Friday, March 21, 2008

TIC Sponsor to Cut Distributions
A large TIC sponsor is stopping distributions on three of its deals and cutting distributions on a fourth. All four are office buildings. Actual operations are not meeting projections due to higher than projected vacancies. I read through the operational summaries on the four deals and it appears to me that the problems are management related and not market specific. The lease expirations and corresponding lower revenue that are behind the distribution cuts were known and reserved, but leasing efforts have been poor. (One property had a lease buyout that added to reserves, but another deal is attempting to get a loan to help with leasing costs as its reserve estimates were insufficient.) To the sponsor's credit (or maybe it's to the lender's credit) at least distributions are not being paid from reserves.

The summaries were poorly written, but it appears that the markets where the four properties are located appear solid with increasing rental rates, increased absorption and limited new construction. One point not addressed in the summaries is the debt coverage ratios and the possibility of technical default on the mortgages. I would bet that the mortgages are conduit loans that were sold into Commercial Mortgage Backed Securities. These loans have debt coverage ratios that must be maintained or the loans go into technical default. Higher vacancies and lower Net Operating Incomes drop the coverage ratios. If the loans had an interest-only period and have not started their amortization, the deals may be in for another set of problems as this will lower their debt coverage ratios.

My opinion on this sponsor, based on the limited number of its deals that I saw, was that it had good properties and poor properties. Each deal needed to be reviewed and it was not enough to approve deals based on the sponsor. This sponsor had a steady flow of product and some of that product would take months to sell in a market where product had a shelf-life of days or weeks. Now we are seeing why the market was giving pause to some of this sponsor's deals.

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