BoyarMiller Breakfast Forum: Current State of The Capital Markets Sept 2013

The Current State of the Capital Markets

Breakfast Forum September 12, 2013

September 12, 2013

Andrew D. Kanaly Chairman

The Great Rotation

Copyright 2010 Kanaly Trust. All rights reserved.

Key Investment Issues

• Slow global growth, but improved prospects in second half – U.S. key strengths: housing/autos/energy/deficit reduction – Europe remains in recession – Emerging economies transitioning to domestic growth

• Federal Reserve preparing to normalize monetary policy – Fed appears poised to scale back bond buying late 2013 – Fed unlikely to raise short rates prior to 2015

• 30 year bull market in bonds is likely over – Will rising interest rates derail the economy? – Asset allocation implications of rising interest rates

• Bull market in equities remains intact – Earnings acceleration into 2014 bullish for stocks – U.S. stocks fairly valued; emerging market stocks are cheap – Potential “great rotation” from bonds to stocks – Expect near term volatility due to interest rates and earnings


The Wheel

Source: Bill Boyar (He was there)

Copyright 2010 Kanaly Trust. All rights reserved. Copyright 2010 Kanaly Trust. All rights reserved.

5

The Heliocentric Universe

Brought to you by heretics: Copernicus, Galileo, Kepler 1543-1621


The Tri-Cone Drill Bit

Thank You: Hughes Tool Company


Elvis


Rotation From Bonds to Stocks?

Source: Strategas Research


Wage Inflation to Determine Speed of Interest Rate Rise

* Highlighted asset classes denote significant position change since 12/31/12


10 Year Treasury Note Yields (since 1979)

(B151)

Daily Data 1/02/1979 - 9/05/2013

%

9/05/2013 = 2.98% 13.65

15.84

13.99

10.23

9.09

8.05

7.066.79

5.44

4.274.61

4.895.25 5.26

4.013.75

8.76

9.47

10.12

6.95

7.74

5.195.53

4.16 4.22

3.13

3.703.89

3.34

2.08

3.21

2.41

1.43Source: Federal Reserve Board

2

3

4

5

6

7

8

9

10

11

12

13

14

15

2

3

4

5

6

7

8

9

10

11

12

13

14

15

1983

1988

1993

1998

2003

2008

2013

10-Year Constant Maturity Treasury Note Yields

Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at


B920A © Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Ownership of Marketable Treasury Debt as of 03/31/2013


Ownership of Marketable Treasury Debt as of 03/31/2013

Other Foreign (3316.8)

Japan (1114.3)

China (1270.3)

Household Sector

(1229.4)

MonetaryAuthority (1796.0)

NonfinancialBusinessand State

& Local Governments

(580.2)

Financial Institutions

(2598.4)

10.3%

15.1%

4.9%

21.8% 10.7%

9.4%

27.9%

Numbers in parentheses in $ Billions (Total = 11905.5)

Source: Federal Reserve Board


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Ownership Trends of Marketable Treasury Debt Quarterly Data 1998-03-31 to 2013-03-31

B920B © Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Ownership Trends of Marketable Treasury Debt Quarterly Data 1998-03-31 to 2013-03-31

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130 1 2 3 4 5 6 7 8 9

101112131415161718192021222324252627282930313233343536373839

0 1 2 3 4 5 6 7 8 9

101112131415161718192021222324252627282930313233343536373839Household Sector (10.3%)

Nonfinancial Business and State & Local Governments (4.9%)Monetary Authority (15.1%)Financial Institutions (21.8%)China (10.7%) Japan (9.4%)Other Foreign (27.9%)



B922© Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Ownership of Corporate and Foreign Bonds as of 03/31/2013


Ownership of Corporate and Foreign Bonds as of 03/31/2013 Local, State &

Federal Governments

(129.0)

Insurance Companies

(2566.3)

Other (2097.3)

Rest of the World (2618.5)

Household Sector

(2454.6)

