VK Shutters Client Presentation (1!31!12) _final

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    1 1

    CAPITAL MARKETS PRESENTATION

    JANUARY 31, 2012

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    CAPITAL MARKETS UPDATE

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    Continued Themes & Concerns

    Stability of the European Banks & Sovereigns

    How much are low rates the result of low growthprospects/global risk concern or the result ofaggressive Fed policy? Should we be concernedwith 10-Year rates at 2%?

    Where will the mountains of cash & liquidity go in a0-2% rate environment with limited opportunities foryield?

    How does a global investment system built on 7-8%annual returns adapt to the reality of earning nadain low risk assets while fearing inflation?

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    Complacency is gone; Volatility is back; but theworld is much calmer today than Q4.

    The VIX index spiked 146% as of August 8th;but now back below pre-July 15 levels.

    The Fed has made it clear that rates will be low

    for an extended period of time.

    What Has Happened in the Overall Capital MarketsSince July 15

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    What Has Happened in the Overall Capital MarketsSince July 15

    5 year Treasuries have dropped 67 bps & 10year Treasuries have dropped 98 bps.

    CMBS spreads widened 90-100 bps, but AAA

    spreads have come back in significantly. Markets are settling into a new paradigm; slow

    to moderate growth but extremely low fixed

    income returns.

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    1000

    1050

    1100

    1150

    1200

    1250

    1300

    1350

    1400

    7/15

    7/25 8/

    28/

    108/

    188/26 9/

    29/

    129/20

    9/28

    10/6

    10/1

    4

    10/2

    411/1

    11/9

    11/17

    11/25

    12/5

    12/13

    12/2

    1

    12/29

    1/6

    1/16

    1/24

    S

    &P500

    10

    15

    20

    25

    30

    35

    40

    45

    50

    VIX

    S&P 500 VIX Index

    Source: Bloomberg

    S&P 500 vs. VIXJuly 15, 2011 - Present

    S&P up 0.6%

    VIX down 4.9%

    +146%+133%

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    0.0%

    0.5%

    1.0%

    1.5%

    2.0%

    2.5%

    3.0%

    3.5%

    7/15

    7/28

    8/10

    8/23 9/5 9/

    1810/1

    10/14

    10/27 11

    /911/22 12

    /512/18

    12/31 1/

    131/26

    5-Year 10-Year

    Source: Bloomberg

    U.S. Treasuries

    July 15, 2011 to Present

    0.77%

    1.93%

    10 Yr. Treas. -98 bps

    5 Yr. Treas. -67 bps

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    CMBS 2.0/3.0 Yield Curve

    106

    143

    188235

    650

    375

    225

    475400

    525

    690

    110

    0

    100

    200

    300

    400

    500

    600

    700

    800

    AAA AA A BBB

    BasisPointsoverSwaps

    March 2011 August 2011 January 2012

    Source: Wells Fargo Securities

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    45

    50

    55

    60

    65

    70

    75

    7/15

    7/28

    8/10

    8/23 9/

    59/18

    10/1

    10/14

    10/27

    11/9

    11/22

    12/5

    12/18

    12/31

    1/13

    1/26

    Price

    Source: Trepp

    2007 CMBXJuly 15, 2011 to Present

    Investors have pulled away from risk; but now confidence has returned

    AJ: 55-60% 2007 LTV down 21 pts.at low, but now down just 2 pts.

    Down 21 pts.

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    0.0%

    1.0%

    2.0%

    3.0%

    4.0%

    5.0%

    Jan-12

    Mar-12

    May-12

    Jul-12

    Sep-12

    Nov-12

    Jan-13

    Mar-13

    May-13

    Jul-13

    Sep-13

    Nov-13

    Jan-14

    Mar-14

    May-14

    Jul-1

    4

    Sep-14

    Nov-14

    Jan-15

    1Mo. LIBOR 5-Year 10-Year Source: Chatham Financial

    Meanwhile, The Bond Markets PredictLow Rates for a Long Time

    10 Yr. Treas. less than2.70% for 3 years

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    Conundrum Faced By CIOs TodayAnnual Returns on $100 mm Invested

    Return(%)

    Return($)

    1 Month Treasury 0.00% $0

    5 Year Treasury 0.75% $0.75 mm

    10 Year Treasury 1.95% $1.95 mm

    AAA 10 year CMBS 3.25% $3.25 mm 1.67x

    Treasuries

    Class A Core Real Estate 7.00% $7.00 mm 3.59xTreasuries

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    -10%

    -5%

    0%

    5%

    10%15%

    20%

    25%

    30%

    35%

    40%

    45%

    50%

    Jan-10

    Apr

    -10

    Jul-1

    0

    Oct

    -10

    Jan-11

    Apr

    -11

    Jul-1

    1

    Oct

    -11

    Jan-12

    S&P NASDAQ MS REIT (Total Return Index)

