Partial IOs - DB Style

I want to be very clear - I do not, have not, and never will work at Deutsche Bank in the foreseeable future. However, they issued a report today on Partial IOs, just a few hours behind my earlier post. Although their imagery is simply not as pretty as mine, they did have some interesting numbers.

Delinquencies are substantially higher on post-reset Partial IOs



, which is not unexpected, but still nice to see in a graph.

They also point out a few other facts, some of which may be obvious, but nonetheless:

• Virtually all Partial IOs remaining are 2005 - 2008 vintage loans.
• About 25-30bln partial IOs per year over the next 3 years. $80 bln total
  
• 2012 will likely be the hardest - virtually all of these are 5-year partial IOs from 2007 - yuck.
• Average increase - 21% (to my, roughly 20%)
• They counted 350 loans worth $5.3 billion that will reset with a <1x>
• $1.7 billion this year, $1.5 billion in 2011, and $2 billion in 2012

Their numbers agree with mine, its always nice to see your numbers actually match someone else that you respect. BUT, wow, their graphics guy needs a dose of caffeine. Their charts hurt my eyes.

Bottoms Up?

Numerous sources have been hinting at a bottom in CMBS, including Barclays who said,

From a macro perspective, an uptick is a clear positive, as it suggests that the gap between buyer and seller preferences is narrowing and could signal that some believe a bottom in prices is approaching.

Housingwire noted that the CPPI is now down 44% on average, and 58% down for distressed properties - back to 2001/2002 levels. They also noted that the insurers bid will come back now that they can rate their own bonds - maybe for new issue, but not so much on legacy assets would be my guess.

They also note the coming risk of partial IO bonds, and this is a very real threat. Up until just last month, we were averaging about $2.5 billion in partial IO rolls each month, but that just spiked above $3 billion in January, and touches $4 billion by July. After a loan rolls from partial IO to amortizing, the average increase in debt service costs is around 20%, but lower coupon loans can get substantially above that, and amortization terms are all over the place. Although CMBS loans were ideally on stabilized properties, the worst offenders of proforma underwriting were loans structured as partial IOs - the lender would underwrite rents in year 5 to the necessary level, and to make it cashflow, would just not require amortization payments until month 61 (as an example).

As a more specific example, take a look at the largest loan to roll to amortizing payments this year, Grand Plaza, $86.5mm, in CD 2007-CD4. That property generated NOI of $6.4mm, and had debt service of $5.1mm last year - the new annual debt service will be approximately $1mm more at $6.1mm. The property cashflows at that level, but the debt service increased by 21.5%, and the property is already underwater at anything above 6% cap rates.

In all fairness, even last year, we had about $30 billion in partial IOs roll, which is about the same for this year, 2011, and 2012.



The biggest near-term concern is the expiration of TALF this month, but Citi made a very good point last week that repo lending has made its way back for most TALF-eligible bonds, and is competitive with TALF financing. They make a linear argument, but fail to explore why anyone would risk TALF if they could get a better deal in the repo market. TALF is clunky, and does not curry favor with either party like a nice repo line can.


Several folks have pointed to the 100 or so bps of tightening over the last 3 months, but in the grand scheme of things, the market has been pretty flat since last fall.

So, a bottom? maybe, but I think it's too early. We still have a lot of pain to work out in the pipeline, LNR still needs to file for bankruptcy, and we're only just starting to see a deluge of defaulted CMBS properties getting sold at viable prices. I don't think there is much to gain by holding a position through March just for the carry, but I also don't think we should all just sell all MBS like PIMCO has done.

Appaloosa attacks Special on Stuy Town

Tepper sues CW Capital...

In the lawsuit, Appaloosa says CW Capital shouldn't have moved to foreclose on the complex while earning fees. The complaint says a foreclosure could cost as much as $200 million in transfer taxes, which would be paid by the investors who own the CMBS bonds....

"The key is, the servicer has to practice its fiduciary duty" to CMBS investors, Mr. Tepper said. "Why did they go into foreclosure? Why are they taking all these excess costs?"

2009 was a tough year for retail...

This summary is not available. Please click here to view the post.

