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Daniel C. Burrell
Chief Executive Officer
330 Garfield St | Santa Fe, NM 87501
505.992.5100 ph | 505.982.2515 fax | dburrell@rosemontrealty.com<mailto:dburrell@rosemontrealty.com>


From: Arlene Busch [mailto:abusch@rosemontseneca.com]
Sent: Wednesday, April 20, 2011 10:08 AM
To: Devon Archer; Dan Burrell; hbiden@rosemontseneca.com
Cc: Eric Schwerin
Subject: Rosemont Realty...confirmation and competitition at the same time

Blackstone Group LP (BX)<http://www.bloomberg.com/apps/quote?ticker=BX:US> and Carlyle Group<http://topics.bloomberg.com/carlyle-group/> are leading a record number of private-equity managers aiming to raise real estate funds as the world's top buyout firms accelerate an expansion beyond corporate takeovers.
Blackstone, the biggest private-equity firm, is planning to raise its next real estate fund, with a target of about $10 billion, later this year. Carlyle is in the process of raising a new fund for U.S. property deals, said a person briefed on the plan who asked not to be named because the fund is private.
The two are among 439 private-equity real estate funds seeking a combined $160 billion, the largest number on record, according to London-based researcher Preqin Ltd. KKR & Co. last month hired its first head of real estate, naming former Goldman Sachs Group Inc. (GS)<http://www.bloomberg.com/apps/quote?ticker=GS:US> executive Ralph Rosenberg to the post. The firms are betting they can produce profits in a still choppy market because their capital is locked up for long periods, usually a decade, allowing them to make improvements and wait out short-term price swings.
"There's a whole world of problems out there and properties need capital to be maintained and to grow," KKR's Rosenberg said in an interview. "New capital is going to have to solve these problems, because there's not a broad liquid market to restructure real estate like there was in corporate debt."
'Lot of Distress'
The 35-year-old partnership has no immediate plans to raise a standalone real estate fund, instead planning to use capital available through its existing buyout and debt businesses, according to a person familiar with the firm's strategy.
Blackstone, created in 1987 by Stephen Schwarzman<http://topics.bloomberg.com/stephen-schwarzman/> and Peter G. Peterson<http://topics.bloomberg.com/peter-g.-peterson/>, has the largest real estate business of the big private-equity houses, with $33.2 billion under management at the end of 2010. Real estate last year surpassed the New York- based firm's private-equity business, which has $29.3 billion under management.
The company in February agreed to pay $9.4 billion to buy the U.S. malls of Australia's Centro Properties Group (CNP)<http://www.bloomberg.com/apps/quote?ticker=CNP:AU> in its biggest acquisition since 2007. Its deals last year included the purchase of 180 warehouse properties from Denver-based ProLogis (PLD)<http://www.bloomberg.com/apps/quote?ticker=PLD:US> and investments in hotel chain Extended Stay Inc. and mall owner General Growth Properties Inc. (GGP)<http://www.bloomberg.com/apps/quote?ticker=GGP:US>
Carlyle, based in Washington, had $10.2 billion in real estate assets under management as of the end of last year, with funds dedicated to investing in Asia, Europe<http://topics.bloomberg.com/europe/> and the U.S. Carlyle's fifth U.S. real estate fund, started in 2006, totaled $3 billion, according to its website.
Wall Street's Exit
"A lot of the private-equity guys and real estate guys are looking at this and realizing there's a lot of distress out there," said Steve Coyle, chief investment officer of Global Realty Partners, the unit of New York-based Cohen & Steers Inc. that invests in private real estate funds.
Some Wall Street funds have revamped or exited their real estate businesses in the wake of losses incurred during the global credit crisis. Those businesses, some of which got established in the early 1990s with the Resolution Trust Corp.'s sale of distressed loans from the savings and loan crisis, also face a new regulatory environment that limits some riskier investments.
