Debt – The Missing LinkOctober 7, 2009

The New Prehistoric Man – “Ardi”

Table of ContentsAgenda

I. Private Markets

II. Securitization Markets

a. REMIC

b. TALF

III. Unsecured Debt Markets

IV. Mortgage REITs

V. Mezzanine Market

VI. Subscription Lines

VII. Implications for Private Equity Funds

2009 2010 2011 2012 2013 2014 2015 2016 2017

$700

Other

GSE's & Fed Related Mtg Pools

Insurance Companies

Comm ercial Banks, Savings Inst

Floating Rate CMBS

Fixed Rate CMBS

$600

$500

$400

$300

$200

$100

$0

~$900 billion of ~$3.5 trillion

21 19

45

7 10

100

135

155

30 40

35

19 24

18

12

4046

5

$0

$40

$80

$120

$160

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17'05 - '07 Fixed Rate '05 - '07 Variable Rate Earlier V intages

___________________________Sources: Barclays Capital, Commercial Mortgage Alert, Green Street Advisors.

~$185 billion of ~$600 billion

Between 2005 and 2007, underwriting standards were characterized by aggressive loan-to-values, inflated appraisals and borrowing costs significantly below current levels

Assets with high acquisition LTVs could have little to no residual equity value and softening fundamentals make underwriting loans more difficult

Private debt markets (i.e. insurance companies) are insufficient to fill the CMBS void and even the best credits could face a frozen and expensive lending environment

Upcoming CRE Maturities ($bn)CMBS Maturities ($bn)

U.S. Commercial Real Estate Debt Market OverviewBorrowers still face challenges as a large portion of the ’05 –’07 vintage loans is scheduled to mature between 2010 and 2012 ($185 billion of the total $600 billion)

1

Private Markets

Prehistoric Ancestor – “Lucy”

2

Capital Availability in Private MarketsTwo primary types of lenders exist in the private markets

Private Markets

Loans tend to be slow, difficult and usually experience a long time until closing

Significantly more depth under $100 million

Life companies must compete aggressively for a limited number of loans

Banks

Loan Amount < $50 million > $50 millionLender Local and Regional Banks European BanksRecourse? Yes SometimesTerm 3 Year w/ 2 Year extension 3 Year w/ two 1 Year extensionsPricing L+300 bps L+350-400 bpsFees 1+% upfront 1-1.25% upfrontLTV 60+% 55-60%Debt Yield 12 -13% 13 -14%Syndicated No Yes

Insurance Companies

Term 5 Year 7-10 YearPricing 5.75 - 6.25% 6.50 - 7.00%Debt Yield 15% 15%

3

Securitization Markets

A Colonial American

4

Current conditions in the commercial real estate industry include the inability to refinance mortgages and the rapid

deterioration of loan performance and underlying fundamentals

Prior to the latest action, REMIC rules prohibited significant modifications of mortgage loans unless the loan was

either in default or “default was reasonably foreseeable”

– Discouraged borrowers and servicers from proactively addressing problems and restructuring loans before defaults occurred

– Loan modifications were permitted only within a very narrow time frame

With new guidance issued, modifications of commercial mortgage loans are permitted if the servicer reasonably

believes that there is a “significant risk of default”

– Increased flexibility to renegotiate loans in order to avoid default and continue to make capital investments to preserve the value of the properties

Additionally, REMIC regulations were amended to allow a wider range of loan modifications including modifications

and substitutions of collateral, modifications and additions of guarantees and revisions of recourse status

– Subject only to the restriction that the loan continue to be principally secured by real estate

REMIC ReliefThe Federal Government is taking action to help address concerns regarding the securitized loan market in an effort to enable loan workouts rather than foreclosures

Securitization Markets

5

In mid-June, newly-issued CMBS became eligible collateral under TALF; however, no deals have priced to date

Securitization Markets

TALF Financing

Barclays Capital has been the top-ranked bookrunner of ABS and TALF-financed ABS deals in 2009

– Barclays has signed over 150 Customer Agreements with buy-side investors, giving us the deepest distribution platform

– The ABS pipeline continues to build up

There are currently 4+ single-borrower transactions in front of the Federal Reserve. 2 of the 4 are expected to come

to market in November

– 3 mall deals (Vornado and DDR with 2 pools)

– 1 hotel deal

– Very difficult to make the proceeds work for office transactions

Other Fed Initiatives:

– Extended TALF to June 2010 for new-issue CMBS

– Is the problem systemic?

