Brookfield to Acquire MPG

Nomura reported this morning that MPG is being taken over by a Brookfield-controlled entity named DTLA at $3.15 per share. This likely a huge positive for CMBS where MPG is a sponsor for some of the underlying loans. MPG road the leverage wave right up until the peak, and when the bubble burst they (and they're founder, of the same name) were one of the hardest hit CRE investors. Not only were they overlevered, they had the highest concentration of residential mortgage companies (servicers, originators, etc.) as tenants amongst REITs.

The potential negative, as Nomura points out, is that it may give DTLA more leverage to work out modifications on the problem assets. 

Exposure:
Wells Fargo Tower (GSMS 2007-GG10), Gas Company Tower (JPMCC 2006-LDP8, WBCMT 2006-C28) are listed as the most likely to see modifications. The other exposures are 777 Tower (BACM 2006-6), BoA Plaza (MSC 2004-HQ4), Ernst & Young Tower (WBCMT 2004-C12), and then a couple properties not in CMBS - KPMG Tower and 601 S. Figueroa.

Boston Attack Exposure

The explosions in Boston are horrific and will go down as another sad day in this country's history.


However, staring at CMBS loans all day leads my thoughts immediately to potential exposure. It is probably a little too soon, but nonetheless there are likely to be lasting consequences to the impacted area.

The two primary explosions that caused the most damage were in the 600 and 700 blocks of Boylston Street (specifically the addresses listed were 671 and 755). The only CMBS property in the immediate vicinity is the 761- 793 Boylston Street loan in CGCMT 2007-C6, representing 0.24% of the deal. In the horrific photos, which are widely available elsewhere, you'll notice a line of stores behind the aftermath starting with a Crate & Barrel on the left side (West) of the images, and continuing right (East) you'll see an Atlantic Fish Co, Forum (the blast appeared to be centered here), and Starbucks. The building with the Crate & Barrel and all the buildings to the left (West) of it back to Fairfield Street are part of this collateral property.

Only three other loans have properties within a few blocks, and both are approximately 1-3 blocks away from the attacks:
GSMS 2007-EOP - 500 Boylston (JV) (I don't *think* this has been released)
CGCMT 2007-C6 - The Wesleyan Building (0.20% of deal)
JPMCC 2007-LD11 - 399 Boylston (1.45% of deal)

Each of these are office and less likely to be impacted then street level retail.

KMart makes a funny commercial

With cutting edge commercials like this, they might make a solid comeback. I'm going to adjust our models to treat them a little more favorably as tenants.

GCCFC 2007-GG9 - COPT Office Portfolio in Special Servicing

Fitch and Barclays are reporting this loan flipped into Special Servicing due to imminent default. Roughly 2/3rds of the underlying properties are located around Baltimore and have heavy exposure to GSA tenants which were severely impacted by BRAC in that area.

Office Markets in places like Huntsville AL (where a large portion of civilian support positions were relocated due to BRAC) have benefited while areas in the greater DC area have been hurt.

Barclays notes that this could impact the AJ, but also highlights the other three COPT Office Portfolios in CMLT 2008-LS1 ($150mm, Northrop, the third largest tenant amongst the two collateral properties, terminated its lease and plans to leave this year), MSC 2006-HQ8 ($108.5mm), and GSMS 2006-GG6 ($103mm).

CRE Fundamentals

Wells posted their CRE Chartbook a few weeks ago (you can request it, and other reports via wellsfargo.com/economics), which contains an amalgamation of a number of useful charts and data from various sources. They also have some summary commentary on each sector. I pulled out a few interesting charts below:

CMBS is a dwindling piece of the pie, losing 1.7% net issuance during the 3rd Quarter 2012, although GSE deals gained ground.

There are still some problems to get worked out... This chart shows the status of all CRE loans, not just CMBS.

Delinquencies have improved dramatically. (Also all CRE)

Retail prices seem lofty, perhaps JCP should re-evaluate a REIT conversion.

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.

Key ASF boardmembers resign over dispute

Key ASF board members resign over dispute with Tom Deutsch, the executive director. My favorite quote from the Bloomberg article was the "who spoke on condition of anonymity because the dispute isn't public"... mmmkay.

He had to know this was coming, and has already faced a prior defections from other board members who were concerned with things such as transparency, executive pay, and supervision over executive decisions. At some point you need to step aside when key members of your organization are quitting over a failure to communicate effectively with you. I'd be interested in others' thoughts, but from my outsider point of view, it seems like it might time for Deutsch to pull the golden parachute and float to safety.

Is the conference canceled?

Downtown, Revisted

We recently covered an area of downtown New York that got roughed up during Superstorm Sandy.  This past week, the NY Times and WSJ caught up with some of the aftermath and today's post will cover 4 New York Plaza and 199 Water Street.

