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CAPITAL MARKETS REVIEW FROM THE TEXAS BERKADIA OFFICES QUARTER TWO a Berkshire Hathaway and Jefferies Financial Group company

CAPITAL MARKETS REVIEW - Berkadia...ECONOMIST SURVEY Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Latest Survey: May 10, 2018 2.98% 3.10% 3.18% 3.26% 3.32% 3.43% AS RATES ARE PROJECTED TO CONTINUE

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Page 1: CAPITAL MARKETS REVIEW - Berkadia...ECONOMIST SURVEY Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Latest Survey: May 10, 2018 2.98% 3.10% 3.18% 3.26% 3.32% 3.43% AS RATES ARE PROJECTED TO CONTINUE

CAPITAL MARKETS REVIEWFROM THE TEXAS BERKADIA OFFICESQUARTER TWO

a Berkshire Hathaway and Jefferies Financial Group company

Page 2: CAPITAL MARKETS REVIEW - Berkadia...ECONOMIST SURVEY Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Latest Survey: May 10, 2018 2.98% 3.10% 3.18% 3.26% 3.32% 3.43% AS RATES ARE PROJECTED TO CONTINUE

STATE OF REAL ESTATE CAPITAL MARKETS

CAPITAL MARKETS REVIEWFROM THE TEXAS BERKADIA OFFICES

Source: Real Capital Analytics Source: Real Capital Analytics

n Excess availability of capital results in increased competition for transaction

n Liquid capital markets allows sponsors to refinance rather than sell below targeted valuations

n Compressed cap rates have led to an increase in DSCR constrained deals. Transactions closed with permanent debt are a result of lower equity returns or aggressive income growth assumptions.

n Increased lender competition drives spreads lower

a Berkshire Hathaway and Jefferies Financial Group company

SECOND QUARTER INTEREST RATE RECAP

n In January, the 10-year Treasury broke 2.62% for the first time in four years and more recently passed the 3.00% threshold.

n The 2-year Treasury broke 2.00% for the first time since the crisis and was 200bps higher than five years earlier.

n The Federal Reserve Bank’s balance sheet normalization process is underway, allowing a gradually increasing amount of existing Treasury and

MBS holdings to mature each month, rather than reinvesting those proceeds back into similar bonds. The Fed’s stated goal is to reduce the $4.5T balance by $50B per month by Q4 2018.

n US debt exceeded $21T. Coupled with the tax cuts, this translates into more Treasury issuance over the next few years, which should exert upward pressure on yields.

Robust levels of capital continue to be raised and allocated to commercial real estate resulting in increased competition for high quality transactions. According to Preqin, forty-seven private closed-end real estate funds held a final close in Q1 2018, raising an aggregate $33bn in investor commitments. This represents the highest first quarter level since 2008 and brings the total amount of dry powder in closed-end funds to $266bn at the end of March. Cap rates nationally have remained remarkably stable despite rising interest rates and geopolitical uncertainty. In addition to the vast amount of equity capital looking for deals, the liquid debt market supports pricing by allowing owners to refinance rather than sell below their expectations. Per Real Capital Analytics (RCA), the markets that have seen the largest percentage increase in sales volume have been higher cap rate markets where investors are chasing yield.

With rising treasury yields, competition among lenders has caused lending spreads to contract, helping absorb some of the impact of rising rates. With cap rates remaining stable or even declining for the most sought-after assets, most transactions are now debt service coverage constrained at lower leverage levels. Transactions that are closed with permanent debt are the result of buyers accepting a lower overall equity return or utilizing more aggressive income growth assumptions to offset the lower leverage. Alternatively, more transactions are being capitalized with shorter term, higher leverage floating rate debt as spreads in the debt fund arena have compressed close to 100 bps in the last six months.

