Posted by: BayAreaComRE | June 10, 2010

Vornado, Cerberus, GE, Blackstone, CMBS – More Restructurings and Losses from the Frothy Boom Times

Many of the high-flying private equity real estate shops, large portfolio investments and REITs are revealing their true colors as the CRE market tries to correct itself, slowly but surely. Most of the transactions currently closing  are generated by trading paper, not assets.

While the overall economy entered into a recession in 2007, commercial real estate did not hit the brakes in investments until 2Q 2008. Even though the economy hit the bottom in May or June of 2009, the commercial real estate has several more quarters before growth, projected by Union Bank’s chief economist to be in 2012.

There has been a headwind for commercial real estate from the exorbitantly priced and liberally financed deals during the boom era. We have highlighted a few deals that caught our attention recently.

Cerberus Capital Management LP, a private equity investment firm whose portfolio includes Albertsons, IAP Worldwide Services, Spyglass Entertainment, also invested in LNR Property, a commercial real estate investor. “LNR is the nation’s largest handler of souring commercial-real-estate loans, a niche business attracting attention from big-name investors such as billionaire Warren Buffett as financial pain sweeps through hotels, office buildings and other commercial real estate.”

Vornado Realty Trust, which lost to Cerberus in a bidding battle for LNR in 2004, is poised to get a stake in LNR along with other creditors as part of efforts by Cerberus to restructure the real-estate company’s debt, according to credit-agency reports and people familiar with the situation. Vornado vs Cerberus: LNR, Round 2 (via WSJ).

“Assets will soon trade a plenty (just look at the volumes flooding into special servicing),” he wrote.” Steven Roth, Vornado’s founder and chairman. Vornado recently stopped paying on the Cannery Loan in the waterfront of San Francisco. “Vornado wants to keep the property, the person said. But, like many owners of distressed property, the company has defaulted as a strategy to restructure the debt, he said. “It was a calculated move,” the person said. Cannery Loan Is in Default

GE Capital, the financing arm of GE, plans to divest half its real estate assets, totaling up to $40 Billion. “What we learned,” Mike Neal, chairman and CEO of GE Capital said, “we were bigger than we should have been in real estate.” Adding that, “We have a plan to make the business smaller.”

GE Capital plans to shrink its commercial real estate portfolio from around $80 billion where it is now, “down to about $40 billion to $50 billion,” he said.  “Bigger Than They Should’ve Been,” GE Capital To Cut $30 Bil.-$40 Bil. in Real Estate. (via CoStar)

UBS invests substantially all of its capital from its Real Estate Opportunity Fund III, L.L.C., in Blackstone Real Estate Partners fund, which acquired EOP (Equity Office Properties) at the height of the market and now took on Hilton Hotels’ Debt. Blackstone’s value has plummeted since the deal, and the fund has sold off approximately $27 billion from the EOP portfolio.

In another Wall Street Journal article, ‘Worst Is Yet to Come’ In 2007, deals financed in the boom from CMBS have endured tremendous loss, and CMBS investors may lose more than ever from their investments.

“For CMBS,at the height of the commercial real-estate boom, Credit Suisse Group packaged 250 mortgages into bonds and sold them to investors in a $3.3 billion issue of commercial mortgage-backed securities.”

The deal, needless to say, went sour.

“That CMBS issue has now achieved a dubious distinction: The deal is expected to see a 15% loss, the highest potential loss for any 2007 CMBS issue, according to Fitch Ratings. Overall, the projected loss rate on all CMBS issued that year in the U.S. is about 10%, Fitch said.”

“But other bad news for CMBS investors also is beginning to surface. Historically, when mortgages that were bundled into CMBS run into problems and are foreclosed on or sold, investors have lost, on average, 37% of their principal. But according to a study to be released by Fitch on Wednesday, that figure, known as the “loss-severity rate,” averaged 57% last year, an all-time high. The rate will continue to exceed the historical average, through 2011, Fitch projects.”

An article in the Wall Street Journal last month contested GE’s Mike Neal claim that a slew of assets will be hitting the market, as least private equity funds don’t see it.

“A slew of private-equity funds, including ones run by Morgan Stanley, Rockpoint Group LLC and Chicago developer John Buck’s firm, have taken the unusual step of allowing investors to exit their funding commitments when the funds’ investment period expired. A total of 19 private-equity real-estate funds have either returned or plan to return more than $6 billion of capital to investors, said Real Estate Alert, a trade publication. Others have sought to extend their investment periods or change their investment mandates in light of the short supply.”

The lack of supply is mostly attributable to the low interest rates. Union Bank’s chief economist, Kei Matsuda, says as long as inflation remains low, the government is not under pressure to raise the interest rates. There are an estimated $500 billion dollars of loans maturing in the next two to three years that are in default. The low interest rates may be creating a bubble in the capital markets, but as long as more loans continue to be serviced, we will avoid a double dip recession and begin seeing growth in late 2011 or 2012. Most deals are being done on paper. Loan servicers have surfaced as a niche market, emerging from the bad loans and opportunities to refinance and restructure, and if Warren Buffett invests in it, we know it’s a good sign!

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