The news for 199 Water Street isn't all that great.  NYT tries to mollify the status of the building but here are some facts gleaned from the article.

1. Wells Fargo isn't rolling the lease when it expires in 2015.  They are currently taking up 325K square feet out of 1.1M which is about 30%.
2. Clean-up and repairs will cost around $50M
3. The space needed to host the electrical switchboards (replacing the ones damaged from the flood) will cannibalize space that could be used for leasing.
1. The building is currently 94% occupied so it's not like there's much room to stuff the electrical boards into.

Mind you, the building represents a hefty chunk (~11%) of the collateral in MSC 2007-HQ11.

As for 4 New York Plaza, the 1M square-foot building bought in 2012 for $270M by a joint-venture that includes HSBC, has yet to see it's main tenants move back into the building.  Overhauling the building is likely to cost around $60M.  Concrete Jungle covered some of the aspects of this building this past summer.

The articles try to provide a positive spin on the situation, but as far as I'm concerned, until Flavors Cafe at 175 Water Street is up and running again, this area is a long ways away from it's former glory.

~-Jingle Male

Sequestration is already here

Wells Fargo Econ Group was out with a write up yesterday covering which states were at the highest risk of Sequestration related negative business impacts. The city next to the cotton field I grew up in was number seven on their list. Growing up, a lot of friends had parents who were highly trained engineers, they built massive weapons systems and space exploration systems, and cars ;-). Talking with folks back home recently indicates that Sequestration effects are already being felt - weeks have been cut to 4 days, early retirement buyouts are being offered, and real estate owners are trying to hit the eject button.

Someone needs to put out a nice exposure list of properties most likely to be impacted by sequestration.

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.
 -

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.
-

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*

Getting hacked by Anonymous is the new killing it...

Anonymous posted 4,000 bankers personal info on the Alabama Criminal Justice Information Center website during the Super Bowl. I honestly just skipped over the story at first, why would the Fed have my information and a password to boot, and I generally assume that hackers break into institutions all the time (I've seen that movie) and already have my coveted phone number and super secret passwords I use to protect my highly sensitive family photos.

So, I reached out to the Fed, informed them how important I was, increasing the likelihood dramatically that my information would be on this list of elite bankers. Three days later they let me know that everyone who did have their personal information exposed had already been contacted. I immediately checked my cellphone, personal email accounts, work email accounts, home phone answering machine, and snail-mailbox... Nothing. Needless to say this does of humble pie was hard to swallow, and I plan on sulking through dinner and perhaps even until Law & Order starts (Mike Tyson guest stars tonight). If you did get a shout out from the Fed, please reach out to me as I need to improve my circle of banker friends.

And the Winner is...

Blackstone, in a bid to spread it's real-estate hegemony to multiple continents and asset classes has made Jonathan Gray a busy man.  Going long and strong real-estate, whether residential or commercial, has been a no-brainer since 2009 but much credit needs to be given to Jon Gray and his crew.  Actually,  the media has been covering his situation pretty thoroughly for a while now so The CRE Review is going to do a synopsis covering Blackstone's dominance in this area.

 Before we get started, here are some overviews of JG that are worth familiarizing yourself with.

1. Jonathan Gray, Blackstone’s Real Estate Wizard Behind the Curtain - New York Observer
2. Jon Gray Skips Party, Afraid Record Buyout Will Fail - Bloomberg
3. Blackstone's Gray Joins Board as Real Estate Rises to 71% of Firm's Profit - Businessweek 

Whether it has been getting involved in GGP's bankruptcy, loaning money to and then owning  Eagle Hospitality (Apollo and preferred shareholders got spanked on this one; more on this story another time), buying Centro, or any other (Emeritus' health-care portfolio) of it's lucrative joint-ventures (Glimcher); Blackstone has acquired an empire that spans beyond commercial buildings.

Jon Gray has also been busy acquiring a massive portfolio of residential houses; often times he is buying them in bulk.  Look no further than the mortgage team at Bloomberg and you will frequently see BX named in a story that excessively celebrates the genius of buying resi when it has never made more sense to do so.

1. Blackstone Sees Two-Year Window to Buy Houses: Mortgages - Bloomberg
2. Phoenix Picked Clean, Private Equity Descends on Atlanta - Bloomberg 
3. Blackstone Makes Foray Into Houses for Rent: Mortgages - Bloomberg
4. Blackstone Rushes $2.5 Billion Purchase as Homes Rise - Bloomberg

See what I'm saying here?   While not every purchase has been a winner (see: EOP restructurings, Hilton buyout), their aptitude to see trends just a few months before anyone (lol) else tells me that leaving the keys in the mail is just the price of doing business on such a massive scale. 

In case you haven't learned enough already.  A couple more to drive the point home.