Blind mortgage REIT pools (i.e., Starwood Capital, Apollo and Colony) will further accelerate reopening of

commercial mortgage market

6

Unsecured Debt Markets

Astronaut in Space

7

50

150

250

350

450

550

650

750

Sep-01 Jan-03 May-04 Sep-05 Jan-07 May-08 Sep-09

(bps)

U.S. Credit Industrial A-rated Industrial BBB-rated

-300

-150

0

150

300

450

600

750

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009YTD

($bn)

Money Markets Equities Taxable Bonds___________________________Source: Barclays Capital.

Credit Indices Have Tightened Dramatically

Technical Factors Continue to Support the Rally

U.S. Mutual Fund Flows

+195+128

+236

Measures of Volatility Have Also Declined

While Rates Have Held steady

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-09 Feb-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Sep-09

(%)

5-year UST Yield 10-year UST Yield 30-year UST Yield

90

128

166

204

242

280

Jan-09 Feb-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Sep-09

(bps)

20

28

36

44

52

60

(VIX)

CDX (LHS) VIX (RHS)

U.S. Credit A-rated BBB-rated

Average 159 bps 132 bps 217 bpsPeak 545 bps 471 bps 717 bpsCurrent 195 bps 128 bps 236 bps

Strong Tone in U.S. Credit Market in 2009High Grade Credit has come back from its worst year on record to post significant gains in 2009 with spreads tightening and new issues performing well

Unsecured Debt Markets

8

Unsecured REIT Credit Market Synopsis

Recent REIT New Issues and Performance

___________________________Source: Barclays Capital.

Industry Rundown As evidenced from the recent unsecured issuances, access to capital

continues to improve

From a valuation standpoint, as REITs have made progress on this end, liquidity is likely to lose its significance as the single largest credit differentiator for companies in the sector

For the better positioned credits from a liquidity perspective, investors should start to pay closer attention to the following parameters:

– Credit metrics

– Portfolio quality and diversification

– Earnings quality

– Management quality and its share-holder orientation

– Exposure to joint venture refinancings

– Exposure to development risk

0

1

2

3

4

5

6

7

8

9

6/1 6/15 6/30 7/15 7/30 8/14 8/29 9/13 9/28

REIT Index 10-Year Treasury

Convergence in REIT Credit Spread PerformanceYield (%)

491bps

275bps

Cou

pon

Ratings Amt. Cpn Spread Current Spread YieldDate Issuer (Mdy's/S&P) (mm) Term (%) At Issue Spread Change Change

9/25/09 DDR Baa3/BB $300 6.5-yr 9.625 T+741.1 T+660 -81 bps -0.15%

9/21/09 BDN Baa3/BBB- $250 5.5-yr 7.500 T+516 T+520 4 bps -0.04%

9/17/09 KIM Baa1/BBB+ $300 10.0-yr 6.875 T+350 T+330 -20 bps -0.26%

9/8/09 AVB Baa1/BBB+ $250 7.5-yr 5.700 T+270 T+235 -35 bps -0.37%

9/8/09 AVB Baa1/BBB+ $250 10.5-yr 6.100 T+270 T+240 -30 bps -0.39%

8/26/09 WDCAU A2/A- $750 6-yr 5.750 T+350 T+340 -10 bps -0.17%

8/26/09 WDCAU A2/A- $1,250 10-yr 6.750 T+350 T+325 -25 bps -0.35%

8/11/09 PLD Baa2/BBB- $350 5-yr 7.625 T+507.4 T+475 -33 bps -0.62%

8/6/09 DRE Baa2/BBB $250 6-yr 7.375 T+479.2 T+450 -30 bps -0.62%

8/6/09 DRE Baa2/BBB $250 10-yr 8.250 T+463.3 T+440 -23 bps -0.64%

8/6/09 SPG A3/A- $500 5-yr 6.750 T+275 T+260 -15 bps -0.50%

8/5/09 CLI Baa2/BBB $250 10-yr 7.750 T+411.5 T+405 -7 bps -0.50%

Over the past few months, REITs ability to demonstrate access to multiple sources of financing in a capital starved environment has had a meaningful impact on valuations

Unsecured Debt Markets

0

1

2

3

4

5

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

($bn)

150

250

350

450

550

650

OAS (bps)

REIT Supply (LHS) Credit Index (RHS)

2009 REIT Unsecured Issuance

9

Mortgage REITs

Under Construction

10

Four companies have recently priced offerings while two companies are actively marketing their offerings

Recent Mortgage REIT Filings

___________________________1. Crexus will charge 0.5%, 1%, and 1.5% of stockholders' equity for the first 12 months, the next 6 months, and after the first 18 months, respectively.2. Tranwestern will charge no base management fee before 2010. Thereafter, for first 12 months: 1.5% of stockholders' equity invested in target / non-core assets and 1% of equity not invested in target / non-core assets. 1.5% of equity thereafter.

