Source: Globe Street

Investors More Bullish on RE Distress

Investors More Bullish on RE Distress

January 27, 2010 By: Paul Bubny


EW YORK CITY-Real estate has gone to the head
of the class as far as investors in distressed assets are concerned. Forty-one percent of respondents to the fifth annual North American Distressed Debt Market Outlook Survey released Tuesday say
they believe real estate represents the best sector for opportunities this year. That’s more than any other sector, and represents a sharp rise from the survey released a year earlier, when only 19% of respondents allocated investment to commercial and residential real estate opportunities.
At least part of the explanation for the rise in real estate’s standing in the 2010 survey is pretty obvious, thinks Mission Capital Advisors’ David Tobin: the outlook today compared to a year ago, when the collapse of Lehman Brothers was fresh in everyone’s minds. “Looking back into the fourth quarter of 2008, it looked very ugly,” Tobin tells “At the same time, prices on fixed-income assets, meaning CMBS and RMBS, were in free-fall. Nobody could predict the bottom, and all they could see was the giant explosion back in September ‘08.”
Today, says the Mission Capital principal, “we’re in a lower interest rate environment than we were. There seems to be a lot more liquidity in the system, and spreads for riskier assets have tightened dramatically compared to a year ago.” Tobin adds that there’s “a little more visibility on the horizon with regard to job losses or growth, vacancy increases or declines and economic activity.”
Even so, Tobin doesn’t think we’ve found a bottom yet, although “certain assets have.” That view is shared by Ron Greenspan at FTI Consulting, one of the firms which commissioned the survey from Debtwire. “Commercial real estate and much of the debt attached to it have fallen in value to the point of being tempting for value players and distressed investors,” says Greenspan, senior managing director at FTI, in the report accompanying the survey. He adds that in most markets, commercial real estate’s down cycle “still has a way to go. The unwillingness of traditional real estate finance providers, namely large regional banks, to increase commercial real estate exposures on their books, and the very limited ability to securitize new loans, amplify the potential refinancing and default crises ahead. But this vacuum is also starting to attract private investment capital into the space.”
Given that, Tobin says, “You can go into a market like this and say, at
this price per pound, I’m comfortable owning that asset even if rents fall another 10%, 15% or 20% and occupancies decline by another
5% or 10%. He says that in contrast to the investors that often predominated during the market peak, today’s would-be buyers need to not only know what they’re getting into but also be aware of their own appetites for risk.
“You have to have geographical comfort because you know the market very well, or you have long-term patient capital comfort in that if the market were to move further downward for any length of time, you could ride it out,” Tobin says. “The investors in 2010 and beyond are going to be very different from the investors we were all very familiar with during the 2000s.”
The fact that the market overall has not reached bottom could steer investors to particular asset classes, Tobin says. “The two groups where current values are most easily ascertainable are multifamily and hospitality, because they have the shortest lease terms-a day for hospitality, a year or two for multifamily,” Tobin says. “Not surprisingly, those two classes have the highest CMBS delinquency. Investors can more easily understand value in these classes, because it’s easier to see how something is operating. It’s less apparent in office or industrial, because you don’t necessarily have clarity on the tenants underlying business.”
Yet the forces that affect the fortunes of lodging and multifamily properties may be “even more macro” than those for other sectors, Tobin says. For example, “what are jobs and unemployment doing to multifamily in any given city? What is tourism business doing for hospitality in a given area? I guess you can pick your risks; if you want to bet that job losses are going to end, you’ll go for multifamily. If you want to bet that tourism and business activity are going to strengthen, you might pick hospitality assets in a given market, or look at airport hotels, which are driven directly by the volume of passenger traffic going through the airports.”
That outlook is in keeping with the Debtwire report, which cautions that investors will have to do more “prospecting” this year. It was commissioned by FTI, Bingham McCutchen and Macquarie Capital (USA) Inc., and is based on responses from 100 distressed debt investors who were interviewed in November and December of ‘09.

