Tag: CRE

Thought you folks might want to know this because, you know, it has been ignored by just about everyone.

From GlobeSt.com:

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.”
Tom Fink, SVP at Trepp, tells GlobeSt.com that “the pricing is tightening up because people see that there’s an opportunity for doing a profitable trade by buying the bonds and then securing financing through the Federal Reserve’s TALF loan facility. That should provide a fairly stable underpinning for the five-year spread at least through the end of the year, which is how long the program is currently scheduled to last. If at the end of that, people start to see a good tone in the market and the performance of commercial real estate stops deteriorating, it could become permanent.”

Still to come are deals on new CMBS through TALF, but Fink says “the market’s fully expecting that there will be new issue on the TALF program between now and the end of the year. You have a number of large institutions that have talked to the Fed and they expect to pursue deals with the Fed. There’s plenty of folks down in Washington who are suggesting that it be continued a lot longer.”

Fink says he doesn’t expect the prospect of further actions by ratings agencies to discourage would-be buyers of CMBS paper. “The ratings agencies have taken their actions,” he says. “Now it’s a matter of the agencies moving through whatever watch lists they’ve put out. So regarding the uncertainty caused by people asking ‘what are the rating agencies going to do?’ well, now they’ve already done it, and it’s priced into the market at this point.”

At the same time, Trepp predicted that the delinquency rate on CMBS loans could double before 2009 is over. Given the decline in property values and drought of capital, “I don’t think it’s out of the question to predict that it could hit 6% to 7% by the end of the year”” says Fink.

Historically, he says, CMBS delinquency rates have lagged the economy by 12 to 18 months. “The Bureau of Economic Research said the recession started in the fourth quarter of 2007, and we saw delinquencies start to climb dramatically in the first quarter of ’09. We’ve got another nine months of rising delinquencies before that lag effect starts to work itself out.”

However, this will not deter investors’ interest in the paper. “You’ve got plenty of research out there talking about which loans are going to go bad and what the losses will be,” says Fink. “A lot of that information has already been absorbed by the market and is reflected in the prices.”

Now, when you couple this with the recent debt offering from Simon Property Group (SPG) one has to think the rumors of CRE’s demise are well overstated. Hat Tip @bobbrinker for that

Commercial real estate investment trust Simon Property Group (SPG.N) on Thursday added $500 million to its 6.75 percent senior notes due 2014, said IFR, a Thomson
Reuters service.

The size of the deal was increased from an originally planned $250 million.

The total amount is now outstanding is $1.1 billion. Citigroup, Deutsche Bank, Goldman Sachs, and UBS were the joint bookrunning managers for the sale.

BORROWER: SIMON PROPERTY GROUP
AMT $500 MLN* COUPON 6.75 PCT MATURITY 5/15/2014
TYPE REOPENING ISS PRICE 105.029 FIRST PAY 11/15/2009
MOODY’S A3 YIELD 5.476 PCT SETTLEMENT 8/11/2009
S&P A-MINUS SPREAD 275 BPS PAY FREQ SEMI-ANNUAL
FITCH A-MINUS MORE THAN TREAS MAKE-WHOLE CALL 50 BPS
*TOTAL AMOUNT NOW OUTSTANDING $1.1 BILLION

What appears to be happening is we are going to have a classic flight to quality assets. We will of course see pictures scattered across the TV of strip malls going out of business because, well, there are just too damn many of them out there. We will also be inundated with constant reminder of how many “billions of CRE debt is now in default” but won’t be told there is trillions of it out there (some perspective is needed). But what we will not see are the high quality regional malls going under. They will grow stronger as overall retail space declines and will then regain much of the pricing power recently lost.

Disclosure (“none” means no position):none

I love reading stuff like this a while after it happened. By doing it this way we can get a modestly accurate gauge their predictions based on what has already happened vs what they though would happen. This “Round Table” has been very accurate up to this point. It appears to be from early 2009. There is a great line there regarding what will happen to CRE in 2009, “Business will pick up in 2009. It has to. You can’t get lower than nothing”. Classic…

All agreed in January that 2009 was going to be “worse than 2008” and to this point it has. All were looking forward to 2010 as they though much of the current dislocation will have passed. This isn’t to say 2010 will be an easy year, but that the stronger players will begin to see the market ease for them as opposed to 2009’s mass oppression.

This is worth the read…

Real Estate Outlook 2009

Disclosure (“none” means no position):

Watch what Zell has to say about interest rates. This is the reason those of us who fear inflation down the road doubt the Fed’s ability to fight it. IF, we see inflation a year or two from now the Fed will be forced to raise interest rates, that action will cause a potential undoing of the CRE market and douse any revival of residential real estate that may be happening at the time.

Disclosure (“none” means no position):

It would appear that some bottom fishing may be happening in commercial real estate finance..

Reuters Reports:

NEW YORK (Reuters) – Several large investment firms are creating new lending companies that plan to go public to raise billions of dollars to take advantage of the distress in the commercial real estate market, and more are on the horizon.

The planned IPOs, which include units of firms like Apollo Management APOLO.UL and Alliance Bernstein Holding LP, could be just the beginning of what some bankers expect to be a boom in Real Estate Investment Trusts (REITs) going public over the next few years.

The U.S. commercial real estate market has been reeling ever since a prime source of financing, the commercial mortgage-backed securities (CMBS) market, virtually closed and banks shut off their lending spigots in the past year.

“In the real estate world, the next few years will be defined by a lack of capital,” said Michael Knott, a senior analyst with Green Street Advisors.

According to a recent Deutsche Bank report, as much as $40 billion will be needed to salvage about $420 billion of CMBS mortgages maturing over the next 10 years.

More recently, the sector has grappled with falling rents and rising vacancies driven by the recession.

The dislocation in the real estate and CMBS markets has prompted several top investment firms to create REITS that will aim to buy up, manage and originate commercial real estate loans.

“As assets start to come on the market and distress in commercial real estate increases, REITs will be the buyer of choice, and they will get bigger and bigger,” said Brad Smith, managing director for equity capital markets at Bank of America Merrill Lynch.

With significant amounts of mortgages coming due in the next three years, there will be demand for loans that traditional players such as banks have been unable or unwilling to make.

In the past two months alone, eight REITs have filed for IPOs seeking to raise up to $3.9 billion, a larger pipeline than that of traditional IPOs, according to Thomson Reuters.

For instance, an affiliate of private equity firm Apollo Management last week filed for a $600 million IPO to take advantage of what it called a “void of several hundred-billion dollars” that must be filled by new mortgage lenders.

The newly formed companies were set up as REITs, a tax structure that exempts companies earning most of their revenue from either rent or mortgages from paying taxes on their taxable income if the company distributes 90 percent of that to shareholder

Now for REIT’s with large debt rollovers coming due, anything that begins to shake the market loose, now at a standstill will be very welcome. What remains to be seen is what investor appetite for these IPO’s ends up being.

It ends up making it feast or famine scenario. If the IPO’s get big interest, the simple sentiment boost would rally the market. Should they not, one can easily see despair setting in rather quickly.

Too soon to tell what the impact will be but one has to pay attention to it.

Disclosure (“none” means no position):

This is a wide ranging interview. Really well done…

Ethan Penner – Interview

Disclosure (“none” means no position):