$460MM Flagler Deal

Class	Size ($MM)	Ratign (F/S)	WAL	Px Talk
A	$ 350	AAA/AAA	6.67	S+190-210
B	$ 30	AA/AA	7.11	S+385-405
D	$ 33	A/A	7.11	S+435-455
D	$ 47	BBB-/BBB-	7.11

LTV= 51.48%
DSCR 2.10x

Florida.

Office (65.6%), Industrial (11.8%), RoW/Excess Rail (22.6%). 44 Properties and multiple parcels.

Flagler's a subsidiary of Fortress, which bought it and affiliates back in 2007 for $3.5 bln. Obviously the WAL is longer than any TALF loan, so unlikely to get much TALF interest, if any.

Comings and Goings

Honestly I wasn't around last week and I missed some of the excitement. It sounds like the Dubai World fiasco caught some market players by surprise, although it is not clear why anyone would be surprised that a resort surrounded by barren desert with man made ski resorts, gargantuan man made islands in the shapes of palm trees and continents, and really not much else - all conveniently in the middle of a bunch of conservative islamic states (although Dubai is an exception, I know) that would poo-poo all over anything Europeans or Americans would consider fun. Further, it's just 7 hours away (in your Gulfstream, 20 hours with layovers in Cairo or Moscow if you fly commercial) from any place that has a base of wealthy enough citizens to actually enjoy such hoopla. Really. Really, I don't have a crystal ball, but the very first time I heard about The World, I wondered to myself how that was ever going to be successful. Maybe it has been, but its just a little off-the-charts insane. All that aside, Dubai World owns a number of U.S. assets, mostly through Istithmar. A lot of the properties are in CMBS deals, most are "trophy" assets, and many are struggling. If you're up to your eyeballs in CMBS you already know this, but even if you're not, you'll recognize properties they own, such as Mandarin Oriental, 280 Park Avenue, and the W Hotel in NY. Expect to see these in the news in coming weeks as journalists recover from their tryptophan induced comas. Some of the better journalists may start digging into the transfer of assets and executives from Nakheel into Istithmar just a few months ago - there is some dirt worth digging up there.

Also, over the last couple of weeks, GGP has been making headlines. All of their loans maturing over the next 4 years have been extended to at least 2014 - we took a closer look at that here. That is substantially all (92.22%) of their CMBS debt outstanding, so if you have GGP exposure and you own current pay or next pay bonds, you may have just got slapped in the face - even worse if you bought the bonds with a 3-year TALF loan and now you have a maturity at least 5 years away. On the other hand, most longer bonds and IOs both benefit from the news.

Maturing Debt in Billions:


The more important GGP news is the announcement from Simon that they have hired advisers to look at buying all or part of GGP. We really went all out and even made a cute little map to show the overlap between Simon and GGP, and after that we started talking to folks and realized we should have included Westfield too. Sounds like we are more likely to see GGP get split up between Westfield and Simon, and maybe some other players. We'll come back to that and update it when we have time. I do think we'll see a lot of loan assumptions, especially given the terms on the newly extended low coupon loans on GGP's portfolio. That is good in terms of the loans having a better sponsor. Either way, I think we'll see GGP come out of bankruptcy before Christmas, and our equity stakes in the bankrupt company will continue to move up while our CMBS exposures will improve in terms of credit quality.

Fitch came out with a report on European CMBS (no link) that was not that revealing, but just reiterated the fact that CMBS on that side of the pond is very different than on this side. They have triggers based on periodic property valuations, shorter terms, floating coupons, and they're just really struggling.

Not sure what happens this week, but expect to see more selling as traders continue taking profits to shore up their year-end bonuses and real money buyers wait to see what their CMBS allocations for 2010 will be.

Heard retail sales for Black Friday were up from last year. I spent all day shooting skeet and trap with a very nice Beretta 391 gas powered semi-automatic 12 gauge with a complex adjustable recoil pad while you nancies stood in line for a good deal at Wal-Mart or wherever, so I'll rely on your feedback regarding how busy retailers were.