1. The Hotel Hegemony Continues
1. Blackstone Said to Seek $450 Million for Hotel Financing - Bloomberg
2. Blackstone Said to Plan Sale of Miami Beach Resort - Bloomberg
3. Blackstone/Apple REIT Merger Signals New Wave of Private Equity Hotel Investment - CoStar

Maybe in the future we'll do a similar story on CRE investors who recently got it all wrong.  Any ideas?  Maguire, Lightstone, Macklowe might work.  Let us know.

~Jingle Male

Andy Beal Needs You!

Featured in the WSJ today, Andy Beal is ramping up his put-back campaign against the evil originators.  If you own any of the following bonds in the list below, you may have a friend in Andy:

CXA Corporation's Tranches Owned

ACE, BALTA, BSABS, CMLTI, GSAA, JPMAC, GSAMP, LBMLT, MLMI, MSAC, RAMC, SABR, SASC, SURF, SAST, SVHE.  All the good stuff.

It seems as if Andy went long all the right kinds of resi at very good prices, no doubt.  He's made a fortune a few times over and it's good to see he's still doing it.   Bloomberg and WSJ have covered him pretty thoroughly in the past.  I suggest the following reads for the unacquainted.

1. Maverick Banker in Texas Chases Distressed Assets - WSJ
2. Beal Becomes Billionaire with FDIC Assets as He Tops Poker Pros - Bloomberg

~Jingle Male

Disclaimer: Not long any of those bonds nor am I affiliated with Andy Beal.

Linkage for the Lazy

Ladies and gents, enjoy the link-fest below:

1. Goldman Sells $750M in Junior Loans on Hawaiian Portfolio - Deal Journal
1. Abu Dhabi Inv., Canada Pension Plan Inv. Board, and Athene Annuity & Life (owned by Apollo) were the buyers.
2. Sony Selling U.S. Headquarters Building for $1.1B - Reuters 
1. Apparently, this is one of the rare times that Sony has been able to make money in the past few years. I really dig  The Brooklyn Investor's arguments as to why Sony is stuck.
3. BRE Properties Is Possibly In Play - WSJ Developments
4. Lennar Expanding into Apartments - Bloomberg
1. Lennar has been doing a lot of things right over the past few years.  
5. Toll Brothers Playing Follow the Leader - WSJ 
1. How cute. "Suburban Builder Sees Growth in City Living; 'Tired of Mowing the Lawn.'"
6. Tishman Speyer in the News, And It's Not Bad This Time - WSJ
1. Apparently they have learned their lesson.  Less leverage equals less pain in a downturn.
1. For the uneducated, The CRE Review has been chronicling the Stuy Town Saga for quite some time now.

Yes, the single-family rental rating drama is still playing out and I'll comment on that soon.  In addition to CBS spinning off it's billboards into a REIT and a write-up on RLJ Lodging.

Until then, enjoy the holiday.

*Hat-tip to reader 'Carte Tranche' for the link on Sony's US headquarters*

~Jingle Male

Guess Who's Back

Today seems like an odd day for the fringes of the credit markets.

1. First you have Hunter at Distressed Debt Investing who is basically decrying the current state of the HY markets as "out of control".
2. Second, you have Bloomberg writing a piece on CRE CDOs making a comeback.  But don't call it a comeback!  And honestly, don't you dare call it a CRE CDO neither, call it a "collateralized loan obligation".   
3. And then, like a phoenix rising from the ashes, the WSJ prints a piece that symbolizes the return of the B-piece buyer.  He's not trying to repack his residual holdings into a CDO anymore though; those days are long gone.  Eric Hillenbrand and his crew have turned a new leaf.  Welcome back gents and if anyone knows where Andy Stone has gone to, please tell him he is missed.

Usually my first instinct is to take the opposing view when the mainstream media prints stories of how a certain asset class is "toppy" but I just don't know what to believe anymore.

~Jingle Male

The Carnage

Hurricane Sandy did damage, no doubt to the Eastern segment of the financial district.  One of the buildings I walk by every day is 199 Water Street, also known as One Seaport Plaza.  Anchored by Abercrombie and Fitch and having BGC, Aflac, and Aon as its tenants; this building was something nice to look at.  Less than a block away from the Seaport itself, it is still under repair and I wonder how this will impact MSC 2007-HQ11.  Abercrombie and Fitch is still not up and running.  Want to get an expensive egg sandwich and coffee at Europa?  Forget about it.  BGC Partners was moved to Cantor's mid-town office for a stint as Jack Resnick & Sons tried to return the real-estate to it's pre-Sandy glory.

According to Moody's "the property was 98% leased as of March 2012, compared to 100% at the prior review and 97% at securitization." One Seaport represents 11% of MSC 2007-HQ11.  Just saying.  But beyond the questionable cashflows this collateral will eke out going forward, Hurricane Sandy poses larger questions for the insurance district in downtown NYC.  Why would any prospective tenant want to secure a major lease in the area after what happened?

