Correct. And the investors won’t buy. Now, I will note it’s fair to say the CMBS underwriting got far more aggressive in the last two years, 2006, 2007, than they were prior to that. So there was certainly some weakness from the fundamentals standpoint in the underwriting of those loans. But, at the same time, the fundamentals of real estate until even today, are relatively strong, but certainly getting weaker in some of the obvious points, particularly retail and hotels.
84% leverage? For a REIT? And instead of replying on corporate lines of credit, like most REITs do, GGP's borrowing was through mortgages, presumably a lot of CMBS debt? This is unbelievable. How could the former CFO and company management let this happen?
Not to pick on Lightstone, but you just can't avoid the bad press for too long when you make such poor business decisions. The Extended Stay transaction was bad when it started - they paid more than two times what Blackstone had paid for the chain just two years before for a limited service hotel chain.One wrinkle in negotiations is that Extended Stay isn't likely to file for bankruptcy protection, because of provisions common in commercial mortgage-backed securities deals that would expose more properties of its founder, David Lichtenstein.
Insurance companies typically do not have to mark-to-market in the same sense as, say, a bank's held-for-sale investments, but rather they reflect reasonable impairment expectations. Mark-to-market can wreck their balance sheet, but their CMBS portfolios typically are relatively unlevered long-term investments to match expected insured payouts.
Subprime, not sub-prime, which is an inferior cut of beef.Its okay to say Treasurys or Treasuries
Everyone understands that everyone else has not been living and breathing bonds the last couple of decades, but if you don't take the effort to do just basic research on a sector (which would reveal correct spellings and such), then don't expect anyone to give your article more than a passing glance.
Triple-A commercial mortgage-backed securities are trading at roughly 70 cents on the dollar, meaning they would produce a 20% return if held to term.That's
Back then the cumulative default rate on loans made in 1986 reached 36%.
Moody's Investors Service expects U.S. commercial mortgage-backed securities' ratings to face downward pressure in coming months as falling demand cuts rents and boosts vacancies in the U.S. commercial real estate market.Its just despicable that rating agencies have done such a poor job - how are they in business?
This is going to be a long post. I wanted to walk through the PCV/ST loan and some possible outcomes
Peter Cooper Village/Stuyvesant Town (PCV/ST) is an 11,227 unit multifamily complex built decades ago by MetLife for the working class. Blackrock and Tishman-Speyer purchased it in 2006 for $5.4 billion, larger than any other real estate transaction in the US – ever. The senior note serves as collateral in four different CMBS deals, with a total of close to 100 bonds, and is part of two CMBX indices, CMBX.4 and CMBX.5. It is a big deal.
The intended strategy was to kick out the rent-control tenants (paying under $2k in NYC, many are paying around $1,200 at PCV/ST) and move in market-paying tenants (lowest available market rent apartment is a 1-bedroom in the bargain basement for about $3,000). With the high number of rent-control tenants, the apartment complexes don’t bring in enough income to even pay their first mortgage (much less the additional debt), so the underwriters required that they set aside a large reserve account ($400 million) to help pay the debt service while they were in the process of kicking out the despicable rent-control tenants living off the back of the rest of us executing and monetizing their business plan. Perhaps a little unpalatable, but a relatively easy to follow strategy.
As one might expect, assuming you haven’t been on an island (did anyone see the article on the last page of Bloomberg magazine last month on Necker Island – my daughter walked in while I reading it and insists that we must go. No matter that a single night cost more than we’ve set aside for her entire college expenses. I need to add a donate button to this website asap!)
NYC mayor Bloomberg, and others, helped get new laws in place in March 2008 that allowed tenants to fight back when landlords wrongly tried to evict them. Part of the strategy, you see, is to sue every tenant possible over the tiniest of things with the hopes that they’ll find it too expensive and a waste of time, and just move somewhere else. There was not a lot of recourse for the tenants, so the landlord could do this over and over to the same tenant. Not anymore – three times constitutes harassment under the new law, and an addendum to the law (currently being considered) may allow for the tenant to sue for damages three times their legal costs for defending themselves. Needless to say, there are roadblocks in place now, that were not taken into consideration when these loans were originated.
PCV/ST is not going as planned, but it’s also not really as bad as some would have you believe. Moody’s states that their debt service reserve (put in place to ensure they could pay their mortgage while they deregulated units) will run out sometime in 2009. Although they have kicked out number of tenants in rent-controlled units (about 1,000 so far), they’ve mostly been one bedroom units, which just aren’t as profitable to deregulate. They’ve also spent a ton of money improving the “Oval” area, and improved landscaping throughout. They’ve unsuccessfully taken nearly 400 tenants to court since the loan was originated (that is a lot of pissed off tenants).