TALF Studs and Wallflowers

CUSIPs Bonds
Accepted
05947UR59 BACM 2005-3 A3A
059512AB9 BACM 2007-3 A2
07383F3X4 BSCMS 2005-PWR7 A2
07383F5K0 BSCMS 2005-T18 A4
07387BEB5 BSCMS 2005-PW10 A4
07387MAE9 BSCMS 2006-PW11 A4
07388NAB2 BSCMS 2006-T24 A2
07388PAE1 BSCMS 2006-PW14 A4
07388QAC3 BSCMS 2007-PW17 A3
073945AB3 BSCMS 2007-T28 A2
14986DAF7 CD 2006-CD3 A5
190749AB7 CWCI 2006-C1 A2
20047EBG6 COMM 2006-C8 A2B
20047QAE5 COMM 2006-C7 A4
20173QAB7 GCCFC 2007-GG9 A2
20173TAB1 CSMC 2007-C4 A2
20173WAC2 CMLT 2008-LS1 A3
22544QAB5 CSMC 2007-C3 A2
22545BAC5 CSMC 2006-C2 A3
22545XAB9 CSMC 2007-C1 A2
22545YAB7 CSMC 2007-C2 A2
36246LAB7 GSMS 2007-GG10 A2
36828QQE9 GECMC 2005-C4 A4
396789JS9 GCCFC 2005-GG3 A3
46628FAB7 JPMCC 2006-LDP7 A2
46629GAE8 JPMCC 2006-CB16 A4
46629PAM0 JPMCC 2006-LDP9 A2S
46630EAC4 JPMCC 2006-CB17 A4
46632HAB7 JPMCC 2007-LD12 A2
50177AAB5 LBCMT 2007-C3 A2
50179AAC1 LBUBS 2007-C1 A3
50180LAC4 LBUBS 2008-C1 A2
52109PAB1 LBUBS 2007-C6 A2
52109RBK6 LBUBS 2007-C7 A2
55312TAB9 MLCFC 2007-6 A2
55312VAB4 MLCFC 2006-4 A2
59022HDU3 MLMT 2004-KEY2 A4
59025KAB8 MLMT 2007-C1 A2
60688BAB4 MLCFC 2007-8 A2
61745MT45 MSC 2004-HQ4 A7
61750WAX1 MSC 2006-IQ12 A4
61751XAE0 MSC 2007-T25 A3
61754KAC9 MSC 2007-IQ14 A2
929766TP8 WBCMT 2004-C14 A2
92976VAE8 WBCMT 2006-C25 A4
92977QAB4 WBCMT 2006-C27 A2
92977RAD8 WBCMT 2006-C26 A3
92978MAB2 WBCMT 2006-C28 A2
92978NAB0 WBCMT 2007-C33 A2
92978PAE9 WBCMT 2006-C29 A4
92978YAB6 WBCMT 2007-C32 A2

Rejected
059497AV9 BACM 2007-1 A3
17310MAE0 CGCMT 2006-C5 A4
50179MAE1 LBUBS 2006-C6 A4
61751NAD4 MSC 2007-HQ11 A31
92978QAC1 WBCMT 2007-C30 A3


TALF applicants, please form a line to your right:

Nothing to see here - CPPI up 4.1%

December 2009 commercial property prices shot up 4.1% according to Moody's CPPI index, providing journalists and analysts the world over an opportunity to call an early bottom... (No link, on BBG)

The Moody’s/REAL Commercial Property Price Index climbed 4.1 percent from November, the second straight monthly increase, Moody’s said today in a report. Transaction volume rose more than 75 percent. Values are down 29 percent from a year earlier and 41 percent lower than the peak in October 2007.
“Two months of positive returns and one month of higher transaction volume does not allow us to discern a trend just yet, particularly in light of the fact that year-end commercial real estate activity can distort the true condition of the markets,” the report said.

Vail wants Whistler

Deal Junkie has an update

Are there any legacy BOA employees in the BOAT?

One Bryant Park lost another 1/2 dozen legacy BOA traders and salesmen from their structured products group since the start of the year. They may now have completely wiped out the entire seasoned and successful team that was there... It's really a lose-lose for all parties.

Goldman working on Glimcher loan

Bloomberg reports.

I'm really just referencing the story for the quote below...

Restarting the commercial mortgage-bond market is “like recovering from a very bad motorcycle accident,” said William Glazer, president of Keystone Property Group of Bala Cynwyd, Pennsylvania

SPG just offered to buy GGP

Looks close to market close price... cash ($6) and equity ($3+) offer...

UPDATE: Don't forget my nifty interactive map showing the two companies postcoital.

So, I was walking to work this morning...

PCV/ST - The Tenant Bid

Lest we forget, the tenants made a bid north of $4 billion before Blackrock/Tishman came in with their $5.4 billion offering. Well, they haven't gone away...

Note that Rose Associates got the management contract after the above article was published.

Comings and Goings

According to one reporter (see image at bottom), there was an amazing event where a multi-borrower CMBS deal was completed without anyone in the CMBS market realizing it . The headline reads, "Keystone Completes Market's First Multi-Borrower CMBS in Two Years". Of course, that is not exactly true - Keystone made a loan that they hope to put in a CMBS deal in 4 or 8 months, or so...

Not sure if you heard, but delinquencies are up:

The hotel delinquency rate grew the most in January, to 9.82%, followed by retail loans, which make up 30% of the total outstanding balance and 40% of last month's new delinquent loans. On a percentage basis, the month-to-month change in the delinquency rate--which now sits at 5.24%--was bigger for retail than the hotel sector.

Markit added additional volatility, er, I mean, they added a new tranche to the CMBX index to represent a basket of AM bonds.

DDR is no longer pursuing a second CMBS deal, instead raising $304mm in new equity (equity is cheaper and easier than senior mortgage debt).






It's disturbing no matter how you twist it - reality, photoshopped, reality, photoshopped...

CMBS In the News

The WSJ reports on 3 CMBS stories:

Notes the loan is going into a multi-sponsor deal slated for the 2nd quarter.

The owner of the Keystone Summit Corporate Park, private-equity firm Keystone Property Group, recently refinanced the building for $53.5 million, including a $41.5 million first mortgage from Deutsche Bank AG and a $12 million junior loan from Pembrook Capital. What makes this deal stand out is the plan Deutsche Bank has for the first mortgage.

First Ritz to ever default. Ever. Described by a former colleague as 45 minutes into the desert, the middle of nowhere.

The hotel's closure is the latest stumble for the Lake Las Vegas development, which was planned around a manmade lake roughly 15 miles east of the Las Vegas Strip. Developer Transcontinental Corp., led by Ron Boeddeker and Texas tycoons Sid Bass and Lee Bass, began developing the 3,600-acre project in the 1990s to include thousands of upscale homes, three golf courses, a small casino and two resorts. But Transcontinental defaulted on a $540 million loan from lenders led by Credit Suisse and sought Chapter 11 bankruptcy protection for the project last year..

