REIT of the Year

As usual, REITs continue to dominate the headlines in one way or another.  Whether it's a disparate business converting to a REIT or privately-held REITs being bought out, the casual reader need not go further than the real-estate section of your favorite news site to find out more.  Today however, we at The CRE Review want to cover an mREIT that has done a fantastic job of turning their ship around since the nadir of 2009.  Now, there is no doubt that a rising tide lifts all boats but the way that Newcastle Investment Corp. has been able to survive and thrive since 2009 is fascinating. Backed by Fortress, it's been interesting to watch how NCT's real-estate strategy has been mirroring that of its sponsor.

While smarter money was going long resi and CMBS back in 2009, 2010 and 2011, NCT has been going beyond the usual mandate of buying odd-lots and AJs.  Here's what they've been up to.

1. Cleaning up the balance sheet by reducing liabilities via collapsing CDOs.  Check.
2. Becoming more transparent with it's quarterly and annual filings.  Check.  
1. 2008 3Q vs. 2012 3Q.  They have become more transparent with the composition of their portfolio.  Back in 2009 I would read their 10Qs and could not understand why someone would invest money in this company.
3. Expanding it's business by acquiring servicing rights.  Check
4. Expanding it's business by acquiring different pools of loans.  Check
5. Restructuring it's business by splitting up into two. Check.
1. NCT is spinning off it's residential side into a separate business and keeping exposure of CRE and other assets on NCT's books.
1. New Residential (NZR) 
1. Excess MSRs, RMBS, Non-performing Loans, Adjacent Assets
2. New NCT (NCT)
1. CDOs, Senior Housing, Other Real Estate Debt, Opportunistic Restructurings
2. Read this presentation to find out more.  It's also a great way to calibrate your assumptions on CRE and RMBS; if you're into that kind of thing.

At Fortress' behest, NCT has gone from another almost-bankrupt and opaque mREIT to a diversified business with a much healthier balance sheet.  Props to FIG and NCT for turning it around and not throwing in the towel a few years back.  Kudos to those who went long resi/CMBS in 2009 and 2010 but I'd give more credit to NCT's management team for going long and strong in a big way that will likely outlast this rally in credit and real-estate.

Disclaimer:  I do not have any positions in NCT or FIG.

~Jingle Male

Edit: Changed the quarterly filings used to 2008 3Qand 2012 3Q as I thought they were better examples than comparing the 2011 and 2009 annual reports.

LN-ARB

Fresh from being bought out by Starwood, LNR was recently in the news regarding risk retention in the CMBS stack. Financial Times and Debtwire did a nice job of covering LNR's stance on retaining (or selling) the B-piece in a CMBS structure.
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For the uneducated, one of  the ways LNR became great in good times (and  weak, in bad times) was through buying the first-loss portion, also known as the B-piece, in CMBS deals. The B-piece buyers are also known as the "Gatekeepers" in the securitization because since they are first exposed to losses in the trust, they get to have a say as to what assets are included.  If a particular commercial-mortgage isn't up to snuff, then the B-piece buyer gets to "kick-out" the collateral in lieu of something of better quality.
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During the euphoria that was 2007, the B-piece buyers could be counted on to keep some kind of credit standard within a CMBS deal.  The shortened version of the role of the B-piece investor is that by purchasing the riskiest component of the CMBS, they get to choose what risks they are exposed to and earn a greater yield, at the expense of being the first to absorb losses.

Look at the chart below.  Typically, LNR will buy the lower half of the middle column which includes the BB tranche, B tranche and the non-rated portion also known as the B-piece.

The FT/Debtwire article goes on to say that with Dodd-Frank's securitization retention rules on the horizon, it is unclear as to how much of the B-piece LNR would have to retain and for how long.  Back in November the WSJ covered a similar issue regarding Rialto and BlackRock.  As this class of investors is known for having "skin in the game" by being long and strong the assets in the trust, they are shrewdly selling down some of their position (The BB & B tranches, for example) while they still can:

"On a notional basis that’s equivalent to about a 7% stake of a new deal. But recently, the BB portion (about 2% of the 7%) has been offloaded into a more liquid secondary market at roughly 8% yields, according to the buysider, a CMBS dealer and a trader.

Put another way, on a cash basis, given the discounted level B-piece buyers pay for their risky bonds, some buyers have retained only the equivalent of about 1% to 1.5% of CMBS deals after stripping away BBs. In doing so, they’ve recouped a major portion of their initial investment, the buysider said."

It's understandable that proponents of the CMBS market would want the league of extraordinary B-piece buyers to match their interests with that of the other investors in the securitization but as long as Dodd-Frank leave this loophole open, then others will keep on driving a truck through it.

