Balance-Sheet Lenders Hold Key to Reigniting Hotel Property Sales

Sep 30, 2009 3:07 PM, By Matt Valley

Securitized lenders were heralded as a driving force in commercial real estate finance during the boom years, but in the down cycle the lenders who’ve held loans on their balance sheets through thick and thin will be the catalyst for establishing a floor on hotel valuations and resuscitating a weak property sales market.

That’s the opinion of Charles Tomb, president and CEO of Integrity Hospitality Advisors based in Stamford, Conn. “Once that first big bank or small regional bank starts to come out and say, ‘OK, here is what we’re doing with our balance sheet,’ the others can’t be criticized,” remarked Tomb last Friday in Phoenix during a panel discussion at the 15th annual Lodging Conference. “The visibility of write-downs against their balance sheets — that’s the catalyst.”

As regulators begin to turn up the heat on banks to clean up their balance sheets, the mark-to-market of assets that will ensue will not only help CMBS special servicers better manage the expectations of bondholders, Tomb believes, but it also will stimulate the commercial real estate financing market. “Right now valuations are all over the place. No one knows the value of anything. These opinions of value coming from brokers are pieces of paper that nobody can hang their hat on.”

But exactly when balance-sheet lenders will bite the bullet and take the write-downs is uncertain. Jerome Cataldo, president of Schaumburg, Ill.-based Hostmark Hospitality Group, says a paralysis of sorts has set in industry-wide stemming from a fear of criticism. “You can apply that to the lender, the buyer, the seller, every aspect of the industry. For example the buyer says, ‘ I don’t want to be the first guy to buy at the wrong price. I want to wait for the bottom.’”

What is more certain is that the level of hotel distress is spreading. There are an estimated 650 hotel loans that are in the hands of CMBS special servicers, according to Bill Linehan, executive vice president and managing director of marketing for Atlanta-based Hodges Ward Elliott, a brokerage and investment banking firm. These special servicers manage loans once they go into default and conduct the workout or foreclosure process.

“The staggering number is the watch list, which has over 1,400 hotels that are in technical default, meaning they are most likely going to have a default on their loan,” says Linehan.

The total delinquency rate for CMBS hotel loans 30 days or more past due rose to 4.9% in August, up from 4.7% in July and 0.3% in September 2008, according to Horsham, Pa.-based Realpoint, which has been tracking delinquencies on securitized loans since 2001.

The researcher forecasts that the lodging sector will likely experience an increase in delinquency as both business and leisure travel slow further, resulting in greater declines in occupancy, revenue per available room and average daily rate.

To bolster their standing with lenders and regain the equity they’ve lost in their hotels due to falling valuations, an increasing number of owners are seeking joint-venture equity partners. For example, a REIT or private equity source might take control of the asset and use its balance sheet to work directly with the bank to either renegotiate the loan or seek an extension of the existing note.
As the economy rebounds, one big challenge facing Cataldo of Hostmark is the underwriting analysis. “Even as demand comes back into the marketplace, where is it going to go first, what type of assets is it going to?”

Cataldo adds that the trickiest part of the analysis is room rate. "How can you underwrite rate returning to a marketplace, and how can you underwrite it returning to an individual asset?"

Manhattan Office Market Eyes Rebound: Third-Quarter Report

Sep 30, 2009 2:49 PM, Staff reporter, NREI

Has the nation’s largest office market finally bottomed out?

It may be too early to call, but fresh research from real estate services firm FirstService Williams indicates that Manhattan office fundamentals may have stabilized during the third quarter.

Several key findings from the report back such a theory. Monthly leasing activity has nearly doubled since the end of May, for example, and this added leasing momentum held the overall availability rate, a measurement of vacancy, in check at 13.4% between the end of the second and third quarters.

On the economic front, the city has benefitted from a buoyant stock market rally in recent weeks plus an increase in New York City payroll employment. These positive economic indicators may be stoking business confidence, which in turn drives leasing demand on behalf of tenants.

To be sure, business confidence can waver unexpectedly at any moment. While it is difficult to predict just how fast the office market will rebound going forward, especially with respect to rental rates, this would mark a far quicker recovery compared with the end of the last recession when Manhattan’s office availability rate continued to rise for another 18 months.

