Industry news, views and occasional strange stuff.
Realty Income closed a public offering today and raised $100 million in the process. It will use the proceeds to pay down debt.
A lot of the public retail REITs in recent weeks have employed a variety of options to pay down debt. As far as I can tell, most have succeeded.
Moody’s has cut the ratings of iStar financial, which specializes in commercial real estate lending, to junk. A company spokesperson tells the Wall Street Journal, however, that iStar should weather this fine for the time being.
One of the stunners in the article is the line about Moody’s expecting iStar’s nonperforming assets to grow to be more than 8 percent of its total assets. That sounds extreme. It’s certainly a much higher level of distress than I think currently exists.
Andrew Backman, iStar’s senior vice president of investor relations and marketing, called Moody’s action “disappointing” but “not surprising.” He reiterated that the company has no near-term plans to raise additional debt or equity capital. “There is no immediate impact from losing our investment-grade rating,” Mr. Backman said.
Until recently, the biggest challenge facing the company was how it would handle billions of dollars of loans and funding commitments to condominium developers that it assumed when it acquired Fremont General Corp. last year. Those types of assets have a higher chance of default in today’s housing slump.
On the positive note, Moody’s said iStar appears to have “adequate liquidity” to meet its debt obligations and funding commitments through 2009 “even in a stressed scenario.”
Investors often look to iStar — a bellwether name in the group of lenders specializing in financing commercial property deals — to get a broad overview of the financial health of the commercial real-estate sector nationwide. So far, that market hasn’t seen the kind of devastating losses felt in the residential market. But the worsening credit markets and a weakening U.S. economy have started to take a toll.
More bad news for Circuit City. After the resignation of its CEO followed by disappointing quarterly results and the company’s decision to withdraw its guidance, the company has hired turnaround specialist FTI Consulting Inc. as an adviser on restructuring. Stifel Nicolaus & Co. analyst David Schick wrote that “The risks of bankruptcy are very real [...] Vendors will have to decide how they plan to do business at Circuit City.”
Reports of a company hiring a restructuring specialist are almost never good for shareholders, but it may be a sign that Circuit City is finally being realistic about just how dire its situation is. To date, the company has explored a bizarre strategy of opening new stores in the face of devastating sales declines as it loses traffic to better competitors like Best Buy and Wal-Mart.
Link.
The CMBS market may be frozen, but the level of outstanding commercial real estate debt continued to expand during the second quarter.
Commercial and multifamily mortgage debt outstanding rose 1.5% in the second quarter, to $3.44 trillion, the Mortgage Bankers Association reports, based on an analysis of the Federal Reserve Board Flow of Funds data.
Amid the current credit crunch turmoil, commercial and multifamily mortgage debt outstanding gained $51.3 billion from the first quarter of 2008. Multifamily mortgage debt outstanding alone grew to $875 billion, an increase of $16.3 billion or 1.9% from first quarter levels.
“Despite the persistent credit crunch, investors increased their holdings of commercial/multifamily mortgages in the second quarter,” says Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “The only major investor group to see a decline in their holdings was the commercial mortgage-backed securities (CMBS) market, which has been most profoundly affected by the credit crunch. Other investor groups including commercial banks, life insurance companies, thrifts and the government-sponsored enterprises (GSEs) increased their holdings over the quarter.”
Could we see a spurt in buying activity before the bailout is enacted? It makes sense to me. The argument goes that commercial real estate is being unduly punished. So why not buy now when the getting is good? Moreover, for CMBS assets specifically, the terms offered by an opportunistic fund are likely to be less punitive than what the government has on offer. Others are skeptical, however.
Those investors feel that if they move quickly, they will be able to snap up deals before the government implements its $700 billion bailout plan, which could be voted on by the House as early as Monday. They point out that banks and other sellers of the soured securities and mortgages may be more willing to do deals with them because, unlike the government plan, they aren’t insisting on provisions such as a limit on executive compensation.
“We’ll try to buy some of the assets ahead of the transfer,” said Chris Hoeffel, a managing director at Bahrain-based Investcorp, which recently formed a $1 billion fund to buy high-yielding commercial real-estate debt.
Other opportunistic investors, though, say they likely will stick to the sidelines for now. They are skeptical that the government’s purchase of distressed assets will accurately establish what they are worth. So far, there have been few transactions, despite the desperation of banks to sell, because of disagreements over pricing.
Shares in embattled shopping centre owner Centro Properties Group shot up nearly 50% in morning trade today when the company announced a string of victories in discussions with the syndicate of bankers which hold the fate of the group in their hands.
Centro chief executive Glenn Rufrano also said it was his preference to stay on at Centro as its boss beyond January when his formal contract runs out. He said he was keen to manage the company as it stabilises and begins to reorganise its corporate structure assuming its debt problems are eventually solved.
Centro said today that its US lending group had further extended facilities of $US1.3 billion ($1.5 billion) associated with Centro’s joint venture with Centro Retail Trust until December 15.
Link.
This perplexes me. Real Estate Roundtable CEO Jeffrey D. DeBoer wrote an op-ed in the Wall Street Journal in favor of the bailout. In the article, the numbers that continue to indicate microscopic defaults in commercial mortgage-backed securities (CMBS) pools are invoked, yet the article still pleads that without the bailout, commercial real estate will suffer. (Incidentally, it appears CMBS will be eligible assets for the government to purchase if you read the text of the act.)
Today, debt on office buildings, shopping malls, hotels and apartment complexes continue to perform well. The default rate for commercial mortgage-backed securities (CMBS) loans stands at just 0.47%, while commercial mortgages in life insurance company portfolios have a default rate of just .03%.