Moody’s calculators must work differently than any that I’ve tried, which is likely related to their poor job at rating deals. The last few draws on the reserve account have been around $10 – 11 million, and the balance was around $165 million last month – give or take a million or two. So, if they are unable to deregulate any more units at all, and keep occupancy roughly in line, they have 15 months of reserves left (right? 165 divided by 11 equals 15). Some reasonable inputs can get you out to 24+ months with a straight face. It’s not running out of money in the very near future.
Utilities, traditionally paid by the landlord, have cost around $10 mm a year (a little more this year). They started installing meters in October 2008 and are going to bill the tenants. All of the fancy landscaping and changes to the Oval – that is what you call a Major Capital Improvement, or an MCI, and you bill your tenants for it. The Oval will have some new services next year and memberships will be available for $250 per year and $25 a month. To twist someone else’s words about the landlords – if anyone can squeeze blood out of this turnip, it’s the heartless MDs young professionals leading the effort.
Now, I’m not saying this is going to work out, I’m just saying it’s better off than the Savoy or Riverton, or any number of similar, albeit smaller, deregulation projects. And, the real problems are quite a ways off. Further, how do you short it? Hedging is more expensive than ever before, not to mention that this is only a small part of the CMBX indices. Heck, let’s say it defaults in 16 months, and let’s assume that it takes a couple of years until the loss actually takes place (it’s extremely reasonable to expect a 1.5 to 2 year disposition period before the asset is resold) – You’re in 2011 or later before the CMBS deals are at risk of a loss. One of the rating agencies have pegged the current appraisal value at a 10% discount to the origination level – the senior mortgage LTV still implies a $0 loss.
The story on the two CMBS loans, while not trivial, actually helped push the rest of the market down. I don't think its a huge surprise two loans are having issues, although it is a bit soon, and it really is a big deal that 20% of an 8-month old deal is delinquent and likely to default.
Distressed sales of commercial real estate may rise next year as about $36 billion in securitized loans written in 2006 and 2007 come due
''The special servicers are not making it easy to assume these debts,'' he said. ``They're taking the opportunity to take another bite of the apple.''
Such loans are typically held for five years
The borrowers will likely have to pay higher interest rates as well as contribute equity
General Growth has $900 million in debt coming due Nov. 28 on two luxury malls on the Las Vegas strip. It has another $58 million in bonds due on Dec. 1. The company is attempting to meet those obligations by selling those two malls as well as another on the Las Vegas Strip. It also is negotiating with its lenders to gain an extension on its deadline to pay those debts.
Another hat-tip to CalculatedRisk, Verizon Center was in the NYTimes yesterday regarding tenancy issues, namely the largest tenants to sign leases are all backing out. If you stay long enough, you realize this is the Verizon Center (1095 AoA) that EOP sold to Blackstone at the exact pinnacle of the market. It is the largest loan in the GSMS 07-EOP deal.Commercial real-estate securities have been Wall Street’s last claim to dignity. You might remember that Lehman Brothers Holdings in the final days pinned its hopes for survival on the values of its commercial real-estate portfolio.Last claim to dignity? I must be on a different train - CRE has been the favorite whipping boy for at least the last 7 months. REIT equity prices are more than 40% off their highs, double digit unlevered returns are possible in AAA CMBS, and the AAA CMBX indices are implying the underlyings will experience losses 4 and 5 times history?
Commercial real-estate loans, including commercial mortgage-backed securities and collateralized debt obligations, total $3.7 trillion. It is only a slow burn right now: Many of those CMBS and CDOs mature in 2010 and 2011The Fed reports outstanding CRE loans closer to $3 trillion, and a little less than 1/3rd of that is CMBS. The Journal might be double counting CDOs, but its not clear. I'm just roughing the numbers based on others' research, but the refi wave really starts in late 2011 and 2012 - less than 8% of the outstanding CMBS mature in 2009 and 2010 combined, and 2011 & 2012 have less than 9% of the outstanding each; most of those are 10-year loans maturing out of deals underwritten at the turn of the century. Late 2011, and 2012 are a little more problematic because the handful of 5-year loans from '06 and '07 deals start to mature.
Who stands to hurt the most? The list starts with the biggest holders of the loans, which include insurance companies, hedge funds and banks, specifically regional banks...Assuming, incorrectly, the pain will be felt most in CMBS - insurance companies have deep CRE experience. Before CMBS, they were the primary lenders for the highest quality sponsors for stabilized properties. CMBS stole market share, and insurance companies bought CMBS, but for the most part they picked the highest quality CMBS out there. Its easy enough to find Insurance Companies that failed to invest wisely, but thats for another post.
...investment banks took many of the highest-quality loans, leaving regional banks holding those commercial loans without stable income streams
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