Monday, March 30, 2009

The Source Maturity Default

The Source matured 2 weeks ago with no payoff...

This particular mall has been hit with multiple bad exposures - Steve & Barry's, Circuit City (3rd largest tenant), and Fortunoff. I prefer to wait on the sidelines to see how this one plays out. I haven't looked at the financials to see how much those tenants contributed to the bottom line, but the mall was performing well last year, it has 10 years of appreciation built into it, and it might be a likely extension (again, not knowing the details).

It should be widely reported today - it's already here and here. This is the sort of news the CMBS sector needs to nip last week's rally in the bud - we can't have strong rally's, we're in a recession folks. Save your money for ammo and water.

Tuesday, March 24, 2009

Toxic Asset Marks?

If Goldman is right (not necessarily the case), the average carrying value for banks on Comm. Mortgages is just 95%. Surprisingly, C&I loans is even HIGHER at 96%. BAC, for example, is carrying Comm. Mortgages at 100%!, so is Citi!

Hotel Tango - go check out his site for the chart

PPIP, REIT maturities, Retail Severities, Premier Properties

Goldman talks their CRE book (hopefully, otherwise their conclusions are insane).

->I'll post a more useful analysis on REIT maturities here in the next couple of weeks.

S&P adjusts retail outlook, but still not negative enough. Looking for 44% loss severities. Also noted ICSC is predicting 73,000 stores will close 1H ’09.

Chris P White's Premier Properties was in the news again yesterday.

Obviously, the big news is the Treasury's plan to buy 'toxic assets'. My initial digest of it was that it would fix all the problems, but on further reflection, it's less powerful than it seems for CMBS. It should still lead to sustained, but measured, tightening, however, it only includes currently-rated AAAs for CMBS, which excludes nearly every AJ (as soon as S&P/Fitch start their downgrades). It could be a boon for New Issue by helping to clean the overhand on IB's loan conduits that never got securitized, and might lead to some large loan deals. I still don't have the details on whether positions will be marked daily and margin-called, how much it will cost and investor, and whether or not there will be term-matching. Not to mention whether the evil investors will be burned at the stake if they profit from this program.

Friday, March 20, 2009

Difference Between a Million and a Billion

Hotel Tango: Barry Ritholtz and Bradman

SPG 10.875% 2018 sells $650mm

The debt was heavily oversubscribed and upsized from $500mm. It traded at a discount to their 2019 notes by over 100 bps, and was very rich to A CMBS with over 5,000 bps of spread between the two. The new issue matures in 2018.

GGP Defaults on CMBS loans

Again, others follow GGP more closely than I, but it would be remiss of me not to send you today's headline story. GGP had a maturity default (or near-maturity in 1 case) on three (3) CMBS loans in two different deals, S&P & Moody's quickly downgraded the company to C, multiple executives were changed out, and they face a 5pm (today) deadline on debt unrelated to the CMBS deals.

The kicker on the CMBS deals, is that the malls are performing wonderfully (even though they ARE malls). Here are the numbers:

LBUBS 2004-C4
  • Town East Mall
  • $105mm outstanding sr. mtg.
  • Matures 4/11/09
  • 3Q 08 NCF DSCR 2.45 and Occupany at 99%
  • 3 Major Tenants: Sears, Dillard's, JCP
  • Next Pay Bond: A2 - $185mm outstanding. Likely to extend in foreclosure.
GCCFC 2004-GG1
  • Southland Mall
  • $81.3 outstanding
  • Matured 3/1/09
  • 3Q 08 NCF DSCR 2.69 and Occupany at 98%
  • 3 Major Tenants: Sears, Macy's, JCP

  • Deerbrook Mall
  • $73.8 outstanding
  • Matured 3/1/09
  • 3Q 08 NCF DSCR 2.55 and Occupany at 99%
  • 3 Major Tenants: Dillard's, Sears, Macy's
  • Next Pay Bond: A3 - $54mm outstanding. Likely to extend in foreclosure.
  • Remaining partially pays down A4 - $296mm outstanding

These two deals are likely to face extensions, and there might be some plays around timing that extension - the near-pay bonds are all trading with high-teen yields; and the b-pieces are likely trading for next to nothing. The more interesting CMBS trade would be to pick up near-pays on other CMBS deals with GGP exposure; these would pay off early if GGP has to sell assets. People have already piled in on this trade, though, so you'd be arriving fashionably late.