*Here is the presale for GSMS 2013-GC10 by S&P, of which LNR bought the E(BB), F(B), G(NR) and R(NR) tranches.  
*Not for the faint of heart: The GSMS 2003-GC10 Prospectus*

CMBS Strategist sues former employer, UBS

Dealbreaker:

So let’s take a look at this lawsuit filed yesterday by a UBS commercial mortgage strategist named Trevor Murray. He seems not to have gotten along with his boss Ken Cohen, a former Lehman guy now in charge of UBS’s CMBS business. From the complaint:

13. Plaintiff was … the target of a concerted, extended effort by UBS Securities, through Mr. Cohen, as well as others reporting to Mr. Cohen, to influence Plaintiff to skew his published research in ways designed to support UBS Securities’ ongoing CMBS trading and loan origination activities.
14. In June 2011 Mr. Cohen implored Plaintiff, in words or effect, to help “improve conditions in the CMBS market” because this was to be a “significant revenue generator” for the investment bank at UBS Securities. In or around September 2011, Mr. Cohen, along with the head CMBS trader, sat directly next to Plaintiff and told him that a person from the market had approached Mr. Cohen about Plaintiff’s research. Mr. Cohen stated that he disagreed with Plaintiff’s research, and asked Plaintiff, so as not to “confuse” the market, to inform the head CMBS trader about his research ideas prior to publication in order to maintain “consistency” between what he and they were saying about UBS Securities’ CMBS products and trading positions.

They go on to point out that it sounds like he was actually a strategist, not a researcher, so the research rules they're trying to trip UBS up on are not going to apply. If your a strategist, you work for the desk and are biased, if you're a research analyst you're supposed to be unbiased. It also sounds like he was off message with his employer, the desk. DB then points out that it turns out his position was kind of wrong too, so, that kind of sucks for him. So, you have a guy whose boss thinks he's doing a bad job, data backs that up at least to some extent, he gets fired, and then he sues and makes allegations which probably open him up to damage claims from UBS. I have a feeling this isn't going to work out well for him and he's going to end up spending $20-$50k to figure that out.

To be clear, that's just my 5 minute take away on the matter - he may have a more compelling case, but it's not apparent from the DB article or the Bloomberg and Reuters stories that are out about it either...

CMBS stands for...

I'd seen Collision Mitigation Brake System, not that different from the Antilock Braking System (ABS), but today I got a news alert for the Center for Mennonite Brethren Studies (CMBS). A dinner is being held at the Wohlgemuth Music Education Center in Hillsboro, NC at 6pm on May 5th. I expect to see you there.

The Dream Hotel loan for sale?

Although not specifically mentioned in the summary prospective bidder materials directly, a $100mm note on a "boutique hotel" in Manhattan is being offered for sale by Mission Capital today. I'm going to go ahead and bet $100mm it is The Dream Hotel at 200 W 55th Street - please let me know if you'd like to take the other side of that bet asap.

Even before debt service it's losing $1mm a year at 91% occupancy according to the 1Q 2011 financials, and appraised at $87mm in April 2011. The loan represents 2.57% of CSMC 2006-C4, and the #3 loan represents 5.10% and is also delinquent (Babcock&Brown FX3), so it's kind of a big deal. In total, 12.61% of the deal is in dire straits, shortfalls are up to the E class, and the D class is already rated "D", with a split rating as high as the AMs...

JPMorgan and BankOfAmerillwide cull traders

Bloomberg reported yesterday that the CMBS and RMBS desks took heavy hits at both JP and BOA.

In other news, large bands of former traders were seen roaming around Bryant Park quoting lines from Braveheart such as, "they may take our lives, but they can never take our FREEDOM!" in Scottish accents that rivaled Gibson's weak attempts in the movie. The situation teetered on violence when one trader tossed down his biodegradable coffee cup that was only half empty.

JPM preparing a non-performing CMBS

viazerohedge.com

Barclays is growing its CMBS team - suck it CS!

Does HITC count as a source?

Barclays Capital announced several appointments to its Commercial Mortgage Backed Securities (CMBS) Finance business in the U.S.

These appointments accelerate the recent expansion of the firm’s CMBS origination capabilities...

Special Servicer's Survival Guide: 201

Anon posted a link to a summary from a recent conference with some interesting highlights. You should really click the link, but I'll hit some of the high points of their highlights:

• More than 2/3rds of CMBS loans coming due have been extended and can be extended no longer due to PSA limitations (I'll need to double check that one...) -Steve Van
• Flags have been laid back enforcing brand standards on their properties, but it's been three years and they're running out of patience. -Steve Van
• Pace of workouts are exceeding the pace of transfers to special servicing and he expects to work through the backlog over the next 3 - 5 years. -Clark Rogers, Keybank and echoed by Michael O'Hanlon, Berkadia
• The lack of financing since August is having a noticeable impact on maturing loans. Expects to see a big uptick in Large Loan Floaters hitting their last extension date with no possibility of refinancing. Expects massive defaults in LL Floaters. -O'Hanlon
• Big demand for Hotel product coming out of Large Loan Floaters. -Rogers
• Specials who kicked the can down the road look like geniuses today? (not sure I would call the specials geniuses).
• Still don't expect a flood of distressed loans. 
• General agreement that nothing has changed - fundamentals have stayed flat, unemployment hasn't improved, recession never really stopped...

