Some CRE Owners Find Rescue Capital for Troubled Assets

Recent transactions suggest that owners are finally finding common ground with lenders on property valuation, allowing them to dodge foreclosure and recapitalize or restructure their debt -- at least in those transactions involving high-quality assets in prime locations - and buy a fresh start in the gradually strengthening economy.

Tishman Speyer Properties LP pulled off two such agreements with lenders this month -- much-needed wins by a commercial real estate firm that took on quite a bit of debt from acquisitions made during the real estate boom.

Tishman and its equity partners, staring down the barrel of a foreclosure auction by junior debt holder Brookfield Properties Corp., successfully completed a $700 million capital infusion and retired the debt on its portfolio of 28 Washington, D.C.-area office buildings.

Tishman this month also reached an agreement to restructure debt secured by five downtown Chicago office properties it acquired from Blackstone Group LP in 2007. The deal injects fresh capital into the portfolio, "enabling ownership to fulfill all existing financial obligations and fund costs related to future leasing and operation" of the buildings.

Tishman did not disclose the capital position it took in the recap, or the level of financial involvement by its equity partners. Those partners include investment company SITQ, the real estate investment subsidiary of Caisse de depot et placement du Quebec of Canada. Tishman said in a prepared statement that "retiring the debt deleverages the portfolio, creates additional liquidity and puts ownership in a strong position to execute its long-term business plan."

The company said it will continue to be the general partner, property manager and leasing agent for all 28 properties, which total 6.3 million square feet and are 88% leased.

What was at work here was the quality of the properties. This is a great portfolio in the best market in the country -- some people say the best in the world. If there was ever going to be a workout that was doable, this was the one. It had all the right things going for it."

By most accounts, institutional holders of commercial mortgage debt are just at the very beginning of the lengthy process of unwinding their portfolios of loans to highly leveraged borrowers for property bought at the top of the market in 2005-07. Property owners are expected to face increasingly tough decisions about whether to restructure their debt and retain ownership of their properties or hand back the keys to lenders. Lender syndicates that own the growing mass of maturing CRE loans will eventually need to either exit or restructure that debt, which analysts say will lead to upside return opportunities for patient and well-capitalized investors. The potential flood of sellers will eventually reach special servicers of delinquent commercial mortgage-backed securities (CMBS) loans.

Recaps and loan restructurings where investors contribute capital in exchange for a reduced senior loan principal balance and a preferred equity position can provide investors with a lower cost basis and a share of the upside returns. These types of restructurings are complex transactions that will require investors to have substantial capital to participate in larger deals, as well as relationships with both lenders and borrowers. Property pricing may not be recovering to the degree suggested by CRE indexes, and lesser quality assets in the bifurcated distressed property market may be difficult to sell. Lenders with stronger balance sheets, however, do seem more willing this year to entertain recapitalization deals.

Early in the financial crisis, borrowers held more power in working out debt with lenders because banks were busily trying to scour their balance sheets and unwilling to foreclose on commercial property. The pendulum swung in favor of lenders last year as at least the money-center banks gained strength.

In 2010, the pendulum has swung back a bit toward the borrower -- if the borrower is in a position to take advantage of opportunities that are coming as well-capitalized lenders move through their inventory of workout assets and make commercially sensible decisions about what assets to take back, what to modify and what to sell at a discount.

Source: Costar

CRE Prices Increase 1.7% in April?

The Moody’s/REAL All Property Type Aggregate Index measured a 1.7% price increase in April. This price increase follows two consecutive months of slight price declines. The index currently lies at 113.10 and has fallen 16.4% in the past year. Prices have remained choppy since the low of 107.98 that was recorded in October 2009. Since that low, prices have rebounded 4.7%. The peak of the index occurred in October 2007 and prices are currently 41.1% below the peak.

However, it is important to note a couple of things in this regard. First, transaction volume is still very low and without higher volumes it is difficult to conclude that prices have stabilized. The retrenchment of commercial real estate markets over the past two or three years has been orderly for the most part, without an enormous flood of properties hitting the market all at once. If banks and servicers were to decide suddenly to unload their distressed properties, the resulting supply of struggling properties could cause another leg down in prices. Second, even if a bottom forms at current levels, the market could bump along for several quarters as weakening fundamentals (for some property types) and the specter of interest rate increases in the future conspire to hold down values. Anemic macroeconomic growth, stubbornly high unemployment, and the impact of the spreading sovereign debt crisis in Europe on the US recovery threaten to delay any sustainable upturn in US commercial real estate prices.

The number and volume of repeat-sales transactions fell in April, with 114 repeat sales and a total balance of just under $800 million. While the number of sales declined only slightly from last month, when 127 repeat sales took place, sales volume is down by more than 50% from last month. The average repeat-sales size dropped from just over $13 million per sale to less than $7 million per sale.

Expect a Wave of CRE Bankruptcies

From Reuters:

Expect another wave of commercial real estate bankruptcies in the United States, particularly in the hospitality, retail and office building sectors, said a top bankruptcy attorney for Venable LLP.

"I think there will be another wave of large real estate investment trust (REIT) and large real estate bankruptcies" over the next year, Gregory Cross, head of the bankruptcy practice at law firm Venable LLP, said at the Reuters Global Real Estate and Infrastructure Summit in New York last Tuesday.