One final note, where have all the researchers gone? We realized today that Darrell Wheeler must have left Citi, and he was definitely there just a couple of weeks back. No word on his current location. Edwin Anderson left Bank of America earlier this year, Lisa Pendergast landed at Jefferies (but we're either not on her list, or they're not publishing), and Howard Esaki's current location is unknown. I think the only one that stayed put, kinda, is Roger Lehman at Bank of Amerillwide. I think Masumi Goldman may have stepped out of this market too. If they all changed careers out of CMBS, that probably doesn't bode well for the future of the CMBS market.

TALF Rejections

Okay, I know I'm a little late getting to this (I took my first vacation in 18 months last week and sat on a beach south of Cuba for a few days. No kids, just fruity drinks, bad food, sand, and salty water), but I want it in here for posterity's sake. The Fed continues to keep the market guessing as to their logic, or lack thereof, behind which bonds get accepted (60 in November) and which ones are rejected (3 in November). The real twist this time, is that all of the rejected bonds were previously accepted...

It's really bizarre, two of the rejected bonds (see table below borrowed from Citi's report on the matter - the reached the same conclusions) saw either an increase in delinquencies or an increase in loans with DSCRs < 1.1x since they were previously accepted, and the third bond (BACM 2007-2 A2) actually improved! Citi goes on to point out that several bonds that were accepted had performance declines that greatly exceeded those of the rejected bonds over the same period of time (see second part of the table below).



To quote Jeffery Berenbaum in the Citi report:

So once again we come up short in trying to understand the Fed’s rejection decision process. As we noted above, the uncertainty is even greater this
month, with the rejection of previously accepted bonds, something the Fed has
not done before.

So, you're probably reading that and wondering what happened to Darrell Wheeler. If you're not thinking that, let me know, because he must have hit the road sometime in the last couple of weeks and they have already taken his name off of everything.



All of the prior accepted and rejected TALF bonds can be found here, along with some month-old stats on them.

A Closer Look at Five Random CMBS Loans

ZeroHedge took a close look at five failing CMBS loans, and clearly laid out their reasoning and loss expectations.

I'd be curious to see them draw a more distinct line between the fundamental analysis and valuation of the actual bonds. Things feel a little rich now, but I still feel like there are some good values in 2006 and later vintages at some points in the capital stack.

The Belnord stuck out as one of the rent-control flips. Here is an abbreviated list from a BOA report that lists some more big ones. The actual report had several pages more - it'd be interesting to see where those all stood today.

GGP Extensions

From the WSJ:

Mall owner General Growth Properties Inc. told a bankruptcy court on Thursday it had reached a deal with lenders and servicers to restructure $8.9 billion of mortgages on 77 malls in hopes of removing them from bankruptcy protection by year end.

The pact is the first step for General Growth in extracting from bankruptcy court the 166 malls it put under Chapter 11 bankruptcy protection in April. The company still must strike similar pacts with lenders on another $6 billion of secured debt as well as $6.5 billion of unsecured debt.
...

The upfront cost of the deal for General Growth is at least $350 million, including a $100 million fee paid to the creditors, payment of past-due amortization and reimbursement of their legal fees, according to people familiar with the talks. General Growth will pay those costs from the $692 million of cash it has on hand, according to a separate person familiar with the matter.

The lenders involved in the deal are servicers overseeing securitized mortgages and life-insurance companies including Prudential Financial Inc. The loans range from $10 million to more than $1 billion on malls including Ala Moana Center in Honolulu. Attorney Greg Cross of Venable LLP handled negotiations for the lenders.
...

General Growth is "close" on similar deals with other lenders among its remaining $6 billion in secured debt in the bankruptcy case, this person said.

So, we're looking at all their pre-2014 mortgages getting extended. Feeling pretty good about GGP exposure put on during the last couple of quarters.

Insurer's CRE Exposure

Fitch (sorry no link) noted that:

...Despite a declining outlook for all US CMBS property types and an escalation of losses, the U.S. life insurance sector should be able to manage its exposure to commercial real estate-related losses...

While most life insurers have yet to recognize material losses on their commercial real estate-related investments, a sizeable portion of their assets are entrenched in commercial real estate. And with an increasingly negative outlook in the cards for CMBS over the next couple of years, performance pressure on life insurers is likely to increase over time.

