Private Equity Real Estate Investing GSBGEN380 Syllabus- Spring Quarter 2014

Nori Gerardo Lietz

The Biggest Gorilla – April 4 Materials: Introductory Presentation 2014 The Biggest Gorilla in the Room LLC

Guest: Theodore Eliopoulos, Chief Investment Officer, Real Estate, CalPERS.

Ted Eliopoulos has served as Senior Investment Officer for Real Estate at the California Public Employees Retirement System since January 2007. Eliopoulos oversees CalPERS’ internal real estate staff of 38, as well as 80 external advisors responsible for investing in and managing all real estate investments for the pension fund.

From 2002-2006, Eliopoulos served as Deputy Treasurer and then Chief Deputy Treasurer for the State of California. In this capacity, Eliopoulos represented the Treasurer on the boards of CalPERS, the California State Teachers’ Retirement System and the California Earthquake Authority; oversaw the Investment, Cash Management, and Information Technology Divisions of the State Treasurer’s Office; and served as Executive Secretary of the Local Advisory Investment Board.

Before joining the State Treasurer’s Office, Eliopoulos was the President of Actium Development Corporation, a firm that provided a full range of real estate services to clients in the Sacramento region. His prior experience also includes serving as a Special Assistant in the U.S. Department of Energy’s office of Environmental Management in Washington D.C. and as an Associate Attorney in the real estate department of Latham & Watkins law firm in the Los Angeles office.

Eliopoulos received a Bachelor’s degree in Comparative Literature Magma Cum Laude with Honors from Dartmouth College, and holds a Juris Doctor degree from the University of Virginia. He is the current chair of the Harvard Joint Center for Housing Studies’ Leadership Forum on Pension Fund and Endowment Investments in Domestic Emerging Markets, as well as on the board of the Pension Real Estate Association.

Supplemental Materials: How Institutional Investors Think About Real Estate Back-of-the-Envelope Glossary from The Real Estate Game, Bill Poorvu with Jeffrey L. Cruikshank

Suggested Reading: Pioneering Portfolio Management, David Swensen

Assignment: Biggest Gorilla -Study Questions Liv Hugen, the new head of real estate investments for Norway's Government Pension Fund Global (the "Global Fund"), must decide how to allocate 8% of the overall fund's $300 billion portfolio to real estate. She must consider key questions such as what investment strategies to focus on (core, value-add, opportunistic, public securities), what geographies to invest in, if she should try and "time" the market, and how much leverage she should employ in the overall portfolio. Study Questions:

1. What percentage of the Global Fund's real estate portfolio should be allocated roughly to the following investment strategies: Core, Value-added, Opportunistic, and public real estate securities?

2. In what geographies should she invest? 3. What percentage of debt, if any, should Liv employ in the portfolio? 4. Over what time period should she deploy her capital? 5. Should Liv try to manage her portfolio internally or externally? How should she pay her

managers?

Hancock Tower and Garage – April 7

Materials: John Hancock Tower and Garage (Tuck 1-0132)

Supplemental Materials Boston Office Outlook CBRE Boston Office Data -CBRE El New York Times Interview with Scott Lawlor Due Diligence Checklist El Hancock Tower -Study Questions

Note on Risk Analysis for Real Estate (Columbia Business School), Lynn Sagalyn The Most Important Thing -Chapter 7 by Howard Marks

Guest: C. Hastings (“Hasty”) Johnson, Vice Chairman and Chief Investment Officer, Hines

Mr. Johnson joined Hines in 1978. As the most senior executive in Hines' Office of Investments, he is responsible for investments and chairs the firm's Strategy Committee. He is a member of the firm's Executive Committee and investment committees. Mr. Johnson served as CFO from 1992 until 2012, and prior to that led the development or redevelopment of numerous projects. He initiated the Hines acquisition program and the firm's investment management business. Mr. Johnson graduated from the Georgia Institute of Technology with a BS in Industrial Engineering and received his MBA from Harvard Business School.

