Times IS Money

The good folks at the WSJ busted their load over the One Times Square building (1471 Broadway) this past week not once but twice. The $208M IO loan was recently securitized by Goldman into GSMS 2012-TMSQ with Jamestown Properties as the sponsor.

According to the solid presale report put together by Kroll, the history and proceeds are as follows:

1. Jamestown bought in 1997 for $117M when NCF was ~$6M which compounded annually at ~8.7%.
2. Another Jamestown investment vehicle bought the building in 2011 for ~$419M and assumed ~$55M in debt.
3. Proceeds from the deal will return $147M of equity to Jamestown, leaving current equity that Jamestown has in this building is at ~$210M. 

I suggest giving the Kroll report a read because they break-down the valuation of this building which generates most of it's revenue from billboard advertising.  Some facts:

1. In 2013, One Times Square is expected to generate $24M in advertising revenue which represents ~85% of the base rental income.   The other 15% comes from Walgreens (lease rolls in 2023), which is the only base tenant.
2. The building hosts the New Years Eve ball drop which generates between $2.5M and $3M in revenue.
3. Estimated CPM for LED displays on the building is $9.00-$10.75.
1. CPM = Costs Per Thousand Passerbys.  For every thousand people that walk by the building, that is the rate advertisers are charged to flaunt their wares on the side of the building.
1. So for every thousand people that walk by Times Square, the building can charge advertisers anywhere between $9.00-$10.75 so their product can touch their eyeballs.
1. With 1MM people going through Times Square on any given day, the building can charge $193K-$300K monthly and $2.2M-$3.6M annually; depending on the location of the billboard.

The one thing that did catch my eye from the presale report has to do with the special servicer.  It seems that Orix and LNR won't be able to get their hands on this beauty anytime soon:

"However, for as long as the borrower is controlled by the sponsor, neither LNR nor ORIX (nor any of their respective affiliates) is permitted to act as the successor special servicer. In this transaction, the holders of the most subordinate class of certificates outstanding do not have the right to replace the special servicer."

Hm, interesting.  If any of our esteemed commenters know why this is then don't be a stranger.

*No I do not work for Krolls but kudos to them for doing a decent job on the presale.  If you're looking to learn more about a single-borrower deal with the collateral basically being a giant billboard in one of the best locations in the world, then give it a spin.*


~Jingle Male

Sources:

1. Kroll BondRatings: GSMS 2012-TMSQ - One Times Square CMBS Presale Report
2. WSJ Developments Blog: Landlords Have a Ball With Times Square Billboards
3. WSJ: Ads, Not Tenants, Make Times $quare

. 

And MGM/Dubai World Wept (Tears Of Joy?)

"We built in the best of times and opened in the worst of times,” Dennis said in a telephone interview.

For those that follow the saga in Nevada known as CityCenter, a recent transaction reported by Bloomberg may indicate that that this is the beginning of the end.  Either that or Ladder Capital pulled the old Sam Zell and got in at the bottom of this particular market.

1) CityCenter, a $8.5B joint venture between MGM & Dubai World, opens during one of Las Vegas' worst real-estate "downturn".
2) The residential condos at 669 unit Veer Towers initially priced at ~$900+ a square foot.
3) Ladder Capital Finance just bought 427 condos in bulk for $119M, or roughly $300 a square foot.
4) ??????????????
5) Profit

With that being said, the Veer only has about 11 penthouses remaining so make sure you buy before it's too late.

Las Vegas CityCenter Condos Sell in Bulk for $119 Million - Bloomberg

- Jingle Male

A Brief Introduction from Jingle Male

My Fellow Americans,

It is an honor to be able to contribute to The CRE Review.  I look forward to helping this fine blog and its readership stay abreast of what's going on in real-estate.

If you need to reach me: creJingleMale@gmail.com

Now let's get back to business.  Here is what has been going in this sphere recently:

1. Demand for Commercial Real Estate Loans is on the Rise - SoberLook
1. According to JPMorgan, interest-only loans (equivalent to "balloon" mortgage) are on the rise and average loan coupon has been declining.
2. Wall Street Sees Promise in Multifamily Loans - WSJ Developments
1. “Multifamily loans lead the pack in terms of how aggressive the lenders will get” within commercial real estate, said Christopher Haynes...
3. Germany to Sell Real Estate to Lone Star for $1.4 Billion - Bloomberg
1. It’s the country’s biggest commercial-property deal of the year.
4.  Blackstone, Ranieri Betting on Bad FHA Loans: Mortgages - Bloomberg
1.  The FHA’s recent auction had 13 loan pools that sold for 24.8 cents to 59.3 cents per dollar of unpaid principal balance. The sales prevented $1 billion in fiscal 2013 losses for the agency’s insurance fund, Galante said 
5. Starwood Books Upgrade as Hotel Demand Slows: Corporate Finance - Bloomberg
1. The company plans to generate 65 percent of its earnings from fees, Chief Executive Officer Frits van Paasschen said on an Oct. 25 conference call. 

 - Jingle Male

Stuy Town one step closer to resolution

The tenants came to a settlement. This was one of the key blocks to a final resolution on the property that had us thinking it would be late next year "at best", but given this settlement, I think it is safe to say that a final resolution by year-end 2013 could even be labeled "likely" at this point. This is definitely a positive for bondholders.