'Commercial real estate (CRE) fundamentals are softening as rents are declining and vacancies increasing in response to the broader economic downturn,' said Managing Director Bob Vrchota of Fitch's CMBS ratings group. 'Without a recovery for commercial real estate fundamentals, recent vintage U.S. CMBS could experience losses averaging 8.7%.'


Some insurers are better off than others. Take Hartford, for instance - not to single any particular firm out, but they had 33% of their structured products portfolio in securities rated lower than AAA at issuance. Virtually all of that has been downgraded to something lower than A-rated today, and thus their RBC ratios have to be shooting through the roof. In addition, about 70% of their structured products portfolio was 2005 vintage or later, i.e. weaker underwriting. According to a 10/24/08 report from Citi, Hartford and XL had the largest CMBS investments of all the Insurers they covered, Hartford had the lowest quality CMBS portfolio (followed by Progressive and AIG), Hartford and Progressive had the highest concentration of IOs, Hartford had the largest CRE CDO exposure (12.3% of shareholder's equity at the time, and 13.1% of their CMBS portfolio) and 11% of them were rated below BBB at the time.

The last stament in the Fitch report that CMBS could experience losses averaging 8.7% seems a little rosy - that is closer to the low-end estimate of average losses in my opinion, and is in line with the average losses experienced during the late 80s/early 90s on senior CRE mortgages. The good news is that most insurers were relatively conservative investors, and further they tended to be CRE guys first, and bond guys second. So, overall I wouldn't expect to see horrible losses in their CMBS portfolios over the long-term.

DDR 2009-DDR1 - Good for the borrower, bad for the investor

ZH sums it up.

Simon and GGP Marriage - With wedding photos and charts

What would this look like?



Something like the above, where the little rusty-red dots are GGP and the Blue dots are SPG. Note that I think the "CUBA" property is really in Italy and the GEO-Coder misinterpreted it - you can click here for an interactive map that includes all their properties, not just domestic.

GGP has substantially lower coupons on their mortgage debt, averaging 63 bps lower @ 5.29%, but the divide is even larger on loans maturing before the end of 2012, favoring GGP by an average of 125 bps. So, given everything else remains the same, Simon will be likely to assume GGP's mortgage loans. Add in factors such as the lack of available financing, higher coupons, stricter underwriting, etc. SPG's only roadblock to assuming the mortgage debt is getting rating-agency sign-off where its required.

GGP's mortgages on their malls actually perform slightly better than Simon's from a cash flow over debt service perspective. The majority of GGP's malls have a NCF DSCR greater than 2x. Simon's average DSCR is 1.83x.

GGP properties also have slightly lower leverage, with average original LTVs at 62.72% versus SPG's average orig. LTV of 66.53%.

Obviously GGP has a lot more overall debt (mortgage and corporate) due to the Rouse acquisition, and we all know about their huge refi hurdle - look below. This is the maturity schedule, in billions, for all GGP and SPG CMBS mortgages, extended out to their maximum ARD or Extension date.


The footprint overlap is probably of some concern that might lead Simon to cherry pick assets instead of taking the entire platform down. Some MSAs have multiple properties operated by each REIT.

Take Atlanta-proper, for instance. SPG has Phipps Plaza, Lenox Square, and Northlake, while GGP has Cumberland and Perimeter; if you expand to the Atlanta MSA, you end up with SPG malls Discover Mills, Gwinnett Place, Town Center at Cobb, Mall of Georgia, Mall of Georgia Crossing, North Georgia, and GGP has North Point and Southlake. Not only is there a high number of malls in the Atlanta MSA from both sponsors, but a quick look at the loans and the GGP Atlanta loans are higher leveraged then average (so are the SPG loans), and have lower DSCRs than average.

Tenant overlap is pretty consistent, just looking at the non-anchors, and focused on revenue, Simon has a slightly more diverse tenant base.

Top Retail Tenants by Rental Income	Simon	GGP
The Gap	2.20%	2.90%
Limited	2.00%	2.60%
Abercrombie & Fitch	1.80%	2.30%
Foot Locker	1.40%	2.30%
Zale	1.00%	<1%
Luxottica Group	1.00%	<1%
American Eagle	0.90%	1.50%
Express	0.90%	1.30%
Sterling Jewelry	0.90%	<1%
Genesco	0.80%	1.10%

Not sure who wins the battle of increased tenant concentration - probably the tenants since they have more negotiating power, but could go to the landlords because the tenants have fewer location options.