“If the national and city’s recessions both ended around the middle of 2009, this stabilization of the availability rate so soon would be remarkable, especially relative to what happened during the last down cycle in the economy, which occurred in 2001,” said Mark Jaccom, CEO of FirstService Williams, in a prepared statement.

Even though the overall availability rate was flat, asking rents again fell 8.5% during the quarter. Rents have taken a major hit, too: Since peaking at midyear 2008, the overall average asking rent for Manhattan fell by a whopping 32.6% through the end of September, according to Robert L. Freedman, Executive Chairman of FirstService Williams.

Added Freedman: “In both the Midtown North and Midtown South markets, the average asking rent fell around 10% during the third quarter. In the Downtown market, the decline was a bit over 7% for the quarter.”

Additional highlights from FirstService Williams’ third quarter analysis:

Roughly a dozen transactions consisting of more than 50,000 sq. ft. closed each month during the third quarter

Monthly leasing volume posted its highest volume of the year during July and August, approaching Manhattan’s historical monthly average of 2.5 million sq. ft. per month.

The Midtown South availability rate dropped to 11.1% from 11.4%. In the Midtown North submarket, availability increased to 14.9% from 14.8% during the third quarter and the downtown market saw availability rise to 11.6% from 11.4%.

The overall average taking rent for Manhattan is down by 40% since the second quarter of 2008 and the declines were even larger in some of the more upscale districts.

Manhattan office sales volume recovered slightly as total volume for the first nine months of 2009 rose to $1.7 billion with six transactions completed.

Two transactions closed in the third-quarter of 2009: Worldwide Plaza at 825 Eighth Avenue sold for approximately $605 million, or $356 per sq. ft., and the AIG headquarters buildings, at 70 Pine Street and 72 Wall Street, traded for $150 million or $107 per sq. ft.

Cambridge Realty Capital Sees Growth Opportunity Amid Downturn

Sep 29, 2009 11:11 AM, Staff report
National Real Estate Investor

Cambridge Realty Capital Cos., which has completed more than $2.75 billion in seniors housing and healthcare debt and equity investments since the mid-1990s, sees no time like the present to expand its investment portfolio.

The Chicago-based firm traditionally has invested in existing properties with historical cash flow predictability and experienced owner/operators, explains Jeffrey Davis, chairman of Cambridge Realty Capital.

Going forward, the company will expand its investments to include the discounted debt of similar assets using strict investment criteria and screening.

The activity will be initiated through the company’s investment affiliate, Cambridge Investment & Finance Co., on a pre-commitment, opportunistic, transaction-by-transaction basis, adds Davis.

Cambridge specializes in three distinctive business lines: FHA-insured HUD loans, conventional financing and investments, and acquisitions. The company is one of the nation's leading HUD 232 healthcare lenders, offers a wide array of conventional lending options, and has been aggressively involved in direct property acquisitions, joint ventures and sale/leasebacks.

"The current credit crisis has significantly marginalized competitive factors, enabling Cambridge to become even more selective in identifying opportunities that meet the company's proprietary investment-screening model,” says Davis.

“Because the frozen capital markets have spread into all sectors, owner/operators are becoming more reliant on firms like Cambridge for their capital requirements," he adds.

Davis believes that the company's integrated debt financing and investment businesses complement each other. The company reviews more than $350 million in senior housing and healthcare financing origination requests on a monthly basis and maintains a large and proprietary database of real-time data.

"We understand the underlying property assumptions as well or better than any other operator or investor in this sector," says Davis.

There are a number of reasons investors might be drawn to the seniors housing/healthcare market segment at this time, he suggests.

"Most experts concur that senior housing has become a non-cyclical business and will not experience the economic recession at nearly the magnitude experienced by other segments of the commercial real estate market,” according to Davis. “Unlike other forms of residential and commercial real estate, seniors housing has not had any major construction or expansion of existing product since the major wave of overbuilding that took place in the late 1990s.”

U.S. Stocks Fall as Chicago Business Index Trails Estimates

Sept. 30 (Bloomberg) -- U.S. stocks fell for a second day as an unexpected contraction in a measure of business activity spurred concern the economy is struggling to recover.