The only negative I can see, is that the rent-controlled units must stay rent-controlled until 2020 to comply with the original J-51 tax abatement and rents are now set through 2020. This obviously crimps potential revenues, but it makes sense that they would have this as a condition. After all, the only way Tishman got the numbers to work in the first place was to mark-to-fantasy, ignore rent control, evade taxes, and team up with the dumbest lender available (yes, I'm talking about you CMBS Market). Also, it is offset by the fact that it allows them to raise revenues

The settlement works out in favor of Wolf Haldenstein Adler Freeman & Herz, the firm representing the tenants, second place prize goes to Venable LLP, counsel for CW Capital. Everyone else lost. The tenants lost and the lender lost. In lawsuits, everyone is a loser except the attorneys.

Interesting side note, I was going through prior posts on this property and all the action seems to happen in October and November. There are some rare August and March posts, but things seem to happen in October and November. Based on this non-scientific analysis, I'm going to go ahead and call it - PCV/ST will get worked out by November 30th, in fact, on November 30th, 2013.

Octomom Lenders! Take 1 loan, take 8 loans, we're here to make dreams happen

You can't make this stuff up.

Thank you CrabsOfSteel.

Commercial Mortgages Getting Frothy?

The WSJ reported last week that it's getting frothy out there again, and I agree. They highlight the Retail Fashion Outlets of Las Vegas deal which went from a 58% senior mortgage to a 58% Senior mortgage plus a 26% junior mortgage (which could be mezzanine debt, it's not clear because the author of the article believes junior mortgages and mezzanine debt are the same thing...).

The article goes on:

Some owners are taking cash out of their properties. For example, the owners of Extended Stay—Centerbridge Partners, Paulson & Co. and Blackstone Group BX +1.01% —plan to borrow $3.5 billion by selling a combination of commercial-mortgage securities and mezzanine debt. They would put about $700 million of the proceeds in their pocket and use the rest to replace existing debt.

You'll recall that just two years ago ESH was mired in bankruptcy, in-fighting amongst special servicers, and a year-ago attempting a $2 billion takeout financing to buyout Centerbridge and Paulson. Today, nearly twice that is apparently available from the market and at much lower costs to the borrower.

Servicers Unite

Starwood is buying LNR for an undisclosed sum with 3 commas:

Barry Sternlicht's Starwood Capital Group has agreed to buy LNR Property LLC, a large player in the distressed-commercial-property market, for more than $1 billion, according to two people knowledgeable of the deal.

and, Ocwen won the bankruptcy bid for ResCap:

Ocwen will take over ResCap's business (subject to the pending approval), which includes the rights to serve nearly 2.4 million mortgages with an outstanding value of $374 billion. The company faced a serious competition from Nationstar Mortgage Holdings Inc. ( NSM ) at the ResCap bankruptcy auction in New York. Nationstar acted as the stalking horse bidder for the auction. For this, Ocwen will pay Nationstar a break-up fee of $24 million, which was included in its final bid amount.

Higher foreclosure rates coming to an RMBS near you.

Outlet Malls Galore!

My wife briefly entered the commercial real estate section of the local business news when she discovered that Tanger Outlets was building an outlet mall just a few short miles from our house! The only good news that I could garner was that I might be able to sit at home while she shops instead of grudgingly going with her and sitting on couches that are for sale in the stores.

Before the day was over, we discovered that Premium Outlets is coming too! Joy! Pure Joy! There is a substantial probability that there will be weekends that I may have the entire house to myself.

From CoStar.

I also secretly hope this leads to a large butt shaped water tower that is meant to look like a piece of fruit, similar to Gaffney SC - currently the closest location for Outlet-shopping fulfillment.

Stuy Town Tenant Group cuts out the middle man

The Stuyvesant Town-Peter Cooper Village Tenants Association tenant group wants to cut out the Special and deal directly with bondholders. Here is the letter to tenants, and here is the letter to CW Capital, the Special.

The group, which has been working with Toronto-based Brookfield Asset Management Inc. (BAM/A) on a plan to convert apartments into condominiums and pay off bondholders, said that CWCapital refuses to consider it. “It has thus far been unwilling to work directly with us and to share the information necessary for us to formalize a bid in advance of opening up the property to a formal sale process,” the association wrote. “CWCapital’s overall response to our attempts to engage it has been to stall and delay.”

Although some saw this as a negative, it clearly shows there is a bid for the property that could result in a $0 loss to the Trust. The lawyers are definitely taking their pound (or ton in this case) of flesh first though.

Who wants to contribute?

It's painfully apparent that we've gotten pretty busy lately and are posting less. Although we hope that posts will pick up again in a few weeks, it seems like a good time to ask if anyone else would like to be a contributor. The pay is $0. Shoot me an email at credarkspace@gmail.com if interested.

GSMS 2007-GG10 REO bucket jumps to mid teens

Nomura noted earlier today that the 470.0mm Two California Plaza loan went REO on October 1. This was just another overleveraged CA office property brought to you by Maguire, via MPG. Nomura's looking for a good 1/3rd loss on this loan.

New York Office market sucks wind, the rest of tge economy to follow...

At least that is the opinion of a post on Zerohedge today. They also state that 666 Fifth is 50% vacant - is that right? I can't recall, but that seems high. Regardless, they do continue to lose tenants.

Zerohedge: Are You Seeing What I'm Seeing?