Regarding the MBA default on their building, Petrie calls Kempner a dolt:

The worst part of buying "that stupid office building," Mr. Petrie says, was that it led to emergency cost-cutting that forced the MBA to dismiss some "wonderful people" on its staff. Mr. Kempner, who resigned in 2008, says the board approved the purchase unanimously. "It was not my decision," he says. An MBA spokeswoman declined to comment.

I'm not even going to do an outake of this FT story - the reporter did a poor job writing this up - but maybe this is of interest to someone because it has opinions based on a survey of how various markets will perform (including CDOs and CMBS).

Also in the FT, the Beltway Battle, discusses the attempted takeout by Brookfield for CarrAmerica's DC properties, that Tishman has defaulted on. I initially thought the article was talking about the CarrAmerica portfolios in BALL 2006-BIX1 and CGCMT 2006-FL2, but the addresses listed in the article do not match up.

CoStar buys MBA building

CoStar just paid $41.25mm for a building that cost $90 mm to build just 2 years ago. But wait, there's more. MBA, the mortgage bankers association of America, paid for it partly with a $75mm mortgage loan. Although I don't know the terms, the timing is about right for a development loan to be coming due.

It's a little ironic that a major CRE news/data provider is buying a distressed property (it's shiny though) from a industry group that represents CRE bankers. One might venture so far as to say it is representative of the shift from large banks to boutiques.

UPDATE 2/9/10: The WSJ had this great quote today that is sure to make someone go postal...

The worst part of buying "that stupid office building," Mr. Petrie says, was that it led to emergency cost-cutting that forced the MBA to dismiss some "wonderful people" on its staff. Mr. Kempner, who resigned in 2008, says the board approved the purchase unanimously.

CMBS Delinquencies Accelerate

I know this is not new information, and it was widely reported over the last couple of weeks, but some charts to put it in perspective below from the Group Formerly Known As Wheeler's (GFKAW):


Nevada and Arizona are really sucking wind with >14% delinquencies. Behind them, there are a number of other >10% states, but most are relatively low overall CMBS exposures (i.e. Rhode Island, Virgin Islands, Montana, etc.).

The Golub Program

Cuomo has loaded his 50cal and has the sights squarely aimed at Vantage Properties for the whole kick out the pesky rent control tenants and replace them with market-paying tenants strategy.

Vantage & Apollo (aka AREA) Multifamily + CMBS Loan deals:
Esquire Portfolio (1.49%; CSMC 2007-C4)
Broadway Portfolio (2.13%, CSMC 2007-C2)
Savoy Park (6.25%, CSMC 2007-C1) (fka Delano Village)

"Vantage's business plans refer to this strategy of removing tenants from rent-regulated apartments to convert them to market rate apartments as the company's 'Golub program,'" the New York Attorney General's letter states. "Vantage's business plans highlight its Golub program as a means of generating tenant turnover. As reflected in Vantage's annual reports to investors and business plans, Vantage's business goals are to "generate unit turnover through active management of the Golub program and other legal efforts."

"The investigation revealed that Vantage often failed to exercise due diligence prior to serving tenants with Golub notices or other legal termination notices," the letter continued. "Vantage often commenced Housing Court proceedings seeking to evict tenants from homes in which they had lived for decades based on little more than database reports, which were often incorrect, or contradicted by other evidence in Vantage's possession."
..."Any experienced commercial real estate operator in New York would know better than to engage in the practices alleged in the AG's letter," said Charles Cecil, partner and CEO of Opin Partners, a CMBS and real estate investment advisor and investment management firm in New York.

The "Golub Program" is not a new movie in the Bourne series, but I liked it as a headline. It is just what Vantage termed it's strategy in reference to the "Golub Notice" that is required to be delivered to the tenant 90-150 days prior to eviction/removal from stabilized rent.

I'll update these as I discover more. Cuomo also took out a GBU-24 Paveway III and aimed it Ken Lewis and BOA this morning, and took off his white glove and smacked Moynihan across the face several times and challenged him to a pissing contest. Very busy over at the AG office today.

Riverton headed to auction

Riverton was back in the news today.

Riverton, like a number of complexes during the real estate boom, was bought for top dollar in 2005 by a company led by the developer Laurence Gluck, who had a plan to increase profits by replacing tenants in rent-stabilized apartments with market-rate tenants.
...
Lawyers familiar with the Riverton foreclosure said the sale would probably take place in March. Several groups have expressed interest in buying the property, which has 1,228 apartments in seven buildings, many of them surrounding a 700-foot-long grassy mall. But it is unclear whether any of them will offer enough money to satisfy the lender, which is represented by Wells Fargo Bank.

“We’re very interested in buying the property,” said Adam Holland, president of Jackson Management, who heads a group of investors who are circling the complex. Like Stuyvesant Town and Peter Cooper, Riverton was built in the 1940s by the Metropolitan Life Insurance Company. It sold Riverton in 1976 to Jack Holland — Adam Holland’s grandfather — and Charles A. Vincent for $12.5 million.

They, in turn, sold it to Mr. Gluck of Stellar Management in 2005 for $135 million. A year later, Mr. Gluck refinanced, getting a $225 million mortgage and a $25 million loan. That enabled him to recover his initial investment of $44 million and collect tens of millions of dollars in profit.

