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UNC Kenan-Flagler Annual Real Estate Conference

Discussion Materials
19 February 2009

UNC Kenan-Flagler Annual Real Estate Conference

Morgan Stanley Real Estate

Global Platform

Leading global real estate investment manager with $91Bn in real estate assets under management(RE AUM) America ($36Bn), Europe ($29Bn) and Asia ($26Bn) Core, value-added and opportunistic investment vehicles Industry leading global real estate investment banking franchise Intermediated $400Bn in real estate M&A transactions over past decade Public debt, preferred and equity underwriting

Frankfurt New York London Stockholm Seoul Tokyo

Moscow Dublin Boston Toronto San Francisco Paris Chicago Madrid Menlo Park Atlanta Milan Shanghai Taipei Hong Kong Los Angeles New Delhi Mexico City Mumbai Bangkok Houston Dubai So Paulo Singapore Sydney Munich Beijing

Buenos Aires

Johannesburg Melbourne

Morgan Stanley Real Estate Global Platform Number of Offices Number of Professionals 22 815(1)

Morgan Stanley Real Estate Offices Morgan Stanley Investment Banking Offices Countries with Morgan Stanley Hotel Investments

Note 1. Includes banking and investing professionals as well as Financial Controllers, IT, Legal and administrative staff who fully support the real estate investing business as of November 30th

UNC Kenan-Flagler Annual Real Estate Conference

Unprecedented Financial and Economic Times

Since September 2008: Conservatorship of Fannie Mae and Freddie Mac Bankruptcy of Lehman Brothers Sale of Merrill Lynch, Wachovia and Washington Mutual Collapse of AIG Failure of numerous other financial institutions Unparalleled global government intervention

The Vicious Cycle

1. Losses on Leveraged Borrowing

The Casualties
$1.1 Trillion Financial Sector Writedowns (1) Banks: $825Bn / Insurance: $165 Bn / GSEs: $114Bn Americas: $758Bn / Europe: $315Bn / Asia: $31Bn Market capitalization of equity markets has declined significantly (2): World: $59Tr to $28Tr (53% decline) US: $19Tr to $10Tr (47% decline)

2. Deterioration in Credit Quality

3. MTMs/Losses in Financials 4. Deleveraging / Reduction in Credit Availability 5. Asset Price Declines

Europe: $18Tr to $8Tr (56% decline) 6. Impact on the Real Economy Asia: $17Tr to $8Tr (53% decline)

7. Repeat step 1

Notes 1. Asset writedowns and credit losses; Bloomberg as of February 13, 2009 2. FactSet aggregate market value calculations from October 2007 to February 12, 2009

UNC Kenan-Flagler Annual Real Estate Conference

Select Real Estate Public Market Declines

U.S.
Index Price Performance since January 1, 2008

Since January 1, 2008, global public real estate markets have declined US: (60.5%) Japan: (41.8%) Europe: (56.5%) The primary Chinese equity index for domestic securities, the China A Share index, has declined (54.3%) The public market decline price in significant cap rate expansion and weakening fundamentals

Europe
Index Price Performance since January 1, 2008

1,000 900 800 700 600 500 400 300 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09
MSCI US REIT Index

2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09
FTSE EPRA/NAREIT Europe

Japan(1)
Index Price Performance since April 18, 2008

China A-Shares Index

Index Price Performance since January 1, 2008

1,050 950 850 750 650 550 450 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09

5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09
China A-Share Index

FTSE EPRA/NAREIT Japan

Source FactSet as of February 17, 2009

Note 1. Index data first made available in April 2008

UNC Kenan-Flagler Annual Real Estate Conference

Stress in All Corners of the Market

Volatility
CBOE Volatility Index of S&P 500
90 80 70 60 50 40 30 20 10 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09

Commodities down 59% from one year ago as of February 17, 2009 Emerging Market Equities down 48% from one year ago as of February 17, 2009

Hedge Fund Performance

Credit Suisse Tremont Hedge Fund Index (Monthly Returns)

%
4.0% 2.0% 0.0% (2.0)% (4.0)% (6.0)% (8.0)% Jan-07 May-07 Sep-07 Jan-08 May-08 Nov-08 Jan-09

Source

FactSet as of February 17, 2009

Source

HedgeFundIndex.com as of February 17, 2009

Commodities
Indexed to 100
140 120 100 80 60 40 20 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09

Emerging Markets Index

MSCI Emerging Markets Index Indexed to 100
110 100 90 80 70 60 50 40 Dec-07 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09

GSCI Commodity Index

Source Bloomberg as of February 17, 2009

Source

FactSet as of February 17, 2009

UNC Kenan-Flagler Annual Real Estate Conference

Summary of Real Estate Environment and Opportunities

We expect the best distressed / opportunistic environment we have seen since the early 90s Distressed opportunities globally will come from: Failed / stressed financial institutions that will be forced sellers Corporate restructurings and non-core asset sales to generate liquidity and solidify balance sheets Public real estate companies needing to deleverage Overleveraged borrowers and bank debt sales Timing of market stabilization is still unclear need to be patient and not enter the market prematurely

Environment
The credit crisis remains intense and has resulted in a dramatic re-pricing of risk Lack of credit/financing Scarcity of capital Less flexible debt; lower LTVs, conforming DSCR All asset classes have been impaired Cap rates significantly wider Real estate yields are at historic lows versus corporate bond yields; reversion to historical norms would require a real estate price decline of 25% Declining operations/fundamentals Global recession is slowing rent growth and vacancies are projected to rise with corporate bankruptcies and unemployment Wholesale vs. retail pricing Big spreads between (i) stabilized vs. opportunistic assets and (ii) prime vs. secondary availability

Opportunities
Distressed situations Lender driven Borrower driven Corporate restructurings Focus on core businesses Sale-leasebacks on occupational real estate Real estate company distress Bankruptcies Growth capital Currently, credit opportunities appear more favorable than equity opportunities

UNC Kenan-Flagler Annual Real Estate Conference

Institutional Investor Approach to Real Estate

Existing portfolios are concentrated in core investments However, new investments are heavily skewed to value added and opportunistic Investors are likely anticipating that near-term vintage years will be strong ones, due to current distress Real estate averages 10% of Plan Sponsor target allocations Expected real estate commitments are down 31% from 2008
Real Estate Capital Flows
($Bn)
80 70 60 50 40 30 20 10 0 71 59 59 46 60 42 29

Existing Allocation by Risk Preference(1)

Expected New Allocations by Risk Preference(1,2)

Existing Allocation to Non-Core 49%

New Allocation to Non-Core 84%

Foreign Investment 14% REITS 1%

REIT 9%

Opportunistic (US) 19%

Core 16%

Foreign Investment 3%

Core (US) 51%

Value-Added (US) 18%

Opportuistic (US) 35%

Value-Added (US) 34%

2006 2007 Actual Capital Flows

2008 2009 Expected Capital Flows

Source

2009 Plan Sponsor Survey, Kingsley Associates

Source

2009 Plan Sponsor Survey, Kingsley Associates

Sources IREN, Kingsley Associates

Notes 1. For US Plan Sponsors Opportunistic investing seeks the highest returns, typically 20% or more, and uses the highest proportion of debt, sometimes reaching 80% or more. Core investing seeks the lowest risk and often targets the NCREIF benchmark, which has historical average returns in the 8%10% range. Core investing typically uses debt between 0% and 40%. Value-Added investing falls between core and opportunistic, seeking returns that typically range between 11% and 17% 2. Excludes a category called Other, which represents 3%