This is a good article on ZH yesterday (small excerpt, much better in it's entirety):

You can’t travel three miles in any direction without passing a Dunkin Donuts, KFC, McDonalds, Subway, 7-11, Dairy Queen, Supercuts, Jiffy Lube or Exxon Station. The proliferation of office parks to accommodate the millions of paper pushers that make our service economy hum has been unprecedented in human history. Never have so many done so little in so many places. Everyone knows what a standard American strip mall consists of – a pizza place, a Chinese takeout, beer store, a tanning, salon, a weight loss center, a nail salon, a Curves, karate studio, Gamestop, Radioshack, Dollar Store, H&R Block, and a debt counseling service. They are a reflection of who we’ve become – an obese drunken species with excessive narcissistic tendencies that prefers to play video games while texting on our iGadgets as our debt financed lifestyles ultimately require professional financial assistance.

What you can’t ignore today is the number of vacant storefronts in these strip malls and the overwhelming number of SPACE AVAILABLE, FOR LEASE, and FOR RENT signs that proliferate in front of these dying testaments to an unsustainable economic system based upon debt fueled consumer spending and infinite growth assumptions.

LNR versus the Universe

Our favorite CMBS blogster, well one of our top 2 favorites (I still am crushing on Misonzhnik), Mark Heschmeyer over at Co-Star highlights some of LNRs stats based on a WF report out last week.

1. LNR has the highest liquidation-to-modification ratio of all the Specials at 11:1, up from 6.6:1 one year ago. The second highest is Berkadia @ 6:1, up from 5:1 last year.
2. LNR is very active in selling off non-performing loans
3. Has the highest average loan size for modified loans at $93.3mm
4. One of the highest average loan size for liquidated loans, at $11.7mm

Check out his article for more.

CMBS Rally to continue?

A lot of people thinks so, but it might taper off after seeing a week of pretty strong supply and what appears to be waning demand.

Dealers continue to build up big positions, but they've been wrong, in terms of timing, before. It also may indicate that they're just not finding the other side of the transaction.

I'll report back the precise future as soon as I get this time machine figured out.

That is going to leave a mark

Highland Mall sold for $1.03mm, and had liquidation expenses of $13.2mm resulting in a 119.99% loss to the trust on the loan that was originally a $71mm loan and was the largest loan in the JPMCC 2002-CIB4 deal.

Highland was a feisty little cat on her way down, but  this never looked like it was going to end well.

It is now home to Austin Community College, but was once a Rouse Mall and most recently a jv between GGP and Simon. Further, while dire, Realpoint only projected a 75% loss on the loan.

UPDATE: CrabsOfSteeel found this gem from HighlandMallsNotClosing.com (which seems like an otherwise dead site):

Delinquencies pushed down by modifications

As CrabsOfSteel mentioned not long ago, delinquencies are "improving" to some degree due to modifications, but that doesn't mean the bondholder's cash flow is improving. From Fitch:

CMBS late-pays fell 14 basis points (bps) last month to 8.48% from 8.62% in June. Helping to drive the downward movement were two large loan modifications. In July, the $305 million Schron Industrial Portfolio (GCCFC 2007-GG9) and the $210 million Savoy Park (CSMC 2007-C1) were both modified.

The "Macabre" Pier at Ceasars

From Bloomberg:

C-III Capital Partners, the loan servicer handling the property since the owner defaulted on an $80 million mortgage, canceled the auction yesterday conducted online by Auction.com. The final bid was $25 million, compared with an appraisal of $56.6 million in January 2011, according to Nomura Holdings Inc. The property was estimated to be worth $210 million in 2007, according to data compiled by Bloomberg. “There was a kind of a macabre fascination,” said Lea Overby, a debt strategist at Nomura. “People were surprised the bids were coming in so low. People had it in their heads that it was going to come in closer to the appraised value.” ...

That level would cause a principal hit to the AJ. Who has two thumbs and doesn't own that AJ?

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...

Eminent Scopolamine Mortgage Seizure Update

I continue to read updates on this insane plan and my initial response is always that there just simply is no way it will be allowed to push forward. However, a dedicated reader highlighted the plan has spread to Chicago and they're having hearings on it. One can hope that whomever is at the hearings will not be in a drug-induced coma and see the glaringly obvious problems surrounding this idea, but just in case I'll highlight a few in a an easy to read bullet point format:

"some arguing that the initiative may actually do more harm than good", from the article.

• No more mortgages available to Cook County residents. Ever. Big bad mortgage lender finds out that in Cook County, they're contracts are worthless. Why would they ever, ever lend here again. No one would ever lend in Cook County again, and home prices would dramatically decline. After homeowners were devastated by the new equity losses, the law would ultimately be reversed, similar to what happened in Georgia when they pushed through a flawed assignability law.
• One municipality is simply stealing from residents outside the municipality - the victims will not be happy. The plan is to focus on Non-Agency mortgages first, then Agencies. So, the responsible mortgage payer in one part of the country (via their ownership of pensions, mutual funds, and ultimately Fannie/Freddie/Ginnie) will ultimately be bailing out irresponsible mortgage defaulters in another part of the country (Cook County, in this example). Can someone pull out the history books and see what happened the last time a State seceded? Oh yeah, it was something about States feeling their rights to govern themselves were infringed on due to some constitutionality thingy - even though the key argument was over slave ownership (aka their property, in their opinion, not mine) not their property in the sense of retirement accounts, investments, tax dollars, but I can see the correlations. Please feel free to call me crazy in the comments.
• Does nothing to help the struggling homeowner. They're only focusing on mortgages that are current, but underwater. So, your typical beneficiary has no problem making the mortgage payment, the value of their collateral has simply declined - instead of having to post new collateral, this is suggesting they just get a pass on their losses... I can't even dream up the situation where that makes sense. It certainly doesn't solve any problems, and only creates more. I guess if you bought a house with your savings, and no mortgage, and the value declined we should just send you a check for your loss - heck, if you bought an apartment building as an investment, you should get a check for your loss too. Let's let our government(s) pay for it so basically every investment everyone makes will never lose. I'm sure it will work out fine...
• The community on the forefront of this idea is going bankrupt. Are we really suggesting that we should look to a community who has failed to manage its expenses properly for solutions to a complex financial issue?

