Thursday, January 24, 2013

Why There Are No Distressed Deals

There are no distressed deals because the big boys get first chance at all the choice deals.  Here is a Bloomberg article on Barry Sternlicht's Starwood Property Trust buying LNR, a commercial mortgage backed security special servicer that is the largest manager of distressed commercial mortgage loans.  The following passage from the article lays out why the distressed deals are few and far between:
The deal gives the Greenwich, Connecticut-based companies a window into some of the more than $1 trillion of commercial real estate debt scheduled to mature in the next five years in the U.S. and Europe, as well as access to pricing of troubled properties and income from fees. LNR’s special servicer business, which represents bondholders in debt restructurings and foreclosures, is the biggest manager of distressed U.S. commercial real estate loans.

“It is a major-league transformative deal,” said Joshua Barber, an analyst with Stifel Nicolaus & Co. in Baltimore. The transaction will give Starwood Property “real size, real scale, unbelievable networks and real mortgage originators.”

Starwood Property gained 4.6 percent to $25.11, the highest closing price since the stock began trading in 2009. The real estate investment trust and competitors including Colony Financial Inc. (CLNY) and Apollo Commercial Real Estate Finance Inc. (ARI) went public that year to try to capitalize on distressed property after the credit crisis.
With Starwood, Colony, Apollo and similar well capitalized firms getting first crack at the best deals there not many quality deals left for smaller investors, and the following is evidence why the top investment firms' will continue to get the best deals:
The company (Starwood) will benefit from having access to LNR’s $131 billion of loans where it is the named special servicer, said Andrew Sossen, chief operating officer and general counsel.

“The information is priceless,” he said in an interview. “As a special servicer, you have a view into what rents are in any given city on any given street in the U.S, to the extent you have a property there. With $131 billion worth of loans, that gives you a data point and a look into the commercial real estate markets throughout the U.S.”

1 comment:

Anonymous said...

This is great, and you nailed it, but some of the articles you quote seem to either slightly miss the mark or at least subtly dance around the truth. "As a special servicer, you have a view into what rents are..." What? Who CARES what rents are, I can call a broker and get that in 2 seconds. If you OWN the special servicer you get FIRST DIBS on the assets. And in this case, the assets = pretty much all assets in the country right now, considering how shitty things are and how everything is controlled by just a few special servicers. Again, you seem to understand this, but the articles seem to dress up the ugly truth.

I would add, though, that that is not the only reason for the scarcity of bargains vs the olden RTC days. Another major reason is the fact that this was a very, very bad downturn across the board and across the globe. Not just special servicers but banks don't/didn't want to casually unload real estate at super-discount prices, because everyone has lost money on all sides at some point over the past few several years. In the early 90s, the problem was limited to the S&L crisis; just a small corner of the universe. This meant that it wasn't such a big deal to dump some great product at pennies on the dollar. The sky wasn't falling at the time like it has been in commercial real estate this time around.