Debt, Equity, and Structured Finance: Capital Sources in a Changing Market

Moderator: Panelists: Fred Harmeyer, Cushman & Wakefield Adam Kies, Terra Capital Partners Jeffrey Fastov, Square Mile Capital Management Tim Johnson, Blackstone Real Estate Debt Strategies Sujan Patel, NorthStar Realty Finance

Please silence all cell phones. This session is being recorded. Fred Harmeyer Cushman & Wakefield

• Oversees and coordinates the businesses within C&W Capital Markets, including Investment Sales and Acquisitions; and Equity, Debt & Structured Finance • Partner responsible for debt investments at High Rise Capital, a long-short real estate securities hedge fund, prior to C&W • Head of Large Loan CMBS Group at Merrill Lynch 2002-2007 • Began career practicing real estate law, and moved to Wall Street including sell-side Senior Equity Analyst and CRE Banking/Finance at Morgan Stanley

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3 Debt, Equity, and Structured Finance: Capital Sources in a Changing Market

Please silence all cell phones. This session is being recorded. Jeffrey Fastov Square Mile Capital Management LLC

• Jeff is responsible for debt products, including originations, at Square Mile Capital Management • Over 30 years in commercial real estate credit – Started CMBS ratings group at Moody’s Investors Service; Co-head of Lending at Goldman Sachs • B.A. University of Rochester; M.B.A Columbia Business School

5 Sujan Patel NorthStar Asset Management / NorthStar Realty Finance Corp.

• Managing Director and Co-Head of Investments responsible for overseeing the sourcing, structuring and execution of NorthStar’s equity, debt and strategic investments across all asset types and geographies • Mr. Patel has been directly involved in or overseen $9Bn+ of closed investments with NorthStar • He began his career at Morgan Stanley in their investment banking division based in New York. Prior to NorthStar, Mr. Patel was responsible for acquisitions at Thayer Lodging Group, a lodging dedicated private equity firm • BA from Dartmouth College

6 Tim Johnson Blackstone Real Estate Debt Strategies

• Managing Director of Blackstone Real Estate Debt Strategies (“BREDS”) • BREDS current AUM of $10bln • Lead North American originations & investment team • Invest across debt spectrum; senior mortgages, mezzanine and preferred equity

7 Adam Kies Terra Capital Partners

• Adam Kies is a Director responsible for transaction origination. Mr. Kies has 18 years of experience in commercial real estate investment and finance. • Previously, Mr. Kies led originations and underwriting for Ascent Real Estate Advisors, which provided bridge and mezzanine financing nationwide. • Prior to joining Ascent, Mr. Kies was a Vice President at Icahn Associates/American Real Estate Partners, where he was responsible for sourcing and structuring a wide range of real estate transactions including direct equity, mezzanine loans and investments in securities and operating companies.

8 Session Objectives

• How has the market for commercial real estate debt and equity capital evolved since the recovery has taken hold? • What are alternatives to traditional senior debt, including higher- leverage first mortgage loans, transitional/bridge loans, mezzanine debt, and preferred equity capital? • Who are the primary sources of such capital, and what are the common structures/requirements? • What are the leverage and pricing parameters, and what is the availability relative to property sector, size, and market (core vs. secondary)?

9 Overview

• Overheated commercial real estate debt market in ’06-’07 was unsustainable • Current recovery with prolonged low interest rate environment and search for yield has caused a renewed flow of capital back to CRE debt markets, and non-bank sources have emerged as key players • CMBS/securitization has returned, and attractively priced senior and subordinate debt/equity/hybrid capital solutions are available • The players, risk appetite, underwriting parameters, and financing structures are in many cases materially different than in the pre-crisis era, and the market continues to evolve

10 Overview

Each of our panelists is with an industry leader in the debt/equity arena: • Jeff Fastov will start with some macro themes and offer an example of a recent suburban office “stretch” financing with structural flexibility • Sujan Patel will offer some comments on the availability and structural requirements of subordinate debt/equity/hybrid capital across various product types • Tim Johnson will discuss large balance higher-leverage first mortgage loans on transitional and stabilized properties and offer an example of a large CBD financing • Dan Cooperman will offer some comments on the availability of mid to smaller-balance subordinate loans and other capital solutions • Panel discussion followed by Q&A