Will be interesting to see if Simon cherry picks the performing assets and let's the others (especially in high-overlap areas) flounder, or if they go in and take it a substantial percentage of the total to increase their footprint and dominate the space (as if they don't already) blocking out any competitors.

ESH Ruling Problematic?

Moody's pondered that the Judge's ruling in the ESH bankruptcy case that the actual investor list be released so he could hear their concerns directly (versus through the Trustee/Servicer)

Moody’s noted it cautioned in June this scenario might lead to “free-for-all financing” as certificate-holders plead their own cases, bypassing the natural filtering process of the trustee and servicers. Because of the implications, Moody’s said at the time any judge would be unlikely to pursue that option.

“Judge [James] Peck may return to his initial skepticism and rule on later substantive motions the way all market participants, even the certificateholders now attempting opportunistically to bypass the trust structure, thought the rules would work when the ESH transaction went out the door,” Rubock said. “Or me may not, and we may need to rethink how robust many structures are — from trusts to participants — under the extreme tests to come.”

Probably not a big deal at this stage, but maybe it sets a new precedent for other workouts down the road.

Chicken and Egg - Bailout and Crisis?

A friend of mine has been sending me depressing stories all morning from the Huffington Post. I don't know if he needs a hug and is reaching out for attention, or if things are just this bad - there's an article about a kid in Michigan who is being denied a prosthetic arm by his insurance company, another about no more raw oysters, another about Al de Molina stepping down (oh wait, this could be GREAT news for BOA in Charlotte). Anyways, they linked to a, mostly factual, slide show from business insider that blames the regulators for the crisis....

UPDATE: I finished the article and decided its stupid and you shouldn't read it.

How A Government Bailout Created Today's Commercial Real Estate Catastrophe


Wait, only the first 1 or 2 slides are mostly factual, then John Carney just starts making things up. The size of the market is wrong, RTC did not "Create" the CMBS market, then he blames Basel I risk-based capital reserves, 60% of CRE mortgages were securitized (try 28%, at the height of the market!), that because of the CMBS market the remaining bank mortgages were the riskiest loans (instead of pointing out that C&D loans were always the riskiest, and he pointed out earlier that these were the primary loans that banks made before CMBS), next he blames REITs, dot com bubbles, and it goes on. I clicked through a few more slides, and its all just misguided garbage. He continues down this path that small banks have risky loans on their balance sheets because they securitized their good loans - small banks didn't securitize any CRE loans, they just originated 100% of the C&D and land loans.

You know what, don't read it. It's so misguided.

FAS 166 & 167 Implications

A topic that I've referenced many times, but have yet to do a complete overview of is FASB's idiotic accounting rules. Barclay's (Hotel Tango ZH) looked at the impact to various banks by primarily looking at nonconforming resi, Credit Cards, and ABCP (It sounds to me like the rules encompass more products than that, but hopefully I'm wrong). Please read the whole article from ZH - I won't take it whole cloth.

This will have the impact of increasing asset levels and possibly reduce retained earnings--both which adversely impact capital ratios. Note consolidation results in an increase in loans and leases, securities, short-term borrowings and long-term debt on the banks’ balance sheets. In addition, there could be a cumulative effect of adopting these new accounting standards resulting in a charge to retained earnings relating to the establishment of loan loss reserves and the reversal of residual interests held. Additionally, limiting banks ability to recognize securitized assets as off-balance sheet exposures could have further consequences on credit creation.

DDR 2009-DDR1 Priced

Tranche	Size	Coupon	Rtg	Talk	Price
A	$ 323.50	4.28%	AAA	N+145-160	N+140
B	$ 41.50	7.45%	AA
C	$ 3.00	8.43%	A

Don't have any additional details. Seems uber-rich to me.

Coming and Going

DDR might get priced today. I think PIMCO summed it up best:

"It's a great execution for the borrower," says Scott Simon, managing director and head of mortgage- and asset-backed securities portfolio manager at Pimco, a leading bond house. "If other real-estate investors can borrow money at that rate, it would be a real game changer for the commercial real-estate market that has been so devoid of financing."

