Volatility, and CRE Lending is not so dead...

Prices in CMBS took a wild ride the last week between TALF 3.0, S&P's assault on the plan, and general confusion in the market.

Deal Junkie makes a great point regarding the loans getting done out there. The fact of the matter is that most CMBS loans maturing, are paying off on time still - they are either getting loans, or reaching into their safe deposit boxes and paying off the old ones.

S&P Dashes Market Hopes

S&P basically came out today that they may downgrade more than half the recent vintage dupers, making them ineligible for the gubments TALF 3.0 plan. Surprisingly, it only sent A4 spreads 100 bps or so wider, but I imagine this plan will continue to unravel in an disorderly fashion.

It is likely that the proposed changes, which represent a significant change to the criteria for rating high investment-grade classes, will prompt a considerable amount of downgrades in recently issued (2005-2008 vintage) CMBS. Classes up through the most senior tranches of outstanding deals (so-called "A4s," "dupers," or "super-duper seniors") are likely to be affected. Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded. We believe these transactions are characterized by increasingly more aggressive underwriting than prior vintages. Furthermore, recent vintage CMBS, particularly those issued since 2006, were originated during a time of peak rents and values, and as such, may be more affected by the proposed rental declines discussed in this RFC. We are currently evaluating the impact of the potential criteria changes on conduit/fusion CMBS transactions from all vintages. Once we evaluate the potential impact on existing ratings, we expect to issue a follow-up publication to this RFC.

Loan Term Lengths

Based on a conversation (see comments) earlier today, it became apparent that there is still a misconception regarding loan terms within CMBS. In the fixed-rate CMBS universe, loans are primarily 10-year loans, with a relatively small portion made up of 5-year and 7-year loans. In the floating-rate universe, loans are primarily (83% of the market) 2 or 3-year loans, with up to 3, one-year extensions.

According to the research piece from BOA titled "More Cowbell", 10-year loans are 74.6% of the Conduit universe, 5-year loans account for 10.5%, 7-year loans account for 6.4% (all by balance).

Surprising to me, was that the percentage of 5- and 7-year loans peaked in 2005 (at over 40%!), and subsided some in 2006 and 2007 registering in the mid 20% range according to Morgan Stanley (chart is from CMSA's 103 presentation).






So, where are all the loans coming from that mature between now and 2012 - if the CMBS universe is not saturated in short-term loans? Regional Banks carry most of the burden, as you can see from Deutsche Bank's chart to the right.





We're going to leave maturity concerns behind next week and focus on partial IOs. We've talked some about them because they are going to be a bigger storm than maturities will be in the CMBS universe. These are loans that were written with an initial Interest Only period, and then moved to a principal and interest payment after a period of a few years. The number of loans that no longer cover after the roll (using recent financials) is astonishing, but no more astonishing the sheer percentage of the market that is comprised of Partial IOs...

Trilogy Apartments - $137.5mm loan - BSCMS 2005-PWR9

This is just the kind of bad news that will temper the sharp tightening seen last week, as soon as it makes the general press.

Trilogy Apartments accounts for over 6.5% of the deal, and is only (not) covering at 0.57x debt service. The property consists of just over 1,000 units, and is located in north Philly. It was a partial IO (rolled at 36 months), and has not been profitable since 2007. It has a monthly shortfall between $200k and $300k, and the current owners have told the special that they will no longer fund shortfalls. The loan matures July 1st, 2010.

Our rough analysis puts the properties value at 35 - 40% of the outstanding senior balance, implying a 60-65% loss (impacts class J)! Realpoint published an update last week that used a blended net cash flow (higher than the most recently reported) and a lower cap rate of 8.5% (we used 9%), and came up with a 40% loss severity (impacts class L).

Early Close

Okay, maybe this is the early close from Memorial Day 1982ish

REIT Maturities, Dig For Fire

Despite the whipsawing we're seeing CMBS spreads, there still hasn't been the "wave of mutilation" that everyone is expecting to see in the CRE space. But fear not, "stormy weather" is coming, and it's easy enough to "gouge away" at some of the obvious points - such as REIT loan maturities in '09 and '10.


