Goldman on Commercial Real Estate

WSJ reports that global shopping center owner Developers Diversified Realty Corp. (DDR) will not be closing the sale of 13 malls to an institutional buyer this month. The buyer is reportedly private equity firm DRA, who walked away from a similar Centro deal in September when the Australian shopping mall giant wouldn’t lower the price. DDR has $930 million in debt to pay back by the end of 2009.

General Growth Properties (GGP) is also furiously negotiating with its lenders to avoid bankruptcy. A $900 million bank loan collateralized by two luxury malls in Vegas was to be repaid last Friday. GGP owns 200 U.S. malls and if it were to collapse, it would be the largest real estate-related bankruptcy filing to date. The Journal relates that Citigroup (C) is the holdout, as it has another 2006 loan to GGP that it wants concessions on before it relents on its share of the $900 million one.

AP reported on Monday what should be good news: That Fitch Ratings said commercial real estate loan delinquencies are down:

Delinquencies on commercial real estate loans fell in November due to lenders allowing more loan extensions than in the previous month… The delinquency rate for commercial real estate collateralized debt obligations, or CDOs, fell to 2.8 percent last month from 3.13 percent in October. That marked the first decline since July.

Will it last? Financials and banks have to choose between unloading commercial real estate loans into a bad market, or extending loans to already struggling companies and increasing risk. Goldman Sachs Group’s (GS) FQ408 Conference Call shows commercial loans had a huge impact on their bottom line this quarter:

During the year, the MSCI was down 45%, with a 34% decline occurring during the fourth quarter alone. Certain high-quality leveraged loans decreased in value by more than 25 points during the quarter.

Commercial real estate assets were under particular pressure, with the CMBX AA Index off by nearly 60%.

Goldman is unloading at loss:

We continued to reduce concentrated risk positions, including leverage in real estate related loans. These asset classes represented 57% of tangible common equity at year end, down from 85% in the third quarter and 224% at year end 2007. Legacy leveraged loan exposure now stands at $7 billion, down from $52 billion at its peak last year. Our commercial real estate portfolio declined by approximately 25%, to $10.9 billion in the fourth quarter alone.

Mortgage revenues declined sequentially due to continued asset price weakness, particularly in our commercial real estate portfolio, where we generated net losses of $700 million.

Full year mortgage results included approximately $1.7 billion of net losses on residential mortgage assets and $1.4 billion of commercial mortgage loans and securities.

Our real estate principal investing portfolio generated $961 million in losses due to valuation adjustments that reflect higher cap rates and weaker fundamentals in commercial real estate.

In the larger context:

Q: Across most asset classes there's been very much of a liquidity freeze and, you know, a $200 billion or so decline in balance sheet, it seems like a big number relative to what you could move into market. Can you maybe frame it in that perspective?

A: Sure. Yes, it is a big number. Most of the assets were more liquid rather than less liquid because there wasn't much of a market for the less liquid, although we did sell some of our leveraged loans. We did sell some of our commercial real estate, which seemed big in the context of how much of those we have but small in the context of $200 billion. So more of it was more liquid, interest rate or credit or other types of assets; our prime brokerage balances were down as well, so that contributed to it. So it was really across all of those asset classes.

Q: Is your deleveraging done and, if not, how much more do you have?

A: You know me well enough to know that I will not say anything is done forever or that we're finished... Our expectation and our hope is that we'll grow, not shrink. We think that we put ourselves in a position with the balance sheet reductions, with the capital increases, with the cash increases, to take advantage of opportunities as we see them. And so, if we see some good opportunities, we will take advantage of them, and we would hope to grow.

Now, I'm a little hesitant, because a month and a half from now, if the world takes a really, really big leg down, we might change our mind and decide the prudent thing is to shrink. But as we sit here right now, that's not our anticipation.

Comments

[Moon Kil Woong:]

I think they should ask them what they are doing with the CDS premiums they booked as profit even though it's anticipated AIG and others will never be solvent enough to pay out. Or about their own CDS book. They still remain off book. We wanna see them. Unfortunately, the second they showed them to the world they'd be bankrupt. A little problem. And also if you read the date all the CDS are written they were all written under the tenure of our now glorified Treasury had Hank Paulson.

And they wonder why everyone is so cynical these days. So we know Goldman's view on the real estate market I guess. We only sell what's liquid because what's illiquid will bankrupt us.

2008 Dec 17 05:28 AM