American Express Co., Walt Disney Co. and JPMorgan Chase & Co. dropped more than 2 percent to lead declines in all 30 stocks in the Dow Jones Industrial Average after the Institute for Supply Management-Chicago Inc.’s business barometer trailed economists’ estimates. CIT Group Inc., the 101-year-old commercial lender, tumbled 35 percent on concern it will be forced into bankruptcy.

The S&P 500 lost 1.2 percent to 1,047.68 at 10:39 a.m. in New York. The Dow Jones Industrial Average tumbled 113.96 points, 1.2 percent, to 9,628.24. About seven stocks fell for each that rose on the New York Stock Exchange.

“We’re in the faith part of the economic cycle,” said Ralph Shive, manager of the $1.3 billion Wasatch-1st Source Income Equity Fund, which has beaten 96 percent of competing funds over the past five years. “All of us to some degree are guessing how strong the recovery is or how long it will take. Market prices have anticipated a decent recovery at this point. At some point we need to see earnings turn.”

Benchmark indexes erased an early advance spurred by a Commerce Department report showing the recession abated more than originally estimated in the second quarter. The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in a year and better than the 1.2 percent decrease estimated by economists in a survey.

Quarterly Rally

The S&P 500 has jumped 14 percent in the third quarter, building on a 15 percent rally in the April to June period. The rally has sent price-earnings valuations in the index this month to the highest levels since 2004. The measure has rebounded 57 percent from a 12-year low in March.

CIT slumped 35 percent to $1.42. The lender is considering an offer of financing from Citigroup Inc. and Barclays Capital, people familiar with the situation said. Bondholders are also seeking to provide about $2 billion in loans as a restructuring deadline approaches tomorrow, said the people, who declined to be identified because the negotiations are private. CIT may choose other options, the people said.

Darden Restaurants Inc. fell the most in the S&P 500, declining 8.9 percent to $33.28. The owner of the Olive Garden and Red Lobster chains said first- quarter sales dropped 2.3 percent, missing analysts’ estimates.

Moody’s Corp. tumbled 6.8 percent to $19.39. U.S. House Oversight and Government Reform Committee is holding a hearing on rating companies today in Washington. McGraw-Hill Cos., owner of Standard & Poor’s, slipped 3.8 percent to $25.12.

Saks, Nike

Saks Inc. dropped 6.3 percent to $6.72. The luxury retail chain plans to offer as much as $100 million in shares, using the proceeds to reduce debt, according to a regulatory filing.

Nike Inc. jumped 7.3 percent to $64.48 and advanced earlier to $64.65, the highest intraday price since October 2008. The world’s largest athletic-shoe maker posted first-quarter profit that exceeded analysts’ estimates as it cut marketing and personnel costs.

All 10 of the main industry groups in the S&P 500 advanced in the third quarter, led by a 24 percent rally in financial shares and 20 percent gains in industrial and commodity producers.

Gannett Co., the nation’s largest newspaper publisher, posted the steepest advance in the index, more than tripling in the quarter. Hartford Financial Services Group Inc., Wynn Resorts Ltd. and Tenet Healthcare Corp. more than doubled.

Recovering Economy

The gains came amid speculation the economy was returning to growth following the worst recession in seven decades. Home prices stabilized, consumer confidence strengthened as job losses abated and the Institute for Supply Management said manufacturing activity ended an 18-month contraction in August.

The performance of the U.S. economy is probably more sluggish than reflected in stock markets, risking a correction in equities, Nobel Prize-winning economist Michael Spence said.

U.S. stock-market investors have “over processed” the stabilization of growth in the world’s largest economy, Spence said in an interview in Kuala Lumpur yesterday. The U.S. economy isn’t likely to experience a “double-dip” slowdown even as that remains a risk, said the professor emeritus of management in the Graduate School of Business at Stanford University.

Alcoa will be the first company in the Dow average to release third-quarter earnings next week, set for Oct. 7.

Analysts expect profits in the S&P 500 to drop 22 percent on average in the third quarter before rebounding 63 percent in the final three months of the year, according to estimates compiled by Bloomberg.

