Monday, August 31, 2009

Bad underwriting + inability to refinance =?

According to this Journal piece, the next potential mortgage crisis. We, of course, have been hearing about this for a long, long time now. Extending loans (sometimes called "extend and pretend") has been working well, especially, when the property is performing; i.e., cash flowing. But there is less flexibility in the CMBS market, where investors are expecting to clip coupons.

I am going to go out on a limb and do a little crystal balling here, so please realize that these are just my own personal views. There will not be a collapse. Special servicers will be working long and hard and borrowers to find ways to stop a complete collapse. Lenders, as the story notes, have no incentive to realize losses. And there are supposedly buyers with dry powder waiting to pounce on properties at heavy discounts. The hedge to that is that I am not sure government programs will help that much on these deals. The other hedge is that the commercial market traditionally lags the residential market by what -- eighteen months, is it? -- so we could see pain before we move back into a market uptrend.

If you have your own thoughts or predictions, please feel free to share them.

Wednesday, August 26, 2009

Isolated occurences or great strategy?

Some real estate lawyers -- who probably know a lot more about the topic than I -- think the GGP bankruptcy ruling is "an anomaly rather than a glimpse of things to come." The theory, I think, is that this is a unique case mainly because of the brinksmanship: the whole company was thrown into BK rather than individual assets.

I still think this is a great strategy. Sometimes to save what you have you have to go to the brink. GGP did. It was the first in this cycke and may not be the last.

The gurus at Wachtell are saying, "[T]he GGP ruling may herald a trend towards bankruptcy filings by highly structured real estate enterprises which today find themselves vastly over-levered." They go out on talk about independent directors and separateness covenants and agree the issues are novel and have not played themselves out. Go click on the link above read it. It's worth a few minutes of your time if you care about these issues.

I believe most everyone agrees with the court that the real goal is to get this company out of 11. It is time for that real work to begin. Stay tuned.

Thursday, August 20, 2009

GGP about to start some heavy lifting -- what a workout!

Sorry, I could not resist that head to my post. This article sums it up pretty well. Lenders want their money back from GGP, in full, and now. GGP wants a seven year extension and favorable rates.

The judge has been siding with GGP so far, from what I can tell, and the bankruptcy guru of gurus said it best when commenting on the judge's refusal to take some of the properties out of the BK:

"The judge encouraged all parties to commence negotiations as soon as practicable in light of the decision," said James Sprayregen, partner with Kirkland & Ellis LLP, General Growth's co-counsel.
Some think GGP's best outcome is an acquisition by Simon and/or Westfield, both of which companies I understand have dry powder. This has been done before, especially in combo, as you may recall when Urban Retail/Rodamco's assets were split up by a troika. Now you could have more antitrust problems with consolidation and all that.

Others want to see the company survive, meaning there may be some very heavy lifting and long nights ahead for bankers and GGP execs on the business side if they want to make this work. And as I have said before that spectre of substantive consolidation hanging over the lenders almost like a Sword of Damocles.

Wednesday, August 19, 2009

The signs of the bottom are....

Take a look here, as Michael Houge does an excellent job of describing them, in my humble opinion.

My favorite, to follow up on my last post, is #2 - The Bad News is At a Crescendo Level.

I'll stop right there, which may make this my shortest post ever. Just remember, only a lawyer can write a 10,000 word document and call it a "brief."

Tuesday, August 18, 2009

Remember about optimism and pessimism....

If you are too optimistic, you are probably wrong. I've been there.

If you are too pessimistic, you are also probably wrong. I've been there too.

And yet I have little to dispute with the facts presented on this Fox Business video featuring dirt lawyer Stephen Meister about mezz debt, loan write downs, equity problems, extend and pretend and TARP. You can see the video at Real Property Alpha and Traffic Court. Mr. Meister thinks the tsunami is coming and points out a lot of good evidence supporting his case.

It reminds me of a borrower-lender game of chicken. The process is being delayed, just as it was in the house market, by not writing down these loans.

Saying almost every loan written between 2005 and 2008 will not be able to be refinanced is a bold prediction. And it could happen. But while I do not have the empirical evidence to back it up, I think about the two axioms above and say to myself, let's hope for just a storm surge and that lenders and borrowers can find ways to meet in the middle. Otherwise no amount of government bailout will help. And that fact alone may be enough to prevent a disaster.

Wednesday, August 12, 2009

GGP: winning in BK, but at what price?

I'm not at all surprised by the ruling yesterday that rejected lender's motions to remove the automatic bankruptcy stay off a number of General Growth Properties' performing malls. As you may recall, several lenders tried to pull their malls out of the BK case on the grounds that the borrowers were special purpose entities. This may put GGP and its team in the catbird seat regarding loan negotiations and exiting bankruptcy next year.

As the Reuters story tells us:

In an opinion closely watched in the credit markets, Judge Allan Gropper ruled that those seeking to have the cases dismissed because they claimed they were filed in "bad faith" were simply inconvenienced by the Chapter 11 filings and that "inconvenience to a secured creditor is not a reason to dismiss a Chapter 11 case."

