Tuesday, August 21, 2007

So Many Deals, So Much Debt

Schadenfreude ! When the deal was announced in February ( see commercial property madness / numbers on the blackstone-eop manhatten sale ) i wondered back then what the hell Macklowe, Fortress & creditors were thinking.

Schadenfreude ! Als der Deal im Februar angekündigt worden ( siehe commercial property madness / numbers on the blackstone-eop manhatten sale ) habe ich mich schon damals gefragt was sich der Käufer und die Kreditgeber wohl denken mögen.

From the link in February
This article gives some good insight on the latest commercial property deals and shows very clear that "ordinary" people can´t understand what is going on. we are not smart enough to understand why you buy a portfolio at record (maybe peak) prices with a starting yield of 3% and including costs close to zero...... the only assumption that makes this deal work is that you double the rents? looks like this should be no problem because already 41 tenants in entire Manhattan pay the needed rent.......

Harry Macklowe, the New York developer, was flying high in February when he decided to buy a portfolio of prime Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money.

Mr. Macklowe was already well represented in the Midtown market, where rents were rising at a staggering rate. His 2003 purchase of the General Motors Building on 59th Street and Fifth Avenue for $1.4 billion, though derided at the time as reckless, had been vindicated as the value of the building soared, enhancing Mr. Macklowe’s reputation as a visionary tycoon.

But as the crisis over subprime residential mortgages spills over into other real estate sectors, causing a severe tightening of credit, there is widespread talk in the industry that Mr. Macklowe is in deep trouble — so much so that he could lose control not only of the newly acquired portfolio but also of the G.M. Building and other properties that were used as collateral for short-term debt that must be repaid six months from now.


Some real estate specialists say that the February acquisition of the seven Manhattan buildings — a deal consummated in just 10 business days —will be remembered not just as a feat of financial derring-do but also as a watershed that ended two years of frenzy in the commercial real estate market.

“If you’re looking for a poster child for what’s been going on, it could well be that deal,” said Mike Kirby, a principal of Green Street Advisors, a research company in Newport Beach, Calif., that specializes in real estate investment funds. “It had all the elements of the froth in the market — assets flipping left and right at ever-higher prices and excessive amounts of debt at ultracheap prices.”

> Macklowe marked the peak....

But in other signs of how the credit squeeze is affecting sales transactions, Tishman Speyer and Lehman Brothers recently postponed the completion of their $22 billion acquisition of Archstone-Smith, a real estate investment trust that owns interests in nearly 88,000 apartments, from late this month until early October. (Shareholders approved the sale yesterday.)

And a REIT that specializes in office buildings in Silicon Valley, Mission West Properties of Cupertino, Calif., said last week that its planned $1.8 billion acquisition by a private equity company had fallen through because the buyer’s lender had withdrawn from the transaction and no substitute lender could be found.

To be sure, the leasing market in many cities has been strong, nowhere more so than in Midtown, where landlords are now asking an average annual rent of more than $81 a square foot, a record, according to the brokerage firm CB Richard Ellis. Few large blocks of space are available. The default rate for commercial buildings has remained low.

But for several months, bond ratings analysts and others have warned that competition among commercial lenders has become so feverish that many are willing to finance 90 percent or more of the cost of the transaction based on overly optimistic projections that rents will continue to rise at a furious pace. In recent transactions, including Mr. Macklowe’s, the expected initial income from the buildings was less than 4 percent a year, with cash flow projected to rise significantly as leases expired and rents reached market levels.
But in the recent hot market, said Adrian Zuckerman, a real estate lawyer at Epstein Becker & Green, “people were not buying the income stream; they were buying the building for what they could sell it for in a year or two years.”

> Too bad that he bought at this "discount" prices.....

> Dumm nur das er zu diesen Schnäppchenpreisen zugelangt hat.....

The purchase price worked out to an average of $1,142 a square foot, the highest ever for a single portfolio..... Only one building, 666 Fifth Avenue, has traded for a heftier price: $1,200.

The Blackstone Group, the private equity company that recently went public, played on an even bigger scale. It bought Equity Office Properties, the nation’s largest office landlord, for $39 billion in February, and simultaneously began to dismantle it.

> EOP/Blackstone takeover

Without even taking possession of the buildings, Blackstone sold most of Equity Office’s portfolio in Manhattan to Mr. Macklowe in the transaction that is now raising questions. (The portfolio originally included the office portion of an eighth building, but that was later dropped from the deal.)

The problem for Mr. Macklowe is that much of the debt — $3.4 billion, according to Commercial Mortgage Alert, a weekly trade publication — is in the form of a short-term investment known as a bridge loan or preferred equity that must be repaid in February. Of that amount, about $900 million came from the hedge fund Fortress Investment Group, with the rest supplied by Deutsche Bank, Mr. Macklowe’s longtime lender. Mr. Macklowe pledged the G.M. Building and other assets as collateral.

Disclosure: Still short REITs / IYR

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Anonymous Anonymous said...

...$3.4 billion...is in the form of a short-term investment known as a bridge loan or preferred equity that must be repaid in February.

Did he actually believe he could pay this loan off by flipping some of these properties quickly enough -- in a year or less -- at appreciated prices (i.e. so he could still make a profit)? No matter how hot the market, isn't that a little bit crazy? If not, how else was he planning to take care of this debt? Refinancing?

His 2003 purchase of the General Motors Building...

Yeah, but that was then and this is now, as they say. I mean, you don't have to be all that astute to know, or all that experienced to have learned, that it is not always a good idea to return to what made you money in the past -- things change. And I think by earlier this year it was more than obvious that a LOT had changed. Ganz viel.

...with cash flow projected to rise significantly as leases expired and rents reached market levels.

Given the short term nature of the debt, how relevant is this?

The default rate for commercial buildings has remained low.

Aber, wie ich gesagt habe: inzwischen alles hat sich verändert. Also, wir werden sehen.


2:07 AM  
Anonymous Anonymous said...

Here more... yes more ... on ABCP


Additions to your chart

2:50 AM  
Blogger jmf said...

Moin Eh,

i think he and his investors are asking themselves the same question now :-)

Min Anon,

thanks for the link.

3:05 AM  

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