Monday, October 26, 2009

Interesting Article On Manhattan Real Estate
Here is an exclusive Bloomberg article on a Manhattan office tower that was part of the whole Equity Office / Blackstone frenzy in early 2007. The current owner acquired the building in July for $590 per square foot, when it sold two years ago for nearly three times that amount. The building is now 40% vacant with rents down 30% from their peak and Manhattan vacancy rates their highest since 1996.
Inland Western's Math
As a parent, I am always telling my children to show their work when doing math homework. I think Inland Western needs to be admonished with the same advice. Here is the brief statement on Inland Western's fourth quarter distribution:
Enclosed is your portion of the third quarter 2009 distribution to Inland Western Retail Real Estate Trust, Inc. (“Inland Western”) stockholders. The board of directors declared a third quarter 2009 distribution of 2 ½ cents per share, payable on October 12, 2009, to stockholders of record at the close of business on September 30, 2009. Including this distribution, stockholders have received a total of 17 ½ cents in distributions in calendar year 2009. Assuming a purchase price of $10.00 per share, this level of distribution translates to a 1.75% annualized return. As each distribution is determined quarterly by our board of directors, the annualized yield is not necessarily indicative of future distributions. If you have invested through a trustee or participate in Direct Deposit or the Distribution Reinvestment Program, a distribution statement is enclosed in lieu of a check.
First off, the letter is confusing calendar year with the fiscal year, as it combines the fourth quarter 2008's distribution with 2009's distribution. How else could a 1.75% annual rate be determined if the third quarter's distribution was just paid? Second, a $.025 cent dividend on a $10 share price does not translate into a 1.75% annualized return. It translates into a 1% annualized return: ($.025 dividend X 4 quarters) = $.10 per share annual dividend, and ($.1 annual dividend / $10 per share) = 1% annualized dividend rate. Third, the letter does not state that the dividend has been cut, when it's clearly been slashed.

When sponsors play with numbers and language like Inland, it makes everything they publish suspect. I am open to and expect some sponsor spin, but this letter was too much for me. Inland's pronouncements on the mountain of debt Inland Western has coming due over the next year need to be read very closely. I hope Inland Western is not using the same obfuscated math as it figures out its debt payments.
Capmark Craps Out
I saw that real estate lender Capmark filed for bankruptcy over the weekend. Here is the Bloomberg article discussing the filing. Here are a few interesting factoids from the article:

Commercial property values in the U.S. have plunged since 2007 as employers cut jobs and the recession reduced demand for offices, retail space and rental apartments. The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the decline to almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.

U.S. office vacancies are at a five-year high, apartment vacancies are at a 23-year record, and retail centers are showing the greatest share of empty store-fronts since 1992, according to real estate research firm Reis Inc. All that unleased space makes it harder for landlords to pay their mortgages to lenders such as Capmark.

The article also states that commercial mortgage defaults are at their highest rates since 1994.

Thursday, October 15, 2009

CMBS Defaults
Here is a reprint in its entirety of a Dow Jones News Wire article, published on, discussing Moody's findings on CMBS defaults:

Delinquencies among U.S. commercial mortgage-backed securities surged to by a record amount in September, according to Moody's Investors Service, highlighing the ongoing woes on the commercial real-estate market.

Occupancy rates and rents are falling, which, coupled with an inability to refinance debt, is resulting in an acceleration of woes for property owners. "After tapering off for two months, the delinquency tracker appears to have resumed an upward trend as expected," said managing director Nick Levidy. "The delinquency rate is likely to continue moving higher over the next several months as troubles compound in the commercial real estate sector."

September's delinquency rate of 3.64% compares with 0.54% a year earlier.

The commercial real estate market had held up better than the residential real estate market until it began to deteriorate quickly at the end of 2008 as the U.S. recession deepened. Retail and hotel properties have been hit especially hard.

The hotel industry posted the largest increase in September, rising to 4.97% from 4.18% in August. Multifamily delinquency rates continued to go up, climbing to 6.09% from 5.51%, the highest of any property type. The delinquency rate for loans on retail properties rose one-third of a point to 3.76%.

Moody's said delinquency rates continued to be highest in the South at 5.14%, up from August's 4.66%. The East was the only region with the delinquencies below the national average - with a rate of 2.14%, up from 1.84% a month earlier.

Arizona, Michigan and Nevada all have delinquency rates nearly three percentage points higher than any other state, with rates of 9.32%, 9.29% and 9.14%, respectively. Ohio was the next highest, at 6.22%.

CMBS was the prevalent form of commercial real estate financing from the early 2000s until the credit crisis started in late 2007 and CMBS stopped cold. The fate of the CMBS market will mirror commercial real estate. I have read research reports expecting the default rate to approach 6% to 8%, close to double the current rates.

Wednesday, October 07, 2009

MGM Cuts Condo Prices
Here is a Wall Street Journal article on MGM Grand cutting condo prices on its huge City Center project. Prices are being cut buy up to 30%. This makes some if people who plunked down deposits close on their condos. City Center is a monster project on the Las Vegas Strip - 67 acres - and is expected to open December. The project was on the brink of collapse earlier this year, which would have devastated a weak Vegas economy.

Monday, October 05, 2009

Starwood Gets Corus' Assets
Here is a Bloomberg article on Starwood and TPG winning the assets of failed bank Corus. Corus was a major lender on high-rise condominiums, and many of these loans are now delinquent or in foreclosure. I suspect Starwood will aggressively pursue the assets underlying all of Corus' failed loans.

Sunday, October 04, 2009

Distressed Debt Articles
Here is a link to a Reuters article on CMBS and how investors are watching the Extended Stays and General Growth bankruptcies. Here is a Bloomberg article on the market's tepid response to distressed debt funds. The Bloomberg articles states mortgage REITs' unpredictable income is part of investor reluctance to them, which makes more sense than rejecting the investment opportunity. Private funds would probably have a better reception.