MutualFunds and

ETFs(2156.0)

Banks and CreditUnions(769.8)

19.2%

16.9%

6.0%

20.5%

16.4%

20.1%

1.0%





Ownership Trends of Corporate and Foreign Bonds Quarterly Data 1975-12-31 to 2013-03-31


Ownership Trends of Corporate and Foreign Bonds Quarterly Data 1975-12-31 to 2013-03-31

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

27.5%

30.0%

32.5%

35.0%

37.5%

40.0%

42.5%

45.0%

47.5%

50.0%

52.5%

55.0%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

27.5%

30.0%

32.5%

35.0%

37.5%

40.0%

42.5%

45.0%

47.5%

50.0%

52.5%

55.0% Household Sector (19.2%)Local, State & Federal Governments (1.0%) Rest of the World (20.5%) Banks and Credit Unions (6.0%)Insurance Companies (20.1%) Mutual Funds and ETFs (16.9%) Other (16.4%)




Ownership of Municipal Securities and Loans as of 03/31/2013


Ownership of Municipal Securities and Loans as of 03/31/2013

Insurance Companies

(458.8)

Other (109.4)

Rest of the World (63.7)

Banks and Credit Unions

(382.2)

Mutual Fundsand ETFs(1056.8)

Household Sector

(1657.7)44.5%

28.3%

10.3%

1.7%

2.9%

12.3%





Ownership Trends of Municipal Securities and Loans Quarterly Data 1977-06-30 to 2013-06-30


Ownership Trends of Municipal Securities and Loans Quarterly Data 1977-06-30 to 2013-06-30

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

27.5

30.0

32.5

35.0

37.5

40.0

42.5

45.0

47.5

50.0

52.5

55.0

57.5

60.0

62.5

65.0

67.5

70.0

72.5

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

27.5

30.0

32.5

35.0

37.5

40.0

42.5

45.0

47.5

50.0

52.5

55.0

57.5

60.0

62.5

65.0

67.5

70.0

72.5Household Sector (44.5%)Mutual Funds and ETFs (28.3%) Insurance Companies (12.3%) Banks and Credit Unions (10.3%) Rest of the World (1.7%)Other (2.9%)



Monthly Data 1/31/2009 - 8/31/2013 (Log Scale)

(B0021)

6-Month Smoothings

BTC Ratio 2-Year ( ) 3.213-Year ( ) 3.275-Year ( ) 2.612.2

2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

BTC Ratio 7-Year ( ) 2.5910-Year ( ) 2.7130-Year ( ) 2.382.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

M J S D 2010

M J S D 2011

M J S D 2012

M J S D 2013

M J

Bid-to-Cover Ratios for 2-,3-, and 5-Year Nominal Treasury Securities

Bid-to-Cover Ratios for 7-,10-, and 30-Year Nominal Treasury Securities Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at


Will Rising Rates Derail the Stock Market?

S&P 500 Performance Around Year/Year DeclinesIn Long-Term Bonds of at Least 15%

% Change % ChangeStart Dates 126 Days Later 252 Days Later

1/21/1980 9.29 17.441/05/1982 -10.63 15.244/25/1984 5.32 14.888/28/1987 -18.11 -20.68/25/1994 4.28 19.110/01/1999 16.82 11.986/14/2004 5.57 6.7112/04/2009 -3.98 10.59

Average 1.07 9.42

Long-term bonds reflect Barclay's Capital Long-Term Treasury Bond Price Index

Source: Ned Davis Research


Rising Interest Rates – Asset Allocation Implications

• Avoid long duration fixed income strategies – Kanaly muni bond portfolios have duration less than 5 years – DoubleLine Total Return Fund – duration less than 2 years

• Swap interest rate risk for credit risk – Strengthening economy favors credit-sensitive fixed income securities – High quality, long duration fixed income likely to provide little return as interest rates normalize

• Invest in actively-managed, unconstrained strategies – Floating rate debt – High yield corporates, non-Agency mortgages – Non-USD debt – Convertible bonds – Ability to short