GGP's maturing CMBS debt by year:

Mat. Year Curr. Balance Num. Loans
2009 1,540,257,761 16
2010 3,780,728,494 37
2011 5,233,299,013 39
2012 1,521,498,883 16
2013 1,001,499,652 15

Thursday, March 19, 2009

Mark to Market Changes

I'm very interested in other folks' opinions on these, but I do not see the level of changes required to make the market snap back for CMBS. They use a CDO in one of the examples, and that may be a different story, but nothing I see in the proposed revisions help CMBS without some less-than-truthful presumptions made by the reporting entities.

At the risk of making our readers dumberer, Jonathan Weil, of Bloomberg, believes the proposed changes will create an STD-ridden cathouse (his analogy) out of the market, but most of the points he highlights are not changes - they're part of the current rules. His example hiding losses on stock holdings of AIG (Average Daily Volume: 80+ million shares) and Fannie Mae (Average Daily Volume: 20 million shares) fails both tests in both the current and proposed set of rules, and companies would still have to report these losses as usual.

Mr. Weil also notes that two members of the panel "opposed" the changes. In reality, the "opposing" proposal was also included in the FSP as an alternative view. They actually agree with the FSP 157-e in regards to determing whether or not a market is active and a transaction is distressed. The big difference in their argument is that A) FASB should work with IASB and come up with a joint agreement to avoid accounting arbitrage, and B) Other-than-temporary impairements should be reflected as an unrealized loss to earnings.

Outside of the journalistic bubble, market particpants realize that FASB's fair value accounting standards are obviously broken (and were broken when they were created). The current environment has highlighted the problem. I don't think it's fair to say FAS 157 created the current problems, but it is contributing to them. I'm biased towards CMBS, so its easy to walk over to the loan trading desk and look at a pool of senior mortgages trading at 80 cents on the dollar, and then walk over to the CMBS desk and see a pool of mortgages with a CUSIP attached (but otherwise identical) trading at sub 50 cents... well, something is wrong there. The 80 cent pool is being priced with some credit concern factored in, and the CUSIP'd pool is factoring credit concerns, but is mostly factoring in liquidity concerns. If you plan to hold both until they mature in 8 years, why should you price them differently?

He probably isn't a fan of "Secret Diary of a Call Girl" either

CRE Prices down another 5.5%

January's decline was the largest since Moody's CPPI index started in 2000.
Prices are now down 19.1% from a year ago and 15.4% lower than they were two years ago. They have declined 21.0% from their peak in October 2007. Prices have nominally returned to the levels they were in the spring of 2005, says Moody's.


Another MBA story, this one regarding complexities surrounding CMBS. I was interested, hoping to gain another's insight into special servicing conflicts, or pari passu workouts. It's leaves a lot to be desired.
"they believed in the bond they were offering as well," but it turned into "slices of slices of slices," Fasulo said.
Is he talking about CMBS anymore? He must be talking about some CDO of CMBS, but is just misquoted here. But then, the next quote...

"[Bondholders] have lost track of their investments because there are so many iterations of slicing and dicing," Korologos said. "It's hard to put a finger on what [they] really have. That's how complex it's become."
... is equally confusing.

There's also a half sentence regarding loans maturing 6+ years down the road that seems a little half-baked and premature
loans maturing in 2015, depending on leverage, property markets values, liquidity and appetite for 75 percent to 85 percent leverage at the time of maturity, could face challenges in addition to loans maturing in the near future.
I'd recommend skipping the article, but you just know its going to be on CNBC, or worse, Dateline "How to Catch a Trader" segment with the quote, "These CMBS securities were all sliced and diced to create AAAs, and are just as bad as Subprime". These guys have good pedigrees too.

Commercial Mortgage Market Grew last year?!

The Mortgage Banker's Association noted today that Commercial Mortgages INCREASED last year by 5%, or $166 Billion.

Also noted that CMBS made up just 13% of the outstanding mortgages, but more surprising to me is that Insurance Co. share dropped by 11% - I had assumed they were taking market share from the void created by CMBS. The commercial banks (up 11%) and specialty finance companies (up 23%) are both taking significant market share, and of course the GSEs (up 23%) are responsible for virtually all of the MF lending.