Assignment: John Hancock Tower and Garage -Study Questions This is the history of the iconic John Hancock Building in Boston and its succession of owners. We will analyze each of the owners' (and their clients,) investment experience. On the first day we will focus on the analysis of the numbers. Please address the following questions:

1. What do you like or dislike about the building today (2013)? 2. What was Beacon's strategy? Were they lucky or smart? 3. What was Broadway's strategy? What were they betting on? 4. How did Normandy get the deal? What should Normandy's strategy be going forward? 5. Is the Hancock Tower a "core" asset? What does that mean? 6. How do you define "risk" in real estate or any private investment?

7. What are the investment attributes of a low risk versus high risk investment?

Suggested Reading: The Most Important Thing, Howard Marks

IBET – April 11 & 14 Materials:

IBET Pension Fund (800133)

Guest: Paul Mouchakkaa, Executive Vice President, Chief Real Estate Strategist, Morgan

Stanley Realty Paul Mouchakkaa is an Executive Director of Morgan Stanley and Head of Global Research and Strategy for the Morgan Stanley Real Estate Investing business (“MSREI”). Paul was a managing director of real estate consulting services for PCA before joining MSREI. Prior to this, he served as a Portfolio Manager for real estate at the California Public Employees' Retirement System (CalPERS), where he oversaw the research, operations and analytics for CalPERS' entire real estate portfolio. Paul is an active member of various real estate organizations including NCREIF, IREI and the REIS Council. He received a BA with Highest Honors in Economics from Carleton University and an MBA in Finance from the University of Oregon.

Assignments: IBET Homework In February 1999 Marisa Caris, manager for real estate of the $2.3 billion IBET Pension Fund, must assess the individual values for the eight individual properties held by the fund and propose an overall portfolio strategy. After several years of a holding pattern of activity, the Trustees had indicated a willingness to increase the fund's investments in real estate from slightly over 5% to 10% of the total portfolio. Written Assignment: Create a portfolio summary sheet, using the format in Exhibit 3, valuing the individual properties. In this document, please show your valuation analysis and make a recommendation to hold or sell each property. In addition, write not more than a 2-page memorandum to the Board of Trustees recommending a portfolio and implementation strategy for IBET and your reasons for it. Be specific -bullet form is acceptable. This is a very long and important assignment and should be done in groups of not more than 2 people in your class. Please make 2 copies and hand one in at the beginning of class (per team) and hold the other for discussion. Be sure to include your name and that of your group mate. The first day we will review Marissa’s portfolio issues. As well as commence the valuation of certain of the assets. On the second day we will complete the portfolio and asset valuations.

Day 1 Assignments:

IBET (Day 1) -Study Questions

Analyze Marissa’s portfolio and compare it against the benchmark information contained in the supplementary information. How do you feel about the composition of Marissa’s portfolio? Is there too much or too little risk in her portfolio? What should she do about leverage? Should she keep her current manager?

Materials : CalPERS Summary Slides Howard Marks: Dare to Be Great Views from the Observatory: Real Estate Portfolio Risk Management and Monitoring (Mouchakkaa 2012) RREEF -Property Performance Monitor IBET Setup Example

Materials (Day 2): Technical Note and Discussion on Real Estate Valuation (CIBET) (802025) (Available for Student Use after the class)

Simon Storage – April 18

Materials: Simon Storage (2120641)

Assignment: Simon Storage -Study Questions Simon Storage is a UK based industrial manager owner and manager of storage facilities in addition to managing a logistics business. The company came under financial distress and Keith Breslauer of Patron Capital looked to buy the industrial portfolio from the Company. Unfortunately, simply buying the industrial assets was not so simple and he had to determine whether it was even worth it to proceed. Keith Breslauer must decide whether to commit capital to acquire the Simon Storage industrial portfolio. He needs to consider the following questions: Identify transaction risk factors. How would you price them? What should the expected return be? Will the transaction achieve it? What is the acquisition strategy? How do you deal with the existing management?

Please submit a vote on the transaction. Would you do this deal? Yes or No?

Project Sun Devil and Project Paris – April 21

Materials: Project Sun Devil and Project Paris

Guest: Tyler Jones, Vice President, Partners Group

Our guest will be Tyler Jones, the case protagonist. Tyler Jones is a member of the private real estate team in San Francisco office. His responsibilities include investment due diligence, research, and performance reporting. Prior to joining Partners Group, he worked in financial planning & analysis at America West Airlines and was also involved in the US Airways/America West Airlines merger. During his studies, he completed an internship at Centex Corporation, where he focused on land acquisition and strategy. He holds an MBA from Marriott School of Management at Brigham Young University, where he was a Stoddard Scholar and a bachelor’s degree in finance from Arizona State University.