    Source: Bloomberg

    U.S. REITs Have Outperformed Other MarketsJanuary 2010 - Present

    S&P: +18.2%

    NASDAQ: +23.6%

    MS REIT: +48.8%

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    -40%

    -35%

    -30%

    -25%

    -20%

    -15%

    -10%

    -5%

    0%

    5%

    10%

    7/15

    7/28

    8/10

    8/23 9/

    59/

    1810/1

    10/1

    4

    10/27

    11/9

    11/22

    12/5

    12/18

    12/3

    11/13

    1/26

    Industrial Retail Apartment Hotel Office

    Source: Bloomberg (Bloomberg REIT Indexes)

    REIT Performance by SectorJuly 15, 2011 - Present

    Industrial: +9.2%

    Retail: +4.6%

    Apt: -1.0%

    Hotel: -2.9%Office: -8.7%

    Oct. 3rd HotelsDown 37.0%

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    DEBT CAPITAL MARKETS UPDATE

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    Current Themes in the Debt Markets Huge amounts of liquidity are in the system due

    to

    a) low of corporate, consumer, and MBSissuance, and

    b) aggressive Fed policy

    Strong Life Co, Bank, & CMBS demand fordecent product.

    Widening spreads for assets < 60% leased or

    low in place cash flow

    Overall spreads for stabilized assets still haveroom to tighten

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    Retail$4.0B21%

    Multifamily$0.6B

    3%

    Industrial$0.8B

    4%

    Hotel$3.8B21%

    Office$9.4B50%

    CMBS$3.9B

    21%

    Life Cos

    $6.1B

    33%

    Foreign Banks$2.3B

    12%

    Finance Co's/Funds

    $1.1B6%

    US Banks

    $5.2B

    28%

    Eastdil Secured Debt Placements Closed & Under ContractJanuary 2011 Today: $18.5 Billion

    Source: Eastdil Secured, as of January 26th, 2012

    Lender Type

    Product Type

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    CMBS 3.0 In 2011, total issuance was $35 billion, 15 deals were done

    above $1 billion; 2 deals above $2 billion.

    After a volatile Q3-Q4 in 2011 that created material losses,CMBS shops are back in business and actively pursuingdeals. Estimated 2012 volume is $50 bill ion.

    More competitive on intermediate size deals ($50-$100mm); deals at 50% or less leverage; and deals at65%-75% leverage.

    Less Competitive on a) low debt yield deals, b) deals

    between 55%-65% leverage.

    Primary Concerns a) limited ability to effectively hedgeloans, b) sufficient transaction volume to build pools timely.

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    Source: Commercial Mortgage Alert

    U.S. CMBS Issuance2002 2011

    $78

    $93

    $229

    $198

    $167

    $35

    $12

    $52

    0

    50

    100

    150

    200

    250

    2002 2003 2004 2005 2006 2007 2010 2011 2012

    Estimate

    billions

    $50

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    Source: Morgan Stanley & Wells Fargo Securities

    Historical AAA CMBS Spreads to Swaps

    4738

    3127 25

    100

    200

    110

    0

    20

    40

    60

    80100

    120

    140

    160

    180

    200

    220

    2002 2003 2004 2005 2006 May-11 Aug-11 Jan-12

    BPSo

    ver

    Swaps

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    Life Companies

    Most aggressive lenders for moderate leverage,quality deals with good sponsorship.

    Significant amount of capital available for 5, 7 to10 year, fixed rate deals, but growing interest in 5year debt.

    Targeting $50 bill ion in originations in 2012.

    Least impacted by market turmoil.

    Some groups starting to get full on certain largeCBDs.

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    Bank Lending

    Growing number of bank balance sheet lenders inthe market, but material concerns about European

    Banks. Banks have significant liquidity with limited

    corporate and consumer demands.

    Initially increased their exposure to real estate viaREITs; now expanding exposure to project basedloans.