Wednesday, March 18, 2009

Cap Rates

CoStar has an article out with some cap rate numbers based on the Korpacz Real Estate Investor Survey:

Class A Office:
4Q 07: 6.1%; 180 transactions
3Q 08: 6.6%;
4Q 08: 7.6%; 80 transactions
1Q 09: 7.9%; (thru 3/18); 42 transactions

Warehouse & Distribution:
4Q 07: 7.1%; 279 transactions
4Q 08: 8.1%;
1Q 09: 8.6%;

4Q 07: 5.9%; 629 transactions
4Q 08: 6.8%; 355 transactions
1Q 09; 6.8%

Mark-to-market FSPs released today

FSPs are the "FASB Staff Position" on proposals. They have some initial guidance and proposals, and allow for feedback from the market.

Here's the one on FAS 157-e and here is the one on the related 115-e, 124-e and EITF 99-20b.

I'm not sure if CMBS makes the cut based on the factors their using to determine a non-existent market place (in FAS 157-e). CMBS are actively traded, and bid-ask spreads aren't really that wide (their pretty narrow at the AAA level) relatively speaking. Although you can get widely disperse pricing on comparable bonds from EJV or whatever pricing service you use, you get close to the same answer if you go to Barcleh or BancOfAmerillwide - and they price the entire market every day for their indices. The only factor that CMBS seems to qualify for is the "Abnormal liquidity risk premiums... blah blah ... compared to reasonable estimates".

The other docs really don't seem to effect CMBS differently than they have in the past. They both note that if management does not anticipate selling the security before recovery, and using reasonable estimates... type of language. I need to read through them in more detail, and I'll post an update if I get any more out of it.

GGP Reprieve Redux

I can't compete with David Bodamer's timely and accurate tracking of GGP - go check his latest update and historical news updates here.

Ackman didn't force default, but I still wonder if, at the end of the day, we all realize that there was some vulture player who picked up the debt real cheap, maybe it's debt that doesn't even mature for some time, and he forces their hand to get paid back early in the bankruptcy process.

The vast majority of GGP malls are performing great, spectacular even. That will not last as more of the retail bankruptcies play out, but I think the debt holders are unlikely to take much of a hit even in a fire sale situation.

Solana Seeks Debt Relief

Solana is a huge multi-use complex in Westlake, TX owned by Robert Maguire (the man, not the company). It was doing fine last year, but something obviously has gone wrong - its not clear what yet. However, we've never been a fan of Maguire's business model with so much exposure to California, and a surprisingly high amount of exposure to mortgage origination and servicer operations, and even more surprisingly high exposure to the subprime variety!

Solana is has pari passu mortgages in BACM 2007-1 and JPMCC 2007-LDPX.


Solana is secured by a 1.9 million square foot (sf) mixed-use property located in Westlake, TX. The property contains office, retail, and hotel components. The loan transferred to special servicing when the sponsor requested payment relief. As of June 2008, the servicer reported a debt service coverage ratio of 1.88 times (x) and occupancy of 98%.

Tuesday, March 17, 2009

Hyatt Regency Boston Trades for $220k per Key

CoStar reports the Hyatt purchased the hotel for $110 mm from Host.

Hyatt Corp. has purchased the Hyatt Regency in downtown Boston from Host Hotels & Resorts for $110 million, or more than $220,000 per room, CoStar has confirmed.

The 22-story hotel has 498 rooms at 1 Avenue De Lafayette, a few blocks east of Boston Common. It was constructed in 1984 and renovated in 2001, and earned the government's Energy Star label in December for its energy efficiency. It includes a business center, fitness center, indoor pool and a spa, and a steam room and sauna.

Please see CoStar COMPS #1663405 for additional information.

Monday, March 16, 2009

CMBS Linkfest

GGP, GGP - it's debt is maturing. Next Story.

I'm a vulture fund manager - what's distressed debt?

I'm a CEO, what is power?

I'm an Insurance Company/Bank/Financial Services Firm, what is Mark-to-Market ?

I'm FASB, really, what is mark-to-market?

I'm a banker, what is a redneck?

I'm the French President, did my wife just say something about a turd in her pants?

