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Discovering Distressed Assets FALL 2010 RESEARCH PUBLICATION Discovering Distressed Assets Whole Loan Workouts and Recapitalization Opportunities A research report prepared for the Steven L. Newman Real Estate Institute, Baruch College, CUNY by contributing author Ben Polen, MBA, Executive in Residence, Steven L. Newman Real Estate Institute1 simple fact has been obscured by the market changes wrought by securitization – many Astructured products are composed of real estate loans. Understanding how to analyze and access these underlying property loans can provide ample opportunity for investors in today’s crowded marketplace. Though it sounds like a mouthful, Commercial Mortgage Backed Securities (CMBS) refers to a straightforward idea – a portfolio of mortgages that are held in single legal entity. Under the CMBS structure, payments from the pool of loans are passed through as payments to investors. This distribution of payments from performing loans is managed by a “Master Servicer.” When loans become delinquent, the management and decision making is the financial engineering of “credit solicitation for a sale to an opportunistic delegated to a “Special Servicer” which enhancement” rather than an analysis investor. Investors approaching special is usually a different company than the of the underlying real estate collateral. servicers looking for a quick distressed Master Servicer. Special servicers are Now, credit is back with a vengeance. loan sale may be disappointed. Fiduciary delegated with managing loan workouts, Knowing that CMBS is simply a packaging responsibilities to obtain the highest foreclosures, and sales. For distressed of commercial real estate loans can open price will generally dissuade a special investors, working with a special servicer an investor’s eyes to a new universe of servicer from any fire sale, and instead is key to a successful workout. potential investments that others fail the special servicer is more inclined to Investors with an appetite for property- to see. manage the foreclosure process and level investing and lending now have While this article will provide an take ownership of the property. This the chance to recapitalize or acquire introductory overview of research tactics, lender-owned property, or REO in real whole loans that have been packaged the strategic endgame should be that estate jargon, will then be put through into securitization. During the credit of a managed loan workout, with an an auction process to elicit a fair price, boom when there was investor demand investor approaching a borrower with whereby the fiduciary can show they have for so-called “structured products,” a capital offer and restructuring plan. met their responsibility. The opportunity financial engineers could slice the bonds Investor and borrower can then jointly in current times is to develop a strategic into different tranches with different present a workout plan to a special risk profiles and corresponding returns. servicer. The special servicer should be 1 Benjamin Polen, Baruch MBA 2008, holds a dual degree in Real Estate & Finance and Investments from As such, attention was focused on more receptive to this approach then to a Baruch College, Zicklin School of Business. P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 www.baruch.cuny.edu/realestate DISCOVERING DISTRESSED ASSETS FALL 2010 heavily stressed scenarios involving Using Bloomberg to Locate additional large loan defaults.” Retail Distressed Loan Leads: and multifamily loans currently make up the bulk of distressed CMBS loans, with 1. If using a Bloomberg terminal, 1,168 multifamily loans totaling $15.4 type LRP <GO> to screen for CMBS billion and 1,365 retail loans totaling loan opportunities. $14.3 billion in delinquent loans. There is also ample opportunity for hotel 2. To narrow a search by property investors, as $9.5 billion in hotel loan type, enter 95 <GO> or click on the balances, representing 438 loans, are “Property Types” option to access this currently delinquent. option (Figure 1). In this example, Because CMBS is owned by numerous only hotel properties are chosen. parties, there is detailed information on Click on the update button, and you the underlying loans available to the will be back in the LRP screen. In this public, known as CMBS surveillance example, the search is narrowed to data, or informally as “loan tape.” select loans that are 60 or more days Contrast this to the secrecy and lack delinquent, with a balance of $10 plan to recapitalize a borrower and create of disclosure surrounding loans held million and greater, located in Florida. new value. on a private balance sheet (whether 3. Enter 1 <GO> to run the search, There is certainly a large universe of owned by bank or fund) and the and 24 matching loans are found property-level distressed loans inside democratization of CMBS data is very (Figure 2). CMBS structures for asset-hunting. appealing. The available information According to Realpoint Research, as includes the property address, loan 4. This example selects the Carlton of September 2010 there were $62.19 term, rate, payment