Nevertheless, the $200 billion annual CMBS market is now dead in the water. Credit to the sector from other sources has almost completely stalled.
In short, the life line of the real estate industry, and indeed, job-creating businesses across America, has been cut. For construction workers, this means delayed projects and layoffs. For property owners, and for Main Street, this means property values are at risk of a free fall. For state and local governments, it means less revenue from commercial property taxes and an even tighter budget crunch. What happened to values in the residential market could very well happen on the commercial side — something which we can take steps to prevent.
If CMBS are, at their core, good assets and commercial real estate is an “island of stability” as DeBoer argues, why does commercial real estate need the bailout? If CMBS are strong, when the market calms, investors will once again invest in the bonds, right? Is CMBS “dead in the water”, as DeBoer writes? Why does commercial real estate need a bailout of CMBS pools are not experiencing huge defaults?
For the past 12 months, the majority of people within the commercial real estate industry have told us at Retail Traffic over and over that commercial real estate is not the same as residential real estate and that CMBS are stronger than RMBS. In RMBS not every mortgage is examined. That’s one reason so many toxic loans made it into highly-rated pools. In CMBS the rating agencies do look at every loan. People have been willing to admit that the industry got too frothy and there is concern about some of the loans done in 2006 and 2007. Yet overall we hear over and over and commercial real estate is fundamentally strong.
When we’ve raised questions or concerns, we’ve been told that we’re being too negative and that we’re spreading panic by even questioning the solidity of the industry. We’ve been told that commercial real estate is a casualty in the widespread fear about real estate. And we’ve been told that in the end the strong fundamentals will mean that commercial real estate bounces back in three months or six months. I can see the argument that everything will be at risk if the financial system is not stabilized. Obviously the banking system needs to be dealt with. But that doesn’t mean the bailout in its current form is the right package. Over 190 economists are circulating a letter opposing the bailout and arguing that the way it is structured will not be effective.
So if all that’s true, why does the commercial real estate industry support the bailout as its currently structured? The idea of the bailout is to remove toxic assets from bank balance sheets. If CMBS aren’t toxic, why should the government buy them?
So which is it? Is commercial real estate healthy or does it need the bailout?
Consumer spending in August turned in the weakest performance in six months, underscoring the threat the economy faces as the government’s stimulus program fades into the past.
The Commerce Department reported Monday that consumer spending was unchanged in August, even worse than the small 0.2 percent gain economists had expected. It was the weakest showing since spending was also flat in February.
Personal incomes were up a better-than-expected 0.5 percent, a rebound after a 0.6 percent drop in July. After-tax incomes, which felt the impact of the stimulus program to a greater extent, dropped by 0.9 percent, however.
The government pumped out the bulk of $92 billion in stimulus payments from late April through mid-July. Another $1 billion in payments were made in August but this was far below the monthly peak of $48.1 billion in payments made in May.
Link.
I found this commentary very compelling. Does this bailout just help Wall Street? If the Treasury buys bonds–including CMBS bonds–will that do anything to help the end borrower at all? Who is actually getting bailed out here? I’ve heard a lot of support for the bailout from various forces in commercial real estate. Is the industry really fully behind this? It seems that in most other circles–including many, many economists–there’s a lot of opposition.
• But most of what will be bought will not be mortgages but parts of various tranches of mortgage backed–securities (MBSs), commercial mortgage backed–securities (CMBSs), collateralized debt obligations (CDOs) made up of MBSs and CMBSs, and structured investment vehicles (SIVs) made up of all the above.
No one knows what is in most of these pools, and heaven knows where the documents are. In time, with enough effort, most of the documents will be found, but not for some time and not all of them—witness the cases where special servicers have been trying to foreclose on a mortgage without original documents, usually unsuccessfully.
• There will be little opportunity to work out the mortgages that make up the pools on which the securities are based, or even to modify the mortgages to help the homeowners, as many people are understandably recommending. Without owning the vast majority of all the tranches of a particular mortgage pool, the Treasury (or its agents) won’t be able to modify the contract with the special servicer in charge of the assets (the mortgages) in the pool.
The servicers will still have to follow their contracts and foreclose on defaulted loans instead of modifying them. Well, sure, the Treasury could buy up all the securities based on the pool—if it can find who owns all of them, and if it can find a price that all the holders want to sell.
But unless it owns enough securities, it won’t control what happens to the mortgages. It could try to override the pool documents and take over control, and perhaps this is one of the reasons the Administration proposed that nothing they do could be reviewed by a court or administrative agency. However, this is highly problematic.
Link.
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What Is (Was?) The Bailout
by David Bodamer September 29th, 2008
Here’s a good and brief rundown of the bailout.
Of course, now that it’s gotten voted down, it could change again.
By all indications, there is massive popular opposition to the bailout. Congressional fax lines and phones have been ringing off the hook with voters opposing the measure by huge margins–like 99 to 1. Opposition has come from the left–who don’t want to see what they perceive as a handout to Wall Street–and the right–who see the bailout as a major blow against the free market and who remain convinced that there is a market solution to the credit crunch.
Personally, I do think that is is necessary for the government to step in and help open the credit markets. But plenty of economists and other financial leaders–Nouriel Roubini, Paul Volcker and Joseph Stiglitz come to mind–who have talked about alternative solutions to the Pauslon plan. Up to now, all Congress has done is to take the Paulson plan and try and tweak it to make it more palatable to both sides. Perhaps it’s time to chuck it.
(Hat tip Deal Junkie for pointing this out.)
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