JP Conklin 704-887-9880 office jp.conklin@pensfordfinancial.com www.pensfordfinancial.

com Leveling the Playing Field September 24, 2012 _______________________________________________________________________ Interview with Ken Beuley of The Keith Corporation After the quietest week in recent memory, we wanted to take this opportunity to speak with some of our clients since they are far more intelligent than we could hope to be. The following is a Q&A with one of Charlottes finest, Ken Beuley. I first met Ken a little over three years ago at The Original Pancake House in the South Park area of Charlotte. Ken is the CFO and Director of Development for The Keith Corp, a premier developer of single and multi-tenant office, industrial, retail, and medical office properties. Pensford was in its infancy and Ken was working on two loans with BB&T. We spoke about my new business venture and how we might be able to assist in his swap negotiations with BB&T. Three unreturned phone calls, four unreturned emails, and five weeks later, I got a call on my cell from Ken late on a spring Friday afternoon. I was in my driveway playing basketball with my kids and my parents were standing right next to me, visiting from PA. He had locked in his swaps a few weeks ago and would I be kind enough to stop emailing him? Undaunted, I asked why he chose not to hire us. He said I had to do the swap with BB&T, so I didnt see how you could help. Gulp. My company was only weeks old and our first live deal had already fallen through. I would be lying if I said I didnt question whether there really was a market for derivative consulting. I tried to explain that we negotiate directly with the lender, just as he had negotiated the loan spread directly with the lender. In hindsight, the uninterrupted dial tone sound should have tipped me off that he had hung up. My parents wondered aloud if the bank would take me back. My son bricked an easy layup. Despite his best efforts to quash my dreams, Pensford slowly got up and running. At some point about a year later, Ken was encouraged to call us again now that we had a track record. We worked together closely on a transaction, analyzing a variety of structures and the relevant considerations and risks with each. We developed a mutual respect and are now happily on a first name basis - he calls me JP and I call him Sir. Weve worked together quite a bit since and I like and respect him, personally and professionally. Relationships like the one I have with Ken are what make this job so enjoyable.

One of my favorite encounters with Ken occurred on that first deal when Ken had significant frustration around the appraisal. We were on the phone with the lender discussing the swap and Ken switched gears to the appraisal. After ticking off reason after reason why the appraisal was wrong, Ken said I seriously question this guys career choice as an appraiser. He and the appraiser are not, to the best of my knowledge, on a first name basis. Ken grew up in Northern VA, so you might expect him to be a diehard Redskins fan. But the Skins are only second team because both of his parents grew up in Pittsburgh, which makes Ken a (gak) Steelers fan. The first game Ken ever watched was a little known game between the Steelers and Raiders on December 23, 1972. Did he really recall that precise date 40 years later? Maybe, but I had to Google it. It helps when the game has a moment with its own name. You may know it as The Immaculate Reception. Unfortunately for me, SteelerNation gained another fan that day, puke yellow flag and all. Ken is a Libra, CPA, political junkie, avid swimmer, and a big supporter of the Charlotte Police Department. He is significantly more qualified to write a newsletter than me, so I thought wed spend a few minutes picking his brain so you can read something intelligible this week. Ken had tickets for the game that night, where the defending Super Bowl Champion Eagles Giants were in town for a Thursday night game against the Panthers, but he still made time for me.

JP: What is the one thing you would do if you were elected President? Ken Beuley (KB): Drop the corporate tax rate for one year to 10%. This would create an incentive for US companies with billions of dollars overseas to repatriate and spend that money on hiring or building a factory or paying dividends.

JP: And raise tax revenue, right? KB: Yes, and some would say that it would be at the expense of future taxes, but those companies will never bring that money back to the US. This would create real demand and growth in the economy and not governmentally manufactured demand.

JP: Will Romney win? KB: No. If I had to wager, today I would say no. Two weeks ago, I would have said yes, but I am very nervous now. He is a great chief executive officer, but a mediocre politician. He knows how to run companies, like Bain and the Olympics. But he doesnt know how to run for office. And Obama is the opposite, great at running a campaign but not at running the country.

