C.M.O. 8.27.2009
Credit Market Overview
August 27, 2009
Over the past two days we have seen numbers for residential house price indices, mortgage applications and new home sales. There are caveats that go along with these numbers e.g. how many sales were foreclosures, how much of the bidding wars were investors paying cash with the intention of renting out the acquired property, etc. Don’t get me wrong, good numbers are always better than bad numbers but numbers you can trust are the best.
The story on the commercial side of things is also a bit of a mystery as news that U.S. banks were charging off commercial loans at the fastest pace in 20 years graced the front of the C section of the WSJ recently with losses possibly reaching the $30BN mark by year end.
Foresight Analytics estimates that delinquencies on commercial real estate loans held by banks reached 4.3% in 2Q09 or more than double the rate from the year ago period.
Tishman Speyer Properties defaulted on debt tied to one of its largest portfolios of office space, known as CarrAmerica, this month. The portfolio was a collection of properties in and around D.C. and included 28 buildings leased to law firms and lobbyists. Amazing that could happen in our Nation’s capital when it seems like there’s enough pork flying around to buy the place outright, not default on it.
Even Ben Bernanke weighed in testifying before Congress saying “the potential wave of defaults on hundreds of billions of dollars of commercial mortgages presents a ‘difficult’ challenge and it would appear this challenge is behind the CMBS oriented TALF initiative.
So how then to reconcile all of this doom and gloom with another article in yesterday’s WSJ heralding “REITs Are Poised to Pick Up the Pieces”? It seems the distinction is between public entities which were able to tap the capital markets and the private companies which have to depend on bank lending.
This explanation makes a lot of sense with regard to the REIT sector of the CEC Portfolio as Simon Property Group (SPG) and ProLogis, two of the REITs mentioned in the article, have been performing quite well since the March lows.
SPG has seen its CDS level fall from 710bps on 3/9 to a low of 162bps on 6/11 before moving sideways to close at 251bps last night. The stock hit a low of $25.95 on 3/6, took a bit of a breather between 5/6 and 7/10 before making another push upward to a 2009 high of $66.67 on 8/7, closing at $63.35 last night.
PLD’s CDS/equity looks similar in result but a bit different in the way it got there. The move in the CDS has been a slow grind lower since March while the stock has exhibited much more volatility. The CDS high for 2009 was 2077bps on 3/9 and the low, 377bps on 8/11. The CDS closed last night at 444bps so even with this reaction off of the bottom it is still about ¼ of it’s early March levels.
Hanging on to PLD’s stock for the same period would have been exactly that as the price of the equity , just recently breaking above the $10.00 mark, moved by $2-$3 over the course of a few weeks at multiple times during its move higher.
It is all a bit of a switch if you think about it, public entities in a better financial position than private empires. The credit crisis has caused some drastic changes. It will be a good long while before we see which of those is temporary and which is permanent. Keeping an eye on the commercial real estate space might provide some good clues as to what’s changing back and when.
Enjoy the week.
Jim Delaney