    Growing interest from Asian banks; slow demandfrom European banks

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    FIXED RATE COUPONS LIFE CO. CMBS

    LTV: 50.0% 60.0% 65.0% 70.0%

    5 Year Fixed 3.75% 4.00% 5.25% 5.40%

    10 Year Fixed 4.25% 4.50% 4.90% 5.10%

    FLOATING RATE SPREADS AND COUPONS (BANKS)

    50.0% 60.0% 65.0% 70.0%

    5 Year Floating Spread 2.00% 2.50% 2.75% 3.25%

    5 Year Swapped to Fixed 3.05% 3.55% 3.80% 4.30%Treasury/Swaps: 5 year at 0.80%/1.05%; 10 year at 1.95%/2.05%, 1 Mo. LIBOR at 0.30%

    Current Loan Pricing Class A Office; 85%+ Leased;Top 10 Market

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    Current Themes in the Equity Capital Markets

    Activity is accelerating again as confidence

    returned in January. Cap rates are stable after some pressure last

    quarter.

    Economically sensitive deals - hotels & majorlease up situations have been impacted most inthe 4th quarter, but are improving in 2012.

    Core plus with a story under some pressure.

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    Well leased deals have held very well &

    opportunities with an attractive basis/foot haveheld well.

    Some REITs stepped back to assess the market

    given stock price volatility in 4th quarter; but arenow focused again as market has stabilized.

    Current Themes in the Equity Capital Markets

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    $121

    $68

    $23$51 $62

    $118

    $160

    $184

    $279

    $68

    $35

    (23%)

    $48

    (24%)

    $61

    (25%)

    $102

    (27%)

    $32

    (20%)

    $0

    $50

    $100

    $150

    $200

    $250

    $300

    $350

    $400

    2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

    B

    illions

    Al l Other US West Coast & AZ

    $66 $80

    $153

    $208

    $245

    $381

    $86

    $153

    $31

    $87

    US Sales VolumeTransactions >$25 Million

    Source: Real Capital Analytics

    2011 Volume Equaled 2004

    Pricing is approaching2005/2006 levels

    West Coast less activethan East

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    West Coast & ArizonaTransactions >$25 Million by Property Type

    Source: Real Capital Analytics

    $0

    $20

    $40

    $60

    $80

    $100

    $120

    2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

    B

    illions

    Apartment Hotel Retail Office Industrial

    $15 $18

    $35$48

    $61

    $102

    $18

    $7

    $19

    $31

    Office 28%

    of Volume

    Office 43%of Volume

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    $0

    $10

    $20

    $30

    $40

    $50

    $60

    $70

    $80

    $90

    Jan . 2007

    (Pre EOP)

    May 2010 Jan. 2011 Jan. 2012

    billio

    ns

    200

    220

    240

    260

    280

    300

    320

    #o

    fD

    ea

    ls

    Prop Sales Financings

    Loan Sales JV/Private Equity

    # of Deals

    $82.0

    $24.2

    $34.6

    $47.7

    Source: Bloomberg

    Eastdil Secured Active TransactionsIn Process: Sales, Financings, Loan Sales & JVs(Private Market Only)

    37% YOYIncrease

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    -50.0%

    -40.0%

    -30.0%

    -20.0%

    -10.0%

    0.0%

    10.0%

    20.0%

    30.0%

    40.0%

    Jan-9

    2

    Jan-9

    3

    Jan-9

    4

    Jan-9

    5

    Jan-9

    6

    Jan-9

    7

    Jan-9

    8

    Jan-9

    9

    Jan-0

    0

    Jan-0

    1

    Jan-0

    2

    Jan-0

    3

    Jan-0

    4

    Jan-0

    5

    Jan-0

    6

    Jan-0

    7

    Jan-0

    8

    Jan-0

    9

    Jan-1

    0

    Jan-1

    1

    Jan-1

    2

    Pu

    blicV

    alueas

    %o

    fNAV

    31

    Source: Green Street Advisors, As of 1-20-12

    13.1%(1)

    (1) Current premium to asset value is 9.5% on an unlevered basis.

    4.6% avg.

    REITs vs. Private Market Real EstateREITs Are Back to a Premium

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    $8.1

    $15.3$12.3

    $18.0$13.7 $11.6

    $24.2 $25.6$5.2

    $5.9

    $3.1

    $4.2

    $4.2

    $1.2

    $2.6

    $12.3

    $17.3

    $22.1

    $26.8

    $18.2

    $5.2

    $10.4

    $19.2

    $13.8

    $33.4

    $4.1

    $0.0

    $10.0

    $20.0

    $30.0

    $40.0

    $50.0

    $60.0

    2003 2004 2005 2006 2007 2008 2009 2010 2011

    Billions

    Common Shares Preferred Equity Unsecured Notes

    $25.6

    $38.5

    $49.0

    $36.0

    $18.0

    $34.6

    $47.5

    $37.5

    $51.3

    Source: NAREIT

    REIT Balance Sheets are in Good ShapeWith $80 Billion of Purchasing Capacity

    Total Equity$89.9 Bil lion

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    Upcoming Maturities

    Source: Trepp (Foresight Analytics)

