Friday, December 30, 2011

Blue Light Special - Sears Closing List

I like Eddie Lampert. I want him to win. How can you not like the story of how he got to where is, well, at least up until about 2003-ish when he bought K-Mart, followed a year later by the Sears acquisition. In all fairness, he quickly shuttered hundreds of stores and turned the new company into a cash cow in the short-term, but ever since the stores have allegedly (I haven't been in a K-Mart since at least 1995, and not in a Sears since at least pre-9/11 - if ever) suffered from a lack of adequate CapEx and ever-changing leadership. Never mind that the retail environment is just tougher today than it was a few years ago.

Then he missed an opportunity to capitalize on the value of the real estate at the peak of the market. Even in back in '04 when the Sears merger was underway, splitting the company into an OpCo/PropCo strategy where you would split the retailer into a Real Estate company (and leverage it up with CMBS debt) and an Operating Company made a lot of sense. The debt likely would have been fine today as well, given that they would have signed some long-term leases (of course, the OpCo may be stuck with lease payments if it shuttered 120 stores...). Within a few months, KKR/Bain/Vornado were divvying up ToysRUs in precisely the same manner.

Well, I'm still rooting for the guy. He announced over the break that they're closing 100-ish stores and they released a list of 80 closures in the last couple of days. They're list is in a PDF and doesn't copy out cleanly, so I pasted a complete list at the bottom of this for anyone who wants it.

CMBS Exposure - Please note that this is not an attempt to be a thorough or complete list, just a quick snapshot. There is a HIGH probability that there are some missing or incomplete data in the list below. The analysis simply consisted of pulling every property with a tenant with a name like "%Sear%" or "%K%Mart%" and matching against ZIP codes on their closure list (Zip codes change, Annex A's misspell stuff, etc.):
Deal Loan Name Loan Status PCT of Deal
MSC 2007-IQ14 Ershig Mall Portfolio Perform(w) 0.83%
GMACC 2004-C2 Shoppes at St. Lucie West Grace(w) 2.06%
MSC 2005-IQ10 69th Street Philadelphia (I) Grace(w) 4.43%
JPMCC 2006-CB15 Lightstone Portfolio Del 90+ ss 3.31%
MSC 2005-T17 Coventry Mall Del 30 ss 9.26%
CSFB 2002-CKN2 Crystal River Mall REO 4.16%
MCFI 1996-MC1 Kmart/Rocky Mount REO 100.00%
BACM 2005-6 Island Walk Shopping Center Perform(w) 0.50%
WFDB 2011-BXR BXR Loan Perform 100.00%
CSFB 2001-CKN5 Manhattan Plaza In Foreclosure 2.45%

In the table above, the formatting kept cutting off columns - if you'd like the complete mapping of columns shoot me an email at

Full Closure List (Source)

Also, CRE Console put together a little map using one of my favorite free online mapping tools here. Over at Retail Traffic, Elaine Misonzhnik postulates that the real estate may be in high demand at many of these locations.

Monday, December 19, 2011

All is Lost!

From Bloomberg.
More than half of commercial mortgages packaged into bonds in 2007 and coming due next year may fail to refinance as maturities reach the most evah and lenders pull back, according to Standard & Poor’s.
Nearly 30% of 2007 CMBS loans carried 5 or 7 year maturities...
About $55 billion of property loans sold as securities come due in 2012, with $19 billion of those originated in 2007, S&P analyst Larry Kay said in a report today. The five-year mortgages have a 50 percent to 60 percent likelihood of failure to refinance, the New York-based analyst said.

Next year will “usher in the first major wave of maturities from the 2007 vintage, which were issued during a frothy period at the peak of the market,” Kay said.

Is the Wave of Mutilation finally upon us? Some say yes...
“Retrenchment in the capital markets and among other lenders in the third quarter of 2011, which has continued into the current quarter, dims the refinancing prospects.”

So, it's kind of a big deal - no money is being lent, the loans maturing contain more underwater crap than ever before, and any money that is being lent is under onerous terms :(

Loans underwritten during the peak five years ago will be challenged by tighter lending conditions, limited borrower equity in the buildings and the large size of loans relative to current property values, S&P said. Property values have tumbled 42 percent since 2007.

Lenders are willing to write a mortgage for a maximum of 70 percent of a building’s value, meaning about 63 percent of loans taken out at the height of the property market bubble will be hard to refinance unless the borrower injects additional cash, S&P said.

Friday, December 16, 2011

666 Fifth Avenue Modified

They managed to get 666 Fifth Avenue modified down into senior $1.1 billion senior note and the rest into a hope note, a new maturity date in 2019 (from 2017), and the rate dropped to 4.5% from 6.3% - all according to a Bloomberg article today.

In other news, Kushner was seen outside the Uniqlo store shopping for Christmas gifts for his new kid on

Monday, December 12, 2011

MSC 2007-T25 - Village Square

Village Square REO sale takes out 10 tranches from MSC 2007-T25 transaction.

Who would've thought that a Las Vegas strip center wouldn't have survived this downturn?

h/t CrabsOfSteel

Wednesday, December 7, 2011

Hotel Lenders avoid Foreclosure

Bloomberg has an interesting article on hotel lenders.

. "Servicers do drag their feet with them a lot more because they aren't sure what to do."

(unless there is a backroom deal to be had)

Among hotel loans being worked out is $1.44 billion in financing backed by 355 La Quinta Inns & Suites owned by a unit of New York-based Blackstone Group LP.

"Special servicing is a routine precondition to requesting an extension and we have done this in over a dozen other similar situations."

