Daily news + a weekly analysis of loan-product trends from scotsmanguide.com
Dan Yeh, mortgage-industry analyst
As published in Scotsman Guide's Commercial Edition, September 2010.
SEPT. 9
Trends in Hospitality
Earlier this month, HotelNewsNow.com reported another week of improving occupancy rates and revenue-per-available-room (REVPAR) for hotel chains. This prompted us to take a closer look at the hospitality sector on Scotsman Guide Loan Post to see if our data was consistent with this trend. The graph below shows average debt-service-coverage ratios (DSCRs) for hospitality properties by region for the past 14 quarters. (Note: There is no data for the Northeast for the third quarter of 2009, hence the break in the line.)
As we can see from the graph, average DSCRs for the West region hit an all-time high this past second quarter at 1.63, while average DSCRs for two regions — the Northeast and the South — made moderate improvements this past second quarter from this past first quarter. Bucking the trend was the Midwest, which dropped its average from 1.53 to 1.35 from this past first quarter to this past second quarter. Nationwide, the average DSCR was up slightly from 1.42 to 1.46.
While these trends are encouraging, it remains to be seen whether these gains can continue. As this post and graph from Calculated Risk show, occupancy rates tend to drop once summer ends and again toward year-end. Add in the prospect of a double dip recession, and conditions could remain challenging for the hospitality industry for some time.
-- Dan Yeh
SEPT. 8
What We’re Reading: Sept. 8
Research firm Boxwood Means debuts two small-cap (i.e., properties of $5 million or less) commercial real estate price indices and uncovers some interesting dynamics in its report (pdf):
“The Boxwood Small-Cap Property Index (‘SCPI’) tracks aggregated U.S. price trends from 90 diverse metropolitan areas involving property sales under $5 million. The SCPI contrasts with the Moody’s/REAL Commercial Property Price Index, or CPPI, which comprises primarily sales of large-cap CRE assets. The Boxwood SCPI-20 Index is a composite of the nation’s 20 largest metro areas – the same markets in the S&P/Case-Shiller Home Price Index of residential housing.”
Among the findings are a strong link between small-balance commercial real estate and local housing/economic conditions, as well as less volatility than larger assets:
“The health of small commercial properties is tied to local economic and business conditions to a greater degree than major, institutional-grade assets which tend to be buffeted by regional-national economic and CRE market trends. Small assets are predominately purchased by local owner-users, small private investors and one-off ‘mom and pops’. Thus, small CRE dwells in a neighborhood-based ecology of housing, business and economic interactions.
“The national aggregate Moody’s/REAL Commercial Property Price Index (CPPI), representing CRE sales transactions with a heavy concentration of closed sales over $5 million, plummeted 43.7% from its high-water mark in 2007. By comparison, Boxwood’s SCPI, encompassing 90 primary and secondary metros, has shed 24.7% peak to current trough.”
-- Dan Yeh
SEPT. 7
What We’re Reading: Sept. 7
The Wall Street Journal (subscription required) takes a look at how investors are making money in niche commercial properties, including self-storage, student housing and abandoned railroad beds:
“Self-storage buildings, anyone? How about abandoned railroad beds, cellular towers, student apartments or parking facilities? Such unglamorous niches, once shunned by the investing elite, are performing well in 2010, even as the Dow industrials limp along.
“If you haven't heard about these seemingly arcane plays yet, it may be because the smarter money is getting there first. In some cases, private-equity firms, pensions and college endowments, which are cutting their exposure to stocks, are looking into these and other offbeat investments.”
For our take on commercial niche properties, take a look at our Aug. 5 and Aug. 12 posts.
-- Dan Yeh
SEPT. 3
What We’re Reading: Sept. 3
The U.S. lost 54,000 nonfarm jobs, which is less than the projected 105,000 job decline, due primarily to temporary census jobs. Private-sector payrolls increased by 67,000, led by the health-care and temporary-staffing industries, according to MarketWatch.