    $166 $188 $205

    $214 $210$185

    $156

    $20$21

    $22 $23 $24

    $23

    $22

    $76 $55

    $54 $54 $62

    $67$102

    $59 $62

    $66 $71 $72

    $69 $59

    $0

    $50

    $100

    $150

    $200

    $250

    $300

    $350

    $400

    2009 2010 2011 2012 2013 2014 2015

    billions

    Banks Insurance Co's CMBS Other

    $347 $362 $368 $344 $340

    $243$242

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    $0.0

    $20.0

    $40.0

    $60.0

    $80.0

    $100.0

    $120.0

    $140.0

    $160.0

    $180.0

    $200.0

    Q3

    2008

    Q4

    2008

    Q1

    2009

    Q2

    2009

    Q3

    2009

    Q4

    2009

    Q1

    2010

    Q2

    2010

    Q3

    2010

    Q4

    2010

    Q1

    2011

    Q2

    2011

    Q3

    2011

    billions

    Non Construction, Standing CRE Loans Commercial Construction & Land Dev. Loans REO

    Commercial Banks & S&Ls30+ Day Past Due & Nonaccrual

    Commercial, Construction & Land Development Loans

    Source: FDIC Insured Institutions

    $105.2

    $189.6

    $143.2

    Future Supply - Banks

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    In Foreclosure

    $18.36B

    22%

    90+ Days

    $12.68B

    15%

    60 Days

    $2.26B

    3%

    30 Days

    $2.64B3%

    REO$15.57B

    19%

    NonPerf/Mat

    Balloon

    $7.04B

    8%

    Performing

    $24.7B

    30%

    Special Servicing Delinquent Loans by CategoryTotal: $83.3 Billion

    Source: Trepp

    56% ($47B) are90+ Days, in

    Foreclosure or

    REO

    $18.1 Billion ofloans > $25 mm

    and > 90+ Days inForeclosure or

    REO

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    9.0-10% unlevered IRR & 1.75-2x EquityDiscount to replacement costExit in 3 to 5 years @ 10-20% discount to 2007 levels

    8.5 9.0% unlevered IRR, levered IRR 12.0% to 14.0%;Focus on stabilized yields (ballpark 7.0-7.5% range)

    7.5 - 8.5% unlevered IRR, levered IRR 9.0 - 10.0%Underwriting modest rent growth 2014-2016 to 2007 levelsby 2016

    7.0 - 7.5% unlevered IRR, levered IRR 8.0 - 9.0%Sub 5% cap if occupancy sub 85%. As high as 6.0% if

    stabilized.

    Return Metrics

    CORE

    CORE-PLUS

    VALUE-ADD

    TROPHY

    Asset ProfileCurrent Investment Climate / West Los Angeles

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    10% unlevered IRR 15% or higher levered IRR; Focus on exit pricing below

    replacement cost 1.75-2x equity multiple ideally

    7.5% to 8.5% unlevered IRR 6.5% to 7.5 stabilized cash on cash yield

    7- 8% unlevered IRR, 10% to12% levered IRR Underwriting rent growth of 20-30% over 3-4 year period,

    with a year of 10% growth trending down

    6.5 -7.5% unlevered IRR, levered IRR 9.0-10.0% 5 - 5.5% cap rate

    Focused on price psf relative to replacement cost andpeak 2007

    Return Metrics

    VALUE-ADD

    TROPHY

    Asset Profile

    Current Investment Climate / San Francisco

    CORE

    CORE-PLUS

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    OBSERVATIONS

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    Observations European debt issues seem under control at this

    time but can create material volatility until resolved.

    None off us should be complacent given theEuropean situation & job issues.

    The transaction market was remarkably resilient.

    Sustained low interest rates will make capital veryitchy to find homes.

    Investors will see limited opportunities in fixedincome investments pushing them towards real

    estate debt.

    Lingering fears of inflation will further push capitalinto real estate.

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    Observations Activity will continue to increase with 2007 debt

    maturities & global deleveraging.

    Lending standards have tightened and spreads willcontinue to be relatively tight.

    Growth rate & absorption assumptions have been

    reduced, but exit cap rates & debt cost assumptionshave fallen to offset much of that change.

    Economically sensitive deals are more challenging andpriced case by case depending on basis per foot.

    Investors will pay up for lower risk. Pricing will increasefor core, well leased product, but definition will narrow.

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    CAPITAL MARKETS PRESENTATION

    JANUARY 31, 2012