JP: What if Obama wins but the Republicans win the Senate, giving the Republicans control over Congress? Will the two sides recognize that neither was given a mandate and realize that they need to work together because the election in four years wont have an incumbent? KB: There arent any adults in the room. Obama and Boehner arent strong enough to be Reagan and Tip ONeill. Sometimes people say this leads to a Congress that wont do any harm, but we cant afford a do nothing Congress right now because of the fiscal cliff.

JP: So how do plans for The Keith Corp change depending on who wins in November? KB: We react to American corporations, we dont build on spec. If theres no need, then we wont gear up. I think if Obama wins, businesses will hold back. If Romney wins, businesses are ready to unleash.

JP: How do you feel about 2013? KB: People have been hesitant to pull the trigger, but they are busting at the seams (Im speaking to the industrial side). It is more important to reduce regulation than it is to cut taxes to create growth right now.

JP: So what happens to TKC if LIBOR or the 10yr Treasury jump by 2.00%? KB: I run our interest rate assumptions using an average 5% during construction, so wed be fine.

JP: Where do you see the 10yr Treasury at year end? KB: If Israel attacks Iran, well experience a global recession and the 10 year Treasury will go to 1.25% because of oil. If Israel doesnt attack, and now Im giving you too many variables, and we have an Obama win, it will peak in November around 1.95%. It will start to come back down in December and finish the year at 1.75%. Once the full impact of the automatic tax increases take effect in January, it will be around 1.45% in the first half of 2013. If Romney wins, the 10 year will finish the year at 2.00% and could finish 2013 at 2.75% because of the economic growth his policies will foster.

JP: What keeps you up at night? KB: Lack of leadership by politicians. They are all talking points, but nobody is doing anything while the nation goes broke.

JP: I know were short on time and youre going to the game tonight, so who is going to win the Super Bowl? And you cant say the Steelers. KB: (Pausepausepause) KB: The Panthers JP: Homer (Editors note: not sure if Ken was drinking in the office as a pre-tailgate party)

JP: What is your biggest regret? KB: Professional or personal? Not working in New York for a period while I was younger, that is a professional regret. But I dont have any regrets about my personal life, none big enough to matter.

JP: When you were 10 years old, what did you really want to be when you grew up? KB: In the military. A Marine.

JP: What is your most memorable phone call? KB: Good or bad? JP: Either. KB: (pause) When my brother died. That is far and away my most memorable phone call. My mother called me to tell me my brother had died unexpectedly. JP: When was that? KB: Seven years ago. The second most memorable phone call happened when I was on the phone with a client and someone popped their head in my office and said a plane had crashed into the World Trade Center. I kept doing the conference call until they popped their head in again and said another plane had crashed into the other tower. So I said to the client I have to go and we all went and sat in the conference room and watched the TV the rest of the day. Those were my two most memorable phone calls.

JP: Thank you for sharing that. I know you have to run, but enjoy the game tonight and thank you for your time today, Sir. KB: No problem, JP. And with that, Ken rushed off to watch his Super Bowl pick just barely lose to the Giants by 29 points. At home. Perhaps his political forecasting skills are the same as his Super Bowl forecasting skills

Dallas Fed President Fisher Hes that pesky voter that keeps dissenting at each FOMC meeting. He spoke at the Harvard Club and I wasnt invited because, you know, I didnt go to Harvard. I would have, you see, butIm just not smart enough. I thought he said some really interesting things: "This much we do know: Our engine room is already flush with $1.6 trillion in excess private bank reserves owned by the banking sector and held by the 12 Federal Reserve Banks. Trillions more are sitting on the sidelines in corporate coffers. On top of all that, a significant amount of underemployed cash or fuel for investment is burning a hole in the pockets of money market funds and other nondepository financial operators. This begs the question: Why would the Fed provision to shovel billions in additional liquidity into the economy's boiler when so much is presently lying fallow?... "Just recently, in a hearing before the Senate, your senator and my Harvard classmate, Chuck Schumer, told Chairman Bernanke, "You are the only game in town." I thought the chairman showed admirable restraint in his response. I would have immediately answered, "No, senator, you and your colleagues are the only game in town. For you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together. Illegitimum non carborundum; get on with it. Sacrifice your political ambition for the good of our country for the good of our children and grandchildren. For unless you do so, all the monetary policy accommodation the Federal Reserve can muster will be for naught." The full speech can be read here: http://www.dallasfed.org/news/speeches/fisher/2012/fs120919.cfm

