, Kingsley Associates

Source 2009 Plan Sponsor Survey, Kingsley Associates Sources IREN, Kingsley Associates

Notes
1. For US Plan Sponsors Opportunistic investing seeks the highest returns, typically 20% or more, and uses the highest proportion of debt, sometimes reaching 80% or more.
Core investing seeks the lowest risk and often targets the NCREIF benchmark, which has historical average returns in the 8%–10% range. Core investing typically uses debt
between 0% and 40%. Value-Added investing falls between core and opportunistic, seeking returns that typically range between 11% and 17%
2. Excludes a category called “Other”, which represents 3% 7