I wouldn't buy it at a 4% yield. However, the new issue machine has officially had most of the dust bunnies blown off and someone flipped on the switch. It's not just Goldman taking the leap, JP Morgan has started warehousing loans for an issue scheduled for early next year. I'm sure others have started to test the water as well.

Spreads responded positively. Spreads on the A4 class have tightened over 100 bps since their wide during the first week of the month.

DDR 2009-DDR1

DDR 2009-DDR1 ($400mm)

Tranche	Size	Coupon	Rtg	Talk
A	$350.0	4.28%	AAA	N+145-160
B	$ 30.0	7.45%	AA
C	$ 33.0	8.43%	A

I'll update with any color.

UPDATED PRICE TALK, again.

TALF changing to SUC OFF

Anonymous Banker has a good point. TALF doesn't really solve any problems. It doesn't matter if you're talking about new issue or legacy, TALF will not be the savior. It is riddled with issues that hinder its own success.

A) Diverse Collateral - unless the FRBNY looks the other way, the DDR deal is simply not diverse. It is 100% one sponsor, and 100% retail. The deal makes sense - we should support loans to institutional quality collateral, even when the sponsors have a BB+ rating, but this deal does not pass the diversity test. (Fortress likely passes, but the other deals in the pipeline don't pass this test either)

B) Failure to Specify TALF Eligibility Requirements - They've basically said, hey, we'll fund it as long as it is AAA and diverse, but we may reject it anyway. So, investors have to buy the bond with the added risk that they may be stuck with it and no TALF loan to leverage it (and a lower price b/c the NYFRB will immediately tell everyone they rejected it). It's the equivalent of telling your assistant to get you a triple-venti non-fat latte, and then throwing it in her face when she gets back from running down the street in the rain because the cup had a black lid instead of white one.

And more specifically to AB's point - what does TALF do to restart the loan market? CMBS was only about a quarter of the CRE lending market to start with, and it's maturity problems are mostly down the road 7+ years, unlike banks. Someone needs to step up and provide some very concrete guidelines and give the market some confidence.

-Stop all this FASB nonsense - just come up with a set of rules and implement it. Preferably stick to rules that aren't stupid like most of your recent changes.

-Stop all this talk about requiring issuers to retain an interest in securities - this already existed (see ABS Auto deals, or Specials on CMBS deals) and it doesn't solve the problem. "Hi, I'm XYZ 2009-1 and the government requires me to retain 10% of the deal on my books, so I'm going to increase some other costs by 10% and value that at near $0.00. Worst-case, we lose nothing and likely case is that value increases to something more than $0.00." "Oh yeah, and because of the new stupid FASB rule, I'm still going to have to put 100% of the deal on my balance sheet, even though I only actually have 10% on there)!"

-If you're going to give investors cheap leverage, how about giving very defined rules on how bonds will be eligible (or just publish a list of CUSIPs you nimrods). While you're at it, how about letting us use our Social Security savings and letting us leverage up on the assets. These aren't 144a. Plop them in a public fund and give us an option - hell, I'll take an $8,000 tax credit, or the clunker value of my primary vehicle, and put it in the fund out of the kindness of my heart to get things started. My tax rate next year is going to be 57% all in, I'm paying 100% of my insurance, rent, mortgage, vehicle loans, etc. - it's time for me to get something back for that, and I want control over as much of my money as possible. Why should some douche managing a fund get to benefit from my tax dollars (my 57 cents of every dollar I earn)?

-Instead of some useless scheme such as TALF, why not sell CDS on the new issue deals. This way an investor can offset their risk, at their own free will, and the government will receive a market-based fee for taking on that risk (a risk that will be far less than 3 or 4 times the purchase price, which is TALF). Structure it to benefit the taxpayer - I'm sure you guys have some great thoughts on this.

-Workout some reinsurance scheme. You can even support a third party to do it to keep the risk as far away from the taxpayer as possible. Offer it on whole loan portfolios, not just securities like CMBS - let an insurer offset some of their risk so they'll underwrite new portfolio loans (they still have money coming in that they need to put to work).