We still have about $2.3 billion in REIT CMBS maturities over the rest of 2009, and $6.5 billion in 2010. Of the total from those two years, $6.5 billion is in the Conduit universe. The plot thickens past 2010, but this is a humble blog with no revenue other than ads (that no one clicks on). Please email credarkspace@gmail.com for further analysis and wiring details :).

There are actually some '06 vintage deals with heavy concentrations maturing in 2010 - these are 5-year loans originated in late '05. They include the Colonial Mall Glynn Place ($23mm - MLCFC 2006-1, CLP), Kenwood Town Center ($147mm - MLCFC 2006-1, GGP), and Alderwood Mall ($108.6mm - MSC 2006-T21, GGP).

Deals with heavy concentrations (>10%) of maturing REIT debt between now and end of 2010 include:

DEAL	REIT Loans Mat. '09 & '10
WBCMT 2003-C8	25.5%
GMACC 2000-C3	23.1%
CCMSC 1999-C2	16.6%
MSDWC 2001-T1	13.0%
BSCMS 2000-WF2	12.9%
JPMCC 2005-LDP4	12.4%
WBCMT 2003-C9	11.6%
MLMT 2004-KEY2	10.6%
CSFB 2001-CK1	10.5%

On the one hand, you have original LTVs that are very low (between 55 and 68%), appreciation in all of these loans (even the shortest), high DSCR ratios, etc. and one would expect that these loans would have no problem refinancing in any market. On the other hand, you have the experience we just witnessed with GGP loans that also met all of those criteria. It seems the salient point in regards to the CMBS deals are the threat of extension, rather than actual losses, so you like IO and credit, and don't like short dupers on these deals.

The obvious other angle is to look at which REITs have the toughest mortgage maturity schedule. Some more work is required to fully analyze this, but a quick look and some challengeable (I might be making up a word here or there) data from Bloomberg, highlights a few names

REIT	CMBS Maturing '09 and '10
GGP	2,252,552,611
DDR	548,001,132
Regency	387,626,486
SPG	374,168,033
CLP	340,774,373
Education Realty	285,103,248
Macerich	232,196,599
Extra Space	227,650,000
CBL & Assoc.	166,635,022
EPT	150,000,000
Equity Lifestyle	144,131,062
Host	135,000,000
Taubman	132,098,802
LaSalle Hotel	126,669,370
U-Store-It Trust	103,662,495

GGP is an obvious winner, but DDR has 21 properties with loans maturing over the next 18 months accounting for over 9% of their total debt outstanding, and nearly 20% of their CMBS debt outstanding. The next one in the list is Regency with $388mm maturing, over 18% of their total debt, and more than 40% of their outstanding CMBS.

Obviously there is much more to be done to really identify the right place to make a play here, but we'll post follow-ups. For what it is worth, I think the equity play is a little hard, because given what is priced into CMBS (despite the rally), equities are too rich, but all the names above are represented in the SRS ETF - probably better to short particular names though, if you're going the equity route. I think the plays are in the debt space. This is actually part 2 on Maturity Waves - see Part I, Wave of Mutiliation, published back in November 2008.

*I corrected the ticker to CLP for Colonial Properties Trust...

Nothing to see here...

"Remember now, we’ve been talking about contagion for almost a year now and just have not seen it," said Mike Willoughby, chief credit officer of Regions Financial Corp. "We may have seen a couple of apartment projects come through, but nothing really to speak of. So, even though we start to look at what unemployment may do, we have not seen it come through our portfolio yet."

Hotel Tango CoStar

Macklowe - The Otera Catalyst

Macklowe is making a last ditch effort to save 1330 Ave of the Americas, which he effectively lost to Otera last month in the foreclosure auction. The play is to bring an equity partner and avoid the $12 mm in transfer tax costs. Macklowe and JV would pay Otera ~50% of their investment, the other mezz holders are already gone, and the taxpayer doesn't get the transfer tax (which seems grossly unfair, but that's another story). It's interesting how the foreclosure could actually end up benefiting Macklowe, even if he ends up a bit diluted given how much he put aside for renovations and whatnot.

Macklow has problems all over. He obviously overpaid for the EOP properties and lost GM and a number of other properties in that debacle, but he also has tenants fleeing (including 1330 AoA which has a 66.1% occupancy), and plummeting lease rates.

