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.
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