“The U.S. economy shed 54,000 nonfarm jobs in August, the Labor Department reported Friday, a much slower decline than economists anticipated as the health-care and temporary-staffing industries led a 67,000 expansion in private-sector employment.
"Though the employment report broadly painted a picture of sputtering economic growth, the payrolls decline in August wasn't as steep as the 105,000 payroll subtraction expected by economists surveyed by MarketWatch and eroded market fears about a double-dip recession.
“Adding to the sense that the report was not as bad as feared, the payrolls count in June and July was revised higher by a cumulative 123,000. Payrolls fell a revised 175,000 in June and by 54,000 in July.
“The unemployment rate ticked higher to 9.6% in August from 9.5% in the previous month. Economists had expected the increase.”
-- Dan Yeh
SEPT. 2
What We Reading: Sept. 2
For the week ending Aug. 28, unemployment claims dropped by 6,000 to 472,000, according to MarketWatch. The more-influential government employment and joblessness report is due tomorrow morning, and expectations are for a gain of 30,000 workers by private employers. Unemployment is expected to remain near 9.5 percent.
“After a brief surge earlier this year, numerous signs indicate the U.S. economy appears to have cooled off over the summer, stoking concerns about whether what's been a fragile recovery can be sustained. Jobless claims, for example, have risen 10% since early July.
“Economists surveyed by MarketWatch had expected initial claims to total about 473,000 -- the same as the week before. Yet claims in the prior week were revised up by 5,000 to a total of 478,000, basically canceling out the latest decline. See our complete economic calendar and consensus forecast.
“The four-week average of initial claims -- a better gauge of employment trends than the volatile week-to-week number -- declined 2,500 to 485,500, according to data released by the Labor Department.”
-- Dan Yeh
SEPT. 2
Trends in Retail Properties
In our Aug. 27 post, we reported that second quarter gross domestic product (GDP) growth slowed to 1.6 percent from a 3.7-percent annualized pace in the first quarter. With that statistic in mind, we thought it would be prudent to take a look on Scotsman Guide Loan Post to see if retail properties (as a measure of consumer health) were experiencing similar trends. The graph below shows average debt-service-coverage ratios (DSCRs) for retail properties by region for the past 14 quarters:
Average DSCRs for two regions, the Midwest and Northeast, hit intermediate highs in this past first quarter and subsequently fell back in the most recent quarter. Despite the decrease, the Northeast appears to be faring well, with the highest average DSCR of all regions at 1.7 – the fact that New York city appears to be rebounding faster than expected could be a main contributor to the region’s performance.
On the other side of the country, the West region ended this past second quarter with an average DSCR of 1.44, an all-time high for that region. So conditions may not be as dire as they seem and stories touting a 2016 recovery could be a bit premature and, to some extent, draconian.
-- Dan Yeh
SEPT. 1
What We’re Reading: Sept. 1
The Institute for Supply Management’s factory index rose to a three-month high of 56.3 in August. Projections called for a drop to 52.8 from a reading of 55.5 in July, according to Bloomberg. Any reading greater than 50 signals that production is expanding.
“The Institute for Supply Management’s factory index rose to a three-month high of 56.3 from 55.5 in July, the Tempe, Arizona-based group said today. Readings greater than 50 signal growth, and the figure was projected to drop to 52.8, according to the median forecast in a Bloomberg News survey.
“Stocks rallied as U.S. and China manufacturing figures tempered concern the global economic recovery will wane without more government stimulus. Production gains may partially compensate for a slowdown in consumer spending and sluggish housing market that are causing the world’s largest economy to cool in the second half of the year.
“Manufacturing is ‘one of the bright spots,’ said Hugh Johnson, chief investment officer at Hugh Johnson Advisors LLC in Albany, New York, the only analyst surveyed to predict the index would rise. Still, ‘you have to have increased demand from consumers and businesses for these numbers to be sustained.’”