The International Monetary Fund today cut its projection for global writedowns on loans and investments by 15 percent to $3.4 trillion, citing improvements in credit markets and initial signs of economic growth.

Pimco Save More, Spend Less Economy Cuts Total Return

Sept. 30 (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross says investors should expect total returns on equities of about 5 percent annually as consumers curb spending and increase savings.

“Returns mimic nominal” gross domestic product, Gross, manager of the world’s biggest bond fund, said in an interview yesterday with Bloomberg Radio. “Nominal GDP is the growth rate of wealth on an annual basis. The new normal is 2 to 3 percent GDP and real growth of 1 to 2 percent.”

Officials at Newport Beach, California-based Pimco say the “new normal” for the global economy will be characterized by heightened government regulation, lower consumption and slower growth. The Standard & Poor’s 500 Index increased 13 percent on average in the five years ended in 2007, before falling 37 percent last year as economies slid into recession. During the last two bull markets, the S&P 500 posted an average total return of 18.5 percent a year.

The U.S. savings rate rose to 6 percent of disposable income in May, the highest level since 1998. Only 8 percent of U.S. adults plan to increase household spending, almost one- third will spend less, and 58 percent expect to “stay the course,” a Bloomberg News poll showed Sept. 17. More than three in four adults said they cut outlays in the past year.

GDP Revision

The world’s largest economy shrank at a 0.7 percent annual rate from April to June, the best performance in more than a year, revised figures from the Commerce Department showed today. GDP contracted at a 6.4 percent pace in the first three months of 2009. The jobless rate climbed to 9.8 percent this month, from 9.7 percent in August, according to a separate Bloomberg survey before the Labor Department reports figures on Oct. 2.

Gross said he’s been buying longer maturity Treasuries in recent weeks as protection against deflation.

“There has been significant flattening on the long end of the curve,” Gross said “This reflects the re-emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.”

Consumer prices fell 1.5 percent in August from a year ago, according to the Labor Department in Washington. Prices have declined on an annual basis every month since March.

Yields on U.S. inflation-protected debt show there’s little concern about consumer prices eroding the value of bonds’ fixed payments. The difference in rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, is 1.76 percentage points. While up from 0.04 points in November, the level is below the average of 2.18 points over the past five years.

Breakeven Rates

The U.S. has the lowest so-called breakeven rates of any major sovereign debt market except Japan. The difference between three-year maturities is 0.6 point, below the average of about 2.21 points this decade.

Gross had said during the midst of the seizure in credit markets that Treasuries offered little value as investors seeking a refuge from turmoil in global financial markets drove yields to record lows in December.

He has since boosted the $177.5 billion Total Return Fund’s investment in government-related bonds to 44 percent of assets, the most since August 2004, from 25 percent in July, according data released earlier this month on Pimco’s Web site. The fund cut mortgage debt to 38 percent from 47 percent.

“We’ve exchanged our mortgages for the government’s check” as the Federal Reserve winds down purchases of agency debt, Gross said. “Mortgages are expensive compared to Treasuries and other vehicles.”

Program Extended

Fed policy makers last week committed to complete their purchases of as much as $1.45 trillion of mortgage securities and extended the end of the program to March from December.

Pimco’s Total Return Fund handed investors a 17.85 percent gain in the past year, beating more than 90 percent of its peers, according to data compiled by Bloomberg. The one-month return is 1.94 percent, outpacing more than 55 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE.

In July Pimco reversed a policy to steer clear of U.S. debt when it said it would buy five- to 10-year Treasury securities.

“With Treasury yields near the top of our expected range, Pimco plans to overweight duration and take exposure to the five- to 10-year portion of the yield curve,” the firm said July 20 in a report on its Web site.

On that day, the yield on the 10-year note touched an intra-day high of 3.72 percent and a low of 3.57 percent. The note yielded 3.29 percent yesterday in New York, according to BGCantor Market Data.

Gross said intermediate- to long-term bonds will perform well as long as policy rates and inflation remain low, after minutes of the Federal Open Market Committee’s Aug. 11-12 meeting was released on Sept. 2.