• Consider reducing fixed income allocations in favor of alternatives – Long-short equity – Absolute return/non-correlated strategies

State of the Capital Markets

Middle Market M&A and Private Equity Update

Cliff Atherton Managing Director

September 2013

22

Middle market deals normally represent more than 25% of total deal value and 80% to 90% of deal volume (no. of transactions)

Source: PitchBook

Percentage of Total Deals

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013*

% ($) Deals Under $250M % ($) Deals $250M+ %Deals (#) Under $250M

% of Total Deals

* As of 2Q 2013

23

Source: Deloitte Oil & Gas Mergers and Acquisitions Report

M&A activity in oilfield services

Billions # of Deals

* As of 2Q 2013

$52.5 $30.1 $12.8 $29.5 $38.7 $24.5 $11.1

123

101

39 42

101

85

0

20

40

60

80

100

120

140

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

2007 2008 2009 2010 2011 2012 2013*

Value Deal Count

24


M&A activity in midstream

Billions # of Deals

* As of 2Q 2013

$30.2 $11.2 $12.3 $9.4 $83.5 $39.5 $26.5

61

40 39 36

65

54

0

10

20

30

40

50

60

70

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2007 2008 2009 2010 2011 2012 2013*

Value Deal Count

25


M&A activity in downstream

Billions # of Deals

* As of 2Q 2013

$30.1 $11.3 $10.3 $8.7 $9.1 $12.4 $0.3

54

33

28

15

24

14

0

10

20

30

40

50

60

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

2007 2008 2009 2010 2011 2012 2013*

Value Deal Count

26

6.0x 6.0x

6.0x

5.9x

6.2x 6.3x

6.1x

0

50

100

150

200

250

5

5.4

5.8

6.2

2007 2008 2009 2010 2011 2012 2013 1H

TEV/EBITDA Deals/Year

Average multiples in middle market deals reached 6.3 times in 2012 and since 2010 the number of deals has exceeded the number completed in 2008

Average Multiples and Deal Volume

202

91 180

183

222

33

Source: GF Data for 1,672 transactions valued at $10 - $250 million and at multiples ranging from 3 to 12 times LTM Adjusted EBITDA

Multiple Deal Count

165

27

Within the middle market, size affects the multiple paid

Buyout Multiples within the Middle Market by Deal Size Multiple


7.4x 7.2x

7.2x

6.5x

7.7x 7.5x

5.4x 5.5x 5.5x 5.3x 5.4x

5.7x

4.0x

4.5x

5.0x

5.5x

6.0x

6.5x

7.0x

7.5x

8.0x

2007 2008 2009 2010 2011 2012

$100M-$250M $10M-$25M *As of2Q 2013

28

Total Debt Multiples


Lenders are once again actively supporting M&A transactions

2.3x 1.8x

2.2x 2.3x 2.4x 2.5x 2.2x

3.1x

1.0x

1.0x

0.8x 1.0x

1.1x 0.9x

0.9x

0.6x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2008 2009 2010 2011 2012 2012 4Q 2013 1Q 2013 2Q

Senior Debt / EBITDA Sub Debt / EBITDA

3.3X

3.7X

Multiples

29

Buyout capital structures use less sub debt as a result

Equity and Debt as a % of Total Enterprise Value (TEV)


46.9% 54.0% 51.8% 47.4% 47.5% 47.1%

16.5%

16.2% 12.4%

15.9% 16.0% 10.8%

36.6% 29.7%

35.7% 36.7% 36.5% 42.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2008 2009 2010 2011 2012 2013 1H

Equity Sub Debt Senior Debt

% of TEV

30

$220 $304 $507 $844 $352 $158 $362 $373 $358

1,754

2,134

2,669

3,175

2,358

1,490

2,071 2,232 2,171

0

500

1000

1500

2000

2500

3000

3500

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2004 2005 2006 2007 2008 2009 2010 2011 2012