-- Dan Yeh
AUG. 31
What We’re Reading: Aug. 31
Banking profits increased 20 percent and the number of problem banks increased 7 percent from the first to second quarter of 2010, according to the FDIC second quarter banking profile in an article from Bloomberg.
“Bank-industry profits totaled $21.6 billion in the three-month period that ended June 30, an increase from $18 billion in the first quarter, the FDIC said today in its quarterly report on industry performance.
“‘The economic recovery that began last year is beginning to be reflected in the rising earnings and improving credit quality,’ FDIC Chairman Sheila Bair said at a briefing. ‘Given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves,’ she said.
“As the largest banks show improvement in earnings and credit quality, the FDIC’s ‘problem’ bank list reached its highest level since 1992 amid slowing recovery from the worst economic crisis since the Great Depression, the agency said.
“The confidential list had 829 banks with $403 billion in assets at the end of the second quarter, a 7 percent increase from the 775 included in the first quarter, the FDIC said.”
As a result, the FDIC’s deposit insurance fund still has a negative balance:
“The FDIC’s deposit insurance fund, which fell into deficit as bank closings soared last year, dropped to a negative $15.2 billion balance in the second quarter from $20.7 billion in the preceding three-month period. The deficit has been reduced in each of the past two quarters after reaching a peak of $20.9 billion in the fourth quarter of 2009.”
-- Dan Yeh
AUG. 30
What We’re Reading: Aug. 30
A slew of new skyscrapers could soon transform the New York City skyline, but only if the economy holds up, according to The Wall Street Journal (subscription required):
“The city's approval of an office tower near the Empire State Building last week is the latest reminder that New York is poised for one of its biggest waves of skyscraper development in decades—provided the economy cooperates.
“Developers are readying two residential towers that will rise above most of Midtown. The massive mixed-use development planned west of Penn Station would transform Manhattan's skyline as viewed from New Jersey. Downtown, the transformation is already happening, with the warped, metallic skin of Frank Gehry's Beekman Tower looming over the neighborhood around City Hall and, at Ground Zero, 1 World Trade Center already rising to 36 stories.”
Some of the projects are just approvals, but others are already under construction:
“Of course, most of the projects aren't going to move ahead until the economy improves, more financing becomes available and demand for commercial space and apartments picks up. Rents in top-tier Manhattan office buildings are still some 20% off their peak. ‘This is still at least a year or two from the right circumstances for a deal, let alone construction,’ Michael Knott, who tracks office landlords for real-estate research firm Green Street Advisors, said of the prospects for Vornado's 15 Penn Plaza. ‘Getting approvals now is just prudent planning, not a signal to ready the cranes.’
“Some projects that got going before the bust are moving forward. The Beekman Tower, Forest City Enterprises Inc.'s $800 million, Frank-Gehry-designed residential skyscraper has already reached its 867-foot height. It's close to the 792-foot Woolworth Building, another iconic tower that was once the tallest in the world and has since been dwarfed by modern skyscrapers.
“At the World Trade Center site, two office towers are already rising and the Port Authority of New York and New Jersey last week cemented a deal with developer Larry Silverstein that allows him to continue with building Tower 4 and promises as much as $600 million in public support for Tower 3.”
-- Dan Yeh
AUG. 27
What We’re Reading: Aug. 27
U.S. gross domestic product (GDP) growth slowed to 1.6 percent in the second quarter compared to earlier estimates of 2.4 percent, but higher than economists’ average expectations of 1.3 percent, according to MarketWatch.
“The sharply downward GDP revision from the 2.4% growth initially pegged was largely expected after the release of June inventories and imports reports, which were not available for the first estimate released on July 30.
“Economists polled by MarketWatch, however, had expected an even worse figure showing of 1.3% growth in the second quarter. As expectations of growth grew increasingly pessimistic in recent days, U.S. stocks started the session modestly higher, and after an initial downturn following a speech from Federal Reserve Chairman Ben Bernanke and a revenue warning from Intel, turned higher again.”
