December 12, 2008 Notes On Commercial Real Estate Conference in NYC we attended

Notes from Wachovia Commercial Real Estate (CRE) Conference 12/9/08

1. Financing trends for all of CRE include lower LTV’s, Fully covered reserves, non-reliance on pro-forma assumptions (unless contractual), floaters and extensions. Cap rate assumptions certainly rising. Non-recourse loans no longer available. Spreads of course have widened.

2. The mood was dire. Most analysts seemed to be talking about the numbness has worn off. Unlike past conferences, most analysts and participants were discussing potential jobs and using the conference as a networking opportunity.

3. Mark Vitner , Senior Economist Wachovia, stated, “Currently we have only seen 20,000 jobs lost in NYC, yet 50,000+ have been announced.

Discussion of Transactions and Financing in 2009

4. “If you think things are bad now, you haven’t even felt it yet.” I was looking over at Bill Powell from Brookfield Asset Management as that was said, and he certainly raised his eyebrows.

5. The key to commercial property valuations is based on if large number of forced sellers. Watch foreclosure sales. If those increase, we may have a large valuation downturn. Consensus was that this is worse than the early 1990’s.

6. Credit markets not normally functioning, as most of the deals are extensions. Consensus is that things will not normalize anytime soon. We have to wait for results of extensions, and if pay-offs or refinancings will be able to be obtained.

7. Barry Blattman, Senior Managing Director of Brookfield Asset Management had to cancel as he had Jury Duty on 12/9/08. Ric Clark of Brookfield Properties was “tentatively supposed to present.” Brookfield Properties did not present. Wachovia clearly stated it was not a cancellation by Brookfield Properties.

8. Watch the jobs numbers. These are most important.

9. Consensus projected 2 years of rent deflation, greater haircuts on loans to value, lenders being “ultra-conservative.” Not accepting stated vacancy rates, imputing there own vacancy rates. “Cap rates need to be higher. Expect to see normalized cap rates of 8%. Expect to see current cap rates increase by 100 – 200 bps.

10. “Cap rates of 5% are dead forever.”

Brookfield Infrastructure Partners

11. Acquiring Public Private Partnerships (PPP) from Brookfield Multiplex. Purchase price of $20M. I asked if this was discount from BAM’s original purchase price, but presenter was not sure. Properties include 2 hospitals. Anticipated close is November / December 2008 (even though presentation was in December 2008.)

12. Described how Transelec will be doing a $1B capex project over next five years. “Of which $200M has already been approved by regulators, and will certainly qualify for 10% regulated return by Chile.” Claimed that another $100M will be approved as regulated going forward. $700M not yet approved. They have both regulated and unregulated assets. There is a regulated return on replacement cost. These should be pre-approved according to BIP in response to my question.

13. Invested in Longview to maintain 30% ownership level. This further investment of $103M was completed in November 2008.

14. BIP claimed they were looking at North American Utilities to invest in. I asked if those would be Hydro plants. BIP claimed, “no, they will not be in the renewable energy arena.”

15. I asked if they have ever bought an investment from an entity not related to BAM. They claimed “No, but we have and are looking at some.”

16. BIP claims estimated liquidity of $821M, broken down as follows at 9/30/08:

17. Interesting that BIP has only bought assets from Parent BAM.

Vornado Realty Trust – Presented by CFO Joe MacNow

18. As I have experienced with occasional meetings with, and word on the street descriptions of typical VNO officers, Joe MacNow seems to live up to the exemplary descriptions given to the chiefs of Vornado. He seems honest and filled with great knowledge. Very cool presentation. I am only writing down parts that interest me, and ones I took notes on. My notes will do VNO no justice. Yet, these should be of interest nevertheless.

19. As of 12/05/08 VNO has a market cap of $9.9B and an enterprise value of $26.2B. Has 16.1M SF of Office in NYC, 17.6M SF of Office in DC, 21.8M SF of Retail Properties, 8.9M SF Merchandise Mart (Chicago), and 32.7% ownership of Toys “R” Us.

20. 1/3rd of NYC business is financial services related. Yet, NYC is a market within itself and over the long-term it will thrive.

21. Merrill was about to sign lease prior to Thain. They were to build massive trading floor at Pennsylvania Hotel (across from Madison Square Garden.) Thain’s tenure halted that process. Thain is from Wall Street, and has a preference for Wall Street locations, yet is not married to Wall Street location. I asked where Joe thinks Merrill will end up going once 2013 lease at World Financial Center expires. He explained that new Bank of America Tower is not big enough for both Merrill and Bank of America. Joe said, ‘I don’t know where they will go, it won’t be at World Financial Center, and I suspect they will go to mid-town.”

22. No acquisitions planned for 2008 and 2009. Looking to preserve a war chest of capital and be prepared for any financial climate when debts of $2.7B and $2.7B respectively come due in 2011 and 2012. He feels that cash flows and current war chest will cover that, even using draconian scenarios, yet they want to be prepared to meet those debts under all circumstances. He indicated, and by no means expects a stock dividend to occur, but if need be, that could save $600M annually. As a REIT they would still have to pay 20% of the required dividend in cash. It is being discussed by NAREIT to change that to 5%, but Joe does not expect that reduction to occur.

23. NYC CRE rents have decreased substantially. He is seeing a general trend of rents decreasing by as much as 43%. He has seen the higher rents of say $200 square feet go down to $125 per square foot.

24. Also saving capital for bargain acquisitions in future. Will commit capital to a franchise in the future. They will stay in the areas they know, which is Class A real estate in Washington DC and NYC. He said, don’t expect us to be buying in Chicago. “We will stick with what we know.” I specifically asked if he would consider the purchase of Brookfield Properties. He said, he doesn’t want to discuss a fellow known landlord, but also offered that the debt attached to BPO creates an enterprise value that they are not interested in. He saw no bargain in Brookfield Properties, as the current debts are attached to any purchase price.

25. He discussed current and future lending environment. He sees no easing over next few years. He said 50% to 60% LTV is very do able, as long as total required is $250M or less. If one is looking for greater than $250M it is “either difficult or impossible.” He used the NYC Palace hotel as an example. He described, “let’s say this building has no debt, yet a conservative value of $1B to $2B. They will not get a loan of greater than $250M. Perhaps they could go to a series of lenders to each put up portions, but again that is difficult if not impossible. That is why a war chest of cash is needed.” Also expect to see Joint Ventures in the future to help funding.

26. If a company has unsecured bonds, they will not be replaceable for at least two years.

27. Typical loans are 50 – 55% Loan To Value, and not exceeding $250M, no matter what the value is. 25 to 3o year amortizations. Easy schedules of last 5 years do not exist. The historical spread of CRE loans to treasuries has been 6.9% over a 46-year period, and 7 % to 10% if you take out boom years. Expect long-term debt rates to eventually settling in at 8.5%, yet that could be after rates shoot up even greater. Don’t be surprised to see interest rates of 10% or greater.

28. Cap rates will be greater than their constants. Constant on a mortgage is total debt service payment/loan amount including principal and interest. If interest rate is 10%, the constant annual payment on a fixed rate loan will be higher because it includes amortization.

29. So if interest rate is 7%…the constant annual payment on a fixed rate loan will be higher because it includes amortization.

30. AAA CMBS should not be 1000 bps over UST.

31. Loves retailers as tenants. They look to make sure that ultimate rent payments is not in great percentage to revenues. Claims retailers can survive when rents as a percentage of sales goes to 18%. Look at sales per square foot.