Wednesday, July 7, 2010

It's tough writing sell-side research all the time. No one really appreciates you internally, it's impossible to gauge your impact on revenues, you're underpaid, and everyone's a critic. People make mistakes too, and you have to forgive them the first time around although sometimes the forgiveness must be delivered in a very harsh shell so that the mistake is not repeated. I get all that.

That being said, Deutsche Bank's Frankfurth-based research group put out a piece on CRE yesterday title "Commercial Real Estate Loans Facing Refinancing Risks; CMBS only a part of a growing problem" that was really embarrassing for them in my opinion. The conclusions, the title, and overall gist of the paper is not incorrect - in fact, it's kind of obvious in the "duh, we have a refinancing wave coming in CRE both in the US and abroad!" kind of way. Hopefully after 3 years of this you're already familiar with the issue - probably more so than the authors at DB!

There is no flow to the paper. Its so bad that its hard to read. One paragraph is about the US, the next is Germany and the UK, and then there's something about Paris, and then you have to loop back and re-read the last three paragraphs to figure out what they're talking about. US CMBS and CMBS from the other side of the pond pretty different animals - and you can't switch back and forth between describing you're typical longer term fixed-rate US Conduit deal and a shorter term UK floating rate deal.

They go to some great lengths to compare ratios between the countries. For instance, they note that in Europe, CMBS only accounts for 8% of the CRE loans, while in the US the ratio is closer to 25%. Okay, what is that supposed to mean? Your Euro CMBS deal is full of short-term floating rate paper, your US is full of 10 year (mostly) fixed-rate paper. Your Euro CMBS loans are structured more like a US regional bank's CRE development loan than anything in the US CMBS market. They don't really come to a conclusion either way, but do infer that "risk of turbulence for CRE would be smaller than for housing" because fewer CRE loans were securitized. Also, without looking, they're estimate for the Resi market seems vastly incorrect.

Pages 5, thru 8 are just completely mind boggling. Under the section where they "define" CMBS, they start off describing a European structure and you assume they're purposefully not including US CMBS yet, then you start seeing a few references to US CMBS that don't show up in European CMBS, and you realize they've just mixed and matched the two as if they were that similar. Somewhere on page 6 it just leaves the realm of reality and I switched from reading to scanning.

Then there are sections just begging for some actual "out-loud thinking" on their part. On page 10 they discuss how 53% of US CMBS maturities in 2010 have extension options, but that percentage drops to 10-14% the subsequent two years. Do you want to know why? Well don't bother looking in the report. Maybe its obvious (it is to me), but I'm guessing if you ask the author, they won't know the answer. They come to the conclusion that things aren't so bad in 2010 - nevermind that the rest of the CRE mortgage market (the 75% that is not CMBS) is virtually all short-term debt maturing now - not in 2016 and 2017.

So, I'll stop picking on them. This is not the worst piece I've ever read, but it does remind me of a similar article in early 2008 when Goldman's Global (non-US) desk produced a report titled "US Commercial Real Estate: High Losses, Slow Burn" that was so factually inaccurate and so obviously authored by someone with zero experience in the US CMBS market that they later had to retract and republish an addendum piece (that still was unimpressive and full of errors).


Anonymous said...

It's is a conjunction of it and is. --> ' is your friend

Dark Space said...

see, everyone makes mistakes.