Meanwhile (also from MarketWatch), Federal Reserve Board Chairman Ben Bernanke pledged in a speech at the Fed gathering in Jackson Hole, Wyo., to fight deflation, although he does not believe there is enough evidence yet to warrant additional action.
“ ‘The Federal Open Market Committee will strongly resist deviations from price stability in the downward direction,’ Bernanke said in a speech opening the Fed's annual summer policy retreat.
“The Fed would be ‘vigilant and proactive’ if inflation falls by a significant amount, he said, though he downplayed concern that the economy would fall back into another downturn, or a double-dip recession.
“He said the economy would continue to grow at a slow pace in the last four months of the year and the pace of growth would pick-up in 2011.”
As
Calculated Risk points out, the language does suggest that Bernanke is setting expectations for another round of quantitative easing.
-- Dan Yeh
AUG. 26
What We're Reading: Aug. 26
Wells Fargo was the largest commercial/multifamily mortgage servicer as of the end of June with $462.8 billion in master and primary servicing, according to the Mortgage Bankers Association's recent servicing report.
“Topping the list of firms is Wells Fargo with $462.8 billion in U.S. master and primary servicing, followed by PNC Real Estate/Midland Loan Services with $307.9 billion, Berkadia Commercial Mortgage with $202.6 billion, Bank of America Merrill Lynch with $133.4 billion and KeyBank Real Estate Capital with $124.7 billion.”
-- Dan Yeh
AUG. 26
Larger Commercial Mortgage Trends Improve
In the past few months, we have seen a steady stream of stories about large commercial real estate deals going into default or being sold at fire-sale prices – hotel real estate investment trust Innkeepers Trust USA, the Sea Island resort and the Xanadu mall complex are some of the large commercial properties that have defaulted on their mortgages recently.
This prompted us to take a look at commercial mortgage loan sizes on Scotsman Guide Loan Post to see if we could see any large-scale trends.
The graph below displays debt-service-coverage ratios (DSCRs) for three loan-amount categories on Loan Post for the past 14 quarters:
As we can see from the graph, average DSCRs for all three loan amount categories ended at 1.45. For commercial mortgages $5 million and more, this was an improvement from the average DSCR of 1.36 in the fourth quarter of 2009. For commercial mortgages $1 million and less, this was a slight decline from last quarter.
Now we can examine the trends for the average loan-to-value (LTV) ratios. The graph below shows average LTVs for the same loan categories, also from the past 14 quarters:
Of the three groups, commercial mortgages $5 million and more ended at the best levels with an average LTV of 57 percent. Commercial mortgages in the other two loan amount categories (i.e., $5 million and less) ended at an average LTV of 59 percent.
It appears that credit metrics for larger commercial mortgages have improved in the past few quarters. However, trends such as the growing number of commercial strategic defaults lead us to believe that we still have a long way to go before the commercial downturn is over.
-- Dan Yeh
AUG. 25
What We’re Reading: Aug. 25
Strategic defaults are increasing among commercial mortgage real estate investment trusts (REITs) and other commercial property-owners as property values decline, according to The Wall Street Journal.
“Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as ‘jingle mail.’ These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.
“These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about ‘strategic defaults,’ when homeowners stop making loan payments even though they can afford them. Instead, they decide to default because the house is ‘underwater,’ meaning its value has fallen to a level less than its debt.
“Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default. Individuals who walk away from their homes also face blemishes to their credit ratings and, in some states, creditors can sue them for the losses they suffer.
“But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments. Deutsche Bank AG's RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties with nonrecourse debt, loans that don't allow banks to hold landlords personally responsible if they default. The theory is that those companies fare better by diverting money to shareholders or more lucrative projects.”