Capital Invested ($B) # Deals Closed

While the buyout market was stable from 2010 – 2012, the trend in the first half of 2013 is to fewer but larger deals

Source: PitchBook

Billions # of Deals

# of Deals Billions

$147 $140

1,023 738

0

500

1000

1500

$100

$120

$140

$160

1H 2012 1H 2013

Capital Invested ($B) # Deals Closed

31

After a crowded closing calendar at the end of 2012 middle market deal-making in 1H 2013 fell to levels not seen since 2009

Source: PitchBook

# of Deals Billions

$103 $117 $132 $172 $198 $309 $371 $473 $192 $160 $77 $81 $160 $202 $173 $200 $147 $211 $140

849 905

1,052 1,082

1,339

1,330

1,631 1,544

1,320

1,038

726 764

964

1,107 1,105 1,127

1,023

1,148

738

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Capital Invested ($B) # of Deals Closed

* As of 2Q 2013

32

PE capital invested and deal count have grown substantially since 1995

Billions # of Deals

Source: PitchBook

$2 $4 $2 $3 $12 $10 $19 $25 $30 $76 $78 $59 $72

$119

$220

$304

$507

$844

$352

$158

$362 $373 $358

59 66 107 127 143 208 305 466

657

925

1,118

849 1,028

1,458

1,754

2,134

2,669

3,175

2,358

1,490

2,071 2,232

2,171

0

500

1,000

1,500

2,000

2,500

3,000

3,500

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total Capital Invested ($ billions) Deal Count

33

PE firm growth since 1980 – The inflection in PE industry growth occurred in 1996 and 1997

No. of Firms

Source: Preqin

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

1980

19

81

1982

19

83

1984

19

85

1986

19

87

1988

19

89

1990

19

91

1992

19

93

1994

19

95

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

New

Existing

34

PE firms hold just under 4,000 portfolio companies purchased in 2008 or earlier

Source: PitchBook

Companies

3,913 3,866 2,339

3,054

3,872

4,771

5,430 5,742

6,154 6,508

6,802 6,851

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

As of Year

2009-2013*

2005-2008

2000-2004

U.S. PE Company Inventory

* As of 1Q 2013

35

Source: PitchBook as of 12/31/12 – U.S. PE Capital Overhang

While the capital the capital overhang is declining there is still significant dry powder in 2009 and older funds

* As of 6/30/2013

*

Billions

36

Current Overhang by vintage year and fund size

Source: PitchBook as of 12/31/12

Fund Size ($ Billions) 2007 2008 2009 2010 2011 2012 2013 TotalUnder $100M 0.4$ 0.2$ 0.2$ 1.0$ 0.4$ 0.0$ -$ 2.3$ $100M-$250M 2.0$ 1.6$ 1.4$ 1.8$ 3.6$ 2.6$ 0.2$ 13.1$ $250M-$500M 2.9$ 3.6$ 3.6$ 3.5$ 4.3$ 7.2$ 1.3$ 26.4$ $500M-$1B 3.2$ 7.2$ 3.0$ 5.0$ 10.5$ 11.5$ 5.2$ 45.6$

Subtotal 8.5$ 12.6$ 8.2$ 11.3$ 18.8$ 21.3$ 6.7$ 87.4$

$1B-$5B 9.3$ 19.1$ 15.0$ 6.7$ 34.0$ 41.1$ 2.4$ 127.6$

Subtotal 9.3$ 19.1$ 15.0$ 6.7$ 34.0$ 41.1$ 2.4$ 127.6$

$5B+ 12.2$ 24.9$ 7.4$ -$ 13.1$ 47.0$ 8.7$ 113.4$

Subtotal 12.2$ 24.9$ 7.4$ -$ 13.1$ 47.0$ 8.7$ 113.4$

Total 30.0$ 56.6$ 30.6$ 18.0$ 65.9$ 109.4$ 17.9$ 328.4$

37

$29.99

$56.63

$30.59

$18.04

$65.88

$109.37

$17.87

$

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$-

$20

$40

$60

$80

$100

$120

2007 2008 2009 2010 2011 2012 2013

Cumulative O

verhang ($B)