Fed-Speak and Unemployment Rate Targeting Chicago Fed President Evans proposed QE until the Unemployment Rate dropped below 7% or inflation exceeded 3%. Minneapolis Fed President Kocherlakota proposed a similar approach, except he calls for QE to continue until the UR drops below 5.5% or if inflation exceeds 2.25%. Keep in mind that we need to add 250k jobs per month for twelve consecutive months for the UR to decline by 1%. Does this mean we wont be discussing the end of QE Infinity

until 2017 or later? And should we be happy that its only 5 years and not really infinity?

LIBOR Outlook Keep an eye on your Alternative Index for floating rate loans. In the event something happens to LIBOR, banks will rely on this to determine your rate. US Bank is using Dodd-Frank implications as a justification to change the rate it charges on the loan. Were hearing they are now willing to tweak the language to read that they will only change the rate if they do so for every loan in the real estate portfolio. WFC is another big offender, where the Alternative Index is frequently several percentage points higher than the rate referencing LIBOR. But, WFC also is moving away from the dreaded rounding issue so kudos to them.

Fixed Rate Outlook I am torn. Treasury must raise $4 trillion this year alone. The four-year increase in borrowing amounts to $55,000 per U.S. household. The Feds balance sheet is now $1.5T and appears to be adding about $500B per year. Eurozone crisis. Oil. Middle East. Fiscal cliff. CJ Spiller shoulder injury. QE Infinity. I think theres a lid on rates right now, with maybe the upper end being around 2.10%. The Fed actively targeting the long end of the curve to the tune of $85B in purchases each month reminds of the adage, Dont fight the Fed.

This Week Quite a bit of economic data out this week in addition to Treasury auctions and several Fed speeches. We expect continued volatility in rates, +/- 10-15bps a reasonable range.
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ECONOMIC CALENDAR
Economic Data Day Monday Time 8:30AM 10:30AM Tuesday 9:00AM 10:00AM 10:00AM 10:00AM Wednesday 7:00AM 10:00AM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 11:00AM Friday 8:30AM 8:30AM 9:45AM 9:55AM Speeches and Events Day Monday Tuesday Wednesday Time 3:30PM 12:00PM 1:15PM Report Fed's Williams speaks at the City Club of San Francisco Fed's Plosser speaks on Economic Outlook Fed's Evans speaks Place San Francisco, CA Philadelphia, PA Indiana Report Chicago Fed Nat Activity Index Dallas Fed Manufacturing Activity Case-Shiller 20-city Index Consumer Confidence Richmond Fed Manufacturing Index House Price Index (MoM) MBA Mortgage Applications New Home Sales (MoM) Initial Jobless Claims Continuing Claims GDP (QoQ) GDP Price Index Personal Consumption Durable Goods Orders Durables ex Transportation Kansas City Fed Manufacturing Activity Personal Income Personal Spending Chicago Purchasing Manager U. of Michigan Confidence 2.2% 375k 3285k 1.7% 1.6% 1.7% -5.0% 0.3% 5 0.2% 0.5% 53.0 79.0 -1.4 1.10% 63.2 -6 0.7% Forecast Previous -0.13 -1.6 0.50% 60.6 -9 0.7% -0.2% 3.6% 382k 3272k 1.7% 1.6% 1.7% 4.2% -0.4% 8 0.3% 0.4% 53.0 79.2

Treasury Auctions Day Tuesday Wednesday Thursday Time 1:00PM 1:00PM 1:00PM 2-year Treasury 5-year Treasury 7-year Treasury Report Size $35B $35B $29B