See history on Riverton here

Cry Me a River

WSJ "reports" on small investors losing out in CRE.

...the 27 owners of 1023 Cherry Road in Memphis, Tenn...lost all $7.1 million they invested...

Many such deals were structured as so-called "tenant-in-common" ventures, known by the acronym TIC. Often, the TICs took out commercial mortgages that were packaged into commercial-mortgage-backed securities.

Cherry Road property's manager, TIC Properties Management LLC, contacted the "master servicer" about a loan extension, according to Paul Aiesi, the company's chief investment officer. But the servicer, KeyCorp, was only in charge of passing along interest payments to the CMBS investors every month. According to CMBS rules, a master servicer has no power to modify loans before they go into default. A KeyCorp representative declined to comment.

Mr. Aiesi says the servicer offered to extend the loan if the investors would contribute another $2 million in equity. He recommended against that move.

"The property is worth significantly less than the debt on it," he explains.

Cherry Road investors say they are innocent bystanders who are paying a painful price for the credit crunch.

"We're not going out to fancy dinners and we're not taking vacations or major trips," says Steve Harris, a retired television-advertising executive who lives in Valley Center, Calif. He declined to say how much he invested in the Cherry Road building.

The article implies this default has something to do with the fact that this was a TIC deal or that the loan failure has something to do with the CMBS market. How shoddy. If roles were reversed and the property was owned by a corporation on Wall Street, and the loan had been made by an artist living in the East Village, the workout would likely have been the same - except the emotion would be removed. It is a 100% vacant office building in West Tennessee, and has been 100% vacant for almost 4 years. The servicer may have been able to let them slide since the rent was still coming in, but they did actually offer them an extension in exchange for new equity - which would likely be required for deferred maintenance, TI/LC, etc. Only then did the owners walked away.

Bureau of Misinformation

Someone took a reasonably accurate article from the WSJ and turned it into this diatribe.

First off, homeowner's turning in their keys versus CRE owners turning in their keys.
A) CRE owners do not turn in their keys because they are cash flowing every month but are underwater. Instead, they turn them in because they lost tenants (or never had them) and cannot afford to pay the mortgage. Complain about pro forma underwriting all you want, right here.

Apparently, you're comparing this to a situation where a homeowner is underwater, can still afford the payments, but walks away from a legal contract - likely with recourse to the borrower (unlike the CRE loan). If I, personally, had made the loan to this guy, I'd drill his knees. If, however, he lost his job, had a mortgage that he never could afford in the first place, well, then, he should turn in his keys just like the horrible CMBS borrower you describe.

B) Further, the CRE borrower in a CMBS deal, signed a non-recourse loan doc - the lender agreed that the borrower could turn in the keys with no credit impact. The poor pitiful homeowner signed an agreement saying they would be held liable if they stopped payments. Bad stuff happens to everyone, but you should feel bad when you go back on your word, even if you feel like it was a bit beyond your control. Bring back debtor prisons and stop writing non-recourse CRE loans.

Second, how did Lehman enter into the story? Ok - Derivatives - where did that come into play?

After blaming CMBS repeatedly, the author does admit to not understanding the structure of CMBS deals, but then he keeps doing it in the follow-up comments.

Fannie and Freddie - they always bought most of the Multifamily collateral of deals. This shouldn't be surprising - maybe unknown, but not surprising. The surprising part is that a transitional loan like this was dropped into the Group 2. Still, I don't see them losing money related to the A1A, even on WBCMT 2007-C30.

Speyer not paying the price (author + commenters)? The poor tenants are the only ones to suffer (commenter)? Let's use the authors numbers (which do not necessarily reflect the truth or current investment sizes). The equity owners are losing $224 million dollars. That is not a big deal? They lost 100% of their investment - I've never lost 100% of any investment, and I've never lost any amount of money with a million after it. Seems like a big deal. Tishman Speyer overpaid for Archstone and numerous property investments, are extremely overlevered... Yeah, I think they're pretty big losers here.

Pension plans losing money - oh, the horror. Don't blame Tishman or Blackrock for this, blame the portfolio manager at the pension for investing in mezzanine loans on a property, in a deal that was hard to make work when they were marketing it. I don't have a crystal ball, and I make a lot of mistakes, but I did not buy any related paper to this deal back when it was originally done (I have bought some over the last 12 months, though, at pretty steep discounts - the see saw is broken).

My favorite part is that the google ad that popped up right above the comments was a freecreditreport.com ad that quoted "A Bad Credit Score is 600 or Below". I think the official ranking of 600 below is "Shitty", and "Bad" starts somewhere north of 600. It had a little pile of gold if your credit score is 699 - really? Nothing wrong with a 699 credit score, but the pile of gold probably should be a pile of plastic to more accurately reflect your typical American with a 699 credit score.

Curbed RE: Stuy Town

Headline says, Even God is Losing Money on Stuy Town. Good stuff.



The list of mezz investors is typical of some of the worst CRE investors out there. You look at any of their portfolios, say Hartford, more AJs than almost all other insurers, more CMBS as a % of total portfolio too, more small balance CMBS exposure, more MEZZ deal exposure.

2010 TALF requests grew - unexpectedly

$1.45billion. I thought everyone was at CMSA? Guess there wasn't a budget for it this year.