Goldman Sachs's leveraged Whitehall real estate funds suffered losses when the credit crisis halted the flow of cheap debt financing and depressed property values starting in 2007. Stuart Rothenberg<http://topics.bloomberg.com/stuart-rothenberg/>, the former head of property investment, left at the end of 2008 after 21 years. In October, Goldman hired Jeffrey A. Barclay from ING Clarion Partners to lead a new business within asset management that will focus on lower-risk commercial real estate, mainly in the U.S.
Goldman's Losses
Goldman, also based in New York<http://topics.bloomberg.com/new-york/>, additionally has a mezzanine lending fund for real estate, which has gathered $2.6 billion in commitments since 2009, according to the firm's website.
Lehman Brothers Holdings Inc., the largest underwriter of mortgage-backed securities at the market's peak in 2007, filed for bankruptcy in 2008 and is liquidating its assets. In June 2010, it sold the management contract<http://topics.bloomberg.com/management-contract/> for its real estate funds to a group of former executives.
Morgan Stanley's top real estate fund executives, including Jay Mantz, Sonny Kalsi and John Carrafiell, left during the past three years. John Klopp and Olivier de Poulpiquet were named last September to run the real-estate investing business.
Diminished Competition
Greg Fleming<http://topics.bloomberg.com/greg-fleming/>, who runs the asset-management business, told employees in January that the firm "remains fully committed to the real estate investing business."
The New York firm raised $4.7 billion for its newest global real estate fund last June, the biggest real estate fund to close since 2008. The amount is less than half what Morgan Stanley had targeted initially. The fund was among bidders for the U.S. malls of Centro Properties.
The diminished competition has helped public real estate funds, so-called real estate investment trusts, attract $47.5 billion in capital in 2010, the second-highest amount on record. The largest amount raised was $49 billion in 2006, according to the National Association of Real Estate Investment Trusts.
Private-equity backed real estate funds will have to convince investors that they can top returns of REITS, after the sizeable fees the firms charge investors, usually around 1.5 percent of assets and 20 percent of profits above a certain threshold. REITs typically charge between half a percent and 1 percent of assets. They are also more transparent and more liquid.
Competing With REITs
The Bloomberg BI NA REITs index, which tracks 124 members, gained 30 percent in 2009 and 29 percent in 2010. Private-equity real estate funds had an average annual loss of 16 percent for the three years ended in September 2010, according to Preqin. They gained 0.1 percent in the 12 months ended in September.
"Anyone who's invested in REITs has done very well," said Jerome Gates, who in March joined Hamilton Lane, the Bala Cynwyd, Pennsylvania-based firm that helps institutional investors pick managers. "For long-term investors, now is a good time for private equity to put money to work, but investors need to be prepared to bounce along the bottom for a while before seeing significant improvement."
Blackstone's first stand-alone real estate fund, Blackstone Real Estate Partners I, made investments from September 1994 to October 1996. That fund returned investors 2.8 times their invested capital, giving an annual rate of return of 40 percent, according to Blackstone's most recent annual report to the U.S. Securities and Exchange Commission.
Hilton Worldwide
Subsequent funds haven't been able to match those returns, with the second, third and fourth funds delivering an annual 19 percent, 21 percent and 16 percent, respectively. The fifth and sixth funds, which includes high-profile investments such as Equity Office Properties Trust and Hilton Worldwide, have average annual returns of 7 percent and 6 percent so far.
Hilton may file for an initial public offering as soon as this year, according to people familiar with the matter, a sign that returns for the funds may improve. After a 35 percent loss in 2009, Blackstone's unrealized value in real estate funds gained 61 percent in 2010.
"We are extremely well positioned to play a major role in this, and we expect to continue to aggressively deploy capital," Schwarzman said March 8 on a conference call with investors. "I think from just talking with people in the marketplace on a regular basis that a lot of investors are looking for a way to take advantage of this asset class."
'Looking Good'
Values of apartment complexes, office buildings, hotels and other commercial properties are rebounding as the economy recovers and investors look for higher yields than assets such as corporate bonds offer. U.S. commercial property prices rose 4.2 percent from an eight-year low during the five months ended January, according to the Moody's/Real Commercial Property Price Index released March 22.