GGP/Howard Hughes got lucky that their beauty was spared the destruction that a lot of the area's businesses could not escape.  It still pains me that I can't get my daily cup of coffee at the Flavor's at Water and John Street.  That business is a great franchise by the way and unfortunately, it looks like it will not be coming back. 

It's no secret that AIG is probably not going to roll it's lease at 180 Maiden Lane and despite SL Green doing a solid job of turning the lights back on after Sandy in about a month's time; it's hard to blame AIG for wanting to find a more secure and stable location.

I'm not sure if tenants will shift away from the Eastern side of FiDi or stay away from it altogether.  Two months out and still, not all the lights are up and running.  This could bode well for Midtown but let's see what kind of concessions property owners will make.  Their hand is weak, and wet.


~Jingle Male

Sell Mortimer! Sell!

Deutsche Bank thinks AJs are overdone and expect a backup.

DRA/Colonial ($742mm) receives extension modification

Barclays put out a loan report today on this loan, which is has pari passu pieces in three CMBS deals. The mod is a positive for investors as it doesn't change the rate, doesn't reduce interest cash flow, and requires deposits, and some effort to sell properties and pay down principal. The extension is for two years, with an additional year possible but dependent on a 50% principal reduction from sales (new max extension = July 2017).

AIG considers suing US for onerous bailout terms

Greenberg has filed a lawsuit already, and he is asking the board to weigh in and join him in suing the US government for around $25 billion (roughly equal to the 'profit' they made on the bailout) because they charged onerous interest rates (14%) and other unfair terms.

My first, second, and last reaction is Wow. It takes some gall to turn around and sue the government when you chose to accept their assistance - and AIG did choose that path, unlike some of the banks who allegedly were effectively forced to take the government assistance and enter into mergers. Some nerve.

The more important takeaway though, is that the government circumvented established bankruptcy law that is set up to handle a situation where a company has made bad decisions and is in financial ruin. No company should be labeled TBTF, if they fail they should go through bankruptcy and have the assets and liabilities lined up and whittled down at discount prices exactly as the law is set up to do currently. Instead the US came in and prevented a bankruptcy - which was well deserved - AIG was neck deep in CDS on mortgage product that was undergoing extreme dislocations and was vastly mispriced. It's not as if other investors didn't see it coming and have a completely opposing opinion and made gazillions of dollars.

CMBS 2013 Outlook

The CMBS market has certainly enjoyed a revival during 2012 and there are a number of reasons to be optimistic about 2013 including the pick up in originations, continued low rate environment, and improved fundamentals within outstanding CMBS deals. Morningstar notes that the consensus is that it's gotta be better than 2012. Some quotes from RBS and CS reports can be found here. The best write-up we've seen so far is Nomura's, and you can contact your sales coverage there for a copy of the 12/6/12 2013 Outlook: The Road to Recovery.

Some of the points others have highlighted as positive include:

1. The mix of maturing loans shifts from the heavy burden of 5 and 7 year loans originated between 2005 and 2007 to 10-year loans originated in 2003, which results in lower term and maturity risk. Maturity risk should remain muted the next 2 to 3 years, but ramp up in 2016 and 2017 when 10-year loans from 2006 start to mature. Further, as Nomura points out, prices are back to 2005 levels (still down 26% from the peak), so fewer 2005 loans are not "under-water".
2. Issuance could exceed $100 billion (Nomura >$100 b, Morningstar - $50-75b), although this is partly driven by the deterioration in underwriting we've witnessed in 2012. Nomura breaks it out by $41b in Conduit, $10b in Agency, and $53.2b in Agency.
3. Delinquencies have likely peaked - Nomura
4. Capital availability has led to increased transactions ($200b in 2012, up 8% - Nomura)
5. Fewer modifications expected as climate improves. This is due both to easier availability of credit to borrowers so they can lend their way out of problems, but more towards the ability of lenders to foreclose on properties and sell them.

Some negative counterpoints include:

1. $40+ billion in defaulted loans are still in the pipeline. We should see increased loan sales from this pool.
2. Deal losses will continue to grow as delinquent loans are resolved. Nomura is looking for an increase from 2.9% deal-level losses on 2005-2008 vintage loans to 5% by the end of 2013.
3. Dodd-Frank - pretty much everyone made a passing reference to legislative risks, but there was less focus than on other risks.
4. Prices are too high, and the easier credit is going to cause more bonds to pay off at par, faster than premium buyers are expecting - RBS & CS. I certainly wouldn't be buying premium front or next pays right now either. RBS recommends buying further down the stack, and that is in line with what we did late in 2012.