==========================================================================
Date 01/20 12/14 11/17 10/21
==========================================================================
TOTAL $1,453.433 $1,324.854 $1,489.827 $2,124.921
% Change 9.7% -11.1% -29.9% 51.6%
-----------------------------------------------------------------------
Newly issued amount $0.000 $0.000 $72.248 $0.000
Legacy amount $1,453.433 $1,324.854 $1,417.579 $2,124.921
==========================================================================
Note: All dollar figures in millions.

Source: Bloomberg, FRBNY

Winter Olympics - Foreclosed

Okay, not really, but just pretending to be a journalist for the day with a catchy misleading headline. NPR reported this morning that the Intrawest foreclosure impacts some of the property the Games are being held on.

Intrawest was bought out by Fortress (yeah, the same guys that just issued that BALL 2009-FDG deal, but this is totally different, totally) and Lehman financed it in 2006. It's not working out well.

Tranche Warfare?

Shoddy journalism from Bloomberg goes out with a catchphrase headline of "Tranche Warfare", and then doesn't talk about Tranche Warfare at all. Honestly I just skimmed it, and wouldn't even recommend doing that, but I don't think they even describe tranche warfare or discuss it in any way. Instead, they just regurgitate stories about loans like ESH - which didn't make sense when they were done, and make references to mezzanine debt.

However embarrassed I am for the journalists involved, I've been waiting to use this image for months and months, so I'm going to waste it on this non-review of their non-story.



























I'm ready to see some real tranche warfare where the special charges some nonperforming property owner 100 bps to extend their loan and push a loss off for a few years, while some front-pay investor cries foul and sues the bejeezus out of them. They should pick on LNR first - they're going down soon.

Blackrock picks up Helix

Not sure what this says, but I bet Kevin Donlon (the CMBS one, not the Father one) is planning a real nice vacation.

Blackrock bought Helix. Blackrock currently sells a product to institutional investors that I assumed competed with Helix, but I'm not really familiar with both companies in that regard - at least not enough to fully tease out what the purchase means. I'm leaning towards either "Blackrock's CMBS analytics suck" or "Helix's analytics are that awesome".

Extended Stay's Stay of Execution

Judge Peck extended the bankrupcty filing deadline to April 2nd.

According to Richard Parkus at DB, Centerbridge and Paulson are injecting $400mm in cash (200 equity/200 rights), and they want to bring on Doug Geoga to represent them on the board. Further, they're ready to pull the trigger immediately.

This may turn into a real issue with Starwood who bought the mezzanine debt, and subordinate bonds off the CMBS (G and H), and has been in much longer negotiations to take over the chain. They've publicly accused ESH of misleading them. Their reorg plan calls for making payments to the CMBS holders (who all are not receiving any interest right now, btw), amongst other things. They may well get a big slap in the face for their efforts to buy the debt, get a controlling position, receive no income on the debt purchase, pay a consultant, and then not get anything for it.

I'm on the road traveling, so don't quote me on the information below that ise based on memory alone!!!

For those without the full history, this is one of those loans (similar to PCV/ST) that everyone scratched their head on when it was first issued. It didn't make sense then, and it's fitting that it is one of the first to fail. Blackstone bought the chain in 2004 for something like $4 billion, and financed it through a loan that ultimately ended up in a Bear Stearns deal. Then, just 2 or 3 short years later, Blackstone flipped it to Lightstone, for TWICE as much ($8 billion). Lightstone is quite possibly the worst real estate investment vehicle ever created - the guy that runs it bought at the top, used the most leverage, and overpaid on top of that, and he did it over, and over, and over again.

So, Lightstone called up their buddy at Wachovia (whose name rhymes with varoom, kind of) and put together a great debt package including a CMBS component and mezzanine debt. Lichenstein (the dolt who runs Lightstone) even got on the hook for a $100mm personal recourse carveout when the loan went into bankruptcy. Of course he figured out a way to get out of this by getting an indemnification from some of the bondholders, which smelled a little funny and he must have used some sort of voodoo to get this in place.

Starwood stepped in and has effectively offered to buy them for $3.5billion. But that brings us back to the start of this article.

Ethan Penner - "Completely Reformatted"

The "inventor of modern day CMBS" was out a year ago highlighting that securitization was not THE problem at all (nothing to see here, people), and then more recently he actually has changed tack and proposed changes to securitization such as retained interests. Read the second half of the article though - most of it is just spot on.

I couldn't disagree more regarding this tired "retained interest" argument. Retained interest and Pfandbrief bond structures would not have prevented the current issues at all. Take a look at the retained interest model used in Auto ABS, or better, subprime Auto ABS - value interest near $0, pass costs onto other bond investors, make more risky loans. The current model where the special servicer buys the b-piece actually works much better - it mostly failed because they got competitive and started reselling the risk into CDOs (the market has effectively stopped that). Special servicer takes first loss risk, manages problem loan portfolio, receives fees for working out problem loans and from cash flow on bonds.

This guy is a really smart guy, and has more CMBS experience than just about every single other person in the market.

Penner experienced a meteoric rise of his own at Nomura Securities Co. in the mid-1990s before his sudden departure in 1998 amid a spreading Asian financial crisis.

... oh yeah, that Asian financial crisis. I don't know shit from shinola, but his departure may also have stemmed from the nine-figure loss he amassed in just six months at Nomura, and was followed just weeks after his resignation by a complete shuttering of the CMBS operation there. AND, followed for years by multiple violation of reps and warranties lawsuits that successfully put back multiple loans to Nomura that resulted in huge losses.