-- Dan Yeh
AUG. 24
What We’re Reading: Aug. 24
Wells Fargo, expecting a rebound in the commercial mortgage-backed securities (CMBS) market, is adding personnel in anticipation of increasing commercial loan originations and securitization deals, according to Bloomberg.
“Wells Fargo added more than 20 bankers and support personnel during the past three months to increase loan originations and bundle them into CMBS, said Ed Blakey, who’s leading the effort with John Shrewsberry. Wells Fargo anticipates selling bonds, though the executives declined in an Aug. 16 interview to give a date.
“‘We believe there is going to be a resurgence of CMBS, and we are investing in anticipation of it,’ said Blakey, head of commercial-mortgage lending and servicing. ‘Our pipeline is growing and we intend to be a leader of this market.’
“Wells Fargo is pushing ahead in a market Wachovia controlled before it reported more than $2.1 billion of losses tied to CMBS in 2007 and 2008. Wachovia was the No. 1 underwriter from 2005 to 2007, with $81 billion of commercial mortgage-backed bonds, data compiled by Bloomberg show.”
-- Dan Yeh
AUG. 16
See You Next Week
Dan Yeh is on vacation until Aug. 23. Posts will resume then.
-- Ivanna C. Sukkar
AUG. 13
What We're Reading: Aug. 13
BankUnited, which was one of 2009’s largest bank failures and a group of investors acquired, has filed for an initial public offering 15 months later, according to Bloomberg.
“BankUnited is planning an initial public offering 15 months after the Florida lender collapsed and was acquired by investors including Carlyle Group and WL Ross & Co., according to people with knowledge of the matter.”
-- Dan Yeh
AUG. 12
What We're Reading: Aug. 12
Innkeepers USA Trust, which filed for bankruptcy last month without attempting to work out its loan with the servicer, could set a dangerous precedent for other underwater commercial mortgage borrowers, according to the Mortgage Bankers Association.
"'This is the first loan of its size where the borrower has proactively filed for bankruptcy rather than making a good faith effort to work out the loan with the special servicer,' Royal Bank of Scotland said in its report, Innkeepers Bankruptcy Potentially Precedent Setting. 'We therefore believe the proposed bankruptcy may set a precedent for other underwater borrowers representing billions of dollars in CMBS loans.'"
-- Dan Yeh
AUG. 12
As Equity Strengthens, Medical Properties Stand Out
In our Aug. 5 post, we looked at average debt-service-coverage ratios (DSCRs) for niche commercial properties. This week, we look at average loan-to-value ratios (LTVs) for the same subset of properties.
The graph below displays commercial properties — excluding the four major property types — with the lowest average LTVs during this past first and second quarter on Scotsman Guide Loan Post:
|Medical (hospital/clinic)|Automotive (gas station/car wash)|Commercial building lot|Church|Office condo|Gas station|Restaurant|Mixed-use|1:||10%|20%|30%|40%|50%|60%|70%&chco=4E387E,00FF00&chdl=First quarter 2010|Second quarter 2010&chbh=a&chdlp=b&chg=14.29,10,2,5)
Land, which had the highest average DSCR of all commercial niche properties in our Aug. 5 post, also had the lowest average LTV in the most recent quarter. This is likely a reflection of strict underwriting requirements for this property type.
Leisure properties had the second-lowest average LTV. Given that the economic recovery appears to be slowing, this could be a reflection of the cautionary environment around these types of properties. As a recent example, we highlighted The Wall Street Journal article on the distressed sale of the famed Sea Island resort in our Aug. 11 post.
Medical properties had the largest decrease in average LTV from this past first quarter to second quarter. Medical properties also have appeared several times in our past lists of commercial niche properties with high average DSCRs, most recently in our April 29 post. This seems to indicate that these properties perform well in uncertain commercial real estate environments.
Other property types appearing on the low-LTV and high-DSCR lists this past quarter include churches, gas stations, restaurants and mixed-use properties. Thus, as
commercial megadeals gone bad dominate headlines, brokers can still find lending opportunities.
