C.M.O. 2.10.2010
Credit Market Overview
February 10, 2010
After defeating the Python, Apollo would worship often at Delphi and it is there that the most important oracle in the classic Greek world resided and where the Pythian Games were established; the Pythian Games being one of the quad annual Pan-Hellenic games which were the precursor to our modern Olympics.
While knowing the origin of the Olympics is interesting as the Winter Games begin this Friday, it is the Delphi that we are more concerned with this morning. The rulers of ancient Greece would visit her for advice and answers to pressing questions such as the outcome to a specific battle or one’s political fate.
The number of visits it would take to answer all of today’s questions would leave for a very exhausted Oracle so we have learned to supplant all that travel with our own pundits, wags, specialists and analysts in hopes of gleaning a glimpse into the future or, at the very least figuring out what just happened.
There is another school of thought, more of the Zen variety, that says by simply observing what has gone on and watching what is going on we can all be our own Oracle.
To this end I would ask you to remember the Blackstone Group’s purchase of Sam Zell’s Equity Office Properties in February of 2007 for $39BN and how, in retrospect, Sam’s prescience was once again demonstrated.
Fast forward to today or more specifically last Tuesday, and while at a much smaller scale, Mr. Zell was once again transacting in the commercial real estate market. This time it was as a buyer of the last three Manhattan apartment buildings owned by Harry Macklowe for $475MM.
That Sam Zell’s moniker in his industry is the “grave dancer” should come as no surprise given his track record of buying distressed properties. As such then and in also staying in the moment, the question we have to ask is whether this is a sign that the bottom in the commercial real estate market is near or whether we have lower to go but the Macklowe buildings were just too much of a bargain to pass up.
There has been much discussion of the pervasive “extend and pretend” mentality in the commercial real estate market at the moment with banks nationwide acting as if there were no difference between the amount of the loans they have extended and the current market price of the properties attached to the financing.
The publicly traded REITs seem to be in a bit of a different position as the group issued about $24BN in equity last year while only buying about $4.6BN in property. This second figure equating to a 67% YoY drop from 2008.
The problem it appears is that all of the “kicking the can down the road” has kept properties off the market. “The volume of the properties that are truly distressed and will be sold in a distressed fashion will be significantly less than had initially been thought”, was the opinion of Bob Steers, co-CEO of Cohen & Steers.
Stephen Richter, CFO of Weingarten Realty Investors laments, “If I would have known the markets are where they are today, I certainly wouldn’t have sold a third of the company”.
If it is truly a sign from Sam, then Mr. Richter might well stay disappointed. If those kicking the can happen to miss, then the Weingarten folks might get the opportunity they desire.
Given his knack for picking tops and bottoms the majority of us are probably rooting for Mr. Zell.
From a CDS/equity perspective the REITs have not had a good 2010 so far with the price of debt protection rising and equity prices falling. In some cases the equity highs were reached back in December so not all of the current drop can be attributed to the roils in the sovereign debt markets.
Having said that with credit spreads widening for almost every type of issuer from federal, state and local governments to corporate issuers at each credit grade it is tough to find a CDS inspired reason to buy at the moment, grave dancers excluded of course.
Enjoy the week.
Jim Delaney
