Anthracite Shelf Offering: Pick Your Poison
Way back on June 3rd, when thoughts of Fannie Mae crashing to the ground like Icarus on a hot July weekend were not so prevalent, Anthracite filed a shelf offering with the SEC, stating that it may periodically sell up to $500 million in common and preferred stock, debt securities and warrants, with the exact price, amount and combinations of securities to be determined at the time of sale.
That Anthracite and other REITs like it would desperately like some cash to invest in this dislocated market should not have been a secret (See also "Blackrock: Back up the Truck on CMBS"). At the time however, the shelf filing offered a tantalizing morsel: was Anthracite actually contemplating some sort of debt offering that could avoid diluting existing shareholders? After all, they had just placed $90 million of equity with DLJ Capital Partners, a real estate fund run by Credit Suisse. Could the financial alchemists at Blackstone have somehow figured out a way to leverage that equity in the public or private markets?
It was at least possible to conceive of such a financial standing-backflip, even though the old standby, the CDO markets, were shells of their former selves. Global funded CDO volume had fallen to US$11.7 billion in the first quarter of 2008, down from almost $187 billion a year earlier. Similarly, cashflow and hybrid CDO volumes were down 92.4% from the same period from a year ago.
While new issuance dried up, ratings agencies turned their attention to the rearview mirrors and started downgrading deals by the dozens, but most were ABS CDOs or mortgage CDOs tied to SFR, not CRE deals. As of April 15, there had been 1,041 (US$382bn) CDO downgrades, compared to 29 (US$2.3bn) upgrades, with the majority of the downgrades linked to structured finance collateral, according to Deutsche Bank.
But at least there was SOME action on the new issue front, and there had been much less credit deterioration in assets underlying most commercial mortgage CDOs, unlike those tied single family, and traders were beginning to trade on the difference. In addition to strong fundamentals in commercial real estate, LIBOR spreads were coming down, and TED spreads were much, much narrower.
The same week that AHR filed the shelf offering, John Bucksbaum, chairman and chief executive of General Growth (GGP), which is one of the most heavily leveraged real estate investment trusts, and an operator of shopping malls no less, told the NAREIT Investor Forum in New York that the company had soft circles on $1.1 billion of a new $1.75 billion term loan, allaying default fears.
He also said they were also exploring a "private commercial mortgage-backed securities" (CMBS) bond deal. "A couple of investors called us that were in our 1997 package," Freibaum said. "These investors said, 'We're pretty sure that a dozen or so of our peers -- in the aggregate we have billions of dollars that we want to put out -- would be very interested if you wanted to create bonds again.'" His comments helped push the stock up nearly 5 percent on the day (ahhh,...the good old days, and it was only a month ago).
The bank deal was to retire all but five of Chicago-based General Growth's remaining maturities in 2008, and the "private" CMBS deal would take care of the rest. According to Freibaum, the single issuer CMBS deal could be as small as $1.5 billion and as large as $3 billion. The deal would take 90 days from start to finish and could be completed in the fourth quarter, he said. (Last week, GGP announced that it had actually closed the first stage of the loan, securing funding of $875 million. The loan bears interest at a rate of 5.64% and has a three year tenor, with two one-year extensions. There was no mention of the single issuer CMBS transaction).
At around the same time, Carlyle priced a €1.5bn low-levered arbitrage European CLO. The deal had been in the pipeline since the beginning of the year. It was one of the largest managed European CLOs to date, and there were a handful of others that were also launched at around the same time, including Jubilee IX from Alcentra, the static Euro Atlantis CLO from Citi and the Puma CLO I from Prudential.
More significantly, Lehman Brothers also closed a €2.9bn CRE CDO, dubbed Excalibur Funding 1, which was retained for use as collateral for repos. And just last week, a €4bn Student Loan CLO closed (though it was basically a structured US Treasury Bond, since the FFELP, or Federal Family Education Loan Programme, assets used as collateral are 98% guaranteed by the US Government).