"We're well into the recovery in the prime markets in the U.S. and that recovery has started to expand into secondary markets around the country," said Dan Fasulo<http://topics.bloomberg.com/dan-fasulo/>, managing director at Real Capital Analytics Inc., a New York-based real estate research firm. "Real estate is looking good versus other asset classes."
Some smaller, more specialized real estate investors are shying away from raising new pools for equity real estate investments. Santa Monica<http://topics.bloomberg.com/santa-monica/>, California-based Colony Capital LLC has no immediate plans to raise a new equity fund, Chairman Thomas Barrack said in an interview last month. Colony has a publicly traded real estate debt fund called Colony Financial Inc. (CLNY)<http://www.bloomberg.com/apps/quote?ticker=CLNY:US>, which has returned 1.8 percent in the past 12 months.
Barrack Has Doubts
Private-equity's forays into real estate may be less lucrative and more difficult in coming years for a number of reasons, Barrack said. For one, institutional investors are pressing for more opportunities to co-invest, circumventing fees private-equity funds charge. Some pensions, including several Canadian groups, have their own teams dedicated to making direct real estate investments.
"The next couple of years will be a period of more modest returns, harder work and more attention paid to 'value added,'" Barrack said.
The larger firms, all of which have either gone public recently or are planning to do so, say real estate is an important area of growth as they seek to diversify their sources of income in a bid to win over public shareholders.
Blackstone went public in 2007, just before the financial crisis brought buyouts to a halt. KKR last year gained a listing in New York, and Apollo Global Management LLC, the private- equity firm run by Leon Black<http://topics.bloomberg.com/leon-black/>, last month raised $565.4 million in an initial public offering. Carlyle may pursue an IPO this year.
Apollo
TPG, the private-equity firm run by David Bonderman and Jim Coulter, handles its real estate investing from its broader buyout fund, a $19.8 billion pool raised in 2008. It may weigh raising discrete real estate funds in the future, according to two people familiar with TPG's plans who asked not to be named because the discussions are private. The firm, whose real estate efforts are managed by Colony co-founder Kelvin Davis, has made deals including the $955 million purchase of homebuilder Taylor Morrison Inc. announced March 31.
Apollo, based in New York, has created a group devoted to real estate investing and had assets of $6.5 billion in that unit as of the end of last year, according to filings related to the public offering. The firm in November bought the real estate management group of Citigroup Inc., adding $3.6 billion in assets.
$10 Billion Fund
Raymond Mikulich, former co-head of Lehman's real estate investments, joined Apollo to run its North American property business. Joseph Azrack, Apollo's global head of real estate, has been expanding the business since he joined the buyout firm from Citigroup in 2008. Apollo also has a REIT with about $1 billion under management called Apollo Commercial Real Estate Finance Inc. (ARI)<http://www.bloomberg.com/apps/quote?ticker=ARI:US>
Even with some of the competition diminished, raising new funds won't be easy after the credit crisis and plummeting property values soured pension funds and other investors on putting more money into real estate, particularly higher-risk vehicles.
"I think the only one who has the shot at it is us," Blackstone President Tony James said Feb. 3, when being asked if a competitor could raise a similar-sized fund as the $10 billion pool Blackstone is seeking. "But I don't think even for us it's going to be easy, frankly."
'It's Tough'
Lone Star<http://topics.bloomberg.com/lone-star/> Funds, a Dallas firm that buys nonperforming loans backed by real estate and mortgage lenders, has had to scale back its fundraising ambitions. The firm, led by John Grayken<http://topics.bloomberg.com/john-grayken/>, in November asked investors for six more months to raise two new funds.
Originally, Lone Star had hoped to gather $20 billion of capital commitments for the two funds. Now, the firm probably will raise about $6 billion, said Cohen & Steers' Coyle.
Jed Repko, a spokesman for Lone Star, declined to comment.
"It's tough raising capital but it's starting to open up," Coyle said in an interview. "Everyone out there will tell you it's tough."


Arlene Busch
202-333-1880
abusch@rosemontseneca.com<mailto:abusch@rosemontseneca.com>