Cumulative Defaults slightly lower than expectations (Fitch)

Fitch reports,

Cumulative default rate for fixed-rate CMBS increased 25 basis points to 13.2% as of the second quarter of 2012 (2Q'12). The steady increase in the default rate has so far in 2012 has been slightly better than Fitch's expectations.

Earlier this year, Fitch predicted that cumulative defaults would reach 14.5% by year end 2012. Newly defaulted loans for 2Q'12 total $2.1 billion (143 loans). Following the trend from first quarter 2012, office continues to lead new defaults at 44% with retail following at 34% by balance, respectively.

The total universe represents fixed-rate deals issued between 1993 and 2012, totaling $569 billion (excluding the Freddie Mac securitizations). Loans are considered defaulted if they have been reported 60 plus days delinquent at least once.

Bloomberg states that new issue CMBS LTVs exceed 100%

Of course if you actually make it to the 8th page of Ms. Mulholland's Bloomberg article...

Lenders use a different formula to calculate a property’s value relative to loan size than Moody’s, resulting in a lower leverage ratio. On a $1.35 billion offering from Morgan Stanley and Bank of America Corp. sold last week, the issuers estimated the average office loan in the pool to be equal to 65.5 percent of a building’s value, compared with Moody’s 109.7 percent, according to the rating company’s assessment of the transaction.

So Morgan Stanley and Bank of America are using appraisals, and Moody's is basically making up a number. It should really just say that at the very top of the article. Moody's takes two numbers to estimate their version of the LTV for a property, stabilized income (so not actual current income, which is what is commonly used in CMBS 2.0 appraisals, and even many CMBS 1.0 appraisals) and higher cap rates then the current or even near-term projected cap rates. While I'm not so naive to believe that appraisals are always accurate. However, it is equally naive (at best) and potentially dangerous for Moody's to imply that this is an accurate accounting of value. Last year, they had the nerve to actually state the following:

In contrast, Moody’s LTV highlighted the growing credit risk late in CMBS 1.0 and is much more consistent with the now evident performance patterns of recent vintages.

So, they would have you believe they saw the storm coming, but continued to rate the bonds exactly the same despite believing that the vast majority IG-rated CMBS they put their stamp on was underwater and would likely be downgraded?

I do believe that Moody's Stressed LTV is useful in analyzing loans in a deal, but it should clearly be labeled as such. In papers specifically about the measure, they label it Moody's Stressed LTV, and highlight that it may be useful in identifying potentially overlevered properties within the confines of a model. But they also seem comfortable with allowing a reporter to publish articles such as the Bloomberg article above and frequently will just call it Moody's LTV.

Skyline Appraisal Wrong... Again. *CORRECTION*

 The appraisal was correct this most recent time - the Trustee just didn't know about it and told Nom Nom the value must be wrong. Nom Nom posted a correction this afternoon, and also noted that

The discrepancy between the various reports, as well as the miscommunication between the master servicer and special servicer, highlights a major issue facing CMBS market participants. We encourage further efforts to improve in-place reporting and communication to limit data errors of this nature.

ORIGINAL POST BELOW:
Nomura noted in a research report today that the servicer submitted the wrong value in the remittance report for the appraisal on Skyline Portfolio (GECMC 2007-C1, JPMCC 2007-LDPX), for the second time. Actually, they go on to say that at one point they changed the first wrong value to the original appraised value (also wrong), so it's been wrong at least twice!

Kind of makes wonder what other kinds of mistakes are being made...

Nomura also noted their target loss severity is at 32% on the loan now, and they're looking for an A/B modification.

Let's talk about the scariest thing we've heard in the mortgage market for a minute

While we rarely post residential-related updates here, an article out today caught our attention and frankly scared the beejezus out of us. Apparently this plan has been making its way through the various political and business echelons for some time now, and we've just missed it. An article in Bloomberg today highlighted a plan where municipalities would use their eminent domain powers to condemn all the mortgages in their county that are underwater, pay a reduced wholesale price to the mortgage holders (i.e. the Federal government, taxpayers, and other investors), and then refinance the homeowners into new mortgages based on market values.

I provided a few snippets and links below for your reading pleasure, and I'm going to avoid the most obvious arguments... okay, I'm going to make just one. If you are a company and you borrow money that is backed by some form of hard asset as collateral, and that hard asset goes down in value, you have to post new collateral - right? Not with a home, but that is kind of the way the world works. You borrow $100k and use a $120k house as collateral, if the house burns down, you need to replace that collateral - you don't just get to write down the amount that was borrowed - that would be insane. If anything, mortgage holders should be asking for more collateral, not writing it off. And why is the government stepping into this process again - it isn't working guys, please stop trying to help us.


