News
COME HITHER, DISTRESS
August 18, 2011
| Knock, knock, distress here. Over 150 people joined us to learn about the opportunities at our door during Bisnow’s Distressed Phase II: Secondary Loan Market event at the Harvard Club this morning. Oh, as for the rest of the joke . . . Distress Who? Distress is caught in your door, so open up. I need it for my wedding. |
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| What gets us going in the morning? A cup of joe, a bagel, and a dish of economic commentary, courtesy of Reis research guru Victor Calanog. There’s still distress from the fundamentals side, but vacancy and unemployment have moderated from the blood bath of ’09, he says. Transaction volume hasn’t recovered that much—it’s 80% from the peak, but still better than the 90% we experienced at the trough. Mortgage delinquencies have topped out and are declining, which is somewhat reassuring that distress won’t be as terrible, he points out. But there’s still some more distress from the vintage years of ’05 through ’07, “the days of aspirational underwriting.” |
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| We’re going to see more portfolios come out of the banks, who’ve been living with problem loans for three years and are getting fatigued, says Eastdil Secured managing director Nicholas Seidenberg, joining us from DC. “The past 30 days have put fear in owners,” he points out. Both US and foreign banks will be sellers, and we’ll see more commodity-type real estate since there’s not as much financing available for one-off deals. It's more efficient when in portfolios, but institutional assets in strong markets are better as one-off transactions, he says. |
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| Over the past two or three months, the bid-ask gap has widened again, thanks to economic situations in Europe, Japan, and the US, says Square Mile Capital Management managing principal Craig Solomon. The perspective about financing: pricing should be more muted. Buyers have sharpened their pencils once again, he says, and sellers are surprised. FTI Consulting managing director Glenn Brill adds that the cost of capital is surely going up, which will affect both yield and pricing. |
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| Buying distress is all about location, location, location, says Dune Real Estate Partners partner David Oliner. The market has reset—stories are different in markets like NY, DC, and Los Angeles, which still attract strong bids. Not so much for land and secondary markets, where buyers are more realistic about credit outlooks. Dune lost bids in the Bay Area of California, (where’s it’s projected that rents will climb dramatically) to buyers who underwrote that significant rent growth. |
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| Rialto CIO William Landis says his firm also lost out on some bids, but is underwriting macro recovery factors into bid price. But after these past few weeks, that may come out of the underwriting. Overall, he says there are very few institutions without problems on their balance sheets. Regulatory pressure wasn’t for the short-term, allowing them to build loan loss reserves and be in a position to realize sales. Rialto fishes in the $2M to $30M loan balance pond, which mostly comes from regional banks, and he says the firm looks to work them out with the borrower. “Generally, they’re underwritten to foreclosure, but often we find restructuring opportunity.” |
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| LoanCore Capital managing principal Mark Finerman says his firm is not looking to take properties, but seeks larger loans that are discounted and can be restructured. “We don’t have a problem doing up to 90% LTV,” he says, noting that LoanCore is looking for borrowers to put some money into the asset or with tenants lined up. Most opportunities it seeks are in overleveraged assets and often times have a sponsor that wants to stay. David adds that deciding what to do with a loan “is not just calculus, but gut.” (Note to any high school students: do not do calculus with your gut.) |
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| Many situations have come across the desk of Glenn, who consults buyers. Depending on who the lenders are, some can come up with a strategy for monetization, he says. Then there are circumstances where banks have the capital to weather the storm, do REO, and create value beforehand before bringing an asset to market. But he warns investors that are buying mezz to be well capitalized and understand you have to be very involved in the solution. |
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| Katten Muchin Rosenman partner Tim Little, moderator, asks panelists about the complicated syndicate. Different parties hold an interest in the financing, and each has actions that need a majority and sometimes unanimous consent (like extending maturities). It’s frustrating when someone doesn’t have skin in the game and takes a position that feathers his own nest, Craig says. In any loan, underwrite whom you’re dealing with and make sure to look at the loan docs—no two are alike or are clear on their face. Dune’s general philosophy: not being part of a syndicate where its position will be too small or doesn’t have some sort of control. When you have like parties in a syndicate, you have a decent shot, Glenn adds, but a mix can be torturous. |
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| Another hot topic: FDIC. It’s an all-or-nothing trade, William told the crowd (Rialto controls $3B of debt with the FDIC). You can get “churches and car washes,” those assets that aren’t optimal to work out. But he says the FDIC is very commercial to work with, thinks through its deals, and is very supportive. There are some political issues that come with the territory, and you have to treat them delicately. “They watch you and want you to have a professional strategy to work loans out,” he says. |