Is she also a super model?

Ok, Mr. President wins.

Friday, March 13, 2009

Mark to Market Changes - April Business

In the CMBS world, we have very tangible examples of how Mark-to-Market rules (FAS 157) are putting undue pressure on the market. It is easy to point to a CMBS deal with a single asset trading at 60 cents on the dollar, while a non-cusip loan with essentially the same collateral trades at 98 cents on the dollar. Obviously there is something wrong with that valuation. You'll find folks have very strong opinions on both sides of the issue, and I will not argue its fallibility or utility, except to state the obvious - it doesn't work in its current form.

Robert Hertz, the FASB Chairman, indicated yesterday in front of Rep. Kanjorski (and the rest of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises) that there would be significant changes within the next 3 weeks.

The same folks that have strong opinions regarding the FAS 157 rule, also have strong opinions about the impact of any changes. Numbers are quoted, arguments are made regarding the relatively small portion of held-for-sale assets that are affected, etc., etc. It is a broad issue, no matter what numbers you're looking at. Any change could substantially move markets.

Full disclosure: I try to be somewhat non-biased about things, but I think FASB is full of idiots.

Tuesday, March 10, 2009

Mark to Market, Mark the Date March 12th

A suspension of Mark-to-Market accounting would whipsaw spreads in dramatically across all markets, but it would be most noticeable in CMBS. The discount in CMBS is much more a liquidity event, rather than a credit/fear event. If they suspend it altogether, it means a huge rally across the board - equities, corporates, MBS, etc.

The house is going to have a talk about it on Thursday.

Remit Day

Today we wait. We wait for the analysts to suck in all of the data from the 60%+ of the deals in the US CMBS universe that pay on the 10th so we can stare at it. We'll probably get our first glance late this week, although any new big delinquencies might start making the WSJ before then if they are interesting enough. Since I don't have it yet, let's just pick the absolute worst numbers from last month's remits.

Worst Total Delinquency Rate (including 30+ through REO) by State, Property Type, and Deal Type:
Nevada - 3.33%
Senior Housing - 2.99% (followed closely by multifamily @ 2.67%)
Credit Tenant Lease deals - 3.91%

Sunday, March 8, 2009

PCV/ST loses another case - $200 million on the line

Deal Junkie brought our attention to the fact that PCV/ST just lost a case in appellate court that could cost them $200 million that would go to roughly 3,000 tenants who received illegal rent increases.

The case revolves around the fact that PCV/ST received a tax break through the J-51 tax program, which allows breaks for renovations on rent-regulated apartments and encourages capital improvements by tenants as well. The NYTimes implies that the outlook is bleak for the owners.

Tuesday, March 3, 2009

We're Halfway There!

Some very long-term landmarks are in sight. Right below Dow 7000, not 2% down from here, is a point at which half of the entire rise from the 1932 Depression low to the ultimate October 2007 high will have gone away. That's explainable given the low-double-digit Dow of '32, but losing half of 75 years worth of upside in 16 months is . . . quite something.

-Barron's Mike Santoli

Monday, March 2, 2009

Extended Stay

Extended Stay started creeping back into the news...

It has never been clear how this loan was expected to survive, even at origination. I previously went into it at length, here and here.

Image from Hans Van DeVorst (.com)

Zoning Laws need Flexibility, or else...

Michael Zarlenga is my "hero of the week". After cooperating with the local zoning board for several months and spending a ton of money on plans and architectural reviews, the zoning board had a change of heart and sent him back to the drawing table. However, he didn't have the additional cash needed to go back to the drawing table, so instead of upgrading his shop, he was forced to shut it down and leased it out to a sex shop - right in the middle of the historic district.

Now the town is upset that instead of dry goods/hunting/fishing store, they have a sex shop in the historic district. Bet they wish that they had been flexible now!

Even worse, now a public attorney, Randolph Sengel, has decided he is going to take on the adult store and try to have the space darkened through some legal means. Not to belittle the power of the zoning board, but the moral high ground here would be to approach them about being a little more flexible. Randolph Sengel wins the dumb lawyer of the week award.

If it is not obvious, I too have had my run-ins with the empire building public servants on the zoning, and similar, boards. I've yet to win an argument, and unfortunately found it easier to work around them, rather than with them.