Doctor's Hospital by itself was a $50mm loss, on a senior mortgage that was something like $49mm - made on a hospital that had appraised in the single-digit millions just before the loan was made (just 18 months before his resignation)! This one loan took something like 10 years to play out, so the losses that could be tied back to actions that he oversaw, are actually substantially higher than what you read about.



I really don't have anything in the world against the guy, but if you're going to allow press releases that go out showing all the shiny stuff, flip flop on what you say year-to-year, and then not acknowledge the flip-flopping and prior errors that are fairly substantial and at least something an investor in one of CBRE's funds might want to hear both sides about... Well, someone is going to say something. And it might be me, and it might be anonymous. But, I'll make a deal - let me know if anything is wrong here, and I'll retract it and apologize about it. I'll even send a gift basket with shinola in it to any offended party.

Insurance Companies do the darndest things

Insurance companies are heavily reliant on ratings. Although many insurers would have rock solid portfolio managers in place, perhaps even more so on CRE investments, others would target the highest yield available solely based on the credit rating. Obviously that was not smart.

I don't know what the right solution is, haven't thought about it much and not going to right now. However, presumably they have thought about it, and their solutions will make you scratch your head. Instead of changing the silly reliance on credit ratings, they just started rating their own bonds. They're already doing this for RMBS, and they're looking to expand it to CMBS. This is not THAT crazy - instead of trusting a biased third party with a horrible track record, they're presumably doing some credit analysis of their own (or trusting PIMCO to do it).

Now they're also adjusting the rules regarding how to value the security, at least in terms of how it affects their capital reserves. Taking the opposite approach of FASB, they're just valuing bonds at par instead of book...

Life insurers are readying for an estimated $5 billion-plus capital benefit ...

The change involving carrying values has been largely off the radar screen, as consumer groups have fretted that Pimco and the NAIC would employ economic assumptions more optimistic than those used by rating providers in the past year or so in downgrading many once-triple-A-rated bonds to "junk."

Moody's concluded that assumptions disclosed recently by the NAIC—for things such as home prices and unemployment rates—"are quite similar to the assumptions we use in rating these securities." Pimco declined to comment.

Ha! So, the rating providers actually put thought and 'economic assumptions' into ratings? Could have fooled me. The most disturbing thing about the entire article is that last paragraph though. Moody's reviewed the new NAIC assumptions, and felt they were demonstrably similar - so the NAIC ratings are as weak as the public rating agencies. This tells us one of two things 1) Moody's is wrong, there are no similarities and the NAIC is simply doing a better job at monitoring their firms' credit risk, or 2) The NAIC is making stuff up as they go. I'm leaning towards the former option, but either way the rating agencies no longer serve any purpose and will quickly go out of business at this rate.

Second & Seneca asking for debt restructuring

Originally part of the EOP transaction, Second & Seneca traded hands 4 times (Zell->Blackstone->Archon (GS)->Tishman), very quickly, ending up in Tishman's hands. For some reason that is not working out so well, and Tishman is attempting to restructure the debt.

More bad news for BACM 2007-3 - see prior post on Renaissance Mayflower.

Rennaisance Mayflower Hotel (DC) asking for loan mod

One of the largest (5.7%) loans in BACM 2007-3 is asking for debt relief. Not completely unexpected, but we did call them last fall on a number of occasions and couldn't get a room - took that as a sign things might be okay there, despite the financials...

Although Rockwood isn’t in default on the note, it was forced to lower room rates to keep up occupancy. As a result, the hotel earned just $7.6 million in 2008 and $6 million for the first half of 2009. That’s not enough to cover the $11.5 million in debt payments that Rockwood pays each year.

Value deficiency is around 55% per Realpoint.

Room 871 is where Ashley Dupre cheered Eliot Spitzer up on a number of occasions, but here presence was apparently unable to lift the hotels flaccid financials.

The Rockwood Group has a number of other problems too, and that concerns me.


UPDATE: April 2010 - went delinquent

Comings and Goings

Peter Cooper/Stuy Town is finally defaulting on their mortgage after much anticipation. Five different CMBS deals have exposure, and are gearing up for their shortfalls.

One, unnamed*, journalist got it right. She didn't get a byline, maybe I should know who she is, but I'm going to dub her "Samantha's Mom". As we've said all along - the CRE problems are much worse on bank's balance sheets than in CMBS.

CMBS is going to rally in 2010, and it's going to be huge!

I'm just embarrassed for the Fed and how they've done pretty much everything. They screwed up TALF, again. Did you know the fed was a private enterprise that can be hired/fired by Congress? Should you be asking your Congressman to let go this wayward contractor?

*It's Agnes Crane - I just think it's weird she doesn't have a byline.

Big distressed deals getting done

The WSJ highlights several distressed deals going to institutional buyers...

In the case of the Drake site, the partnership has signed a deal to pay off about 10 creditors that hold the $510 million loan the developer took out primarily to acquire the site. The creditors are getting paid as much as 90 cents on the dollar and as little as zero, the people with the knowledge of the matter said.

...

Meantime, Blackstone is aiming to control the restructuring Highland by buying a chunk of so-called mezzanine debt with a face value of about $320 million from Wachovia Corp. That piece of debt, in a key position between the equity and the first mortgage debt backed by the hotels, gives Blackstone a significant say in how any restructuring unfolds, people familiar with the matter said.

...