-- Dan Yeh
AUG. 11
What We're Reading: Aug. 11
Sea Island, the famed Georgia resort, is being sold to investors Oaktree Capital Management LP and Avenue Capital Group for less than $200 million in cash, causing its creditors to write down $340 million in debt, according to The Wall Street Journal (subscription required).
"As part of a pact expected to be announced on Wednesday, funds managed by Oaktree Capital Management LP of Los Angeles and Avenue Capital Group in New York have agreed to pay $197.5 million in cash for Sea Island. Under the deal, Sea Island also is expected to seek bankruptcy protection on Wednesday.
"The 84-year-old resort is famed for its Cloister hotel, four golf courses, exclusive clubs, a private development called Ocean Forest Golf Club, and hosting a Group of Eight summit in 2004. Sea Island hit a financial wall when it couldn't repay debt taken on by Bill Jones III, the company's CEO and the fourth generation of his family to lead Sea Island, as part of a $395 million renovation and expansion in 2006 and 2007.
"The deal shows how some banks are increasingly willing to get rid of distressed assets at a steep loss as they slog through their commercial real-estate problems. Many financial institutions have been reluctant to sell troubled loans and foreclosed property to preserve capital while values have plunged.
"Sea Island's sale and bankruptcy will cause a group of creditors including Bank of America Corp., the Bank of Scotland unit of U.K. bank Lloyds Banking Group and Synovus Financial Corp., a regional bank based in Columbus, Ga., to relinquish $340 million in loans. The lenders approved the sale Friday, and a federal bankruptcy-court judge in Brunswick, Ga., is expected to decide how they will divide the $197.5 million in cash proceeds from the sale."
New Jersey mega-mall Xanadu, the $2 billion mall that was going to have an indoor ski slope and a Ferris wheel, is being taken over by lenders from Colony Capital LLC, according to Bloomberg.
"Colony, led by billionaire Thomas J. Barrack, and investors including Dune Capital Management LP took over development from Mills in 2006 after the developer ran out of money. The group agreed to invest $500 million and arrange $1 billion in financing. Building stalled after Lehman Brothers Holdings Inc., which provided financing for the project, filed for bankruptcy in September 2008.
"Lehman's bankruptcy left lenders unable to meet obligations to the developers, the Colony group said in its statement. The group agreed to pursue a loan restructuring, and were willing to invest 'significant new capital,' it said."
-- Dan Yeh
AUG. 10
What We're Reading: Aug. 10
According to recent remarks from U.S. Department of the Treasury Assistant Secretary Michael S. Barr, the government is planning on increasing banks' capital requirements, restricting their ability to pay dividends or buy back stock and improving the quality of capital that banks hold.
"Internationally, we are working to raise capital requirements so that financial firms can withstand future crises as severe as the one we have just gone through, and do so without government support. In the Basel III negotiations, we are pushing hard to set minimum capital ratios at a level that will represent a significant increase in firms' requirements. These new requirements include the creation of a capital conservation buffer above the minimums, which if breached will restrict firms' ability to pay dividends or buy back stock. Such restrictions will help shore up a firm's capital base before it reaches a point of no return.
"Not only are we raising the ratios, but just as importantly, we are raising the standards on the quality of capital that underlie them. The new capital requirements will focus on common equity, excluding other liabilities that did not act as a buffer to absorb losses in the crisis. There will be strict limits on minority interests, as well as on the aggregate contribution of investments in other financial institutions, mortgage servicing rights and deferred tax assets.
"In addition to increasing the quality of the capital that firms hold, we are increasing the capital required for banks' riskiest activities, such as their trading positions and their counterparty credit exposures. Capital calculations for trading exposures will now have to be based on stressed market conditions, and the charges for securitization exposures will be increased substantially. In both derivatives and secured lending transactions, firms will now also be subject to a capital charge for losses associated with a deterioration in the credit worthiness of their counterparties.