Curr

ent O

verh

ang

($B)

by

Vint

age

Under $100M $100M-$250M $250M-$500M $500M-$1B $1B-$5B $5B+

Cumulative Overhang

Overhang by Vintage and Fund Size

Current Overhang ($B) Cumulative Overhang ($B)

Source: PitchBook as of 12/31/12

Current Overhang of $328 Billion by fund size and vintage year

$117.2 Billion

38

Source: WilmerHale 2013 Mid-Year IPO Market Review

In 2012 PE Funds provided 10x more Equity capital ($358 B) than IPOs

Billions # of IPO Offerings

* As of 6/30/2013

$37.8 $29.8 $36.2 $43.3 $23.1 $19.2 $34.7 $28.7 $35.1 $16.9

198

276

175

193

27

54

136

97 102

0

50

100

150

200

250

300

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

$45.0

$50.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Dollar Volume ($billions) # IPOs

39

Source: PitchBook

The majority of IPOs were made by VC and PE-backed companies

$23.5 $4.7 $8.9 $13.3 $21.7 $30.5 $11.7

121

19

33

83 78 88

54

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

2007 2008 2009 2010 2011 2012 2013*0

20

40

60

80

100

120

140

Capital Exited ($B) PE & VC Backed IPOs

Billions # of Offerings

* As of 2Q 2013

40

Source: PitchBook; WilmerHale 2013 Mid-Year IPO Market Review

Total IPOs vs. PE & VC backed companies IPOs vs. energy PE & VC backed IPOs

Billions

* As of 6/30/2013

$43.3

$23.1

$19.2

$34.7

$28.7

$35.1

$16.9

$23.5

$4.7

$8.9

$13.3

$21.7

$30.5

$11.7

$4.5 $0.3 $1.0 $1.9

$4.2 $3.5 $0.6 $0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

$45.0

$50.0

2007 2008 2009 2010 2011 2012 2013*

Total PE & VC Energy PE & VC

State of the Capital Markets Real Estate Finance

Presented by Tom Fish

National Perspective

Although relatively low from a historical perspective, the 10-year Treasury yield has been on the rise since mid-May

0%

1%

2%

3%

4%

5%

6%

7%

8%

Aug-9

3Fe

b-94

Aug-9

4Fe

b-95

Aug-9

5Fe

b-96

Aug-9

6Fe

b-97

Aug-9

7Fe

b-98

Aug-9

8Fe

b-99

Aug-9

9Fe

b-00

Aug-0

0Fe

b-01

Aug-0

1Fe

b-02

Aug-0

2Fe

b-03

Aug-0

3Fe

b-04

Aug-0

4Fe

b-05

Aug-0

5Fe

b-06

Aug-0

6Fe

b-07

Aug-0

7Fe

b-08

Aug-0

8Fe

b-09

Aug-0

9Fe

b-10

Aug-1

0Fe

b-11

Aug-1

1Fe

b-12

Aug-1

2Fe

b-13

Aug-1

3

Yield

(%)

Ten yr treasury One mo libor

Source: Moody’s Analytics, Bloomberg, Jones Lang LaSalle Research

As of 9/5/13, the 10-year treasury hit 2.99, the highest level since July 2011. We attribute the recent move to the Fed’s plan to taper off the pace of its $85 billion monthly bond purchase program; which some investors are overly concerned that it could begin as early as mid-September.

CMBS Spreads

Source: Bloomberg, Commercial Mortgage Alert, Jones Lang LaSalle Research

* As of September 6, 2013 As spreads tightened, Banks are more likely to lend as originating loans are in favor of positive leverage.