(translation, "we've defaulted on over a dozen other failed loans where we are the borrower)

"Having some type of extension on an existing loan already in place, rather than a foreclosure or REO situation, is more likely in hospitality than in other commercial sectors," Stacey Berger, executive vice president at Midland Loan Services Inc., said in October. REO refers to real estate owned by lenders following a foreclosure.

h/t Anon

C-III and Grubb Ellis accused of breaking the rules

The WSJ reports.

C-III Asset Management, agreed last month to allow C. Michael Kojaian, the owner of the two buildings, to pay off loans at greatly discounted amounts, according to a report by Amherst Securities Group's research unit. The loans for $24.2 million and $22.6 million were paid off for a total of about $8 million...

Days after C-III and Mr. Kojaian finalized the deal, Trinity Health, a large not-for-profit health system, announced that it had signed a lease for 340,000 square feet in the two buildings.

Three days after the loan payoff on the two Michigan properties, Grubb & Ellis announced that it was in exclusive negotiations with C-III on a strategic partnership....

I heavily pared the WSJ article comments back.

Calm before the storm

A few news outlets were running this story the last few days. Maturities are really going to hurt this year - especially 5 year maturities that are hitting us from the peak of the bubble.

The bad news is that 5 & 7 year loans in the fixed-rate Conduit universe peaked at 40% of total issuance in 2005 (i.e. 5s are mostly gone now, 7s will hit in 2012), and then slowed to roughly 25% of total issuance in 2006 and 2007. Also, 2012 is the year that fully extended floaters issued by both banks and CMBS lenders will come due, and most of these were on projects that were not yet stabilized. And further, 2002 was actually a slow year for 10-year loans (<$50 billion), so its not like these maturities are a bunch of well underwritten, highly amortized, low LTV loans.

I don't have an updated version of these maturity charts - if someone has them, please pass them along. Thanks.

Sedmak exits RBS stage left

According to Bloomberg he's leaving financial services altogether...

Friday, December 2, 2011

Moody's taking CMBS IOs to the finishing lot

Moody's announced it was planning on rating IO tranches to more accurately reflect the inherent credit risk in CMBS IOs. S&P took a similar stance in 2009, and Fitch started withdrawing many IO ratings in 2010.

If you're unfamiliar, IOs in the CMBS world are comprised of the leftover interest in a deal - in other words, the difference between the weighted average net mortgage rate and the weighted average coupon of the CMBS bonds. If the underlying mortgages have a coupon of 5% and the WAC of the CMBS is 4.75%, then there is a 25 bp excess interest cash flow that goes into the IO. This was sometimes split instead into a PAC and a support IO. The IO also typcially gets all or part of the prepayment penalties.

Because the cash flow stream is so thin and there is no principal cash flow to IOs at all, these typically trade in single digits regardless. But, there is roughly an IO notional balance that equals the total size of the universe (they quote $600bln in the sell-side research and WSJ articles, but they're missing big parts of the universe... likely Ginnie Mae Project Loan deals for one.).

Obviously this interest cash flow stream can be interrupted by prepayments, defaults, modifications, various fees, and ASERs. The rating agencies are basically conceding that when they originally rated IOs, they only measured ratings against prepayments and gave credit back for prepayment penalties.

Will this REALLY impact prices?
On the one hand, I would be astounded if a ratings downgrade that has been widely anticipated since at least early-2009 and talked about in years prior to the meltdown would force a massive sell off. Does anyone even use ratings any longer? On the other hand, it wouldn't really surprise me that something widely anticipated and expected still caused a sell-off in CMBS-land. However, IOs are already treated as non-AAA securities by many regulators and most investors, so we really need substantial downgrades (from AAA to nonIG) to force selling.

Although small and mid-sized banks are not big players in CMBS, there are some that are active and they probably will sell any IOs that fall below investment grade (even AAA-rated IOs are treated with the same risk based weighting as a BBB cash bond by the FDIC, so a single notch downgrade will not force the bank's hand).

Some institutional investors will have investment grade/non-investment grade criteria that still causes them to unwind positions as well. Insurers (the vast majority of the legacy CMBS investor base) are less likely to sell off IOs en masse, IMHO, though, because they already rely less on ratings than their new risk-based modeling performed by PIMCO and Blackrock. Mutual Funds on the other hand may be forced to sell off.

I pushed the button earlier, and it didn't do anything. I was tempted by the possiblities for days but was too timid at first, finally abdicating earlier today and smashing it down, only to be overwhelmed with disappointment.

Buy or Sell?
I for one hope it does cause a sell-off so I can pick up some IO bonds. I actually have bought a few (both off Conduit and Project Loan deals) over the last several years that have performed beyond my expectations. I'm still surprised, generally in a positive way, when I get a little unexpected cash flow off of one of these. The real hard part is buying them cheap enough - beat the hell out of collateral and still get really good double-digit returns (even triple-digit if you're lucky) - that hasn't been possible as much in 2011 as it was in the prior 2 years. Hopefully 2012 will give us some more good cheap pricing.

Where can I find out more?
One can derive the most entertainment and get the most information about this move by reading the overly sensationalized WSJ article on the matter, which misinterprets a sell-side research report (coincidentally? authored by a former rating agency analyst) from Deutsche Bank. BAML issued a report a few years ago that described them in detail, but I can't find it online (the image above is cut from it though). I'd be happy to email it to someone if they're interested, so just let me know.

7 World Trade Center to go into a CMBS deal

CMAlert reported that Silverstein is looking to refinance the current Liberty Bond structure into a CMBS deal structured similarly to OBP, but with JPM.

The building hit 100% occupancy on the 10th anniversary of 9/11 when MSCI (the owner of the like-named indices) signed a new lease for 125k sf on the top floor.

As long as they will stop saying things like "it's the safest building in the country", inviting some twisted Titanic karma, it should make for great collateral. Of course, that is also what BOA thought in mid-2001 when it wrote the loan on the last building that was destroyed on 9/11.