"Under Basel III we will also be introducing a new, internationally applied, leverage ratio requirement that, for the first time, includes firms' off balance sheet commitments and exposures."
-- Dan Yeh
AUG. 9
What We're Reading: Aug. 9
Hedge fund Pershing Square Capital Management LP and Winthrop Realty Trust are teaming up to purchase $300 million in defaulted mezzanine loans on New York City's Stuyvesant Town-Peter Cooper Village apartments and will begin foreclosure proceedings on the property, according to Bloomberg.
You might recall that Stuyvesant Town-Peter Cooper Village was one of the decade's largest commercial real estate deals.
"Stuyvesant Town's future was thrown into question in January after Tishman Speyer Properties LP and BlackRock Inc. missed payments on a $3 billion senior mortgage. Bank of America Corp. and special servicer CW Capital Asset Management LLC have sought foreclosure on behalf of creditors of that loan. Pershing and Winthrop are seeking to take control of the property and convert the apartments to co-ops, according to the statement."
-- Dan Yeh
AUG. 6
What We're Reading: Aug. 6
Colony Capital LLC may lose control of Xanadu, a $2 billion shopping mall in New Jersey, after taking control of the project from developers and sinking $500 million into it, according to Bloomberg:
"Xanadu's lenders, including Credit Suisse Group AG, Capmark Financial Group Inc. and an affiliate of Fortress Investment Group LLC, plan to take over development by Aug. 9 after rejecting restructuring offers, said the people, who asked not to be identified because the talks are private. The developers, creditors and state officials are meeting today to discuss a handover, one of the people said.
"Colony and investors including Dune Capital Management LP took over Xanadu from Mills Corp. in 2006 after the developer ran out of money. The group agreed to put $500 million in the project -- designed to feature an indoor ski slope, Ferris wheel and skydiving facilities -- and arrange $1 billion in financing. A lender takeover would be a setback for Colony, a real estate- focused private equity firm that has invested $45 billion. Santa Monica, CA-based Colony is also seeking to keep control of bankrupt Station Casinos Inc."
-- Dan Yeh
AUG. 5
What We're Reading: Aug. 5
Jobless claims increased by 19,000 to reach 479,000, instead of the expected 453,000, for the week ending July 31, according to MarketWatch:
"After falling steadily last year, state jobless claims have flattened out. They have hovered above the 450,000 range through the first seven months of 2010, reflecting sluggish hiring trends in the U.S. Claims are 5.5% higher compared to the end of 2009.
"The four-week average of initial claims -- a better gauge of employment trends than the volatile weekly number -- rose by 5,250 to 453,250, according to government data.
"Claims data for July is usually distorted by summer shutdowns at auto plants, but a Labor official suggested the latest data was not affected by the industry's annual retooling."
-- Dan Yeh
AUG. 5
Land Attracts Investors
Now that we have examined the four major property types, let's look at which niche commercial properties performed well in the most recent quarter. Below is a table of the properties with the highest average debt-service-coverage ratios (DSCRs) in this past first and second quarter on Scotsman Guide Loan Post:
Land and church properties were among the property types with the largest average-DSCR gains this past second quarter. Average DSCRs for land increased by 0.18; this likely was buoyed by increasing investor interest in the asset class earlier this year, as this
Reuters article points out. We have highlighted church properties several times, most recently in our
July 1 post as one of the most-popular property types among lenders.
Properties with the largest DSCR declines this past second quarter included restaurants and single-tenant buildings. Restaurants likely were a victim of the slowing economic recovery in the most recent quarter, while single-tenant buildings' deterioration was likely magnified because of these properties' concentrated nature.
As we saw in our Aug. 4 post, high-DSCR and low loan-to-value properties are still in strong demand. As such, commercial mortgage originators should be mindful of these trends.
