Capital Markets Update
The Forces Transforming Markets
November 2007
The Past
December 2006 – April 2007“The Height of the Market”
November 2007
CB Richard Ellis | Page 3
Changes in Risk Tolerance Spring 2007
Rating Agencies Tighten Screws on CMBSThe widening in CMBS spreads occurred despite the excellent fundamental performance in commercial mortgages.
Heat Turned Up on Securitization ProgramsSubordination levels rose for commercial MBS deals- reversing a decade-long decline.
Aggressive PricingSpreads near 100 bps
Aggressive underwritingDebt service coverage below 1.10
Future income versus in-place income
CB Richard Ellis | Page 4
Perce
ntage
of In
teres
t Only
Loan
s
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20070%
By Loan Count By Loan Amount
10%
20%
30%
40%
50%
60%
70%
Source: Trepp
CMBS Underwriting TrendsImpact on Value % of IO Loans Has Skyrocketed
CB Richard Ellis | Page 5
0.050,000.0
100,000.0150,000.0200,000.0250,000.0300,000.0350,000.0
1995
1997
1999
2001
2003
2005
2007US ($Mil.)
Non-US ($Mil.)
Global ($Mil.)
Source: Commercial Mortgage Alert 2007 through 3Q
Historical CMBS Issuance
CB Richard Ellis | Page 6
CMBS Timeline
The Present
A “Mixed Market”
November 2007
CB Richard Ellis | Page 8
Moody’s April 10 declaration, underwriting gets conservative
Residential loan market tumbles with sub-prime issues
Commercial mortgage spreads widen
CMBS deals fail to “sell-out”, B buyers back in charge
On-book lenders (life companies, Freddie Mac, Fannie Mae) regain prominence
The Lending Environment Changed
CB Richard Ellis | Page 9
Historic 10-Year Treasury
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
10-Yr. Treasury Trailing 10-Yr. Average
November 2, 2007 Close @ 4.31%
30-Year Average = 7.68%
10-Year Trailing Average 4.78%
CB Richard Ellis | Page 10
LIBORHistoric One Month LIBOR Rates
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
One Month LIBOR
November 2, 2007 Close @ 4.69%
10-Year Average = 3.98%
CB Richard Ellis | Page 11
Home Mortgage Delinquency on Rise
CB Richard Ellis | Page 12
CMBS Delinquency Rates
Sources: Lehman Brothers, 3Q 2007 *Note delinquencies represent loans 60+days delinquent
CB Richard Ellis | Page 13
Cap Rates
CB Richard Ellis | Page 14
Underwriting
Early 2007 Underwriting Standards Versus Recent Standards
Source: Citi
UNDERWRITING EARLY 2007 STANDARDS RECENT PARAMETERS
Interest Only Loans Commonly Offered 30-yrs common, 1-2 yrs IO offered and additional IO at a substantial premium unless low leverage
Underwriting Higher of market rent and rent contracts
Revert to in-place rent roll unless there are contractual lease steps by a long-term investment grade tenant
Loan to Value 75 to 80% based on aggressive cap rates
75-80% with adequate coverage (see DSCR below)
DSCR Sub 1.0x based on no amortization and anticipated
market improvement
1.2 times being held firm based no tougher underwriting and amortization
Reserves Frequently dropped in competition
All up-front and continuing reserves are now being funded
CB Richard Ellis | Page 15Source: Commercial Mortgage Alert, Morgan Stanley
CMBS Spreads, Swaps & Treasuries
CB Richard Ellis | Page 16
Source: Wall Street Journal & Bloomberg
Key Rate Summary
11/1/07 6 Months Ago
Year Ago
Prime 7.5% 8.25% 8.25%
5-Yr US Treas. 4.02% 4.53% 4.52%
10-Yr US Treas. 4.36% 4.64% 4.57%
LIBOR 3-mo. 4.87% 5.35% 5.37%
Dow Jones Avg. 13,567 12,382 12,031
10-Yr Swap Spread 63bps 53 bps 55bps
The Future
“Where Will Tomorrow Lead?”
November 2007
CB Richard Ellis | Page 18
Source: Institutional Real Estate, Inc. Kingsley Associates
Expected Capital Flows to Real Estate
Non-Invested Capital Carryover From 2006: $60 billion
CB Richard Ellis | Page 19
Change in Availability of Capital for 2008
Relative Strength
Capital Cushion
More Discipline
Greater Caution
Extended Pain
Source: Emerging Trends in Real Estate 2008 Survey, ULI
CB Richard Ellis | Page 20
Source: Commercial Mortgage Alert 2007
CMBS Deals in the Works
CB Richard Ellis | Page 21
0%
10%
20%
30%
40%
50%
60%
70%
1991
1993
1995
1997
1999
2001
2003
2005
2006
2006
2007
Depository Institutions
Life Insurance and PensionFundsCMBS
Source: CBRE Torto Wheaton Research
Holders of Commercial Mortgages
CB Richard Ellis | Page 22
53%
26%
2%
7%
6%2% 2%2%
AustraliaGermanyNetherlandsMiddle EastIrelandUnited KingdomJapanSingapore
2006 Investment Survey
Source: Association of Foreign Investors in Real Estate, 2007
Most Active Foreign Buyers of U.S. Real Estate
CB Richard Ellis | Page 23
1998 Crisis 2001 Crisis
Source: Citi Research 2007
Is History Repeating Itself?