history, income, and Hotel located in Miami Beach. Clicking billion in delinquent CMBS loan balances, debt service. Investors with an appetite on the property in the results list pulls representing 4,477 loans. With a total for distressed assets and recapitalization up a set of tabbed data (Figure 3). In outstanding CMBS issuance of $773 opportunities can target specific Bloomberg, this includes up to seven billion, these delinquent loans represent property types, geographic regions, and tabs: Loan Details, Property, Financials, about 8.0% of all CMBS. Of the loan balances by using this information. Payment Information, User Notes. $62.19 billion in loans that are currently These parameters narrow a large Some loans also include Watchlist delinquent, about $7.32 billion were REO, potential pool of assets to a targeted Commentary and Delinquency or lender-owned assets, while another selection. There are several information commentary tabs, though this is not $14.5 billion are in foreclosure. Due to gatekeepers that hold the keys to this present on all loans. those conditions, it would be too late garden of information. Which company 5. You can export either search for a potential “white knight” suitor to you choose to work with may depend results, found in steps 2 and 3 above, approach with a recapitalization plan. on your organizational structure, budget or the property results in step 4 to However, the remaining $40.4 billion in and how comfortable an investor is Excel. delinquent loans are potential candidates working with the information. However, 6. Bloomberg also offers a loan for loan restructuring. Further, Realpoint the ability to search, organize, and lookup function, accessed by entering projects delinquent CMBS balance to present information will differ depending LLKU <GO>. This function is useful remain between $60 billion and $70 billion on which service is used. for recalling data on specific loans. until 2011, so investors can expect the Subscribers to Bloomberg can use However, the results screen and data opportunity to continue. This could result the service to lookup and search format for researching a list of loans are in more than 9% of CMBS loans entering for delinquent CMBS loans. Since a in a more usable format when using the delinquency, according to Realpoint, Bloomberg subscription costs from LRP function. the potential remains “under more $1,500 - $1,800 per month, this solution P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 – 2 – www.baruch.cuny.edu/realestate DISCOVERING DISTRESSED ASSETS FALL 2010 real estate investors seeking distressed Figure 1: CMBS leads, with a layout and design Property Type Selection on Bloomberg similar to most software. Investcap also offers personalized services to work with investors seeking loan workout opportunities from CMBS loans. The company is headed by a team with a background in both credit analysis and CMBS structuring. Investcap believes the current wave of loan defaults presents opportunities for investors, and its platform is designed to target these investment opportunities. Similar to Bloomberg, Investcap users can target a search by geographic region, property type, loan status, balance size and other parameters. Loan level and property reports are also available on Investcap. In this example, the Radisson Source: Bloomberg Resort in Kissimmee, FL is selected. Table 1: According to the report, the loan has a balloon payment of $24.8 million due Florida - Delinquent CMBS Loans that the borrower has been unable to repay or successfully refinance. Under the property tab, an updated property valuation from December 2009 reports the property is only worth $14.4 million. The hotel’s occupancy has dropped from 77% in 2007 to 59% for the most recent data from the first quarter of 2009. While most observers would agree that general economic conditions have improved is more appropriate if you were already and technical support is geared towards since then, it would be difficult to argue paying for or had access to the service. CMBS bond traders, not investors that the property value is greater than Through the Subotnick Center, located seeking loan workout opportunities. the balance of the loan. in the ground floor of the Baruch Library, The service is really not designed to This difficult situation presents a members of the Baruch community support investors hunting for individual scenario ripe for deal making, at least can use Bloomberg terminals to access loan deals, though it does provide useful for those with the right mindset. “The CMBS loan surveillance data. (Please access to the data for investors who may recapitalization process allows new see sidebar for step-by-step instructions) be comfortable doing some legwork capital to flow into the deal and create Both search result data and property themselves. an equity shift by negotiating with the result data can be easily exported to For a more user-friendly solution current owner/sponsor,” Investcap Excel, which may be a useful intermediate for accessing CMBS loan surveillance Advisors Managing Director Scott Barrie step for data analysis.
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