Housing Market Tracker - Moody's Downgrades Banks on Commercial Real Estate

Quote of the Day

"There are very disquieting signs that have ominous implications for the next few years." - Richard Anderson, president of the New York Building Congress, said about the commercial real estate market in New York City. (NY Sun, Mar. 3rd)

Commercial Real Estate and Real Estate Investment Trusts (REITs)

Unease Erodes Ambition in Real Estate. "NYC: The number of citywide building permits is expected to drop, public and private funding for projects is drying up, and a stream of multibillion-dollar plans is coming in over budget and behind schedule, with many designs being scaled back or scrapped altogether. Last week, the Metropolitan Transportation Authority said... the first leg of the Second Avenue subway line [cost] had ballooned to $4.35 billion from $3.8B... The planned redevelopment of Penn Station has a budget shortfall of at least $1B... Governor Spitzer plan[s] to scrap the expansion of the Javits Convention Center after cost estimates more than doubled to $5B." (NY Sun, Mar. 3rd)

A Solid Year For Commercial Real Estate. "Central Massachusetts: It might appear that last year was a down year for commercial real estate sales. The top two sales on our 2006 list were $222 million and $135M. By contrast, the top two sale transactions in 2007 were $68M and $63M. But the bottom of this year's list... finishes with sales of more than $8M. Last year, our list of the biggest sales of 2006 was rounded out by sales of less than $2M... This year's largest lease, at more than 490,000-sf, blows [away] last year's top lease of 180,000-sf." (Worcester Business Journal, Mar. 3rd)

Commercial Real Estate Plunge May Be Overdone. "The CMBX index [situation] is not that dire... Fitch Ratings' Commercial Mortgage-Backed Securities Index covering 48,000 loans: Actual delinquencies on commercial mortgage bonds were a tiny 0.28% at the end of 2007... Even if that rate goes up... it's still far from double-digit subprime loan default rates... Derrick Wulf, Dwight Asset Management: There is a lot more "due diligence done on a $100 million office building than a $150,000 subprime loan." Lastly, only 28% of commercial mortgages since 1995 versus 80% of subprime loans are securitized... Losses on those loans can be recognized more slowly by banks and won't create the same capital pressure as subprime losses have." (Charleston Post & Courier, Mar. 3rd)

Is Global Real Estate On The Rebound? Probably Not. "Ernst & Young’s annual state of the global real estate market report: “The situation isn’t likely to ease in 2008.” But: "Capital will continue to flow around the world. The one market likely to attract the bulk of the international cash—the U.S... Sovereign funds investing on behalf of national governments” will continue to pour money in to the markets, ranging “from luxury properties in major markets such as New York and San Francisco, to distressed U.S. assets and emerging market properties.” [Also:] “Knowledgeable, patient investors holding cash are likely to find... bargains, especially in residential land and lots they can hold for the recovery.” (Int'l Herald Tribune, Mar. 3rd)

Deerfield Dumps Dividend Obligation. "Most recent Deerfield Capital (DFR) 10-K: Deerfield suffered an "exacerbated" strain on liquidity during Q1'08... and resulted in the "acceleration of our strategy to decrease investment in AAA-rated non-Agency RMBS and to seek to liquidate other assets to significantly reduce leverage in our balance sheet in an effort to support liquidity needs." DFR dumped $2.8 billion in agency RMBS and $1.3B in non-agency RMBS -- over half of its December 31 balance sheet... Deerfield expects to have a net operating loss carry forward from the asset sales, meaning that there is no dividend obligation." (Patrick Harden in Seeking Alpha, Mar. 2nd)

Mortgage REITs: Ignore GAAP, It's All About the Cash. "Mortgage REITs manage their businesses based on long-term opportunities to earn cash flows. Their common stock dividend distributions are driven by the REIT tax laws and their taxable income as calculated pursuant to the IRS tax code. Their reported results for GAAP purposes differ materially, however, from both their cash flows and their taxable income... GAAP is [useless] for evaluating a mortgage REIT's financial performance. Just by adopting FAS 159 on January 1, RAIT Financial's (RAS) GAAP book value jumps from $6.78/share to $23.35/share, simply by virtue of being able to mark its CDO liabilities to market." (Patrick Harden in Seeking Alpha, Feb. 29th)

Weak Commercial Real Estate Outlook Hurts Some US Bank Ratings - Moody's. "Moody's Investors Service has taken negative rating actions on [several U.S.] regional and community banks...The ratings agency has cut the outlooks of Associated Banc-Corp (ASBC), Associated Bank NA, Bank of Nevada, Susquehanna Bancshares Inc (SUSQ), Western Alliance Bancorporation (WAL) to negative from stable... Moody's said the negative rating actions were based on the potential loss content in the affected banks' commercial real estate portfolios. Moody's also downgraded bank financial strength rating of Amegy Bank National Association, First Commercial Bank (FCHI.PK) and Nevada State Bank to 'C+' from 'B-', [and] placed Fulton Financial Corp (FULT)'s 'B-' BFSR under review for possible downgrade." (Forbes, Feb. 29th)

How to Play REIT Uncertainty. "It's best to stay away from [REITs] that have debt maturities they potentially can't cover. General Growth Properties (GGP) has $2.6 billion of debt maturities coming due in 2008, and $3.2B due in 2009... It has only $221 million available on its $650M revolving credit facility... Fellow mall giant Simon Property Group (SPG) has $1.1B open on its $3.5B credit facility... Simon has $809.7M of debt coming due in 2008, and $1.6B in 2009... [High quality shopping REIT] Federal Realty (FRT) also has a clean balance sheet and has had some of the highest spreads on new leases of any retail REIT in recent years." (The Street, Feb. 29th)

Ex Head Of GE Real Estate Bullish On CMBS. "Michael Pralle, the former head of GE Real Estate: "Pervading fear in the capital markets has driven down bonds backed by commercial real estate loans to levels where they now present an enticing investment.There are already opportunities in real estate debt markets today. Pralle left General Electric Co (GE) in June and became president and COO of JER Partners, a private equity real estate investment management firm... JER buys equity or debt in commercial real estate that looks cheap or in which JER can use its expertise in operating real estate to boost the value... JER is "opportunistic," seeking riskier investments with return rates of 13%-15%." (Reuters, Feb. 29th)

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