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Cornerstone Research
Nashville ApartmentMarket Analysis
Dags ChenCornerstone Real Estate
Advisers LLC
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Research drives Cornerstone investment process
Strategy
Tactics
Public (REIT) and private real estate research integrated
Cornerstone “scrubs” industry data to remove errors and refine accuracy
Cornerstone’s granular analysis is more localized than typical
Live access to data and forecasts throughout Cornerstone via the Research Analyst platform
Top Down
Bottom Up
Regional TeamsLocal Data
Market Presence
Value
Research InsightData
ModelsForecasts
Cornerstone Research
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Economy.com’s NAICs Employment
Forecast
Dun & Bradstreet Establishment Data
by NAICs
Scrubbed supply data from F.W. Dodge Pipeline
Market Occupancy & Rate/Rent Trends
Construction Activity, History and Forecast
Demand/Supply Forecast w/ Local Coefficients
Demographic Forecasts
Occupancy Forecast, Rent Growth, Market Weighting, Investment Recommendation
Demand, Supply, and Local Coefficient Inputs are property-type specific
Cornerstone’s Demand Model: Employment Growth by Zip Code,
County, and MSA, Benchmarked to U.S.
Regional Office, REIT Team and
Hotel Team input
Cornerstone Research
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-6
-4
-2
0
2
4
6
2004 2005 2006 2007 2008 2009 2010
Annualize
d G
row
th R
ate
%
Source: Consensus Forecasts, Cornerstone Research 2-6-2009
Weakness is pervasive and accelerating. Forecast for negative GDP through 2009,
recovery hopes in 2010, employment recovery lags.
1/12/08 Forecast
6 quarters of negative growth
would be the longest
contraction since the Depression
Forecast US GDP Growth
5
Source: Bureau of Labor Research, Cornerstone Research 12-8-2008, 1-14-2009
Job losses likely to surpass early 1970s, 1980s
95%
96%
97%
98%
99%
100%
101%
-12 0 12 24 36 48
Months
Perc
ent of Peak E
mplo
yment
1972-1976
1980-1983
1989-1993
2000-2005
2007- ?
Forecast
Months to recover peak employment 19 28 32 48
Total Job Losses
1972-76: -2.1mm
1980-83: -2.8mm
Current: -3.5mm through January, (another 2mm to go?)
50+ months?
Steep Jobs Decline and Slow Recovery
Source: Cornerstone Research
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Monthly Sales Volume
0
25
50
75
2001 2002 2003 2004 2005 2006 2007 2008
Billions
of US$
Apartments Industrial Office Retail HotelBlackstone purchase of
EOP
Commercial Real Estate Transaction Activity
Source: Real Capital Analytics
Blackstone purchase of
Hilton
7
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Number of Quarters Following NCREIF Capital Index Peak ValueCum
ula
tive
% D
ecl
ine S
ince P
eak 1990s Downturn Current Downturn
NCREIF Property Index Comparison
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Proforma Cash Flow
INCOME Year 1 Year 2 Year 3 Year 4 Year 5Income Growth Assumption: 0.0% 2.0% 3.0% 3.0% 3.0%Gain(Loss) to Lease Assumption: 0.0% 0.0% 0.0% 0.0% 0.0%Vacancy/Loss/Model Assumption: -6.0% -5.0% -5.0% -5.0% -5.0%Concessions Assumption: 0.0% 0.0% 0.0% 0.0% 0.0%Total Economic Vacancy -6.0% -5.0% -5.0% -5.0% -5.0%Market Rents 4,409,700 4,497,894 4,632,831 4,771,816 4,914,970Gain (Loss) to Lease 0 0 0 0 0Gross Potential 4,409,700 4,497,894 4,632,831 4,771,816 4,914,970Vacancy/Loss/Model -264,582 -224,895 -231,642 -238,591 -245,749Concessions 0 0 0 0 0Rental Income 4,145,118 4,272,999 4,401,189 4,533,225 4,669,222Other Income 160,792 164,008 167,288 170,634 174,047Total Income 4,305,910 4,437,007 4,568,477 4,703,859 4,843,268EXPENSESOther Income and Expense Growth Assumption: 2.00% 2.00% 2.00% 2.00%Utilities -59,553 -60,744 -61,958 -63,198 -64,462Variable -516,785 -527,121 -537,663 -548,416 -559,385Taxes -563,246 -574,511 -586,002 -597,722 -609,676Insurance -57,400 -58,548 -59,719 -60,913 -62,132Management Fee -107,648 -109,801 -111,997 -114,237 -116,521Replacement Res. -43,050 -43,911 -44,789 -45,685 -46,599Total Operating Expenses -1,347,682 -1,374,635 -1,402,128 -1,430,171 -1,458,774Net Operating Income 2,958,228 3,062,372 3,166,349 3,273,688 3,384,494
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Proforma Cash Flow
Debt Service Year 1 Year 2 Year 3 Year 4 Year 5
Net Operating Income 2,958,228 3,062,372 3,166,349 3,273,688 3,384,494
Debt Service ($1,971,427) ($1,971,427) ($1,971,427) ($2,366,761) ($2,366,761)
Cash Flow $986,802 $1,090,945 $1,194,923 $906,927 $1,017,733
Debt Service Coverage Ratio 1.5 1.55 1.61 1.38 1.43
All Cash Yield 6.73% 6.97% 7.20% 7.45% 7.70%
Cash On Cash Leveraged Yield 8.98% 9.93% 10.87% 8.25% 9.26%
Price $43,956,000
LTV % 75%
Loan Amount $32,967,000
Interest Rate*: 5.98%
Amortization: 3 0 30
Term: 1 0 10
First 36 Months (Interest Only) $164,286
Months 37 - 120: $197,230
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Effective Rent Growth US, Nashville
-12%
-8%
-4%
0%
4%
8%
12%
1996.2 1997.2 1998.2 1999.2 2000.2 2001.2 2002.2 2003.2 2004.2 2005.2 2006.2 2007.2 2008.2
Source: Axiometrics
U.S.
Nashville
Historical Rent Growth
Downtown
West End
24
Source: Axiometrics, BLS
Rent Growth Linked to Job Growth
Nashville Rent and Employment Growth (4Q trailing)
-6%
-4%
-2%
0%
2%
4%
6%
1996.2 1997.2 1998.2 1999.2 2000.2 2001.2 2002.2 2003.2 2004.2 2005.2 2006.2 2007.2 2008.2
Nashville Employment Growth