Wednesday, January 27, 2010

Geithner Watch
I would put the over/under on Geithner's tenure as Treasury Secretary at ten days, or next weekend.  It is ironic that Geithner's chief inquisitor is congressman Darrell Issa, who is no brain surgeon and who is no stranger to the justice system.

Tuesday, January 26, 2010

Here Come The Sharks
The money guys are circling Peter Cooper and Stuyvesant Town.  Here is a Bloomberg article and a Wall Street Journal article on the players involved.  The special servicer is CW Capital.  I found this gem buried in the Bloomberg article:
Tishman Speyer and BlackRock each invested $112.5 million out of total equity financing of $1.9 billion. They took out a $3 billion mortgage from Wachovia Bank and $1.4 billion of mezzanine debt. The mortgage was packaged with other commercial- property loans and sold as securities. The biggest holders are Fannie Mae and Freddie Mac, the U.S. government-owned home-loan finance companies.
So Tishman Spyer and BlackRock each only put up about 2% of the entire purchase in equity.  This does not surprise me.  So why didn't this deal implode sooner?  Here is an outtake from the WSJ article showing a glimpse of the complexity facing the debt holders.

The leading contender to get initial control is CW Capital, a servicer that represents the investors who hold the $3 billion first mortgage on the property. That mortgage was packaged into commercial mortgage-backed securities known as CMBS. But the property's debt structure is complicated and others are likely to push for control, including possibly the thousands of residents of the more than 50-year-old complex.  When complex deals like the one for Stuyvesant Town fall apart, who is in control? The News Hub panel discusses what they call "the $4 billion question."

In addition to the first mortgage, there is $1.4 billion of junior, or "mezzanine," debt on the property and some holders of that debt have also been maneuvering for control in recent weeks. Some junior creditors may try to replace the Tishman venture as owners by agreeing to pay the debt service on the first mortgage. If CW Capital takes over, the mezzanine investors likely will suffer a big loss.
CW Capital is involved because most, if not all, of the debt is in CMBS.  CW Capital's job is got get as much money as possible for CMBS owners.  Freddie Mac and Fannie May own about $1.5 billion of the $3 billion of CMBS.  This story is going to evolve over a long, extended period. 

Monday, January 25, 2010

Flying The Coop
Tishman Speyer and Blackrock Real Estate gave the high profile Peter Cooper Village and Stuyvesant Town apartment complex back to their lenders today.  Restructuring talks collapsed over the weekend making a loan modification unlikely.  I think this deal sold on a cap rate of like 4.5%, which was eye-popping in 2006, but in retrospect makes me wonder why this property was not lost sooner.  This low cap rate looks even lower when it's taken into consideration that the two complexes had many apartment units that were rent controlled.  Articles on the property are here and here.  I posted last week that that the estimated value of the property is now $1.8 billion.  For comparison purposes, the 2006 sales price was $480,983 a unit, and today the unit prices are $160,328 a unit.

Thursday, January 21, 2010

Tranche Warfare Article
Hat tip to CRE Review, again.  Here is a BusinessWeek article on CMBS.  Not too much on the intricacies of tranche warfare, but more of a summary of all the big, highly leveraged real estate deals that are imploding, which used debt now lodged in CMBS. 

The article does give a glimpse of the problems facing commercial real estate and what form the solution will arrive.  The problem, which is mirrored throughout the country, is exemplified by Stuyvesant Town / Peter Cooper Village, the mega-apartment complex in Manhattan.  It was acquired for $5.4 billion in 2006 and used $1.4 million of mezzanine debt and $3 billion of mortgage debt, which are both in CMBS. The property is worth $1.8 billion, so its equity is gone, the mezzanine is gone and almost half the mortgage is gone. 

The solution is going to be new equity (and new owners) and a refinance of the CMBS debt.  Here is the equity available:
Real estate private-equity firms raised $6.8 billion in the fourth quarter of 2009, according to London-based Preqin Ltd., and more than $40 billion for the year. Sternlicht, the former chairman of U.S. lodging company Starwood Hotels, raised $930 million when he took Starwood Property Trust public in August.
The solution is going to get ugly,  but there is capital available to buy the properties and refinance the debt.   The legal wranglings combined with how much new equity is available is going to dictate the fate of commercial real estate.  A few precedent setting decisions and workouts will spread across the CMBS market.  The question for many CMBS tranche investors is do you want 100% of nothing, or a smaller percentage of something?

Wednesday, January 20, 2010

Errors, Errors, Errors....
Here is an article with significant misrepresentations on non-traded REITs.  It is from some website called Before You Invest.  Here is the article titled "Behringer Harvard REITs Continue Trend in Non-Traded REIT Market:"
Investors who placed their money in unlisted REITs, including Behringer Harvard, have been awakened to the myriad of issues related to the nature of these products. Unlisted, or non-traded, REITS differ from listed REITs in that they are not traded on an open market. Rather, non-traded REITs are sold to investors who then hold the product until the end of an investment term.
Behringer Harvard and other non-traded REITs contain a fundamental flaw which is many times not evident at the time of purchase: their value is set by the very companies which sell them. To clarify, a listed, or public, REIT is valued daily based on the market in which it is traded whereas a non-traded REIT’s value is determined by the staff of the REIT, or sometimes by a third party consultant paid for by the REIT which it is supposed to objectively value. Obviously, a conflict of interest can easily develop in the standard valuation procedure of a non-traded REIT.
Another issue with non-traded REITs is that if one chooses to sell their shares, it must do so in conformity with the procedures of the REIT. The usual procedure is to sell shares through a redemption program; however, many such programs have been suspended due to adverse financial conditions when many investors attempt to redeem their shares at once. The consequence to investors is that they are stuck in the investment until the redemption program is reinstated.
When sold Non-traded REITs, many were not informed of these obvious drawbacks to the product. Some have posited that it might have something to do with the somewhat common 15% commission given to the selling party, or the broker. Though regrettable, many investors may be able to recover losses in such products, including Behringer Harvard, through arbitration.