A private investment firm (Mortgage Resolution Partners LLC; MRP) is pushing this plan forward and apparently has made great headway in some locales such as San Bernandino County where local ordinances have been drawn up to allow this to happen.

They are not talking about bailing out homeowners who are delinquent, mind you. The plan is for *help* underwater homeowners who are current on their payments. So, a local government is using it's laws to pass substantial costs back to the Federal government - Our $100k example above might mean that the San Bernandino resident gets a free $50k (not completely free, he'll owe taxes - at least there is some justice in the world!) while the residents of all the other counties in the United States will essentially cover the other $50k for him through our tax dollars. The taxpayer will get stuck with this in two ways: Directly - i.e. the Federal government guarantees principal on Fannie, Freddie, and Ginnie deals. and Indirectly - someone is going to have to fund the bailout of all the Pensions and Investment Companies that are going to crash from the non-agency bonds impacted.

And who is going to ever lend money to any homeowner that lives in one of these counties EVER again if this goes forward? I've seen a few comments that reply that it is absurd to think that originators will get over it in time, or work around it - do they not remember what happened a few years ago in Georgia when a new state law allowed for legal liability all the way up to the individual bondholders if a mortgage was not underwritten correctly... Almost every national originator closed shop until the law was struck down. Fannie and Freddie won't ever be able to do business in San Bernandino county again.

Even if an originator decides to start writing new mortgages in this county in the future they are without a doubt going to add language holding the homebuyer responsible, demand larger down payments, increase various costs, and only lend to the highest quality borrowers.

The complexity of the deal is enormous as well - there would be fights for decades over the valuation of the properties. San Bernardino is not just ripping off a little old lady here - they're ripping off EVERY little old lady in the country by hitting their retirement accounts and increasing their tax liabilities at the same time. Even the head of MRP, Steven Gluckstern, stated "no bondholders will be hurt because the loans would be bought for amounts that could be objected to in court." (he left out, "for years, and years, and years of trials and debates and great expense to everyone involved because this is the worst possible approach to solving the problem", but I'll tack it on there for him.)

They do realize the mortgage market is on the order of $14 trillion  - it's kind of a big deal - right?

Oh, and one more thing - Shiller thinks this plan is a good idea?!?!

Links:
Shiller ?
ABAlert
Bloomberg

People have only one wallet.

Kottke has a summary of Uniqlo's (highest paying retail tenant in Manhattan in 666 Fifth?) CEO interview with Fast Company.

I love his little one liners throughout - if you use your Mr. Miyagi voice they are that much more meaningful.

Savoy Park purportedly sold at no loss

Bloomberg reported (sorry no link) that a fund jointly started by Citigroup and L&M Development Partners bought the loan for "more than $210 million, the outstanding balance on the senior mortgage, satisfying the loan", but no additional details. The senior is in CSMC 2007-C1 and constitutes 7.08% of the collateral. Unlike some rent-control flips (i.e. PCV/ST), this is actually paying towards the A1A tranche, which is probably held by Freddie (although that is a complete guess).

The A2 is the current pay for the rest of the pool, and a small piece was on a BWIC yesterday. 13mm+ of the A3 was being offered at a 103 handle last week.


This was one of the rent control "let's kick out the rent control tenants and replace them with market-payers" projects that failed miserably. Vantage and Area Property Partners were the sellers.

We've previously discussed Savoy Park (fka Delano Village) here.

CMBS, Distress Debt Plays Returning to Market

See full article here - I excerpted the last few bits on distressed debt below:

When it comes to investing in distressed debt deals, Sotoloff says the best value is found the securities space. “We were able to buy a significant amount of legacy loans,” he said. “There haven’t been as many as we expected, but that’s testament to the Fed’s efforts to keep liquidity in the market and keep banks afloat.”

The market has indeed shown a tremendous amount of rescue capital opportunities, said Gollenberg. “What was once a trickle of deals is now starting to become a steady stream of resolutions come through, where actual assets—those bank-owned properties—are starting to be resolved.”

More loans are coming out of special servicers, said Lesser; expect a few billion dollars worth to come out of that segment this year. European loan portfolios are also being sold, but it’s been very slow going. Two biggest sources, added Salem, are direct relationships with regional banks and special servicers. “More banks are starting to let go of assets.”

Kline, too, sees more activity out there than there has been in the past. “No doubt we’re going to see fewer banks over the next few years.”

Which led Donahue to comment that perhaps “too big to fail is creating too small to survive.”

S&P to Revamp CMBS Ratings

WSJ reports that S&P is revamping it's CMBS rating system:

Since that event last July, no issuer has hired S&P to rate any of multiloan CMBS deals, which have typically been $1 billion in size. More than $12 billion in CMBS have been sold this year.

Payback hurts, doesn't it. We have not analyzed the proposed changes, but we have to assume that they are doing more than just calling all the new loans "crap", as an S&P analyst was quoted saying back in February 2011, just 4 months before the ratings firm was essentially blocked from all new issue deals.

My favorite quote is:

Harris Trifon, a CMBS strategist at Deutsche Bank, said that "at first glance, it seems the magnitude of the changes will disappoint most investors."