Assignment: Project Sun Devil and Project Paris -Study Questions Tony Lee is the advocate for Project Sun Devil which is an investment opportunity to acquire a student housing complex in Phoenix. Tony's potential investment will compete for capital with Project Paris, a mezzanine investment opportunity on a real estate service company. His investment committee has already indicated that they will only approve one of the two transactions. You will be asked to be an advocate for one transaction or the other. Please consider the following:

1. Did you perform a SWOT analysis for both transactions? What were the risks/merits? Were they all properly identified? ("Strengths, Weaknesses, Opportunities and Threats")

2. Did you calculate the projected IRR for Block 1949? How does the projected return for Project Sun Devil compare to the projected return for Project Paris? How do the risks compare?

3. Do the respective markets make a difference? 4. Should there be a differential in the returns and if so how much? Are the two

transactions priced appropriately? 5. And of course, which one should we approve? Which deal would you do and why?

Would your answer change if you were a European investor?

Please vote on the transaction. Which transaction would you do?

The Perfect Storm – April 25 Materials:

Case, The Perfect Storm (213077)

Guest: Edward L. Shugrue III, Founder of Talmage

Our guest will be Ed Shugrue, founder of Talmage, a CMBS management firm, and the protagonist of this case. Mr. Shugrue is the Chief Executive Officer of Talmage, LLC. He established the company and its investment management business in 2003 and is a member of the firm’s Investment Committee. He has over 24 years of commercial real estate investing, lending and restructuring experience as an owner, lender and advisor. From 1997 until 2003, Mr. Shugrue co-built one of the country’s first commercial real estate mezzanine investment platforms in his capacity as the Chief Financial Officer of Capital Trust, Inc. (NYSE: CT). From 1991 to 1996, Mr. Shugrue was one of four people responsible for turning around, taking public and selling River Bank America, a New York bank. While at the bank, he managed over $1.5 billion of nationwide foreclosures, repositionings, sales and high-yield financings. From 1988 through 1990, Mr. Shugrue worked in the real estate group of Bear Stearns on principal, agency and securitization assignments. Mr. Shugrue is a graduate of the University of Pennsylvania with a BA (honors) in political science and a degree from the Wharton School. Mr. Shugrue is a former governor of the Commercial Mortgage Backed Securities Association (CMSA). Mr. Shugrue has published articles regarding real estate finance in CRE Finance World and PREA Quarterly. He has also been a guest lecturer at the Harvard Business School (where he co-authored a case study), The Wharton School of Business and the Columbia University Graduate School of Business. He is a frequent contributor to The Wall Street Journal and To Bloomberg News.

Assignment: The Perfect Storm -Study Questions Adam Carter is the portfolio manager for a commercial mortgage backed security (CMBS) limited partnership. His partnership begins to fall apart during the financial crisis of 2008. As his lenders begin to circle and potential foreclose on his partnership assets he has to scramble to consider his options in salvaging the investments for his clients. He and his investors have to consider their options. They asked themselves:

1. What should Adam do? What are his next steps? 2. What would the terms (especially the interest rate) of the Recap Loan have to be to

entice Henry to go to his Board with such a troubled investment (as opposed to a "de novo" investment)? What should his cut off point be? What terms should Andrew require?

3. Attached in Exhibit 5 is a table of highly liquid AAA GGlO CMBS dollar prices over this period, should Henry buy these instead? How is he better/worse off?

4. What due diligence should Henry and Andrew perform? What questions should they ask?

5. Were Adam's liquidity assumptions correct? Had he retained sufficient liquidity to weather the 2008 financial crisis?

6. Ideally, what should have been the outcome?

Please vote on the transaction.

Would you commit additional capital to this transaction or “double down”? Yes or No.