Meanwhile, despite the closing of some high profile deals like General Growth's term loan and SFI's success with GE, the U.S. commercial real estate markets have remained more or less stuck. I spoke last week with a large CRE mezzanine lender who said they were "doing nothing", but it wasn't not for lack of trying. According to this person, a very wide bid-ask spread remains between many of the newly-minted distressed debt buyers and the banks and conduit lenders who are about to be fleeced by them. The former were offering the latter 65 cents on the dollar for loans that the banks refused to sell for less than 85 cents and not without full recourse (the banks want to be completely out).
Despite this valuation disparity, the whole-loan sales market is awash in offerings as banks and commercial lenders struggle to dispose of unwanted or nonperforming loans. Many mezzanine lenders have now focused most of their origination efforts at absorbing this huge supply of existing paper rather than originating entirely new loans on their own. Indeed, Commercial Real Estate Direct reported that more than $5 billion of loans - performing and nonperforming - are in various stages of being marketed on behalf of a host of sellers, from Wall Street conduit-lending shops to insurance companies and finance companies.
So, if you were the speculating type, you may conclude that if Anthracite were to make use of the shelf offering by issuing debt, it would be difficult to get anything worthwhile done in the US markets because they are still just as dysfunctional as they were in December 2007 and January 2008, particularly with all the new fears around solvency with Fannie Mae and Freddie Mac.
Since AHR is well diversified geographically and has a large European portfolio, it would be much easier, for example, to imagine DLJ's $90 million being used to buy a package of European CMBS in the secondary market and then levered up via a CDO out of London, Paris or Frankfurt. However, this may be a lower return strategy than attempting the same feat in the U.S., and therefore quite possibly just as dilutive as deploying equity in a higher yield market.
However, without access to new capital, the Company cannot grow and earn dividends for shareholders. The portfolio will simply run off, dividends will shrivel, and shareholders will be left to bet on nothing more than the amount of each quarter's earnings reductions.
Current shareholders may forget that AHR raised roughly $55.6 million in a follow-on offering almost one year ago, on June 7, 2007. Management has shown that it has the ability to invest equity proceeds accretively, since earnings and dividends have increased over the past twelve months. Nevertheless, without sufficient leverage, this may be more difficult the second time around.
So brothers and sisters, we're all in it together. Which you rather have? A dilutive equity offering, a low return European debt strategy, something in between, or nothing at all? Pick your poison, because AHR's .31/share dividend cannot be maintained very much longer without a credible capital markets strategy.
Disclosure: Long AHR
That Anthracite and other REITs like it would desperately like some cash to invest in this dislocated market should not have been a secret (See also "Blackrock: Back up the Truck on CMBS"). At the time however, the shelf filing offered a tantalizing morsel: was Anthracite actually contemplating some sort of debt offering that could avoid diluting existing shareholders? After all, they had just placed $90 million of equity with DLJ Capital Partners, a real estate fund run by Credit Suisse. Could the financial alchemists at Blackstone have somehow figured out a way to leverage that equity in the public or private markets?
It was at least possible to conceive of such a financial standing-backflip, even though the old standby, the CDO markets, were shells of their former selves. Global funded CDO volume had fallen to US$11.7 billion in the first quarter of 2008, down from almost $187 billion a year earlier. Similarly, cashflow and hybrid CDO volumes were down 92.4% from the same period from a year ago.
While new issuance dried up, ratings agencies turned their attention to the rearview mirrors and started downgrading deals by the dozens, but most were ABS CDOs or mortgage CDOs tied to SFR, not CRE deals. As of April 15, there had been 1,041 (US$382bn) CDO downgrades, compared to 29 (US$2.3bn) upgrades, with the majority of the downgrades linked to structured finance collateral, according to Deutsche Bank.
But at least there was SOME action on the new issue front, and there had been much less credit deterioration in assets underlying most commercial mortgage CDOs, unlike those tied single family, and traders were beginning to trade on the difference. In addition to strong fundamentals in commercial real estate, LIBOR spreads were coming down, and TED spreads were much, much narrower.
The same week that AHR filed the shelf offering, John Bucksbaum, chairman and chief executive of General Growth (GGP), which is one of the most heavily leveraged real estate investment trusts, and an operator of shopping malls no less, told the NAREIT Investor Forum in New York that the company had soft circles on $1.1 billion of a new $1.75 billion term loan, allaying default fears.