0

200

400

600

800

1,000

1,200

1,400

Jul-0

6Oc

t-06

Jan-

07Ap

r-07

Jul-0

7Oc

t-07

Jan-

08Ma

y-08

Aug-

08No

v-08

Feb-

09Ma

y-09

Aug-

09De

c-09

Mar-1

0Ju

n-10

Sep-

10De

c-10

Mar-1

1Ju

n-11

Oct-1

1Ja

n-12

Apr-1

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AAA CMBS Spread to Swaps

Highly-rated CMBS spreads remain at post-crisis lows, but have widened as much as 50+ bps since mid-May, before tightening by 15-25 bps since beginning of July

3Q2006 – 3Q2013* Sp

read

ove

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basis

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CMBS delinquent unpaid balance* declines in July for four of the five categories compared to a year ago; higher for REO

CMBS delinquency breakdown for July 2013 versus the year ago period

* Source: Morningstar, Jones Lang LaSalle Research

Jul-13 Jul-12 Category UPB ($Bil) UPB ($Bil) 30-Day $3.44 $8.74 60-Day $2.04 $3.34 90+-Day $11.15 $18.58 Foreclosure $10.62 $12.22 REO $19.49 $17.17 Current $698.28 $650.76 Total CMBS * $745.02 $710.82 Total CMBS Del. $46.74 $60.06 Delinquent % 6.27% 8.45% * Includes the "All Deals", "Agency" and "Canadian" portfolios as identified by Morningstar - representative of all CMBS data collected by Morningstar Credit Ratings, LLC ("Morningstar") on a monthly basis.

Source: Federal Reserve, Jones Lang LaSalle Research

Finance Companies, $45 bil. (1%) Agency & GSE-Backed, $121 bil. (4%)

Commercial Banks, $1.50 tril. (49%)

CMBS,CDO & Other ABS $562 bil. (18%)

Life Companies, $328 bil. (11%)

GSEs, $262 bil. (9%)

REITs, $33 bil. (1%)

Other, $221 bil. (7%)

Current commercial and multifamily real estate debt outstanding: $3.07 trillion as of Q1 2013 Holders of commercial and multifamily mortgages outstanding

Lender Type Amount (Millions) %Bank & Thrift $1,496,000 49%

CMBS, CDO & Other ABS $562,000 18%Agency / GSE Portfolios & MBS $121,000 4%

Life Insurance Companies $328,000 11%GSE $262,000 9%

Finance Companies $45,000 1%REITs $33,000 1%

All Other $221,000 7%Total $3,068,000 100%

Properties of at Least $5 Million, entity-level transactions are included in these data. *YTD 2013 estimates based on preliminary data as of early August 2013 Source: Jones Lang LaSalle Research, Real Capital Analytics

Houston and Dallas strong when compared to major Gateway markets

Total transaction volume by market (ranked by order of volume) – apartment, industrial, office and retail

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Cross-Border capital into the U.S. remains strong

Source: Real Capital Analytics, Jones Lang LaSalle Research * Properties and portfolios of $2.5 million and greater, September 5, 2013

Source of Capital Volume in $US Billions # of Properties

Canada $7.09 287

Singapore $1.88 8

Germany $1.71 43

China $1.70 12

South Korea $1.45 18

Israel $1.29 38

Australia $1.14 15

Switzerland $0.80 11

Norway $0.63 5

Other $3.59 77

Total $21.28 514

Canadian asset managers and REITs; Singaporean sovereign wealth funds; German investment managers; and Chinese private HNW individuals have been highly active year-to-date*

Market destination of cross-border capital

Source: Real Capital Analytics, Jones Lang LaSalle Research * Properties and portfolios of $2.5 million and greater, September 5, 2013