Currently, the Federal Deposit Insurance Corp. has about $30 billion in real-estate debt that had been held by the scores of banks that have failed since the economic downturn, according to the agency. CMBS servicers also are emerging as sellers because, unlike banks, they have limited flexibility to extend or restructure troubled loans. Carlton Group, a loan-sale adviser in New York, is currently marketing $307 million CMBS loans in one of the largest sales by a nongovernmental agency.

CMBS Delinquencies continue to hit new records

Delinquencies are still really, really high, and headed higher. Hotels are the worst.

Oops - TALF accepts bond on accident

BACM 2007-1. The FED has accepted a few bonds off of it, then rejected one, then accepted one in December. Then yesterday they came out and said it was an error to accept it this last time, and they wouldn't accept it again at the current market price.

The, er, logic continues to baffle investors.

Also, what does price have to do with their TALF decision? If they don't think its worth PAR in the stress scenario they shouldn't be lending money on it - right?

Comings and Goings

I need a little help. Looking for a retail focused b/d to buy bonds (Corps, MBS, Sovereigns, etc.) from - any recommendations? No problem sourcing it at an institutional level, I'm talking about buying for my personal account, some directed trades. I'm tired of dealing with the TDAmeritrades of the world who are great at stocks, but don't know the difference between an MBS and a corporate and want to charge me a 150bp spread everytime I trade or are getting duped on the other side of the trade with an asinine price from the seller.

Don't expect much until after the new year passes. CMBS has been relatively quiet, but it's not dead. This week, we've seen lists that include everything from A4s down through AJs (on one of the TIAA deals), and several small seasoned credit pieces are floating around.

ZH and Sprott have their tin foil hats on again, but I moved mine prominently to my desk for easy access after reading.

Why didn't Peter Cooper Village/Stuyvesant Town default?

Tepper is heavily invested in CMBS - but some of his logic is wrong, or he's talking his book.

All we want for Christmas is some Jingle Mail

Morgan Stanley is turning in the keys to 5 properties that were part of the Blackstone EOP-flip. All are in San Francisco. I'd say these properties are off more than the 50% quoted in the article - they were the peak of CRE market, and they're in San Fran which already has issues that are worse than the average MSA.

My favorite part about the story is this:

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

They're not defaulting - they're just going to give the lender the keys and stop paying the mortgage payments, permanently, which is the opposite of what was agreed to in the loan docs. He sounds like the traffic cop who explained to me that he was giving me a "simple" speeding ticket, not one of those complicated ones.

The buildings Morgan Stanley is giving up are One Post, 201 California St., Foundry Square I, 60 Spear St. and 188 Embarcadero, Barnes said. The bank will continue to own the five other office buildings it acquired in the deal, Barnes said.

Comings and Goings

Bridger has started making Conduit loans again. First?

Fitch was out this morning with an update on CRE CDOs - delinquencies are just at 12%! I would've guessed much higher. Maybe should revisit some of those bid lists that keep getting dismissed.

Extended Stay examiner, "earned" $4mm, or 10% of the original senior note. What a great job. The new structure looks like it will be a $1.8bln senior, 775mm second, 471mm preferred stock going to the senior mortgage holders... Mezz and preferred stock holders are getting 10% of the new common.

ZeroHedge puts some more CMBS loan updates up. Full disclosure, the loss severities are extremely low (lower than historical averages even in good times) and the information is from the servicer comments and is a little dated (some of the information is almost 2 years old). Still interesting to some people based on the comments on ZH.

Zell has been on the horn all week now that his new fund is getting fat. CRE will recover before employment does is the message.

Stuy Town Update

(Press release from Tishman)


December 14, 2009

Joint Statement from Tishman Speyer, Wolf Haldenstein Adler Freeman & Herz, and Bernstein Liebhard

Re: Amy Roberts et al. v Tishman Speyer Properties et al.

“Representatives of the property owner and counsel for the plaintiffs, Wolf Haldenstein Adler Freeman & Herz LLP and Bernstein Liebhard LLP, today reached an interim agreement to adjust rents in each apartment affected by the recent Court of Appeals decision in Roberts v. Tishman Speyer Properties to an estimated rent-stabilized level for January and February 2010.
The rent adjustment will be reflected in the January invoices that will shortly be sent to residents. During the interim agreement, each affected tenant will also be afforded certain rights available under the Rent Stabilization Law, including the right of renewal and succession rights.

“In addition, Tishman Speyer and BlackRock have reached agreement with counsel for the plaintiffs on a more inclusive, six-month agreement covering a wider range of unresolved issues beyond those addressed in the interim agreement. The six-month agreement, which is intended to achieve an expedited resolution of the Roberts case, is contingent upon consent by CW Capital, the special servicer acting on behalf of the property’s senior lenders.”

Inland pricing rumored

Reuters/BBG reporting the top two classes at +150 and +205, respectively.

Someone hit me back with the structure?

UPDATE (Hotel Tango crabsofsteel)

Amount Rating (S&P/Realpt)
Class ($Mil.) sprd
A-1 58.354 AAA S+150
A-2 330.646 AAA S+205
B 24.100 AA S+360
C 42.900 A S+420
D 44.000 BBB-

NAIC - "We'll just rate our own bonds!"

Risk.net reports: You have to have sympathy with their plight - the US National Association of Insurance Commissioners (NAIC) sat down a long time ago and put restrictions dictating how much an insurance company must keep in reserve based on an investment's rating; a rating determined by NRSROs.

Obviously, in hindsight, and even just with sound investment management practices, no one should make an investment solely based on a rating. Nonetheless, that is how virtually all funds are set up to some extent ("Investment Grade" fund, "AAA" portfolio, you see it over and over).