He also said they were also exploring a "private commercial mortgage-backed securities" (CMBS) bond deal. "A couple of investors called us that were in our 1997 package," Freibaum said. "These investors said, 'We're pretty sure that a dozen or so of our peers -- in the aggregate we have billions of dollars that we want to put out -- would be very interested if you wanted to create bonds again.'" His comments helped push the stock up nearly 5 percent on the day (ahhh,...the good old days, and it was only a month ago).
The bank deal was to retire all but five of Chicago-based General Growth's remaining maturities in 2008, and the "private" CMBS deal would take care of the rest. According to Freibaum, the single issuer CMBS deal could be as small as $1.5 billion and as large as $3 billion. The deal would take 90 days from start to finish and could be completed in the fourth quarter, he said. (Last week, GGP announced that it had actually closed the first stage of the loan, securing funding of $875 million. The loan bears interest at a rate of 5.64% and has a three year tenor, with two one-year extensions. There was no mention of the single issuer CMBS transaction).
At around the same time, Carlyle priced a €1.5bn low-levered arbitrage European CLO. The deal had been in the pipeline since the beginning of the year. It was one of the largest managed European CLOs to date, and there were a handful of others that were also launched at around the same time, including Jubilee IX from Alcentra, the static Euro Atlantis CLO from Citi and the Puma CLO I from Prudential.
More significantly, Lehman Brothers also closed a €2.9bn CRE CDO, dubbed Excalibur Funding 1, which was retained for use as collateral for repos. And just last week, a €4bn Student Loan CLO closed (though it was basically a structured US Treasury Bond, since the FFELP, or Federal Family Education Loan Programme, assets used as collateral are 98% guaranteed by the US Government).
Meanwhile, despite the closing of some high profile deals like General Growth's term loan and SFI's success with GE, the U.S. commercial real estate markets have remained more or less stuck. I spoke last week with a large CRE mezzanine lender who said they were "doing nothing", but it wasn't not for lack of trying. According to this person, a very wide bid-ask spread remains between many of the newly-minted distressed debt buyers and the banks and conduit lenders who are about to be fleeced by them. The former were offering the latter 65 cents on the dollar for loans that the banks refused to sell for less than 85 cents and not without full recourse (the banks want to be completely out).
Despite this valuation disparity, the whole-loan sales market is awash in offerings as banks and commercial lenders struggle to dispose of unwanted or nonperforming loans. Many mezzanine lenders have now focused most of their origination efforts at absorbing this huge supply of existing paper rather than originating entirely new loans on their own. Indeed, Commercial Real Estate Direct reported that more than $5 billion of loans - performing and nonperforming - are in various stages of being marketed on behalf of a host of sellers, from Wall Street conduit-lending shops to insurance companies and finance companies.
So, if you were the speculating type, you may conclude that if Anthracite were to make use of the shelf offering by issuing debt, it would be difficult to get anything worthwhile done in the US markets because they are still just as dysfunctional as they were in December 2007 and January 2008, particularly with all the new fears around solvency with Fannie Mae and Freddie Mac.
Since AHR is well diversified geographically and has a large European portfolio, it would be much easier, for example, to imagine DLJ's $90 million being used to buy a package of European CMBS in the secondary market and then levered up via a CDO out of London, Paris or Frankfurt. However, this may be a lower return strategy than attempting the same feat in the U.S., and therefore quite possibly just as dilutive as deploying equity in a higher yield market.
However, without access to new capital, the Company cannot grow and earn dividends for shareholders. The portfolio will simply run off, dividends will shrivel, and shareholders will be left to bet on nothing more than the amount of each quarter's earnings reductions.
Current shareholders may forget that AHR raised roughly $55.6 million in a follow-on offering almost one year ago, on June 7, 2007. Management has shown that it has the ability to invest equity proceeds accretively, since earnings and dividends have increased over the past twelve months. Nevertheless, without sufficient leverage, this may be more difficult the second time around.
So brothers and sisters, we're all in it together. Which you rather have? A dilutive equity offering, a low return European debt strategy, something in between, or nothing at all? Pick your poison, because AHR's .31/share dividend cannot be maintained very much longer without a credible capital markets strategy.