510 Madison was damaged by fire in February, and now two major tenants that were coming into the still-under-the-shovel building are trying to break their lease and recoup deposits. Tourneu had initially agreed to lease the ground floor retail space (3300 sq. ft.) and Jay Goldman & Co. had plans to lease the 19th floor of the 30 floor building.

TALF expanded to Legacy CMBS

Realpoint and DBRS were recognized as actual rating agencies in the same release - the world is really changing around us...

from Bloomberg:

Fed says legacy CMBS will become eligible for TALF The Federal Reserve Board announced that, starting in July, certain high-quality commercial mortgage-backed securities issued before January 1, 2009, or legacy CMBS, will become eligible collateral under the Term Asset-Backed Securities Loan Facility, or TALF. The TALF is designed to increase credit availability and support economic activity in part by facilitating renewed issuance of consumer and business asset-backed securities and CMBS. To be eligible as collateral for TALF loans, legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages and, as detailed in the attached term sheet, meet certain other criteria designed to protect the Federal Reserve and the Treasury from credit risk. The FRBNY will review and reject as collateral any CMBS that does not meet the published terms or otherwise poses unacceptable risk.

CRE Losses at Banks

Everyone is waiting for this wave to hit, but the WSJ took a different look at it today and plugged the data from 900 or so regionals and locals into the "Stress Tests" previously performed on the 19 largest financial institutions.

The results were an expected $100 billion loss, and a possible $200 billion loss. That result is in line with some of the projections you see from other sources such as Goldman or Moody's, based on different kinds of analyses (Maturity schedules, credit quality, etc.). However, if you're like me and think the "Stress Test" were a joke, then you're also probably like me and think that Goldman and Moody's analyses were jokes as well. Nonetheless, an interesting take...

Total losses at those banks could surpass $200 billion over that period, according to the Journal's analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks analyzed by the Journal.

SEC Lawyers Accused of Insider Trading

I know this is soooo last week, but based on the reported facts, it sounds like it might just be an honest mistake on the two 'perps'. But, the lack of compliance within the SEC, and their rules in general stand in stark contrast to the rules your typical Investment Banker must adhere to...

SEC: One lawyer made 247 trades from 1/06 to 1/08, mostly in specific company names.

Contrast: Definitely no active trading - Buy and Hold is strongly encouraged.

SEC: Investment analytics tool: Google. Investment Results: 73% Decline in portfolio value.

Contrast: Investment decisions: Some Broker or third party analysis tool, company filings on Edgar, TGL/CreditSights/etc, everything you should've learned for your CFA, etc. Investment Results (for successful investors): mostly flat in recent years with single digit percentage point fluctuations. Investment Results (for the general market): 40% decline

SEC: No compliance officer. They had a reporting mechanism through human resources, but the post was not filled, and thus no one was there to report trades to.

Contrast: Many IBs require personnel to request special permission to trade ANY specific company name from their superior, and maintain restricted lists that must be closely adhered to. Failure to do so has dire consequences in addition to causing the bank to unwind the entire trade. Funds not considered diversified, are not even allowed without permission. There are even cases where the funds listed as options in 401(k) plans do not qualify as diversified under compliance-made-up rules and any trades are routinely unwound to the detriment of the employee. I personally regularly have received calls from compliance regarding investments (especially LP interests, LLCs, and individual trades - these all resulted in periodic calls with a compliance nimrod getting me to reaffirm it's purpose) during my employ at an IB - on the PUBLIC side.

SEC: 6 Month required hold periods on any stock purchases.

Contrast: 30 day holds. Although 6 months is a little too long in my opinion, knowing it was going to be at least 6 months before I could reevaluate my holding would have prevented me from entering virtually every equity trade I entered the last 10 years. The exception being some long-term coupon/dividend/royalty paying investments (mostly not stocks).

I've been liberated from my day job (working for "The Man") and I'm going to Disney World

Talf was extended to include 5 year terms, and some other CRE news surely happened today and likely will continue to happen in my absence. I highly recommend checking out M. Herschmeyer, Zero Hedge, Bodamer, and Deal Junkie for witty, thorough, and timely CRE comments until I get sucked back in and can no longer stand being liberated from the markets.

Dark Space may comment in my absence.

Return date is unknown. Final destination is unknown. There is no guarantee Freedom will last.