Coming and Going

We have a lot of Treasury auctions this week, retail sales, gas. Most importantly, Wednesday is an recommended close for Veteran's Day, and I'm looking forward to watching the little cars with big guys in red fez hats zipping around on our little village's Main Street drag (or is that Memorial Day - I think I may end up being very disappointed if there are no fez's on Wednesday).

Spreads gapped wider for the week. There was a lot of selling as folks took profits off the table for the year, and very little buying as the same folks are waiting to see what kind of allocation they'll get for 2010. The holiday doldrums seemed to have started a few weeks early this year.















It felt like there was a huge uptick in downgrade activity this week, but I think it was just in the MSM a little more than usual. Within domestic CMBS, there were 280 rating actions last week, just slightly below the average 309 actions per week since August 1st. They were mostly negative with no upgrades, and just 8 cases where the watch status improved. S&P has always been the dominate CMBS rating agency, but they have been substantially more active (869 actions since 8/1/09) than either Moody's (302) or Fitch (646). The deals that had downgraded are listed below:

WBCMT 2007-C31
WBCMT 2007-C30
WBCMT 2006-WL7A
MLCFC 2007-5
JPMCC 2006-LDP7
GCCFC 2007-RR2
CSMC 2007-C4
CSFB 2001-SPGA
MSC 2005-T17
MLMI 1999-C1
JPMCC 2006-LDP8
CSFB 2005-TF2A
WBCMT 2005-C21
CSFB 2005-C4
BSCMS 2006-BBA7
BACM 2007-3
WBCMT 2006-C28
STRIP 2004-1A (these are some old ReREMIC deals mostly 3yr old A1s and A2s)
STRIP 2002-2A
STRIP 2002-1A
STRIP 2003-1A
MLCFC 2007-9
CMLT 2008-LS1

Peter Cooper Village Stuyvesant Town

Stuy Town officially moved to the special servicer last week. CWCapital has the honor, and Fitch came out with a distressed value of $1.89 billion. Fitch also stated that the sponsor requested relief, which is the reason for the transfer to the special.

S&P went into a little more detail and noted that there have been no conversions since early in 2009, and some units may be re-regulated.

GGP Shortfalls Coming to a Bond Near You

Most of these appear to be automatic ARAs of 25%, but a few are smaller. You can see that the servicers reversed a few of the ASERs from the prior month, and will likely do the same for the ones we see here. All of these are as of the October pay date.

Deal (s)	Loan	ARA ($mm)	Outstanding Bal. ($mm)	ASER ($mm)
GCCFC 2004-GG2, GCCFC 2005-GG3	Grand Canal Shoppes at the Venetian	43.80	$ 393.75	0.00
GECMC 2005-C3, GECMC 2005-C4	Oglethorpe Mall	17.54	$ 280.21	71.50
COMM 2005-LP5, GECMC 2005-C1	Lakeside Mall	22.54	$ 179.37	-87.50
WBCMT 2006-C26	The Woodlands Mall	45.96	$ 173.68	0.00
LBUBS 2006-C1	Chapel Hills Mall	28.91	$ 115.65	0.00
BSCMS 2003-BA1A, CSFB 2005-C3	Southland Center Mall	26.99	$ 107.80	-115.75
LBUBS 2004-C4	Town East Mall	26.30	$ 105.18	0.00
GECMC 2005-C4	Grand Traverse Mall	21.17	$ 84.56	88.51
MLMT 2004-KEY2	Crossroads Center	20.94	$ 84.31	0.00
LBUBS 2001-C3	Vista Ridge Mall	20.09	$ 80.35	0.00
GECMC 2005-C1	Ward Centers	14.57	$ 58.29	-56.58
CSFB 2004-C2	Valley Hills Mall	14.14	$ 56.56	0.00
LBUBS 2000-C5	Gallery at Harborplace	13.52	$ 53.77	0.00
MLCFC 2006-4	Northgate Mall	11.19	$ 44.72	-57.04

The CMBS market is taking a dive the last couple of days. We're about 100 bps wider on the week, and, say, 130 bps wider since late October in A4s. Many AJs are back in the h40s, after flirting with h50s/l60s.