Commercial Mortgage REIT Overview Since early June, 12 “blind pool” mortgage REITs have filed with the SEC, looking to raise approximately $5.0 billion of proceeds to take advantage of distressed debt levels

Mortgage REITs

Deal Statistics Compensation Structure

Original Latest Filing BaseIssuer Filing Filing Status Value ($mm) Mgmt. Fee Incentive Fee Sponsor

06/05/09 08/13/09 Priced $810 1.5% of SE 20% over 8% Starwood Capital Group

06/12/09 09/02/09 Filed 500 TBD N/A Legg Mason, Inc.

06/26/09 09/17/09 Priced 200 1.5% of SE (1) N/A Annaly Capital Management, Inc.

06/30/09 09/23/09 Priced 250 1.5% of SE 20% over 8% Colony Capital, LLC

07/08/09 09/14/09 Pulled 500 1.5% of SE 20% over 8% AllianceBernstein L.P. (55%) and Others

07/10/09 09/09/09 Priced 200 1.5% of SE N/A Apollo Global Management, LLC

07/13/09 08/31/09 Postponed 300 1.5% of SE TBD% over 8% Angelo, Gordon and CO., L.P.

07/17/09 09/04/09 Postponed 400 1.5% of SE N/A Ladder Capital Finance Holdings, LLC

07/29/09 09/03/09 Filed 500 1.5% of SE 20% over 8% Bayview Asset Management, LLC (BAM)

07/29/09 09/02/09 Filed 500 1.5% of SE (2) 20% over 8% Transwestern Investment Company, LLC

08/28/09 08/28/09 Filed 500 1.5% SE 20% over 7% Brookfield Asset Management Inc.

08/28/09 08/28/09 Filed 300 TBD N/A Marathon Asset Management, L.P.

11

Commercial Mortgage REIT Comps

Established Platform Developing Platform

OpportunisticLoan

Acquisition

Loan Origination

(1)

___________________________1. Mortgage REIT business plan(s) will include large allocations of residential mortgage loan and RMBS purchases.

Lo

ng

Ter

m B

usi

nes

s P

lan

s

Securities Acquisition

(1)

(1)

(1)

(1)

(1)

Comparable business plans range from primarily loan originations to securities acquisitions and everything in between

Mortgage REITs

12

Clearly Defined Business Strategy­ Companies need to distinguish themselves from others­ Create a barrier to entry

Modified “Blind Pool”­ Partially identified pool of assets

Refined Fee Structure­ Elimination of the incentive management fee­ Sponsor must incur all fees relating to the transaction

What Structure Will Work Today?Recently priced deals call for a number of changes to the “blind pool” mortgage REIT business model

Mortgage REITs

13

Mezzanine Market

In Search of Opportunities

14

There has been a significant amount of money raised, which will be used to acquire and originate mortgage and mezzanine loans

Targeted yield: 12-18%

– Mezzanine debt yield is even behind first mortgages yields of 6%

– Upcoming transactions may reflect tighter pricing

Targeted LTV: 60-70%

Capital Returning to Mezzanine MarketThe mezzanine market is expected to rebound as companies have raised capital to take advantage of opportunities in commercial real estate loans

Mezzanine Market

15

Subscription Lines

A Leprechaun With A Pot of Gold

16

Subscription LinesSubscription Lines

Subscription Lines

Fund Size $250 million - $500 million $500 million - $1 billion $1.5 billion - $2 billionTerm 1 Years 2 Years 2 YearsUpfront Fees 100 bps 125 bps 100 bpsMargin L+ 325 bps L+ 275 bps L+325 bpsNon-Usage Fee L+ 50 bps L+ 75 bps L+ 100 bps

17

Implications for Private Equity Funds

An Evolution

18

“Pretend and Extend”

TALF

Go Public

Implications

There are currently three viable options to address upcoming debt maturities

Implications for Private Equity Funds

19

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

1/1/09 2/23/09 4/17/09 6/10/09 8/2/09 9/25/09

Indexed Price

Market Volatility Has Declined

Risk Appetite Has Increased

Mutual Fund Flows Have Turned Positive

S&P 600: +17.1%S&P 500: +15.6%

HY Index: +48.2%

___________________________Source: Bloomberg, Dealogic and FactSet. Market data as of 9/25/2009.

Net New Cash Flow (bn)