Download icon PDF File 53.52 KB Download
Source: Daily Business Review

Special Report: Bankruptcy & Auctions

Special Report: Bankruptcy & Auctions

Equity capital new king of commercial real estate

January 21, 2010 By: Jeffrey H. Cannon


group of investors led by Starwood Capital Group
and private equity firm TPG, formerly Texas Pacific Group, beat out seven rivals to win Chicago-based Corus Bank’s bankrupt $5 billion condo portfolio with a combined bid of $2.77 billion.
Starwood’s up-front stake was only $554 million, and hands the company and its investor partners 112 construction loans, more than two-thirds of which are in default or foreclosure. As a result, Starwood Capital quickly emerges as the condo king of South Florida and the once-hot and now-beaten markets like Las Vegas and California.
To sweeten the acquisition deal, the Federal Deposit Insurance Corp. provided up to $1 billion over the next five years for any unfunded commitments, construction overruns and carrying costs for bank- owned inventory, at an effective 0 percent interest rate, and took a
60-percent equity stake in the Starwood partnership. Investors would have to pay off any of that debt plus $1.38 billion in debt issued by the FDIC before they can begin collecting on their investment.
The bid was 20 percent higher than competing offers, and many speculate whether Starwood overpaid for the transaction. Is this an opportunity for equity capital to take advantage of the market or a case of too much equity chasing a potential yield? Time will be the arbiter. But the last time such opportunities existed — almost 20 years ago — such transactions proved to be significant windfalls. The Miami Tower built for CenTrust and purchased by Winthrop is one such example.
The Corus transaction illustrates the opportunities equity capital can uncover and discover in today’s “frozen” debt markets as the illiquidity first experienced in 2008 transitioned into 2009. The big names in commercial real estate were not the pension funds, real-estate investment trusts or life insurance companies that invested in and originated billions of dollars in commercial real-estate transactions before 2008 and 2009. They were not the large investment banks and commercial banks such as Goldman Sachs, JPMorgan Chase, Bank of America or Wells Fargo, which originated billions of dollars in commercial loans and mortgage back securitizations.
The names being spoken by the real-estate professionals today are DebtX, First Financial Network, Carlton Exchange, Eastdil Secured, Garnet Capital Advisors and Mission Capital Advisor.

Redeploying Funds

These names, unfamiliar to anyone not directly involved with
commercial real-estate debt markets, have come to prominence as auction houses and loan sale advisers help regional and community banks staunch portfolio losses and return desperately needed capital back to the institutions’ balance sheets. In addition, they are the conduit that has allowed the FDIC to regain liquidity from the sale of loans acquired from failed banks and thrifts. This, in turn, permits the organization to redeploy funds to systematically and efficiently shutter insolvent financial institutions without insured depositor loss. The FDIC has been adding to its stable of note-sale advisers and recently — perhaps ominously — contracted with one for a five-year term.
While this isn’t new — many of these names established themselves in the days of the savings-and-loan crisis with the Resolution Trust Corp.’s substituting for the FDIC — the sale of loan notes and real estate-owned assets through the use of sealed bids and auctions has provided a baseline for the valuation of commercial real estate. The difference now is equity capital has substituted for debt capital, forcing prices down to allow investors to realize the necessary yield to compensate for risk.
The expectation that the commercial real-estate market will enter a freefall akin to the housing market has not presented itself; neither has the expectation by lenders that the market will make a quick recovery.
The result is that the fundamentals of sound investing will prevail — location, location, location, with manageable leverage and proven and realistic expectations of cash flow. Commercial real estate trades on its ability to generate cash flow, and the returns investors require determines its value.
As the recession worsened and 150 Ponzi schemes representing every state were uncovered in 2009 alone, investors today are seeking realistic returns on capital that are tangible and have straightforward investment strategies. Commercial real estate deals that work on a realistic return on investment coupled with a determination of a return of investment will provide the benchmark for 2010.
Jeffrey H. Cannon is Greenspoon Marder’s director of real estate services in Fort Lauderdale and is a former South Florida banker.

Download icon PDF File 52.26 KB Download