They fail to mention that he is a former S&P analyst. He's a nice guy, and he's probably right - heck, he probably knows more about S&P than just about anyone in a research group on the Street - but it just seems like WSJ would disclose that, right?

4 New York Plaza trades, defeases

4 New York Plaza traded from Harbor Group International (HGI) to HSBC and Edge Fund Advisors for $270mm. That's a great return for HGI who bought it as part of a sale-leaseback from JPMorgan in January 2010 for $107mm, although they did do some work to boost occupancy during that time.

The 2010 transaction was funded with a $72.6mm mortgage that comprises 24% of the RBSCF 2010-MB1 deal, which will be defeased. The new purchase is funded with a $154mm 5-year mortgage from MetLife according to an update out from Nomura. This is the first defeasance from a CMBS 2.0 deal.

Third Party Pricing - Case Study WBCMT 2006-C24 K

As CrabsOfSteel so eloquently put it,

...Every model in the universe will give it some positive value. Yet, a bond which will never receive another cashflow is worth 0. IDC may be tied into TRACE, and BVAL is mining quotes from Bberg emails, but the bond is worth $0. It's really that simple...

It is almost that simple, except when you open up your Pershing account and look at your holdings there is a price next to it. We all know it comes from IDC and it's just a made up price that doesn't have a firm grip on reality, but try telling your investors that. Try telling your auditor that! They're going to argue with you until the cow's come home that the value in the Pershing account is Level 1 (even though it is not "quoted prices in active markets for identical assets or liabilities"). In reality these are more likely a Level 2 pricing source, which according to FAS 157 is "based on market observables" using inputs that are observable in the market such as quoted prices for similar assets. Level 3 is the broadest category and includes unobservable inputs for assets where there is "little, if any, market activity".

The best place in the world to get the most accurate pricing is to call up your friendly dealer, or evaluate the security yourself and determine it's value on your own. Neither of these are favored by either FASB or your friendly auditor, and in some cases investors don't prefer that method either.They all want to see a nice clean print out on a monthly statement.

If the values were always a little high, or a little low, then it would be something you could manage, but they're not - they're all over the place. I've personally witnessed cases where IDC had a bond marked at half what it actually traded at the same day - can you imagine if you reported to investors a value that was either 50% of or 2 times reality? That is what IDC (and the others do).

So, that is my long-winded rant that brings us to WBCMT 2006-C24 K. It defaulted in May. Default means that it will no longer receive any principal or interest, it has a factor of 0, and could not be worth any dollar amount to anyone - you couldn't trade it if you wanted to, because it's gone.

Or is it? BVAL, Bloomberg's valuation tool pegged it at over $7 on 5/17, the last valuation they have for it (likely because they marked it as defaulted that day). Needless to say that seems a little high - especially if you look at their historical pricing where they actually improved it's price substantially the last month.

As of 5/17 (likely the day their system noted it as defaulted)

IDC is a little better in that they at least have it priced lower, $1.78, but they're still showing (via Pershing) the holding has a $178k value (for $1mm face) this morning. That's an entry-level Bentley.

As of this morning, last night's value

IDC, BVAL, Trepp - they're all just trying to provide a model-in-a-box solution to investors, and any model is bound to have flaws. The real problem is that the accounting authorities of the world hold this methodology in such high esteem.

If someone has an image of Trepp's valuation for this bond, let me know and I'll post it.

Loss Severities improve slightly in Q1

Moody's reports that loss severities for Conduit loans were down 50bps to 40.5% in the 1Q, and excluding loans with <2% losses the average was 52.2% (down 40bps).

Click your feet together in the air and Jazz Hands

Moody's Alters its CPPI

CRE Console did a summary comparison here.

I'm not going to just copy and paste his entire post here, but this image kind of sums of the results very succinctly:

Turns out CRE has improved far greater than we thought... or is it just a really suspicious outcome?

$1,800/sf lease rate may be the pain threshhold Times Square retail

TrafficCourt, and The Real Deal, report:

...Express had walked away from a 45,000-sq.-ft. deal at 4 Times Square, on 42nd Street, though the company didn’t disclose its reasons. The store would cost Express $45 million a year, and created downward pressure on its performance expectations for 2012, according to The Real Deal. Retail space in the Times Square area reportedly goes for about $1,800 per sq. ft.

Markit to use Trepp's CMBS Pricing...

Does anyone have an opinion on quality? I know IDC and BVAL can be grossly wrong in many cases.

Let's perform a test:

1. perhaps someone who has Trepp can post 1 price for one bond as of last night, and we can compare to IDC and BVAL? 
2. Let's try an AJ bond
3. Must be a bond that someone is making a "real" market in, such as CB15 AJ, C29 AJ, PW17 AJ, etc...

Simon Shareholders reject (non-binding) pay package for CEO Simon

The WSJ reported that shareholders rejected the pay package for the CEO in a non-binding vote. They actually were focused on the base pay package of $1.25mm per year, not so much the $132mm potential stock option awards, because it was more than 2x that of the other employees at Simon.

It doesn't really seem like that much to me - the company is worth 45 billion and has 3,300 employees. The only surprising thing about the shareholder group's statement is that the next highest paid employee is apparently taking home closer to 1/2 a million - you'd think the other c-suite guys got more, right? I don't really look at salaries much though, so maybe I'm way off here.