11 Market Conditions & Outlook

Jeffrey Fastov, Square Mile Capital Management LLC

12 Market Conditions & Outlook

• Interest rates will inevitably rise • Improving economy is driving absorption • Constrained new supply is supporting higher rents • Senior lending, core equities and gateway cities are most liquid sectors • Cap rates lag peak levels in less liquid sectors

13 Market Conditions & Outlook

Source: CoStar Portfolio Strategy

CONFIDENTIAL 14 Must not be duplicated, shared or printed without the written consent of USAA Real Estate Company US CMBS Credit Quality Nears Pre-Crisis Levels

Moody’s LTV % Off Trough Peak 117.5% 100.0% Current 108.2% 75.2% Trough 80.0% 0.0%

Source: Moody’s Investors Service

CONFIDENTIAL 15 Must not be duplicated, shared or printed without the written consent of USAA Real Estate Company Structural Changes in the High Yield Credit Market

Peak Market 2006 – 2007 Today

CDO Funding • CDOs drove market froth • CDO funding is no longer the most efficient funding & Related • Rating Agencies too aggressive, especially on junior • Junior debt is no longer financed Structures debt • Rating Agencies more conservative • Blind pools, did not deleverage with loan payoffs • Bond investors don’t rely on ratings and aren’t using • No discrimination across sponsor quality extreme levels of leverage • Matched funding is obtained in A Note market Warehouse • Margin call provisions • Warehouse providers more selective Financing • Street provided to tie up bond underwriting • Warehouse product viewed as a balance sheet loan • Limited term created funding mismatch • No margin calls for interest rates or spreads • Longer terms Sourcing & • Acquired in the secondary market • Only direct originations meet investment criteria Underwriting • No ability to influence structure or due diligence • Requires sourcing, structuring, underwriting and Investments ongoing asset management capabilities Barriers to • Sponsors with limited real estate experience got • Ability to source investments, obtain warehouse Entry warehouse funding and access to the CDO market financing, place A Notes, show strong track record and • Expertise in structured finance / capital markets more substantial infrastructure create very high barriers important than in real estate

CONFIDENTIAL 16 Must not be duplicated, shared or printed without the written consent of USAA Real Estate Company Opportunities in Credit

• $2 trillion of loan maturities and recapitalizations over next five years • Constrained banks leave a $400 billion opportunity for non-traditional capital solutions • Non-regulated lenders comprise the smallest segment with greatest growth potential – Barriers to entry will help sustain attractive risk- adjusted yields • Underwriting reflects current market conditions not pro forma cash flows common at market peak • High leverage on maturing loans, drive borrowers to seek gap capital

CONFIDENTIAL 17 Must not be duplicated, shared or printed without the written consent of USAA Real Estate Company Stretch Lending Case Study

• Property Summary – Location: Warren, NJ – Type: Office – Size: 371,780 SF • Acquisition Summary – Closing Date: June 2014 – Investment Type: First Mortgage Whole Loan – Sponsor: Normandy Partners / Greenfield Partners – Initial / Full Funding: $30.3 million / $46.4 million – Retained Interest: $7.0 million / $10.7 million – Loan Term: 3 years + two 1-year extensions • Return Summary – Status: Unrealized – Going In Yield: 9.7% – Projected Gross IRR: 11.7% – Projected Gross MOC: 1.29x

CONFIDENTIAL 18 Must not be duplicated, shared or printed without the written consent of USAA Real Estate Company Availability and Structure of Subordinate Debt/Equity/Hybrid Capital Across Product Types

Sujan Patel, NorthStar Realty Finance Corp.

19 Investment Criteria

Investment Size $50MM to $1Bn First Mortgages, B-Notes, Senior or Junior Participations, Mezzanine Loans, Preferred Equity and JV Security Types Common Equity All types of commercial real estate including Office, Multi-Family, Hotel, Retail, Industrial, Senior Property Types Housing, Manufactured Housing, Self-Storage, Golf and Construction Loans Geographic Locations Throughout the United States with no market automatically “red-lined” Term 3 to 5 years on average and up to 10 years First Mortgage Loans: Floating rate loans with spreads over LIBOR of 3% or higher depending on risk characteristics Target Returns/Pricing Mezzanine Loans: Pricing starts at 10%, fixed or floating available Equity Deals: Levered cash on cash returns of 9%+, with 15%+ IRR & 1.5x or higher multiple target Market promote and JV structures for operating partners Closing Timeframe Typically 30 days or less with experience of closing in shorter timelines Fees Typically 1% each, upfront and exit fees on debt investments Call Protection Prepayment prohibited for certain period of time but potential for flexibility Non-recourse, except for standard “bad-boy” carveouts and depending on circumstances other credit Non-Recourse enhancements