Disclosure: Long AHR
Labels: AHR
posted by RW at
5:45 PM
3 Comments:
You might want to post a little more detail on asset maturity schedules and loan balloon dates by volume prior to insinuating such strong speculation regarding dividend attrition.
I can assure you that there is credible capital markets strategy, well orchestrated and planned months and quarters in advance. I agree that the issue is central and based upon the preparations AHR mgt. made to increase liquidity prior to the Q4 '07 liquidity meltdown (which few others foresaw), I have every reason to believe that they have a plan and that it will be credible.
As mentioned in several of the more recent announcement-related conference calls, AHR mgt. does not expect nor are they planning on the return of the traditional CDO market to any sembelence of normalcy until ~Q3 '09. The focus is on smaller, more tailored private (or one-off) match-funded transactions, which will mimic similar net results to the income stream and duration-gap-match previously created via CDOs.
These guys actually do think about this stuff all the time and just because they don't announce their strategy in advance certainly doesn't imply a strategy is lacking.
Final note: Management has far more than implied the safety of the dividend for the next 6-8 quarters in conference calls. Does it make any sense for these quite savvy and experienced managers, who take stock as their fee, to voluntarily state this unless there is significant, steady and predictable earnings from which to make these payments?
It seems to me quite obvious that they are inviting significant litigation OR they know exactly what they are saying. BlackRock is just not going to take that litigation risk, period.
Your comments greatly appreciated.
42
Long: AHR
And I am sure that you are sure they have a plan, well orchestrated and planned months and quarters in advance, but there is no evidence of that.
There is only "speculation", as you refer to it, which is exactly what investing in the entire Mortgage REIT sector entails. We are speculating that this now pear-shaped business will somehow right itself.
Please don't misunderstand the purpose of the article. I like AHR and own the stock. Chris Milner also bought a lot of it last year, on the open market and with his own money, so management's heart is in the right place. Also, AHR has been more successful than almost any REIT out there with their capital markets "strategy", such as it is, as evidenced by their $90 million private placement of equity.
However, I want this site to be a useful and credible resource for all REIT investors. If it is to be both useful and credible, it can't just be the public relations arm of the glee club.
So, as you already well know, buying any mortgage REIT involves two basic, but huge leaps of faith: (1) that the respective portfolio is sound, and (2) that the respective REIT will regain it's access to capital, and lots of it, soon.
There are too many hopeful optimists out there who often lose sight of this second issue, either all the time or some of the time (I have also been guilty), and sometimes even the first issue, mostly by obscuring the obvious in the process of conducting their own hopeful analysis.
I have found that if you keep even half of your hopeful brain focused on the downside, you might only see 10% of the issues. So, in order for this site to be a true resource, space must be devoted to the downside as well as the upside. Comments in either of those two regards, yours or anyone else's, at any time and on any topic, are both welcomed and greatly appreciated.
As for management's statemements and Blackstone's litigation risk, please don't believe everything you read and hear until you pick it apart in the context of your own objective knowledge. Take a look around you: Deerfield, Crystal River, Alesco, Novastar, Thornburg, New Century.
Blackstone took litigation risk just by taking AHR public, so they're already in the kitchen. Scraping the burnt toast with a knife while nobody's looking, just before slathering it with butter and jam is not so hard to do, especially when the roast is still in the oven.
And as for the fee being taken in stock, that is valuable treasury stock AHR is issuing. It is given to Blackstone, which then dilutes you and me, because Blackstone also gets the dividend. It's a minor point and small dollars, but it also amounts to double-dipping (taking the fee and the dividend together). It would be much better if Blackstone were to defer the fee and take it in cash later when they sort this sh*t out, and only then. That is a far better framework for aligning their interests with ours.
Overall, I am still focused on the prize though, and if and when these REITs emerge from the swamp, I believe AHR will be one of them. I am also working on another article on the future availability of the capital markets; there might be a small glimmer of light shining through the end of this dark tunnel!
Good luck, and thanks for taking the time to comment on the article - I appreciate your thoughts.
Reitwrecks,
I believe you mean Black Rock instead of Black Stone?
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