CAP RATE COMPRESSION

DECOMPOSITION OF COMMERCIAL CAP RATES

8%

7%

6%

5%

4%

3%

2%

1%

0%

Equity Spread

Debt Spread

10yr UST

‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18

5%

6%

7%

8%

9%M

ar-1

0

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Cap Rate Compression

US Office Cap Rate US Industrial Cap RateUS Retail Cap Rate US Apartment Cap Rate

8%

7%

6%

5%

US Office Cap Rate US Industrial Cap RateUS Retail Cap Rate US Apartment Cap Rate

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Page 3: CAPITAL MARKETS REVIEW - Berkadia...ECONOMIST SURVEY Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Latest Survey: May 10, 2018 2.98% 3.10% 3.18% 3.26% 3.32% 3.43% AS RATES ARE PROJECTED TO CONTINUE

Lender Execution Agency

Deal Name Eilan

City San Antonio, TX

Production Amount $69,000,000

Leverage 75%

Narrative 539-unit mid-rise apartment development with 50M SF of incorporated office and retail space surrounding luxury hotel.

Challenge Navigating the condominium structure and underwriting the apartments and retail /office space on a stand alone basis.

Berkadia Solution Berkadia implemented the correct condominium structure and provided the Sponsor with a 12 year loan for the apartments and retail/office space.

Lender Execution CMBS

Deal Name Remington Park

City Houston, TX

Production Amount $42,500,000

Leverage 70%

Narrative93% occupied Class B apartment complex in the midst of a market downturn due to oversupply.

Challenge After the Sponsor put down earnest money, operations at the Property continued trending downwards.

Berkadia Solution Berkadia originated a max leverage, 10-year fixed rate CMBS loan with full term interest-only at the quoted loan amount.

Lender Execution Agency

Deal Name Guilford

City Baltimore, MD

Production Amount $25,000,000

Leverage 55%

Narrative85% occupied student housing property being leased by-the-unit in a by-the-bed market due to seller’s lack of experience in the student housing sector.

Challenge The Sponsor required fixed-rate financing with maximum interest-only to acquisition an inefficiently managed asset located in an oversupplied market.

Berkadia Solution Berkadia originated a 10-year fixed rate agency loan with full term interest-only at the quoted loan amount.

BERKADIA CAPITAL SOLUTIONS — CLOSED DEALS

INCREASINGLY HAWKISH FOMCn Three total hikes in 2018 is still the base case priced into markets (LIBOR to 2.35%), but Fed-speak suggests the growing potential for a fourth

hike. Futures markets have a 45% probability of a fourth hike, which would put LIBOR around 2.55%.

GLOBAL REMOVAL OF ACCOMMODATIONn The Fed is actively shrinking its balance sheet and the ECB is expected to end its own QE program by year end. The two central banks

own a combined $10T in bonds and no matter how gradual the removal of this accommodation, it suggests upward pressure on yields and increased volatility in rates. Additionally, the Fed is actively raising rates and the European Central Bank (ECB) is expected to begin hiking in the middle of 2019.

THEMES TO WATCH FOR REMAINDER OF 2018

10 YR INTERPOLATED TREASURY FORWARD IMPLIED RATE

1-YR FWD

2-YR FWD

3-YR FWD

4-YR FWD

5-YR FWD

Interpolated Treasury Curve 3.07% 3.11% 3.14% 3.15% 3.17%

Implied Treasury - Forward Swaps 3.04% 3.06% 3.07% 3.07% 3.08%

Average 3.06% 3.09% 3.11% 3.11% 3.13%

ECONOMIST SURVEY Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19

Latest Survey: May 10, 2018 2.98% 3.10% 3.18% 3.26% 3.32% 3.43%

AS RATES ARE PROJECTED TO CONTINUE TO RISE, HISTORICALLY LOW FIXED RATE COUPONS ARE STILL READY TO BE LOCKED IN THE NEAR TERM

PensfordF I N A N C I A L G R O U P

a Berkshire Hathaway and Jefferies Financial Group company

Page 4: CAPITAL MARKETS REVIEW - Berkadia...ECONOMIST SURVEY Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Latest Survey: May 10, 2018 2.98% 3.10% 3.18% 3.26% 3.32% 3.43% AS RATES ARE PROJECTED TO CONTINUE

a Berkshire Hathaway and Jefferies Financial Group company

BERKADIA CAPITAL SOLUTIONS — CLOSED DEALS

Lender Execution CMBS

Deal Name Southeast and Texas Self-Storage Portfolio

City Tx, LA and MS

Production Amount $101,500,000

Leverage 45%

NarrativeRefinance of a 17 property, 1.6 million sq. ft. storage portfolio located in Texas, Louisiana and Mississippi.