Yamanote – April 28 Materials: Case, Yamanote Kaikan (205084) Yamanote Kaikan, Spreadsheet Supplement (XLS701-XLS)

Guest: Peter Briger, Principal and Co-Chairman of the Board of Directors, Fortress Investment

Group Our guest will be Pete Briger, one of the founders of Fortress Investment Group. He leads the team’s investment activities of acquiring NPLs (non-performing loans) especially in Japan. Mr. Briger is a principal and Co-Chairman of the board of directors of Fortress. He has served

as a member of the board of directors of Fortress since November 2006 and was elected Co-

Chairman in August 2009. Mr. Briger has been a member of the Management Committee of

Fortress since March 2002. Mr. Briger is responsible for the Credit and Real Estate business at

Fortress. Prior to joining Fortress in March 2002, Mr. Briger spent fifteen years at Goldman,

Sachs & Co., where he became a partner in 1996. Mr. Briger serves on the board of Tipping

Point, a non-profit organization serving low income families in San Francisco. Mr. Briger also

serves on the board of Caliber Schools, a network of charter schools committed to preparing

students for success in competitive four-year colleges and beyond. Mr. Briger received a B.A.

from Princeton University and an M.B.A. from the Wharton School of Business at the University

of Pennsylvania.

Assignment: Yamanote -Study Questions

In 2001, James O'Connell, President of Holyoke Japan, an affiliate of Larson Capital, a

distressed debt private equity firm, wants to bid on a 90 billion yen loan currently in default by

the borrower, Sanjo Enterprises, for a popular wedding and banquet facility with an adjacent

office tower in downtown Tokyo. O'Connell has to determine a bidding strategy, consider the

competition, and price the deal.

1. What is the maximum price O'Connell could bid on the full loan? Be prepared to justify

your price.

2. What should the seller (the bank) do to conduct the sale?

3. What should the bidder do to enhance his position?

4. What makes O'Connell good at what he does?

Poll: Please submit your bid price.

Hilton Hotels – May 2

Materials: Deutsche Profile Hilton Hotels Corp 27 (March 20061) Citigroup Profile Hilton Hotels (30 Apr 20071)

Guest: A.J. Agarwal, Head of the Americas Blackstone Real Estate, (Stanford GSB)

A. J. Agarwal is a Senior Managing Director in the Real Estate Group and is based in New

York. Mr. Agarwal oversees North American acquisitions for the Real Estate Group. He has

been directly involved in a number of the Real Estate Group's investments, including Extended

Stay Hotels, Hilton Hotels, General Growth Properties, Centro Properties, and Hotel del

Coronado. Mr. Agarwal joined Blackstone in 1992. Prior to joining the Real Estate Group in

January, 2010, Mr. Agarwal was a member of Blackstone's Financial Advisory Group, leading

the firm's advisory practice in a number of areas, including real estate and leisure/lodging. Mr.

Agarwal graduated from Princeton University, where he graduated magna cum laude and Phi

Beta Kappa and received an MBA from Stanford University Graduate School of Business.

Assignment: Hilton Hotels -Questions and Classroom Protocol The class on this day will consist of a presentation by A.J. Agarwal, the head of Blackstone's North American real estate group. Mr. Agarwal was one of the partners who analyzed the original transaction. He will discuss their privatization of Hilton Hotels. It goes without saying that anything that is discussed in class is confidential and not to be shared outside the classroom. There is no formal case on this transaction as the investment is still active. You have been provided analyst reports issued at the approximate time immediately preceding Hilton's acquisition by Blackstone to give you the market context at the time. The format of the class will be a brief discussion of why you think Blackstone bought Hilton. Here are questions for you to think about for this part of the class:

1. What was fundamentally attractive about Hilton? 2. What was Blackstone's "edge" in acquiring the company? 3. How do you feel about the purchase price which was 40% above the then traded price of

the stock? Is it justified? 4. What do you think has to be done to the company in order for Blackstone's investors to

achieve a 20% gross return?

A.J. will then discuss why they bought Hilton and what has happened since, both good and bad. He will then open up the class for Q & A. There will be a slightly longer time period for Q & A. The first part of the Q & A should focus on Hilton and the last ten minutes should focus on the market generally and how Blackstone sees the investment landscape.

This is a unique opportunity to hear from the largest real estate private equity investor in the world. Each student should focus on asking questions that will shed insight into the success, or not, of the Hilton investment. If you need some assistance in this regard, send me an e-mail. Also, you should take this opportunity to learn about the present market context from one of the industry's leading figures.

