Tuesday, December 9, 2008

Distressed Investor

The observer notes

Correct. And the investors won’t buy. Now, I will note it’s fair to say the CMBS underwriting got far more aggressive in the last two years, 2006, 2007, than they were prior to that. So there was certainly some weakness from the fundamentals standpoint in the underwriting of those loans. But, at the same time, the fundamentals of real estate until even today, are relatively strong, but certainly getting weaker in some of the obvious points, particularly retail and hotels.

GGP's Leverage

From Deal Junkie and the WSJ

84% leverage? For a REIT? And instead of replying on corporate lines of credit, like most REITs do, GGP's borrowing was through mortgages, presumably a lot of CMBS debt? This is unbelievable. How could the former CFO and company management let this happen?

Bank CMBS Writedowns hattipTrafficCourt

Banks face additional writedowns

Monday, December 8, 2008

Seeing the Light - Lightstone and ESA

Not to pick on Lightstone, but you just can't avoid the bad press for too long when you make such poor business decisions. The Extended Stay transaction was bad when it started - they paid more than two times what Blackstone had paid for the chain just two years before for a limited service hotel chain.

However, the article seems off on a few points. The problems did not "arise directly from the weakening economy", although they were exacerbated by the economic problems.

One wrinkle in negotiations is that Extended Stay isn't likely to file for bankruptcy protection, because of provisions common in commercial mortgage-backed securities deals that would expose more properties of its founder, David Lichtenstein.

I'm not sure what misinterpretation McCracken is putting forth here, but the whole point of putting creating an SPE to hold your property is to avoid this situation. This is going to sound unintentionally snarky, but I really would like someone to explain what "provision" he's alluding to.

I do think the chain is going to get hit harder as revenues decline, but a foreclosure on the senior mortgage seems unlikely in the next 60 days. Instead, I'd look for the foreclosure to hit after the senior mortgage matures in June 2008 - although extensions are freely available, the chain is unlikely to hit performance targets resulting in a transtion to amortizing payments... at that point, it will not cover debt service on the mezz debt and if the economy continues on its path, the senior mortgage will not be far behind.

EVERYTHING is okay though, Fitch took a close look at it just 3 months ago and found nothing wrong with the transaction. Nothing to see here, please move along.

*I had no insight into what the WSJ was going to publish when I commented on the ESH transaction and Lightstone's recent default on the Burlington and Macon malls this past weekend - I just got lucky.
**Please excuse the overt sarcasm, it's hard to take some things too seriously when everyone gets it wrong, including the journalist "uncovering" the epic fail itself.

Saturday, December 6, 2008

Hotel and Retail CMBS

Maris Zivarts and Courtney Alexander of UNITEHERE did an excellent write-up about the Columbia Sussex portfolio. Obviously there is a slight conflict given they work for the union of workers who are employed at some of the properties, but it is duly noted and the article is well written.

Hotel CMBS is historically one of the most volatile sectors with the highest losses. It was obviously on its way up at a frothy pace in 2004 & 2005, which can be tracked by the ~$3-4 billion in new cash put into Extended Stay Hotels by Blackstone, to be flipped two years later to Lightstone for more than 2x as much, $8 billion.

Lightstone Group turned in the keys on two malls that it defaulted on this year. Although I think it is undisputed that Retail will feel some pain, I'm beginning to believe that Regional Malls may feel more pain than strip centers given the concentration of highly levered retail tenants.

Monday, December 1, 2008

GGP Gets Temporary Stay

The debt has been extended for two weeks...