Saturday, February 28, 2009

Warren Buffet's Annual Letter

I'm admittedly a cautious fan of Mr. Buffet, and enjoy hearing his insights. His annual letter can be found on his website here, and numerous other folks have highlighted important parts of it, here, here, and here (some of it is even real estate related). He has numerous prescient comments ranging from derivatives, to underwriting mortgage loans, to the pitfalls of investing in the latest bubble - government debt.

So, I don't have much more to add, and instead will take the low road and just highlight the lines that made me think, "Really!?!" (in your best Seth Meyers voice)

As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere...
Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with...

And perhaps, my favorite is the link to the Clayton IHouse (which I think is a great idea, and hope it takes off more than all the competitors who are lagging in this markety), which opens with background music that is a cross between light-techno, heavy-sax-laden elevator music, and soft-porn-background-music.

Friday, February 27, 2009

Closures and Layoffs

Sears is closing its store at Eastland Mall in Charlotte NC. The fact that it took so long (just 3 weeks ago, ESL was stating publicly how committed he was to that location) is smear against the company. This mall has disintegrated into an unsafe place responsible for a high level of crime and has no anchors (Sear's was the last), but this disintegration started before the turn of the century and it was in bad shape back then. After losing money for some significant period of time and working with local groups to come up with plans to revive the site, the former owner, Glimcher, bowed out and turned in the keys in 2008.

The comments in the Charlotte Observer story are mildly amusing if you're bored. Commentators call each other racists (the mall is located in predominantly minority part of town) and blame everyone for the Mall's failure (except the owner and manager of the property).
Regardless, it got me looking for other closures, of which I try to keep a close eye on. The list is really growing. David Bodamer has a nice one compiled at the bottom of his article on Sear's closures. However, Mark Herschmeyer has the best weekly update on closures and layoffs at, and I haven't found one that rivals the depth and quality - but let me know if I'm missing a good one.

Rent Control Regulation Proposals

NY is proposing to make changes to rent regulations that would make it vastly more complicated to execute the deregulation strategies that are being undertaken by several private equity groups. The most notable includes the Tishman/Blackrock Peter Cooper Village/Stuyvesant Town (PCV/ST) and Stellar Management's Riverton, but the list doesn't end there.

Deal Junkie and Bloomberg did a fine job summarizing the changes. The largest new hurdle seems to be the increase in the destabilization threshhold from $2,000 to $2,700. Further, one year ago in March 2007, NY put into place legislation that made it demonstrably easier to sue your landlord if he repeatedly, and unsucessfully, attempted to deregulate your apartment based on false accusations.

Can't say that it is easy to feel sorry for the PE groups though. Some others include.

Savoy Park ($210mm, CSMC 2007-C1) sponsored by Vantage and Apollo
Meyberry House ($72.4mm, CSMC 2007-C4) sponsored by J.Goldberg and A.Cohen.
New York City Apt. Port. ($195mm, MSC 2007-IQ14) - sponsored by Insureprofit, which filed for bankrupcty last year.
Broadway Portfolio ($70mm, CSMC 2007-C2) - Vantage and Apollo
Esquire Portfolio ($31mm, CSMC 2007-C4) - Vantage and Apollo
Villas Parkmed ($300mm, CD 2006-CD2 - Stellar and Rockpoint are the same sponsors athat are involved in Riverton; This property is located in California, but is the same type of story.
The Axton ($21mm, MSC 2007-HQ12)

Friday, February 20, 2009

Riverton defaulting

Riverton's foreclosure is today. It seems that the mezz lender (CBRE) is going to take a turn at the helm to see if they can make it profitable after taking out the current equity holder (Stellar).



It's just the most obvious rent-control flip problem on the radar. There are several others I've written about previously. Jeff Bernstein details some of the new rent control laws in the pipeline that are going to further exacerbate the problem for PE landlords playing the deregulation game The game was mostly played in NYC, but also in San Francisco (The owner of Riverton actually has a similar project in SF) and other cities with rent-regulation.

Either way - you know you have problems when 96-year old women (see image from NYTimes to the right) are gathering in the streets protesting with signs disparaging Private Equity - I mean really...

Moody's completed downgrades

Following 7 days of correcting their ratings on 1,422 bonds worth over $50 billion, Moody's stated it was done with its review. The actions were highly anticipated for some time, and made for a volatile market the last two weeks.

Obviously, Moody's made a huge mistake - they are not downgrading these due to deterioration in quality, but rather due to changes in their model. And their new model is only calling for 5% losses on recently issued deals with the weakest credit profiles. Historical losses when times were good are 3%! I don't know how they are still in business.
Publish Post

Friday, February 6, 2009

PCV/ST Deals Downgraded

How prescient. Deal Junkie brought a lengthy article on PCV/ST to our attention this morning, and by this afternoon Moody's had started it's wave of mutilation in CMBS due to the same transaction. The Aaa-rated AJ class was downgraded to A2...

Frankly, I don't think it was unexpected and I figured it was mostly priced in, but it is putting surprising pressure on spreads.

Thursday, February 5, 2009

Run for the Hills!!!! AAA Downgrades are coming...

Not sure if that is Tad Philipp enjoying his new found freedom on the buy side, or Nick Levidy chasing a couple of the weaker AAA broads bonds through the valley as he thins the herd.

Moody's is going to whack AJs down half a dozen notches over the next couple of months according to a release to day.
the junior Aaa-rated classes, to be downgraded by four to five notches on average.

Expect losses of just 5% on average (seems low).
Moody's generally rated conduit and fusion transactions from 2006 through 2008 to an expected loss of about 2%, but now expects that deals from these vintages will experience losses of approximately 5% on average.

Credit problems on the horizon? Who'da'thunk...
"Early in the current economic crisis, our biggest concern was the impact of a liquidity crunch on commercial real estate," says Moody's Senior Vice President, Michael Gerdes. "However, Moody's now expects a significant overall decline in property cash flows as a result of a higher incidence of tenant defaults and bankruptcies and a sharp decline in lease renewal rates."


Clueless CMBX Investor (but Clueless has still made a lot of money over the last year, maybe he's just playing dumb.)

CRE TBI cliff diving

CRE and Resi are so different in so many ways, I don't understand why folks try to draw corollaries.... The whole article should be trashed based on the headline alone, but the conclusion is wrong too.

Some other Resi folks who aren't quite in tune with the CRE market, but do manage to speak with great confidence and authority:

From Christmas, CR informs the world that he knows nothing about CRE when he is caught off guard that all properties are put into special purpose entities and loans are non-recourse...

I hate to be speculative without seeing the actual Cushman & Wakefield report quoted in the NYTimes, but I'm guessing we're talking about two different locations when comparing the cost of retail space in Manhattan. Obviously, retail space that is leasing for over $2k per square foot (i.e. 666 Fifth Avenue to Abercrombie and Diesel's space at 685 Fifth) should sale for more than $3k per square foot.

Till mixing? I appreciate this guy's writing style, but he lost me a few times with the analogies. You are absolutely not supposed to mix the tills if you have multiple properties with different SPEs for each. People do. Michael B Smuck did, once a couple of decades ago, and again in 2007, and as the resi author indicates, he failed miserably.

CRE loans do not default because property values decline, unless they mature and cannot get refinanced. Hardly any CMBS loans mature until after 2010. Your property value could go to $0, and if you are still bringing in more rent than your expenses, you continue to operate.