20 Case Study

• NorthStar is focused on aligning with best in class, strategic partners to grow and scale its debt and equity investment platform. • In December 2013, NorthStar completed a strategic investment comprised of corporate debt, preferred equity and common stock in a leading real estate operating and investment management company focused on office and multi-family in the New York City metropolitan area. • The partnership recently registered a co-sponsored $2.0Bn public, non-traded REIT offering to make office and multi-family debt and equity investments in the New York metropolitan area.

21 • Related Transactions Closed in 2014: – $77MM preferred equity investment for the acquisition of a 400,000 square foot office building in Downtown Manhattan. Preferred return of 10% current plus a 15% profit participation. Above market yield on high-quality real estate. – $69.0MM mezzanine loan secured by a 1.2MM square foot Class A office building in Times Square. Ranges from 75-85% LTV. 10% current return. Investment-grade credit tenant with a long term lease. Street level retail tenancy is significantly under-market, offering considerable value protection in a marquee submarket. – $144.0MM senior mortgage for the refinance of 28 office buildings comprising 1.47MM square feet located in Long Island, NY. Ranges from 0-85% LTV. Projected IRR of 15%+.

22 Large Balance Transitional Loans

Tim Johnson, Blackstone Real Estate Debt Strategies

23 Target Investments

Property Types All commercial property types

Loan Size $50,000,000 and up

Collateral First mortgage, mezzanine and preferred equity on transitional assets

Geographies North America and Europe

Loan to Value Last dollar 60 to 80%

Rate LIBOR + 3.50% and higher, scaled to risk

Term 3 to 5 years

Amortization Typically interest only

Fees Typically 1% origination fee and 0.25% to 0.50% extension fees

Prepayment Flexible

24 Sample Transaction: 401 North Michigan Avenue

• $190.0 million floating rate, first mortgage loan secured by 401 North Michigan Avenue in Chicago – Well located class A office building undergoing value-enhancing repositioning; 69.7% LTV – Initial funding of $145.0 million with $45.0 million future funding commitment for building improvements and leasing • Transaction secured through existing Blackstone relationship with experienced regional owner • Located in a core U.S. market where Blackstone has been an active investor

25 Mid-Small Balance Capital Availability & Opportunities

Adam Kies, Terra Capital Partners

26 Financing Parameters

Office, apartment, retail, industrial, hospitality, self-storage, rented Property Types condominium properties, MHP, student housing and entitled land

Loan Size $5,000,000 - $50,000,000

Loan to Cost Up to 90%

Term Two to ten years

Interest Rate Competitive and tailored for each transaction – generally current pay

Amortization Transaction specific; interest-only loans also available

Markets Primary and secondary markets nationwide

Acquisitions, recapitalizations, loan purchases, tenant Uses improvements/leasing commissions

27 Case Study

• Property Summary – Location: Nashville, TN – Type: Office – Size: 602,312 SF – Occupancy @ Close 14% • Loan Summary – Investment Type: Mezzanine – Loan To Cost: 90% – DSCR N/A – Initial / Full Funding: $8.1 million / $14.1million – Loan Term: 3 years + two 1-year extensions • Economics – Status: Unrealized – Rate: 15% – Fees: 1% In/Out – Min Return: 36 Months

28 Q&A

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30 Thank You!

Fred Harmeyer Tim Johnson Sr. Managing Director & Head of Capital Markets East Managing Director Cushman & Wakefield Blackstone Real Estate Debt Strategies (212) 841-7515 (212) 583-5625 [email protected] [email protected]

Adam Kies Sujan Patel Director Managing Director & Co-Head of Investments Terra Capital Partners NorthStar Asset Management / NorthStar Realty Finance (212) 753-5159 (212) 547-2616 [email protected] [email protected]

Jeffrey Fastov Senior Principal Square Mile Capital Management (212) 616-1578 [email protected]