Moreover, the Wall Street Journal is saying:
[T]he ruling has no bearing on the question of substantive consolidation, which entails combining separate entities of the same corporate parent in a bankruptcy case. The case is being closely monitored by real-estate investors and borrowers, since many securitized mortgages are packaged as special purpose entities.
That is where we get to the interesting part (correctly, in my opinion): the Reuters story is saying that the judge's "decision could pave the way for General Growth to seek 'consolidation' of its subsidiaries, and treat some of its units as a single debtor, overriding their status as separate companies."

Why is that interesting? I don't think it is great news for the credit market -- how do you do these deals now? I'm sure some smart people are trying to figure that out if they haven't already. All along the CMBS market has been relying on non-consolidation as a vehicle to make these deals more creditworthy. That is conceivably off the table, especially if this works and other companies copycat GGP's legal strategy. I remember working on these reasoned legal opinions years ago and wondered about the worth and value of them. Maybe now I know.

Monday, August 10, 2009

Death watch or evolutionary cycle?

There's a lot of talk today about Maguire Properties handing back seven buildings to the lenders (one of which is another real estate company that bought the debt at a discount). The "imminent default" magic words language might also mean Maguire is trying to get into the hands of the special servicer, which leads to a workout or to a deed in lieu of foreclosure or something. Maguire bought these buildings at the top of the market.

Some bloggers are calling this a "commercial real estate death watch." After all, "Lending hasn’t come back, prices are plummeting and those that poured funds into the sector during real estate boom are getting killed by high vacancy rates and falling rents."

While I agree we are waiting for some properties to "die," in a sense, I take a more phoenix-like perspective to the whole thing. After all, the property is reborn by its transfer to a new owner. So I like to think of this as the bottom of an evolutionary cycle, after which a lender dumps the property to a new buyer on the cheap or holds it for a while. As I keep saying, however, the problem, at least for many prospective buyers, will be finding money, because traditional lenders are not lending much and the CMBS market -- well, we'll see when or if that phoenix arises.

Friday, August 7, 2009

Is it time to buy?

That's what CBRE Investors is saying, at least in this story. And the analysis is sound, in my humble opinion.

"At this point, we don't know if we're at the bottom, but it appears we're pretty close, from the pricing perspective,” Lee Menifee, Global Strategy senior director with CBRE Investors, told CPN. "Over the last two or three months, there's been a firming of prices on income-producing assets with secure tenants, especially smaller deals."
Waiting for the absolute bottom, as the story points out, could mean lost opportunity costs.

There's one bugaboo, however: money. Money, that is, at LTVs that allow the deal to work, at reasonable interest rates and on legal terms that borrowers can stomach. So, let's see if these guys are right. (The customary full disclosure: I worked with CBRE Investors in its capacity as an advisor on many deals some years ago, and perhaps even represented them once on a small transaction, but I have never worked with Lee Menifee.)

Have a good weekend! And thanks to Doug Lytle for pointing out this story to me on Twitter.

Thursday, August 6, 2009

The latest on Strategic Hotels - a missed target

Since I know some of you follow locally-based Strategic Hotels & Resorts, here is the latest from Crain's:

Chicago-based Strategic Hotels, a real estate investment trust, said Wednesday that its comparable funds from operations were a loss of $2.5 million, or 3 cents a share, in the second quarter, compared with FFO of $36.4 million, or 48 cents a share, in the second quarter last year.

Analysts on average had estimated a 1-cent loss in FFO, according to Bloomberg L.P.

I'll let people who know more about the company comment. Regular readers know I have a soft spot for any company run by a admirer of Winston Churchill.

Wednesday, August 5, 2009

Shhhh...check out AAA spreads

Just a quick post to mention this story:

Spreads on AAA-rated CMBS have narrowed by 100 to 150 basis points as a rally in these securities continues for the second straight month, particularly in five-year triple-A paper, according to a new report from Trepp. Predictably, the spreads have narrowed more on loans backed by stronger collateral, Trepp says. The narrowing has occurred even amid what the CMBS information provider calls "continued negative headlines."
Combine TALF, underwriting and dealmaking and what do you get? This. Let's see where it goes.

Monday, August 3, 2009

GGP - people didn't see this coming?

You can't be serious. The way this case is going, and now with a plan delayed for quite some time, we see this:

[GGP] at a hearing said it was considering ways to treat some of its subsidiaries as a single debtor and override their status as separate companies, according to a transcript of the hearing.
Perhaps even more stunning is this howler:
"This was a surprising development that was probably saber-rattling on General Growth's part," said Daniel Rubock, a senior vice-president at Moody's, who attended the hearing.
Saber-rattling, yes? But surprising? Not in my humble opinion, as I think I alluded to some months ago. From a tactical legal standpoint it makes a lot of sense to me, and I know I am not alone in saying that you could see this being at least a thought in the back of someone's head. I readily admit to happily not being an expert in substantive consolidation, but the mere fear of it in the eyes of the lenders -- even if it is an uphill battle for GGP to get it -- might make some kind of global settlement more likely, as the story quite correctly points out.

Speaking of fear, if you've read this far I think you know this goes way beyond GGP. If the company were to go to that nuclear option and then even succeed, then every other distressed borrower will copycat on to that theory and create what could be a complete disaster at the end of the day. It almost goes without saying that this would mean "pop" goes the loan market, such that it is these days anyway.

 
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