Accor sells Motel 6 to Blackstone for $1.9 billion

Blackstone just agreed to buy Motel 6 from Accor SA for $1.9 billion dollars with a target close date in October 2012. The deal includes the 604 company owned hotels (my guesstimate at 97 keys per property puts that at 58,588 keys or $32,429 per key in terms of real property purchased only) and the franchise business from the 480 franchisees, and an additional 18 properties that were undefined (but this could be the Studio 6 brand that was part of the deal). The total deal value would have come in at $17,699 per key, but keep in mind that includes the Franchise and they're not actually buying that real estate. The WSJ published $25k per key, but I'm not sure how they got there. Looking at it from another angle, the price reflected a 9.3x 2011 EBITDA multiple.

JP and Deutsche Bank are providing the debt package, and I wouldn't be surprised to see it in the CMBS market in the near future.

Other interesting facts:

1. Accor originally purchased Motel 6 from KKR in 1990. 
2. Colony Capital owns a 21% stake in Accor.
3. Accor SA sold Red Roof Inns to a domestic investor group in 2007, right at the peak, and the $366mm CMBS senior mortgage from that deal ultimately defaulted in 2009, ultimately resulting in a 48% loss severity just one short year ago.
4. This almost completely removes Accor from the US market (other than Sofitel brands), but they have a substantial base internationally. The US now represents 1% of their total rooms - Europe= 56%; Asia Pacific = 28%. They even have a footnote stating that 35% of the hotel portfolio is in Emerging Markets - apparently roughly half of their pipeline is in Asia Pacific.
5. Reduces the percentage of owned rooms (versus leased, franchise, and just under management) to 10% of their total key count of 427,800 keys

The englais version of Accor SA's investor presentation on the Motel 6 disposal is here.


The current exposure to Motel 6 in CMBS is a little hard for me to gauge, and I'm sure I am missing some. It looks like the entered into a number of 20 year balloons and blocked off the properties in to SPEs with names like Mountain S9, East S9, etc. corresponding to their region. This is definitely not all of the debt associated with the hotels, though, because Accor noted in their press release that Blackstone is assuming €330mm in debt and fixed-lease commitments of €525mm - the debt below is listed with original face values (and it has amortized substantially in most cases) and only adds up to around €130mm using the original face and just a few dozen properties.

1. Accor- California South loan ($11.5mm) in CSFB 2001-CF2, which only covers 4 properties and matures in 2019. 
2.  Accor - Mountain Summary ($26.8mm) CSFB 1999-C1 is listed as a CTL so it's probably some master lease over a few properties. Matures in 2019.
3. Accor - California North Summary ($14.2mm) CSFB 1999-C1 with a 2019 maturity.
4. Accor - East Summary ($14.5mm) CSFB 1998-C2. 5 properties. 2019 maturity.
5. Accor - SouthEast Summary ($13.8mm) CSFB 1998-C2. 4 properties. 2019 maturity.
6. Accor - West Summary ($13.2mm). CSFB 1998-C2. 3 properties. 2019 maturity.
7. Accor - Texas Summary ($30.3mm) CSFB 1998-C2. 6 properties. 2019 maturity.
8. Accor - Florida Summary ($19.2mm). CSFB 1998-C2. 4 properties.2019 maturity.
9. Accor - Midwest Summary ($15.7mm). CSFB 1998-C2. 5 properties. 2019 maturity.
10. There are a couple of other non-defeased Motel 6 loans, but they look like franchises.

Westin Portfolio still trying to move markets, Again

A bankruptcy judge dealing with the Westin Portfolio (JPMCC 2007-C1 & JPMCC 2008-C2) has ordered a 0% interest rate and a 15-year extension! I mean wow! I'm pretty sure that is unprecedented in the CMBS market, although I haven't read all the sell-side research that I'm sure has been published on it the last couple of weeks. Surely that will be overturned.

This was in the WSJ a couple of weeks ago (I'm still catching up, give me a break).

You may think I'm joking about it moving markets, but when it defaulted in 2008, CMBS was all of a sudden all over the MSM and the head of Citi's CMBS research was on CNBC talking about it.

We've previously posted updates on this loan here, here, and here. You might actually recall it because it defaulted in 2008... just 8 months after it was originated.

Delinquencies up again, REO bucket now makes up 1/3rd of total delinquency

Mark Herschmeyer reported over at CoStar on the increased delinquency rate. One notable excerpt is the average timeline of REOs in Judicial-only versus Power-of-Sale states:

For the current inventory of REO assets, it took an average 179 days to foreclose on properties in power-of-sale states, versus 323 days in judicial-only states. This suggests that the current REO inventory from judicial-only states represents older stock that is finally making its way through the system.

Nothing really new there, but it's always a stark reminder that geography matters. Here is a list of each state and their foreclosure law:

 