Market Destination Volume in $US Billions # of Properties

Manhattan $3.55 21

Los Angeles $2.82 27

Washington, DC $1.00 12

Houston $0.90 16

Seattle $0.87 18

Chicago $0.85 12

Inland Empire $0.81 7

Hawaii $0.78 2

Atlanta $0.63 17

Other $9.07 382

Total $21.28 514

Gateway markets remain top destination of choice for cross-border capital

U.S. and select market GDP growth & 10-year Treasury comparison

Source: Jones Lang LaSalle Research, BEA, Bloomberg

The strong GDP growth of Houston and Texas overall makes borrowing rates here highly favorable (2001 – 2012)

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

YE 2

001

YE 2

002

YE 2

003

YE 2

004

YE 2

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YE 2

006

YE 2

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YE 2

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YE 2

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YE 2

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US Texas Florida California New York Houston 10yr Treas

Growth for Texas and Houston ahead of 10-year Treasury in most years; past three years since recovery, Houston has shown steady growth

U.S. and select market GDP growth & 10-year Treasury comparison

Source: Jones Lang LaSalle Research, BEA, Bloomberg

GDP Growth Vs. 10-Year Treasury Spread Between GDP Growth & 10-Year Treasury US Texas Florida California New York Houston 10-Year US California Texas Houston YE 2001 0.40% 4.40% 5.30% 0.10% 3.80% 1.80% 5.05% -4.65% -4.95% -0.65% -3.25% YE 2002 1.94% 2.60% 5.80% 1.90% -0.40% 1.30% 3.82% -1.88% -1.92% -1.22% -2.52% YE 2003 3.87% 5.30% 7.10% 3.10% 0.30% -1.69% 4.25% -0.38% -1.15% 1.05% -5.94% YE 2004 2.90% 9.60% 8.20% 4.60% 2.80% 7.02% 4.22% -1.32% 0.38% 5.38% 2.80% YE 2005 2.81% 7.20% 9.60% 4.20% 4.40% -2.80% 4.39% -1.58% -0.19% 2.81% -7.19% YE 2006 2.38% 8.90% 7.40% 3.30% 4.10% 5.63% 4.70% -2.32% -1.40% 4.20% 0.93% YE 2007 2.21% 8.80% 4.00% 1.00% 0.10% 7.86% 4.23% -2.02% -3.23% 4.57% 3.63% YE 2008 -3.32% 5.40% -1.70% -0.40% -2.20% -1.36% 2.21% -5.53% -2.61% 3.19% -3.57% YE 2009 -0.08% -5.70% -3.68% -5.10% -1.40% -0.79% 3.84% -3.92% -8.94% -9.54% -4.63% YE 2010 2.39% 7.60% 0.90% 0.30% 4.00% 4.84% 3.29% -0.90% -2.99% 4.31% 1.55% YE 2011 1.97% 7.70% 2.50% 1.20% 1.20% 3.70% 1.88% 0.09% -0.68% 5.82% 1.82% YE 2012 1.67% 5.80% 4.10% 3.50% 1.30% 4.80% 1.75% -0.08% 1.75% 4.05% 3.05%

Texas markets top metro-level employment growth as Silicon Valley drops to sixth place

Source: Jones Lang LaSalle, Bureau of Labor Statistics

Houston 3.6%

Austin 3.3%

Dallas 3.6%

Denver 3.1%

Charlotte 3.1%

Silicon Valley 2.9%

Office sector

Tech and energy still leading recovery, but more markets participating in the recovery as we head into the second half of 2013

Source: Jones Lang LaSalle

2010

Net absorption as a percent of inventory

2011 2012 2013

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Houston Dallas SiliconValley

Austin Portland SanFrancisco

Seattle Atlanta Miami Phoenix San Diego

Sunbelt markets starting to add to the recovery, but tech and energy still dominating growth

2013 net absorption as percent of inventory


Energy markets

Technology markets

U.S. average

Sunbelt markets

11 markets have seen over 500,000 s.f. of starts since Q1 2012; Houston responsible for 28.6 percent of starts

7,119,392

2,489,6512,107,872

1,531,449 1,496,757 1,448,6721,100,000 1,022,000 854,684 732,595 637,000

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