-$80

-$60

-$40

-$20

$0

$20

8/08 9/08 10/08 11/08 12/08 1/09 2/09 3/09 4/09 5/09 6/09 7/09 8/09

2.1%

-5.4%

10.0%11.2%

3.7%2.5%

8.7%

4.2%

7.6%

-10%

-5%

0%

5%

10%

15%

20%

1/09 2/09 3/09 4/09 5/09 6/09 7/09 8/09 9/09

7-Day Return

Equity Offerings Are Outperforming the Broader Market

2009YTD follow-on equity transactions have outperformed

the S&P 500 by 10%

81%

100%

89% 86%

75%

84%

95%

76%

60%

32% 29%

4% 6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept

10

20

30

40

50

60

70

80

90

S&P Intraday Vol. (Days with >2% Swings) S&P Implied Vol. (VIX)

Equity Market Backdrop Has ImprovedImproved technicals are propelling the equity market

Implications for Private Equity Funds

20

Monthly IPO Filings2009YTD Aftermarket Returns

LTM IPO Issuance Annual IPO Pricings

___________________________Source: FactSet and Dealogic as of 9/25/2009.Note: Issuance volume reflects base deal size. Excludes deals less than $25 million, closed-end funds and SPACs.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

0

2

4

6

8

10

12

14

16

Amount Filed ($MM) # of IPO Filings

2009YTD 2008Comparable Pd. % Change Year-over-Year

Volume ($mm) # Deals Volume ($mm) # Deals Volume ($mm) # Deals

IPOs $7,952.9 29 IPOs$24,484.2 29 -67.5% 0.0%

Follow-ons $131,188.4 422 Follow-ons$106,630.1 226 23.0% 86.7%

Converts $23,361.7 80 Converts$56,584.6 102 -58.7% -21.6%

Total $162,503.0 531 $187,698.9 357 -13.4% 48.7%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

30%

40%

50%

60%

70%

80%

90%

100%

110%

IPO Volume ($MM) S&P 500 Dow Jones RMZ

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

All IPOs Pricing Dynamics by Market Cap

15.6%

10.1% 10.5%

19.5%

0%

5%

10%

15%

20%

25%

Dow Jones RMZS&P 500 2009 IPOs

IPO Market ConditionsWith the broader equity new issuance surge in 2Q09, IPO activity has increased in recent months

Implications for Private Equity Funds

$42

$49

$35

$48

$16

$5

$25

$0

$10

$20

$30

$40

$50

$60

2003 2004 2005 2006 2007 2008 2009YTD

2004-2008 Average: $40bn

+200%

($ in billions)

$42

$49

$35

$48

$16

$5

$25

$0

$10

$20

$30

$40

$50

$60

2003 2004 2005 2006 2007 2008 2009YTD

$42

$49

$35

$48

$16

$5

$25

$0

$10

$20

$30

$40

$50

$60

2003 2004 2005 2006 2007 2008 2009YTD

2004-2008 Average: $40bn

+200%

($ in billions)

21

Value of $100 Invested in REITs vs. Private Real Estate at the peak of the '89 bubble

Although the share price drop that began in August ’89 was severe, it took the public market less than 18 months to reflect the full extent of issues in the real estate market, while it took five years before the private market found its floor

Private capital largely exited the real estate world after years of declining asset values and high profile bankruptcies

– The lack of private capital opened the door for public offerings to fill the void, which led to a flood of REIT IPOs and secondary offerings for real estate companies with relatively strong balance sheets

___________________________Source: Green Street Advisors.

IPO Activity Following the 1989 Real Estate BubbleIn the last major real estate recession, REIT valuations hit bottom much faster than private market values creating an opportunity for well capitalized firms to take advantage of higher valuations available in the public market

Implications for Private Equity Funds

22

Public company implied cap rates are trading tighter than their private counterparts

Current Themes in Real Estate Investment Banking

Attractive public valuation, relative to private valuation, will be primary driver in any IPO wave

Most CEOs choosing to float their companies are motivated by the following factors

– Need to raise equity

– Desire to use the public markets as a capital source

– Simplify their business models

– Demonstrate value in underappreciated stock prices

Public vs Private Cap Rates

___________________________1. Barclays and Green Street research.2. Implied cap rate implied based on FFO/AFFO multiple valuation for active Barclays Transactions.3. Excludes certain companies with ongoing liquidity concerns.4. Sector average based on property type. As of 10/2/2009.

