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Capital Markets Update: Capital Drought or Capital Bubble? Depends on Where You Stand?

An analysis of the current state of the capital markets, exploring the emergence of two distinct worlds and their impact on equity and debt opportunities. Examining the rise of REITs and the increasing appetite for hotel investments.

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Capital Markets Update: Capital Drought or Capital Bubble? Depends on Where You Stand?

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  1. Capital Markets Update Rob Stiles EVP & Principal Head of Western Region Cushman & Wakefield Sonnenblick Goldman

  2. Property & Finance Update Capital Drought or Capital Bubble – Depends on Where You Stand? • Post Triage – Two Worlds Emerge • Changing Equity Markets • Changing Debt is Back – Really? • Resultant Imbalance of Equity Capital Raised to Investment Opportunities • So What Will it Take Looking Forward?

  3. Post Triage – Two Worlds Emerge • Enter REITVILLE • Better Asset Pricing • Cheaper & Higher Leverage Debt • Ability to Price on 3 – 4 Year Forward 7 – 10% returns on Cost • Hard to Get Visas • Enter Realityville • Buyers Want Distress • Lenders Want Coverage!? • People Know How to Spell Recourse • Fewer Optimists

  4. Changing Equity Markets • Plenty of Capital – But Why the Increasing Appetite for Hotels? • No Good Alternatives Outside Real Estate • Within Real Estate – Only Hotel NOI Has Bottomed • Public REITS, Private REITS, PE Funds, Domestic and International HNWs • Two Minds of Buyers: • Cycle Buyers Who Believe We Have Bottomed Out • Buyers Focused on Deep Discounts

  5. Hotel (31%, 23%) Confidence in Future Fundamentals2012 NOI Expectations Source: Green Street Advisors

  6. Domestic Sales Transaction Volume (Deals >$25mm)(in $ Billions) • YTD 2010 Annualized Totals Source: Real Capital Analytics

  7. Maximize Value REITs vs. Private Market Real EstatePublic Markets are Anticipating an Improvement • Current premium on asset pricing is 13.8% on an unlevered basis. Source: Green Street Advisors, As of 09-03-10

  8. Debt is Back – Really?In One of the Two Worlds Anyway • Lack of Debt or Lack of Cash Flow • Starting to Look Forward Again! • Data is Supportive • Yield is Delicious Relative to Options • (3.75 – 4.25%/Year Fixed for Core Office) • CMBS 2.0 or 1.2? $6.3 Billion 4th Qtr Pipeline • General Debt Parameters • Leverage • Coverage / Debt Yield • Pricing • Term

  9. Will Resultant Imbalance of Equity Capital Raised Make Sales Happen? • Voluntary Opportunistic Sellers Come Out of the Woods • The Surge is Visible (Off a Terribly Low Base) • Suddenly, underwater Owners Have Equity! (But they still can’t refinance their debt) • Surging Confidence Among Lenders Leads to Action • Recovery Values move above Marked Loan Values • Lenders are in a Better Position to Get Aggressive

  10. So What Will it Take Looking Forward? • Debt Costs to Remain Low and Begin to Tighten on the Borders • Prospects of Sustained Lower Debt Costs to Push Valuations • Lack of Alternatives Will Continue to Attract Capital - $60 Billion of Capital Raised by REITS in 2009 and YTD 2010 • Hotels to Become Increasingly Favorable Class (In Reitville) • Ability to Compete – Buy on Forward Stabilized Return on Cost • Nerves to Play in the Other World (Realityville): • DPOs • Structured Transactions • Note Sales • In the End – Its All About the Loathing of Writing Checks • Think Long Term –- or Duck

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