Societé de Louvre – May 5 Materials: Case, Societé de Louvre Investment Memo Letter to Partners from Barry Sternlicht

Assignment: Societé de Louvre -Study Questions Brad Child, the Chief Real Estate officer for the State of Oregon's retirement fund, has to evaluate a potential direct co-investment in Societé de Louvre, a conglomerate with multiple business, including both luxury and budget hotel companies. As only one of two real estate professionals he is concerned about a number of issues, including his ability to analyze non real estate assets. He asked himself the following:

1. There are so many moving parts to this transaction. What is the optimal strategy for the acquisition? What should be kept, what should be sold immediately versus what should be sold prior to ultimate sale? Why?

2. Can and will Starwood actually execute this strategy within a five year time period? (Should he be concerned that this portfolio might never be sold?)

3. What does Starwood know about the budget hotel space and the other business, especially a perfume and crystal company?

4. In flipping through the materials, the overall tone seemed to Brad to be pretty optimistic. In reviewing the assumptions, which were the most aggressive? What was his true potential downside?

5. If he were to bring this opportunity to his Board, as it would require their approval, what should the return expectation be?

Please vote on the transaction? Would you do this deal? Yes or No?

Stuyvesant Town – May 9 Materials: Stuyvesant Town -Peter Cooper Village: America's Largest Foreclosure (211106)

Assignment: Stuyvesant Town -Study Questions In July 2010, William Ackman (HBS 1992), the founder of Pershing Square Capital Management, was considering a distressed investment in Stuyvesant Town-Peter Cooper Village, a largely residential property in Lower Manhattan consisting of 11,227 units in 10.2 million square feet in 110 buildings on 80 acres. Tishman Speyer, a real estate developer and Investor, along with Blackrock, a leading New York-based investment advisory firm, had co-sponsored the acquisition from Metropolitan Life in November 2006 with total debt and equity of $6,290,000 in the project including so-called, "Sponsor Equity," of $1,890,000. By July 2010 the cosponsors had turned over the property in foreclosure. Some had suggested the value was now as low as $1.8 billion. Ackman needed to decide whether to make the investment and at what price and what his strategy should be going forward.

1. Why did Tishman Speyer and Black Rock propose this investment in the first place? 2. What mistakes did they make, if any, or was it just bad luck and bad timing? 3. What should Ackman's value be today? 4. If you got the property what would your strategy be going forward?

Project Knight – May 12

Materials: Case: Project Knight Assignment: Project Knight -Study Questions John Grayken is one of the world's preeminent distressed real estate investors. His firm, Lone Star, has the opportunity to acquire Project Knight, a Korean based bank. This is a continuation of the firm's investment strategy to acquire non-performing loan portfolios at significant discounts to the face value of the loans. However, Korea is a new market for the firm.

1. Do you as a limited partner in the Lone Star fund that will acquire the bank want to participate in the co-investment opportunity that Lone Star is offering its investors?

2. What do you think of this investment opportunity? How comfortable are you with the key assumptions? Is there anything that was missed?

3. Do you double down given that you will already have some exposure to the opportunity via your Fund IV investment?

4. Is a 25% return threshold high enough given that the same nominal return threshold was used in Japan?

Please vote on the transaction. Would you do this deal? Yes or No?

Taubman – May 16

Materials: Simon's Hostile Tender for Taubman (A) (205052) David Simon of the Simon Property Group (SPG) had just launched a hostile tender to acquire the Taubman Companies another competitive regional mall owner and manager. Robert (“Bobby”) Taubman had to evaluate the offer seriously as it was at a significant premium to where the stock of the Taubman Company was then trading. What was the intrinsic value of the company and how should he respond to the tender offer? Should he “cut and run” or fight?

Assignment:

Taubman -Study Questions

1. Does Simon's acquisition of Taubman make strategic sense? Why/Why not? What price should David Simon be prepared to pay for Taubman Centers (TCO)?

2. Do you agree with the Morgan Stanley analyst's analysis of TCO's value in Exhibit 9? Is the analyst using the right 'cap rate"? How does the cap rate selected compare to TCO's cost of capital per CAPM? Is there anything that the analysts or the capital markets are missing especially when one compares the historical performance of TCO versus Simon Property Group?