On the other hand, the new methodology has a little bit of the Fox watching the henhouse feel to it, despite being implemented by PIMCO. They're already using it for RMBS, and they're looking at moving it to CMBS.

In an exclusive interview with Life & Pensions, Kermitt Brooks, first deputy insurance superintendant (sic) for New York State Insurance Department, speaking on behalf of the NAIC, said that after evaluating the performance of its new agency-independent capital requirement regime for residential mortgage-backed securities (RMBSs), the regulators would consider expanding the methodology to other structured securities.

"The NRSROs did a good job on single-name securities like corporate bonds, but not on structured products. Let's see how the new approach with RMBSs works – if it does, we will consider whether we want to expand into other structured products, like CMBSs."

On a side note, hopefully this will hasten the demise of the rating agencies...

p.s.s. another win for PIMCO. After TCW's epic fail this week, customer's who are fleeing TCW will naturally be attracted to PIMCO. Despite outperforming PIMCO time and time again, PIMCO carries much better brand recognition as a fixed income powerhouse.

SPG taking down Prime Outlets

I didn't see that coming - Simon paying $700mm, $2.325 bln total valuation. Lightstone needed cash from somewhere because no one would accidentally confuse them with savvy real estate investors. Probably a real good deal for Simon.

Prime Outlets Property Roster

Property	City / State	GLA (sq. ft.)
Prime Outlets Orlando	Orlando, FL	773,368
Prime Outlets Birch Run	Birch Run, MI	681,621
Prime Outlets San Marcos	San Marcos, TX	672,093
Prime Outlets Grove City	Grove City, PA	532,152
Prime Outlets Williamsburg	Williamsburg, VA	521,604
Prime Outlets Hagerstown	Hagerstown, MD	484,906
Prime Outlets Ellenton	Ellenton, FL	476,755
Prime Outlets Jeffersonville	Jeffersonville, OH	409,869
Prime Outlets Pleasant Prairie	Pleasant Prairie, WI	401,436
Prime Outlets St. Augustine	St. Augustine, FL	338,414
Prime Outlets Barceloneta	Barceloneta, PR	331,813
Prime Outlets Gaffney	Gaffney, SC	303,602
Prime Outlets Gulfport	Gulfport, MS	302,783
Prime Outlets Queenstown	Queenstown, MD	298,409
Prime Outlets Huntley	Huntley, IL	278,759
Prime Outlets Calhoun	Calhoun, GA	253,667
Prime Outlets Lebanon	Lebanon, TN	226,869
Prime Outlets Lee	Lee, MA	224,519
Prime Outlets Florida City	Florida City, FL	207,873
Outlet Marketplace	Orlando, FL	204,866
Prime Outlets Pismo Beach	Pismo Beach, CA	147,416
Prime Outlets Naples	Naples, FL	145,966
Total		8,218,760

CRE Mortgage Market Share

Bad Comparisons - MBA Edition

The MBA is out with their little delinquency chart that tells you nothing. It's like saying the apples at the corner market cost more than the steak at the butcher?!?! I know that they now disclaim as much, but why bother putting out a useless chart in the first place.

I'm not sure why they don't just put out a chart that compares, say, 60+ day delinquencies for each lender group. I've asked, and they claim not to have the data, which makes me wonder where they get the data from that they do have - any source should have both.

Comings and Goings

The current CRE crisis will be over in 2011.

This guy says you should buy REIT equity now! I couldn't disagree more.

Banks fully understand their CRE risk, and it's manageable. Nothing to worry about there. Defaults are not expected to exceed 11.3%. Interestingly, in another article out by the same rating agency (Fitch) on the same day, is also quotes max losses for recent vintage CMBS at 8.7% and max CRE related losses at Insurers (presumably including their CMBS) at 8.37%.

GGP may come out of this whole thing mostly intact, despite angling by a number of players including Ackman, Brookfield, Simon, and Westfield.

Istithmar owns a number of trophy properties in the U.S. and is a subsidiary of Dubai World's. We saw a couple of sell-side reports listing CMBS exposures, but they were not consistent with each other and both were missing one property that we know of - as time allows, we'll publish a combined list. Most of the properties are in NYC, most are recent vintage, highly levered, and underwritten poorly. Some will default imminently.

Wheeler to join Amherst Securities

From Bloomberg (no link):

Wheeler will join the company early in 2010 as head of CMBS strategy and “the company intends to build a comparable operation” to its residential-mortgage bond business, Amherst said today in an e-mailed statement...
... “We are very pleased to welcome an executive of Darrell’s caliber,” Amherst Chairman and Chief Executive Officer Sean Dobson said in the statement. “Together with Laurie Goodman, who oversees our RMBS strategy efforts, we believe Amherst is
now poised to provide more knowledge, insight and reliable data on the entire mortgage industry than any other broker-dealer.”

$625MM Inland Deal

The 3rd CMBS deal A.D. is coming from Inland - also looks like it'll be non-TALF. From the WSJ:

The $625 million in 10-year financing is backed by 55 retail stores owned by Inland throughout the country, and represents 75% of the property's value. The loan-to-value ratio is higher than the 50% of the Developers Diversified offering, which was collateralized by 28 shopping centers. Despite the relative high leverage, the Inland debt was underwritten based on factors including current property values, rent rolls and the potential for more downward pressures on cash flow as the health of commercial real estate typically lags behind that of the overall economy by a year or two.