Group Description	State Foreclosure
Alaska	Power-of-Sale
Alabama	Power-of-Sale
Arkansas	Power-of-Sale
Arizona	Power-of-Sale
California	Power-of-Sale
Colorado	Judicial
Connecticut	Judicial
Washington DC	Power-of-Sale
Delaware	Judicial
Florida	Judicial
Georgia	Power-of-Sale
Hawaii	Power-of-Sale
Iowa	Power-of-Sale
Idaho	Judicial
Illinois	Judicial
Indiana	Judicial
Kansas	Judicial
Kentucky	Judicial
Louisianna	Judicial
Massachusetts	Power-of-Sale
Maryland	Power-of-Sale
Maine	Judicial
Michigan	Power-of-Sale
Minnesota	Power-of-Sale
Missouri	Power-of-Sale
Mississippi	Power-of-Sale
Montana	Power-of-Sale
North Carolina	Power-of-Sale
North Dakota	Judicial
Nebraska	Power-of-Sale
New Hampshire	Power-of-Sale
New Jersey	Judicial
New Mexico	Power-of-Sale
Nevada	Power-of-Sale
New York	Judicial
Ohio	Judicial
Oklahoma	Power-of-Sale
Oregon	Power-of-Sale
Pennsylvania	Judicial
Puerto Rico	Power-of-Sale
Rhode Island	Power-of-Sale
South Carolina	Judicial
South Dakota	Judicial
Tennessee	Power-of-Sale
Texas	Power-of-Sale
Utah	Power-of-Sale
Virginia	Power-of-Sale
Vermont	Judicial
Washington	Judicial
Wisconsin	Judicial
West Virginia	Power-of-Sale
Wyoming	Power-of-Sale

Delinquency by Property Type:

Kickouts discussed in MSM

Once subjugated to the new issue desk and investors, kickouts are making the news in the WSJ and Fox:

The loan on the Glades Plaza and The Commons at Town Center has popped up again in a planned CMBS from Deutsche Bank (DB, DBK.XE), whose bonds have included Ladder Capital loans in the past. The deal is being shopped to junior investors and isn't final, the person said.

Total Government Employees = 21.4+% of the Work Force

My tinfoil hat is a little loose today, but this article regarding our Department of Homeland Security ordering 450 Million rounds of hollow point bullets caught my eye. I don't know why, but that is just a lot of ammo no matter who you are, but it's also hollow point ammo (which is banned in multiple international conventions for military use, so they're planning on using these right here at home) not training rounds. That got me wondering how many employees work at DHS - 216,000. Wow! Over 2,000 rounds per employee... Then I thought CONTRACTORS! They outnumber employees at DHS, so I rounded up to 450,000 workers, or 1,000 hollow points per worker bee.

Then I said to myself, hold on, how many people work at DHS? 450,000? That's almost 0.15% of the US population. How many people work for the federal government? A LOT apparently. There is repeatedly disputes that the current government workforce is smaller than it has been historically, but all that data looks at top level, non-contractor, federal numbers. It's frankly hard to get the real numbers using "the Google Service" (^tm My Dad coined this term while informing me last Christmas that they had gotten the Google Service at their house since I was last down to visit, so I could use it to look stuff up if I wanted), but I'm going to take a stab at estimating it just so I can feel how big the number is.

Federal Government data puts their total Employees count at 4,443,000 as of 2010:

• 2.776mm - civilians
• 1.602mm - uniformed military
•  0.64mm - legislative and judicial

State Government total FTEs (full time equivalents) stood at 4,377,777 in 2010:

• 1,824,042 (41.67% of total State Government FTEs) - Education; surprisingly, only 7.5% of these are elementary & secondary education employees?
• 472,306 (10.8%) - Corrections! That War on Drugs is putting people to work!
• 409,195 (9.35%) - Hospitals
• 235,934 (5.39%) - Public Welfare
•  230,370 (5.26%) - Highways
• Every other category comprised less than 5% of the total

Federal Contractors - 15,683,790 estimate for 2010 (see below):

•  Paul C Light is the guy to turn to for these numbers. He reported in the Washington Times that the number of Federal contractors rose from 4.4mm in 1999 to 7.5mm in 2005, and then to 14.6mm in 2006 (someone to fight our wars).
• Using his numbers as a proxy, there were 14.6mm contractors in 2006 and 4.133mm Employees of the Federal Government that year, or 3.53 contractors per employee. Using that 3.53x the 4.443mm Employees in 2010, I get 15,683,790 contractors for 2010 (maybe it's less due to the draw down in the theatres of war, maybe it's more due to DHS, I don't know, but this seemed reasonable for now.

State Contractors - I have no idea how to start on this one, so let's just leave it off for now.

Total Employees & Contractors working in our government - 24,504,567

The Census Bureau tells me there are 311,591,917 folks living here, mostly citizens at the end of last year. Of those folks, 114,509,626 were working in nonfarm jobs back in 2009.

Realizing that this is somewhat of a guesstimate, but please give me feedback on how to improve it, these are pretty scary numbers. That means that 7.9% of our total population (including babies, for the love of god) are working for the government. For every 12 of us, there is a 13th person working for the government. If you limit the population to just the working population, 21.4% of the US worker bees are making government honey; LESS than 4 out of 5 worker bees are in private enterprise!

I don't know - I have never looked at these numbers this way before (apparently other folks have ad nauseum), but these seem really concerning to me. Especially since the States employee contractors as well, and so my numbers are probably conservative. What do these people do? Why is there effectively 1 government employee to represent my household, surely we can do this more efficiently - if that is as efficient as the government is going to get, then I'd rather move to a farm with wind power, a well, and our own private butler for Pete's sake. Obviously I would also want my taxes back, which include 15.3% self-employment tax, an effective (i.e. actual taxes paid divided by actual household revenue) federal rate of 11% (doesn't sound as good after the self-employment tax, does it - I wonder why Mitt Romney doesn't factor that in when he talks about taxes), and an effective state rate of 2%. I actually could afford a butler if I got to keep another 28.3% of my income each year.