-- Dan Yeh
AUG. 4
What We're Reading: Aug. 4
The innovative structure for Goldman Sachs and Citigroup Inc.'s upcoming commercial mortgage-backed-securities (CMBS) offering is drawing strong interest from investors, according to Reuters. Or perhaps investors are attracted to the conservative criteria that were used to underwrite the commercial mortgages -- the deal's average debt-service-coverage ratio (DSCR) is 1.88, and its average loan-to-value ratio is 53.7 percent.
"The new CMBS will be sold with an average loan-to-value ratio of 53.7 percent -- more conservative than issues during the real estate boom. The debt-service coverage ratio of 1.88 is also safer than older issues sold at levels that could not meet routine debt payments without help from interest reserves."
Lehman Brothers Holdings Inc., now in bankruptcy, is putting more money into commercial real estate, according to The Wall Street Journal (subscription required):
"Since the investment bank's collapse in September 2008, the firm overseeing Lehman's bankruptcy has reinvested more than $1 billion in apartments, office buildings and other commercial property already owned or financed by Lehman. Those properties, located from Austin, Texas, to New York to Washington, faced varying levels of distress.
"Lehman also has spent nearly $1 billion to pay off partners and creditors and reach other settlements that resulted in the return of real-estate assets to the firm.
"By piling more cash into these deals, executives at Alvarez & Marsal, the advisory firm overseeing Lehman's bankruptcy proceedings, are hoping to salvage the maximum amount from the $14.4 billion of commercial real estate on the bank's books."
-- Dan Yeh
AUG. 3
What We're Reading: Aug. 3
Goldman Sachs offers a new structure for an upcoming commercial mortgage-backed-securities offering that allows AAA holders to appoint the special servicing firms on the mortgages, according to Bloomberg:
“The $788.5 million offering gives holders of the safest portion of the transaction, or about 81 percent of the deal, the power to direct and replace firms hired to handle loans that become troubled, according to marketing documents distributed last week to investors. Typically, that right is held by investors who buy the smaller, riskiest slice.”
Not everyone is convinced that this will eliminate conflicts of interest, however:
“The offering being marketed by Goldman Sachs and Citigroup Inc., the fourth sale backed by newly originated commercial mortgages this year, uses an ‘innovative structure,’ according to Andy Solomon, a managing director at Angelo Gordon & Co. with $23 billion in assets under management. It still doesn’t eliminate potential conflicts of interest, he said in an interview.
“‘I don’t see any reason to believe that AAA holders would influence special servicers to make better decisions for all bondholders as a group,’ said Solomon, who is based in New York and oversees $4 billion in commercial-mortgage-backed bonds. ‘These are the same folks that wanted to liquidate loans at fire sale prices into a no-bid market two years ago.’”
-- Dan Yeh
AUG. 2
What We're Reading: Aug. 2
A bill from U.S. Rep. Walt Minnick, D-Idaho, that would help community banks free up capital is gaining traction, according to the Idaho Statesman. The bill deals with the issue of too much commercial real estate exposure on smaller banks’ books:
“Many of those smaller, independent banks have been flagged by regulators for having too much commercial real estate debt on their books, Minnick said. At least six smaller banks headquartered or doing business in Idaho are under regulatory supervision for having too much of that sort of debt, and they've been ordered to get rid of it.
“But the market for commercial real estate has dropped 40 percent nationally, meaning that the property often is worth less than the outstanding loans are. As a result, many borrowers have defaulted. And because those commercial real estate assets sank in value, community banks have had to sell them for less than they're actually worth.”
The proposal aims to allow community banks to sell their commercial real estate portfolios to larger banks:
“The bigger banks package the loans as investments. If they're rated high enough, the U.S. Treasury will back them.
“It creates a mechanism for banks to get cash for their loans at fair market value and not the distressed prices they're currently seeing, Minnick said.”
For more on House bill No. 5816, click here.
-- Dan Yeh
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