Spreads widened sharply then began to recover in 3 to 6 months
CB Richard Ellis | Page 24
Spectrum of Possible Outcomes
Probability
Return to Goldilocks
Evidence
Soft Landing Hard Landing Prolonged Recession
Description
• Very Unlikely • Most Likely • Possible • Very Unlikely
• Originations of leveraged loans, high-yield bonds, and CMBS resume onformer terms
• Availability of cheap capital fuels strong growth in domestic economy
• Backlog exhausted / debt markets find new equilibrium
• Moderate domestic growth• Adequate fundamentals:
consumer spending, interest rates, employment
• Liquidity crises catalyst for economic slowdown
• Housing and consumer trends worsen
• US troubles impact foreign economies
• Synchronized global recession
• China bubble bursts• Housing meltdown• Central bank missteps
• High-yield defaults remain at all-time lows ~1.5%in 2007
• Immense global liquidity likely to continue
• Strong global growth expected: 5.0% 2007E and 4.5% 2008E
• Recent Fed actions; further 50 bps expectedby 3Q 2008
• Low default rates ~1.5%• 46% and 30% of firms
surveyed plan to increase CapEx and hiring
• Large backlog of committed PE capital
• US forecasted real GDP growth only 2% until 2009
• Higher cost of borrowing• Tight labor market and
increasing commodity prices threaten inflation
• Residential investment projected to go down 16.2% in 2007 and 15.2%in 2008
• Unemployment projected to be 5.5% by 4Q 2008
• Global growth projections downsized in light of liquidity issues: 4.6% 2008E
• Political unrest in India and China may lead to slower than expected economic growth
Source: Morgan Stanley
Economic Trends
November 2007
CB Richard Ellis | Page 26
GDP 3Q Update
Source: BEA and Torto Wheaton Research
CB Richard Ellis | Page 27
Business Has the Means to Continue the Expansion
4 .0%
5 .0%
6 .0%
7 .0%
8 .0%
9 .0%
10 .0%
11 .0%
12 .0%
13 .0%
14 .0%
19 921 9 9 2
1 9 9 31 9 9 4
1 9 9 51 9 9 5
1 9 9 61 9 9 7
1 9 9 81 9 9 8
1 9 9 92 0 0 0
2 0 0 12 0 0 1
2 0 0 22 0 0 3
2 0 0 42 0 0 4
2 0 0 52 0 0 6
2 0 0 7
Corpora te Profits a s a % of GDPSource: BEA and Torto Wheaton Research
CB Richard Ellis | Page 28
Employment Situation
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Sep-
05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb-
06
Mar
-06
Apr-
06
May
-06
Jun-
06
Jul-0
6
Aug-
06
Sep-
06
Oct
-06
Nov
-06
Dec
-06
Jan-
07
Feb-
07
Mar
-07
Apr-
07
May
-07
Jun-
07
Jul-0
7
Aug-
07
Sep-
07
Service-producing Goods-producing
Employment, % change year ago
Source: BEA and Torto Wheaton Research
CB Richard Ellis | Page 29
Positive but Slowing Employment Growth
Source: BEA and Torto Wheaton Research
CB Richard Ellis | Page 30
Jobless Claims
Source: BEA and Torto Wheaton Research
CB Richard Ellis | Page 31
Personal Income
Source: BEA and Torto Wheaton Research
CB Richard Ellis | Page 32
United States Exports are Growing
40
60
80
100
120
140
16019
75.4
1976
.319
77.2
1978
.119
78.4
1979
.319
80.2
1981
.119
81.4
1982
.319
83.2
1984
.119
84.4
1985
.319
86.2
1987
.119
87.4
1988
.319
89.2
1990
.119
90.4
1991
.319
92.2
1993
.119
93.4
1994
.319
95.2
1996
.119
96.4
1997
.319
98.2
1999
.119
99.4
2000
.320
01.2
2002
.120
02.4
2003
.320
04.2
2005
.120
05.4
2006
.320
07.2
-20%
-10%
0%
10%
20%
30%
40%
Trade Weighted Dollar Value (1973 = 100) Annual Growth in the Export of Goods
Trade Weighted Dollar Value YoY Grow th, Goods Exports
Source: BEA and Torto Wheaton Research
CB Richard Ellis | Page 33
Moving Toward a Business Driven Economy
-2
-1
0
1
2
3
4
5
2004 2005 2006 2007 Q 1 2007 Q 2
Consum er Business Governm ent
We Believe Future GDP Will Continue 2Q Trend of Positive Contributions from Business Investment & Trade
% G
DP
Source: BEA and Torto Wheaton Research
CB Richard Ellis | Page 34
Globalization
Globalization has allowed emerging markets to more fully take advantage of their comparative economic advantages and contribute to the growth in the global economy.
Due to a significant increase in the quality and quantity of their labor force, emerging markets have provided a significant global disinflationary force to counterbalance high global commodity prices and wage pressure in developed economies
In addition, the forces of globalization have led to a significant increase in capital formation, especially in commodity-based and export-oriented economies.