3. As a TCO independent director what should you do? Accept the $20 per share offer? Pursue some other alternative? What are fiduciary obligations to the shareholders?

Do Stay or Do I Go Now? – May 19 & 23

Materials: Case: Do I Stay or Do I Go Now? Partnership Agreement Investment Memo

Guest (1st day): Eric Bergin, Vice President – Rockpoint

Eric Bergin is responsible for Rockpoint's fund model as well as certain acquisitions and asset

management activities in the U.S. Mr. Bergin resides in Rockpoint's Dallas office. Mr. Bergin

joined Westbrook Partners in February 2004. For Westbrook Funds I-IV, Mr. Bergin is involved

in managing the firm's fund model as well as certain asset management activities. Prior to

Westbrook, Mr. Bergin was an associate at PricewaterhouseCoopers in the Dispute Analysis

and Investigation Group. Mr. Bergin received a B.B.A. in Finance from Southern Methodist

University in 2001.

Guest (2nd day): Ani Vartaninan, Founder Rubicon Capital

Ani Vartanian Boladian is the co-founder and Managing Partner of Rubicon Point Partners (RPP). Rubicon Point Partners is an institutional real estate investment company based out of San Francisco, California. RPP invests predominately in office and industrial buildings, located

in-­‐fill locations, near mass-­‐transit and amenities and services. RPP’s goal is to serve the new generation of employees and companies, providing space that is open, interactive, and creative.

Prior to RPP, Ani was a senior official at the U.S. Department of the Treasury and acted as an advisor to the White House on commercial real estate policy matters. She managed the Term Asset Backed Securities Loan Facility (TALF), a $200 billion lending program in partnership with the Federal Reserve in restarting the asset-­‐backed and commercial mortgage-­‐backed security markets. She worked closely with the FDIC and the Federal Reserve in both shaping the TALF program as well as addressing the overexposure of financial institutions to commercial real estate.

As the head of TALF, Ani was responsible for structuring the Program, including asset-­‐backed security eligibility, borrower restrictions, broker/dealer requirements, and risk and compliance

systems. TALF has become one of the most successful public-­‐private programs, posting a substantial windfall for the taxpayer with government funds being returned at an expedited rate. She regularly provided recommendations and updates to the Treasury Secretary, the Chairman of the National Economic Council, and the President’s Council of Advisors.

Prior to her role at the Treasury Department, Ani was with Rockwood Capital, a private equity firm with $4 billion of equity under management, she was responsible for initiating, negotiating, and managing a $400 million separate account on behalf of a state pension fund. Ani was also responsible for acquisitions and asset management of 2.4 million square feet of office, retail, and multifamily investments in the six major investment markets across the United States. Her weighted average performance on liquidated assets was 34% and 2.4X equity multiple.

Ani began her career at Goldman, Sachs & Co. as a member of the municipal finance team and later joined the fixed income sales and trading division. At Goldman, she was responsible for increasing the firm’s market share of a proprietary debt security from approximately $1 billion to $3 billion.

Ani is a graduate of Stanford University and Harvard Business School. At Harvard, she authored and published two HBS real estate cases.

Assignment: Do I Stay or Do I Go Now

Bastian and his friend Fabian are entertaining the thought of leaving their current employer and starting up their own firm. They need to understand the economics of the private real estate equity business. They have several important issues to address, which you must do one their behalf. The materials to be reviewed include a partnership agreement with the economic terms conveyed in the partnership agreement. Your task is to review the enclosed memo and create a model that will depict the economic outcomes under three different economic scenarios. Please model the waterfall provisions based upon the language of the partnership. You will need to create a budget for your firm assuming you can raise $ 500million For example, how much will you pay yourself? How many employees will you need? What kind of expenses will you have to incur and what can be delayed? Can you survive on the fee income generated by your first fund? Separately, you have to create a term sheet for your potential investors to present to them. This assignment can be completed in teams of two. The assignment will be graded.

Presentations – May 28

and May 29 from 6:00-8:00pm

Course Wrap Up – May 30 Materials: Chapter 20: The Illusion of Validity, Thinking Fast and Slow