"There are the perfect dynamics for a cram down in the marketplace," which could spur companies to file for Chapter 11, said Cross, who has worked on the real estate bankruptcies of mall owner General Growth Properties Inc. and hotel chain Extended Stay America Inc.

"If you do a cram down plan, you're looking for a low interest-rate environment and low valuation. It seems to be the perfect time for those kinds of bankruptcies. So far there have not been as many as I would have forecast."

Cram downs allow companies to reduce the principal on an outstanding mortgage to the current value and cut interest rates.

Foreclosures Over 300,000 for 15th Straight Month

RealtyTrac reports residential foreclosure activity over 300,000 for the fifteenth straight month as REOs set a new monthly record. Even as foreclosure filings declined marginally, by 3% in May, to 322,920 (1% higher YoY), bank repossessions (REOs) hit a record monthly high for the second month in a row, with 93,777 properties repossessed by lenders. It appears banks are finally starting to pick up backlogged housing currently in foreclosure. And as this REOed inventory goes back on the market, the so-called shadow inventory will tide will wash over the markets and flood existing artificially propped up supply levels, pushing prices much further down. James J. Saccacio, CEO of RealtyTrac confirmed this observation: "The numbers in May continued and confirmed the trends we noticed in April: overall foreclosure activity leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months. Defaults and scheduled auctions combined increased by 28 percent from 2007 to 2008 and another 32 percent from 2008 to 2009 — creating a build-up of delayed bank repossessions. Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed.”

Housing is about to take fresh new turn lower.

More from RealtyTrac:

A total of 96,462 U.S. properties received default notices (NOD, LIS) in May, a 7% decrease from the previous month and a 22% decrease from May 2009. It was the fewest default notices since November 2008 and down 32% from the peak of 142,064 default notices in April 2009.

Foreclosure auctions (NTS, NFS) were scheduled for the first time on a total of 132,681 U.S. properties, a decrease of 4% from the previous month and down less than 1% from May 2009. The May 2010 total was down 16% from the peak of 158,105 scheduled auctions in March 2010.

Bank repossessions (REOs) hit a record monthly high for the second month in a row in May, with a total of 93,777 U.S. properties repossessed by lenders during the month — an increase of 1% from the previous month and an increase of 44% from May 2009. All 50 states posted year-over-year increases in REO activity.

Nevada, Arizona, Florida post top state foreclosure rates in May with one in every 79 housing units receiving a foreclosure filing. Nevada continued to document the nation’s highest foreclosure rate despite a nearly 12% decrease in foreclosure activity from the previous month and a 16% decrease from May 2009. The state’s foreclosure rate was more than five times the national average.

Arizona foreclosure activity increased less than 1% from the previous month and was down nearly 5% from May 2009, but the state posted the nation’s second highest foreclosure rate for the second month in a row. One in every 169 Arizona properties received a foreclosure notice during the month — more than twice the national average.

One in every 174 Florida properties received a foreclosure notice in May, the nation’s third highest foreclosure rate, and one in every 186 California properties received a foreclosure notice in May, the fourth highest state foreclosure rate.

Foreclosure activity in Michigan increased nearly 6% from the previous month and was up 46% from May 2009, helping the state post the nation’s fifth highest foreclosure rate — one in every 223 Michigan properties received a foreclosure filing in May.

Other states with foreclosure rates ranking among the top 10 in May were Georgia, Idaho, Illinois, Utah and Maryland.

Metro foreclosure hot spots continue to post annual declines with a 1% increase in foreclosure activity from May 2009. Vallejo-Fairfield, Calif., was the only metro area with a top-10 foreclosure rate to post an annual increase in foreclosure activity. One in every 101 Vallejo-Fairfield properties received a foreclosure notice in May, the fourth highest foreclosure rate among metropolitan areas with a population of 200,000 or more.

All other metro foreclosure rates in the top 10 were in cities with declining foreclosure activity on a year-over-year basis: No. 1 Las Vegas was down nearly 18%; No. 2 Merced, Calif. Was down 7%; No. 3 Modesto, Calif., was down nearly 28%; No. 5 Cape Coral-Fort Myers, Fla., was down nearly 19%; No. 6 Stockton, Calif., was down 33%; No. 7 Riverside-San Bernardino-Ontario, Calif., was down nearly 29%; No. 8 Bakersfield, Calif., was down 19%; No. 9 Reno-Sparks, Nev., was down nearly 18%; and No. 10 Phoenix was down nearly 9%.

CMBS Delinquency Rate Jumps to 8.42% in May

The delinquency rate for commercial real estate loans in commercial mortgage-backed securities (CMBS) continued to move higher in May as the monthly rate of increase has demonstrated remarkable consistency. For seven of the last eight months, the rate of increase in delinquencies has been between 37 and 49 basis points. The only exception was February of this year when the delinquency rate nudged up only 22 basis points.

Overall in May, the percentage of loans 30 or more days delinquent, in foreclosure, REO, or non-performing balloon jumped 40 basis points, putting the overall delinquency rate at 8.42%.

Delinquency level of 8.42% is once again the highest in history of CMBS industry

If defeased loans were taken out of the equation, overall delinquency rate would be 8.96%

The percentage of loans seriously impaired moved up almost in lockstep with the headline number. The percentage of loans seriously delinquent (60 days +, in foreclosure, REO, or non-performing balloon) jumped 41 basis points to 7.55%.

Historical Perspective

Four of Five Major Property Types Show Weakness