Thanks Anon.

CMBS Deal Pulled - Traders Quit

The GC4 deal was pulled today after S&P waffled and then pulled its ratings, but perhaps even more interesting is the fact that the head traders quit at both lead underwriters. Citigroup stated that the departure of Warren Geiger was in no way related to the GC4 transaction. Matthew Salem also left Goldman Sachs today.


So, sell all your CMBS - traders are giving up.

Riverchase Galleria ARA 52%!

GGP-owned Riverchase Galleria, in BACM 2006-6, just got hit with a 52% appraisal reduction. The loan represents 12.69% of the deal, the largest.

Looks like they want to keep it and are just sticking it to the CMBS holders for a mod...

CMBS Issuance to pick up steam in 2011

Nothing new here, but always good to see CMBS in the TOP news on Bloomberg.

Deutsche Bank and UBS are teaming up to issue as much as $2.5 billion in commercial mortgage-backed securities linked to loans on office buildings, shopping malls and hotels in what would be the largest offering of its kind since the market froze in June 2008, according to a person familiar with the deal. JPMorgan plans to sell $1.5 billion in similar debt, a person familiar with that sale said.

Dwight's Norris sees further CMBS gains

I respect the guys at Dwight. That being said, I'm surprised that they're moving down the curve into AMs and AJs stating that the Super Senior trade is done. I'd argue the AM & AJ trade is about over too. AMs are being quoted in spreads now and all the decent ones are 90-above par. AJs seem to be priced pretty far up too. I'd even go so far to argue that the time to buy B - Ds is past, but the run-up is next year (hopefully)!

From Reuters:

Norris said Dwight -- which manages $64 billion in bonds -- is looking at slightly riskier CMBS known as "AM" and "AJ" classes, which have higher yields but less protection from loss. The risk spreads on those could contract another 1 to 1.5 percentage points, he said.

Dwight's portfolios already overweight with CMBS could expand their weightings to as much as 15 percent from about 9 percent, where prospectus allows, he said. Benchmark indexes have about 3 percent CMBS, he said.

I also disagree with their tenant review of Bob's Gun Shop in Texas as not being a desirable tenant - sounds like a perfect tenant for the upcoming revolution!

"There are also some properties that you want to stay away from," he added. "Maybe a mall in Midland, Texas, that's supported by Bob's gun shop."

Delinquencies up 21 bps in August per Trepp

Is there any other CMBS news out there to report on?

FDIC looking to securitize "distressed" CRE

And there it is, RTC Part Deux, that means that all of those real estate funds that raised capital to go after distressed loans and properties are going to have to change their docs and get investor permission to buy CMBS to stay in the game... If they haven't already been shut down after running up against the end of their investment period.

Running Aground

The BOAT (aka One Bryan Park, Bank of America Tower) debt is finally being marked by BAML and JPM as a $650mm 10-year pass-through. They'll also issue a $650mm 2010 Liberty Revenue Refunding Bond split into a $351.6mm Class 1, $87.1mm Class 2, and a $211.3mm Class 3.

It's structured as an ARD, and refinances the existing debt + $25mm that's being used for "general corporate purposes (but don't focus on that, just trust us)"

More Servicers getting the boot

Bloomberg reports:

Guggenheim Structured Real Estate replaced Bank of America Corp. as the servicer...

The commercial mortgage fund operator, a unit of Guggenheim Partners LLC which has more than $100 billion in assets under supervision, took over management of the $284.5 million loan two weeks ago, according to people familiar with the transaction. The New York-based firm joins Green Loan Services LLC, a unit of SL Green Realty Corp., in using its position as a junior debt holder to name itself to oversee troubled loans.

...Debt holders have replaced special servicers 35 times this year, compared with 44 in all of 2009, according to Moody’s Investors Service.
...
The MeriStar debt, composed of 18 hotel properties, financed Blackstone Group’s acquisition of the hospitality firm in 2006. Blackstone is trying to extend the maturity of the debt, said one of the people, who declined to be identified because the information isn’t public.
Guggenheim Structured Real Estate, based in New York, owns a junior slice of Blackstone’s debt sold as part of a $1.8 billion commercial-mortgage backed bond in March 2007. Blackstone owes an additional $249.1 million in mezzanine debt, the person said.
...
Green, which became a special servicer of commercial mortgage-backed securities loans in May 2009, is the junior lender on about half of its $1.3 billion of its assignments on mortgages bundled into bonds, said Andrew Falk, senior director of the unit of New York’s biggest landlord. Green Loan Services has completed $4.8 billion in loan workouts and restructurings during the past 10 years, he said in an e-mail.