Challenge Mitigate floating rate exposure and create capacity with construction lenders.

Berkadia Solution Originated a 10 year fixed-rate, full-term interest only CMBS loan on behalf of the Borrower.

Lender Execution Agency

Deal Name Morgan Portfolio

City Houston, TX

Production Amount $44,000,000

Leverage 75%

NarrativeAcquisition loans for a four-property multifamily portfolio.

Challenge Speed of execution on four separate transactions.

Berkadia Solution Loans were originated using Freddie Mac’s Green Up Program and were index locked and closed in 35 days.

Lender Execution Life Company

Deal Name Echo Lane

City Houston, TX

Production Amount $26,700,000

Leverage 60%

NarrativeAcquisition of Class B 300,000 SF office campus.

Challenge Over 50% of in-place tenancy rolling in first three years. Sponsorship needed to hedge interest rate exposure.

Berkadia Solution Found lender willing to get aggressive on Class B suburban office in Houston market. Locked non-recourse loan at application.

Lender Execution Debt Fund

Deal Name Union Crossing

City Houston, TX

Production Amount $8,750,000

Leverage 60%

Narrative Refinance of raw land for site development.

Challenge Borrower had near term loan maturity and funds to facilitate horizontal site improvements.

Berkadia Solution Berkadia originated an 18-month non-recourse bridge loan with two 6-month extensions to facilitate the loan payoff, horizontal improvements and parcel release paydown.

Lender Execution Life Company

Deal Name Los Carneros

City Santa Barbara, CA

Production Amount $21,000,000

Leverage 55%

Narrative53% pre-leased new-construction Class A multimfamily midrise.

Challenge Sponsorship looking to mitigate floating interest rate exposure.

Berkadia Solution Originated fixed rate 20/20 with a 1.20% spread to hedge interest rates over a long-term hold.

Lender Execution Debt Fund

Deal Name Milbrook Pointe

City Augusta, GA

Production Amount $26,100,000

Leverage 80%

NarrativeGarden style multifamily Class B asset.

Challenge Maximum leverage to fund $31,830/unit renovation to the collateral.

Berkadia Solution Delivered a creative financing solution so Sponsor could act quickly and decisively.

Page 5: CAPITAL MARKETS REVIEW - Berkadia...ECONOMIST SURVEY Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Latest Survey: May 10, 2018 2.98% 3.10% 3.18% 3.26% 3.32% 3.43% AS RATES ARE PROJECTED TO CONTINUE

AUSTIN OFFICE...................901 S. MoPac Expressway, Bldg 2, Ste 430 | Austin, TX 78746 | 512-226-8700LLOYD GRIFFINManaging [email protected]

BRANT SMITHSenior Managing [email protected]

ANDY HILLManaging [email protected]

CAMERON [email protected]

TYLER NOWLINAssociate [email protected]

DALLAS OFFICE...........................................8333 Douglas Ave, Ste 1100 | Dallas, TX 75225 | 214-346-0200JOHN KOEIJMANSSenior Managing [email protected]

CHRIS POLLARDSenior [email protected]

ELI GERSHENSONSenior [email protected]

JASON RICEManaging [email protected]

JOE HEVEYManaging [email protected]

NATHAN STONEManaging [email protected]

BRADY MEYERAssociate [email protected]

AUSTIN BLANKENSHIPAssociate [email protected]

BRAD MASONAssociate [email protected]

HOUSTON OFFICE.................................. 2229 San Felipe, Ste 1600 | Houston, TX 77019 | 713-469-4500TUCKER KNIGHTHead of Texas [email protected]

CUTT ABLESONSenior Managing [email protected]

JON GILFILLANSenior Managing [email protected]

CORBY CHAFFINSenior [email protected]

MARK CROSSWELL, CFAAssociate [email protected]

NICHOLAS MURPHYAssociate [email protected]

a Berkshire Hathaway and Jefferies Financial Group company

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44Life Insurance CompaniesWith whom we have closed loans

LEADER Leading firm in Houston, Dallas and Austin offering all forms of financing products – FNMA, FMCC, FHA, CMBS, LifeCo, Bank, Debt Fund and Equity

#1FreddieMac & FannieMae (Combined Volume)

#1HUD Loan Top Origination