This article is full of assumptions and misleading statements.  The title of the article infers that Behringer Harvard has done something wrong, which is not supported in the article.  I think that Behringer Harvard's non-traded REITs deserve extra scrutiny, but you don't learn why from this article.  Shock - non-traded REITs have their price set by their sponsor.  How else would a non-traded REIT or any other non-traded investment be valued initially?  The SEC requires that non-traded REITs provide a per share, net asset value eighteen months after the close of the offering period.  Non-traded REIT valuation is typically done by third parties, not the REIT sponsor.  The share valuation is not the largest single flaw of a non-traded REIT.  Larger flaws include non-traded REITs' inability to quickly access capital markets for equity or debt, and their outside management structure. 

By law, a non-traded REIT can only redeem up to 5% of its shares per year, or it changes the REITs registration status.  Sure, some REITs have suspended their redemptions, but not all.  All non-traded REITs are sold as illiquid investments. 

"When sold Non-traded REITs, many were not informed of these obvious drawbacks to the product," is a crazy, reckless statement.  How does the author know this?  Was he or she in client meetings?  Most non-traded REITs have significant disclosure, written in language that is not hard to understand.  All investors are required to receive a prospectus and meet suitability requirements.  The article implies that investors are not told of non-traded REITs' drawbacks because the selling broker makes a 15% commission.  First, the maximum amount a non-traded REIT can pay for offering expenses is 15%.  Most REITs offering costs are in the range of 10% to 12%, not the full 15%.  The amount of commission paid to a broker's broker / dealer is 7% plus a marketing fee that's typically 1% or less that the broker / dealer keeps.  The selling broker receives 90% or less of the commission. 

Non-traded REITs need analysis and investors need to question their brokers about the pros and cons of including a non-traded REIT in a diversified portfolio.  This article is irresponsible for its innuendo and lack of supporting facts.  Investors should look elsewhere for information than from Before You Invest.

Sunday, January 17, 2010

Now You Tell Us
Here is great quote from Ray Torto, chief economist at CB Richard Ellis from today's New York Times:
“Anybody who bought property in the last six years has their equity pretty well washed out,” said Ray Torto, chief economist at CB Richard Ellis, a real estate firm. “People are looking back on that period as the peak of the madness, the bubble. The expectation was that there was always someone who would pay a higher price after you.”
I saw Torto speak at a Tenant In  Common Association conference a few years ago, '06 or '07, when he was with Torto Wheaton, and if I remember correctly, was touting real estate and saying that there was no bubble and justifying the drop in cap rates.  He was as the cliche says, preaching to the choir.  It is funny that so few "experts" realized that the whole real estate  bubble was finance driven, and that when the finance stopped so would the drop in cap rates.

Monday, January 11, 2010

This morning I saw some CMBS news on Calculated Risk and CRE Review and followed the links to various articles.  CMBS defaults are expected to peak at 12%, which is much higher than the record defaults of the late 1980s, which peaked around 6% (although the CMBS market is much larger today than in the '80s).  The current default rates are at 4.71%, so a jump to 12% is big.  Currently, hotels and multifamily are leading the default parade at 9.13% and 7.54%, respectively.  Here is a counter intuitive post from a Reuter's blog stating that CMBS investors are set to benefit in 2010 as investors believe that their worries were overstated at year ago.   I hope the poster is correct.   Either way, the loans done between 2004 and 2008, and really I am thinking the loans done from mid-2005 through the end of 2007, are going to cause the most trouble.  This is stating the obvious, especially since real estate prices are down 44% from their peak, according to the Reuter's blog linked to above.

Friday, January 08, 2010

No Surprise

According to Bloomberg, Tishman, Speyer Properties, LP and BlackRock are going to miss a scheduled bond payment on debt from their $5.4 purchase of Stuyvestant Town.  This deal was the poster child of the real estate boom.  This default has been telegraphed for several months.  Now the transaction is going to get interesting as the parties struggle to retain their interests in the property.  I like this quote the article ends with:
“The joint venture has been engaged in discussions with CWCapital, the special servicer acting on behalf of the lenders, and hopes to continue good-faith negotiations toward a potential restructuring of the debt,” Tishman and BlackRock said.
The talks sound so nice and friendly, I wonder who brought the bagels and coffee?

Saturday, January 02, 2010

Happy New Year and Good Riddance
I am looking forward to the new decade. Finally a decade name we can all agree with, wait, er.. the tens until its the teens. Oh well, its only ten years until the '20s. Anemic economic growth, the tech bubble burst, the real estate bubble and corresponding burst, the credit crisis, real stock declines... the aughts or noughties are a decade to forget.