We Are Nashville... CMBS loans.

I am a big fan of Nashville, although I'm an interloper and typically swoop in for a long weekend to see friends, listen to music, and live life. Nashville is different then the other places I've always liked to visit on a regular basis - it's full of real people (albeit some are of mythical proportions), it's a little grimy, there's southern-flavored hockey, pick up trucks the same age as me are prevalent, and jeans and cowboy hats are just as acceptable as tight leather and lip rings.

So, after a week of listening to the plights of friends & family, seeing pictures of destroyed vintage guitar collections, wondering about the hole-in-the-walls that I enjoyed over the years, curious how my favorite Rachels are doing... My wife, a former Nashvegas local, says to me this morning in the kitchen - "most of those places didn't have flood insurance". And, the lightbulb went off (two weeks late, but at least it still goes off occasionally) - CMBS exposure! Duh! Has anyone seen a good list from our well-funded sell-side research colleagues?

This is a very incomplete first cut - I'll have to work on this some more and will post some updates if anyone seems interested and as I get it together. After spending a couple of hours on this, I realize that the damage is far worse than I had anticipated, despite numerous descriptions from friends in the area. I really just assumed they were over-reacting given it was their backyard, but the lack of MSM coverage is astounding given the damage.

You can click here, for an interactive map of CMBS loans in Nashville. Click on the little pins for loan name and other info.

This map doesn't include all the loans outside of Nashville that are likely affected, and I didn't scrub the data for innacuracies or missing fields.

As you can see below, (Google earth plug-in care of PhillipGalbreath), the flooding really stomped on some areas, and then just skipped over others. Note that the map is incomplete. Downtown Nashville is all flooded, which is not shown well - LP stadium, the train stations, everything is underwater down there...


LP Stadium is a big bowl of Cumberland Soup

Here is a great picture of Rutledge Hill in BACM 2007-3 - it's on the left hand side in the background. Picture from kelseywinns.


This is all very incomplete. Hendersonville, for instance, was apparently slammed by the flood as well. I called a lawyer friend (if you can call lawyers friends) there today, but haven't heard back. It is East of Nashville.

Going southeast towards Murphreesboro, again, slammed hard by the flooding. I-24 was completely underwater with only the tops of vehicles visible in the news footage at the Blue Hole interchange. I saw some video footage of that exit - sorry no picture or link.

If you the owner of The Marketplace on Charlotte Pike in COMM 2004-LB4A, you might be screwed. Likely flooded, likely no flood insurance, and loan was performing.

On the other hand, if you're one of the 35 motel/hotel CMBS borrowers in the area including a number of Lightstone-owned ESAs, or Red Roof Inns, that were not performing and fortunate enough to have flood insurance, you may have just found your exit strategy.

Lakeforest Mall - BSCMS 2005-T20 $121mm

Reuters had a headline grabbing (give it time, it'll make its way up the headlines) story out today about a Simon Mall about to default.

Default, or not? Occupancy is rough at only 65%, but they're still covering at 1.74x. Any quick review of cash flows and the mall is likely worth far more than the 55% OLTV senior mortgage on it. The maturity date is July 2010, so the real problem is what is going to happen then - refinanced and paid off, or extended.

Seems like a tough call. If you use GGP as a guideline - highly performing assets, maturity dates looming - it will get modified.

The scary part is the special's comments where they apparently do not know the anchor tenants (none of which are part of the collateral). I refer them to the Mall's tenant directory and map.

CWCapital suitors: Centerbridge, Apollo, Berkadia

From BBG:

May 13 (Bloomberg) -- Buyout firms Apollo Global Management LP and Centerbridge Capital Partners LLC made competing bids for CW Financial Services, parent of the second-largest manager of delinquent U.S. commercial real estate loans, according to two people with knowledge of the offers.
Berkadia Commercial Mortgage LLC, a partnership between Warren Buffett’s Berkshire Hathaway Inc. and Leucadia National Corp., was also weighing a bid for the New York-based company, said a third person familiar with the matter. The people asked not to be identified because the auction is private.
CWCapital Asset Management, a unit of CW Financial, is the special servicer of $143 billion of securitized real estate loans, including more than $18 billion that are delinquent, according to data compiled by Bloomberg. It has access to valuable pricing and payment information, said Ben Thypin, an analyst at researcher Real Capital Analytics Inc. in New York.