Implied Cap Rates (1)

The analysis below illustrates the disparity between public and private valuation

Public PrivateDeal Sector Implied Nominal

Property Type Cap Rate (2) Cap Rate (3) (4) Cap Rate (3) (4)

Office 6.4% 8.0% 8.9%

Multifamily 6.6% 7.3% 7.6%

Multifamily 7.3% 7.3% 7.6%

Shopping Center - Grocery Anchor 6.6% 8.3% 9.3%

Shopping Center - Grocery Anchor 8.0% 8.3% 9.3%

Shopping Center - Big Box 7.4% 8.3% 9.3%

Retail - Convenience Store 9.1% 8.6% 8.9%

Retail - Mixed 7.8% 8.6% 8.9%

Industrial 7.0% 8.5% 8.6%

Net Lease 11.0% NA NA

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DisclaimerThis document has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC ("Barclays"), for information purposes only. This document is an indicative summary of the terms and conditions of the securities/transaction described herein and may be amended, superseded or replaced by subsequent summaries. The final terms and conditions of the securities/transaction will be set out in full in the applicable offering document(s) or binding transaction document(s).

This document shall not constitute an underwriting commitment, an offer of financing, an offer to sell, or the solicitation of an offer to buy any securities described herein, which shall be subject to Barclays’ internal approvals. No transaction or services related thereto is contemplated without Barclays‘ subsequent formal agreement. Barclays is acting solely as principal and not as advisor or fiduciary. Accordingly you must independently determine, with your own advisors, the appropriateness for you of the securities/transaction before investing or transacting. Barclays accepts no liability whatsoever for any consequential losses arising from the use of this document or reliance on the information contained herein.

Barclays does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. Any data on past performance, modeling or back-testing contained herein is no indication as to future performance. No representation is made as to the reasonableness of the assumptions made within or the accuracy or completeness of any modeling or back-testing. All opinions and estimates are given as of the date hereof and are subject to change. The value of any investment may fluctuate as a result of market changes. The information in this document is not intended to predict actual results and no assurances are given with respect thereto.

Barclays, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in transactions or securities (or related derivatives) identical or similar to those described herein.

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BARCLAYS CAPITAL INC., THE UNITED STATES AFFILIATE OF BARCLAYS CAPITAL, THE INVESTMENT BANKING DIVISION OF BARCLAYS BANK PLC, ACCEPTS RESPONSIBILITY FOR THE DISTRIBUTION OF THIS DOCUMENT IN THE UNITED STATES. ANY TRANSACTIONS BY U.S. PERSONS IN ANY SECURITY DISCUSSED HEREIN MUST ONLY BE CARRIED OUT THROUGH BARCLAYS CAPITAL INC., 200 PARK AVENUE, NEW YORK, NY 10166.

NO ACTION HAS BEEN MADE OR WILL BE TAKEN THAT WOULD PERMIT A PUBLIC OFFERING OF THE SECURITIES DESCRIBED HEREIN IN ANY JURISDICTION IN WHICH ACTION FOR THAT PURPOSE IS REQUIRED. NO OFFERS, SALES, RESALES OR DELIVERY OF THE SECURITIES DESCRIBED HEREIN OR DISTRIBUTION OF ANY OFFERING MATERIAL RELATING TO SUCH SECURITIES MAY BE MADE IN OR FROM ANY JURISDICTION EXCEPT IN CIRCUMSTANCES WHICH WILL RESULT IN COMPLIANCE WITH ANY APPLICABLE LAWS AND REGULATIONS AND WHICH WILL NOT IMPOSE ANY OBLIGATION ON BARCLAYS OR ANY OF ITS AFFILIATES.

THIS DOCUMENT DOES NOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ISSUES RELATED TO AN INVESTMENT IN THE SECURITIES/TRANSACTION. PRIOR TO TRANSACTING, POTENTIAL INVESTORS SHOULD ENSURE THAT THEY FULLY UNDERSTAND THE TERMS OF THE SECURITIES/TRANSACTION AND ANY APPLICABLE RISKS.

Barclays Bank PLC is registered in England No. 1026167. Registered Office: 1 Churchill Place, London E14 5HP. Copyright Barclays Bank PLC, 2009 (all rights reserved). This document is confidential, and no part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays.

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