Northstar Flexing Earnings Muscles; Window Closing on Others
I have already written extensively about Northstar here, here and here, among other places, so I will keep this somewhat short.
The biggest news to come out of the call from a "market" perspective is that Northstar is now starting to deploy cash. Forget about having to raise equity; they have $295 million available to invest. Also, in a further indication of credit quality (still no non-performers) they had $53 million in repayments during the quarter, and they estimate a possible $200 million in "optional" repayments for all of 2008. This means that their borrowers don't have to repay, but they are choosing to do so because they are finding profitable exits, even in this terrible market
By extension, this also means that Northstar's self-origination model is performing much better than the "whale" strategy employed by some other REITs: Raise a bunch of cash, and then cruise down Wall Street with your mouth open, collecting loans like so much plankton and krill.
Northstar was much more selective, and they did sacrifice short terms earnings as a consequence (all that low yielding cash did nothing for their dividend). However, as things begin to play out, and assuming they maintain their incredible credit discipline, the forward dividend will start looking stronger and stronger.
Why? Because they have cash to deploy now. There are 36 private equity mezzanine funds on the road now, attempting to raise $21.3 billion. 2008 will see a huge increase in the number of these funds and their buying power. We're only half way through the year, and already 14 mezzanine funds have raised $20.3 billion, vs. 29 funds that raised $15.7 billion for all of 2007. You can read the full story here, and a related story here.
These are not all real estate-focused funds, but the distress in this area is no secret, and plenty of them will be focusing on deals like the one that landed in my inbox just this morning: a discounted $231 million commercial and mezzanine loan portfolio with office and multifamily collateral located in New York and Chicago.
This is Northstar's bread and butter, and they are clearly trying to get out ahead of the crowd (the article above notes that prices are already starting to increase). Accordingly, they expect to reduce available liquidity to between $50 and $100 million by the fourth quarter. Based on their available cash and estimated loan repayments, that may mean $400-$500 million of equity invested by year end. They think these investments will generate levered returns in excess of 20%.
With the new players rushing into this market, Northstar is betting that opportunities will start to decline in quantity and quality in 2009 and 2010. It's too early to tell, but unless they can raise cash, this may mean that many of the more broken REITs will simply be left to manage run-off on legacy portfolios (or be wound up, acquired, etc).
There was some interesting "Itolja so" as well. Northstar did in fact buy back some of it's own highly rated CDO debt at a 40% discount to face. As the CEO said, this validates the FAS 159 accounting model, and they booked a $7 million gain on the repurchase. It will be interesting to see how many other REITs choose to take advantage of the same dislocation.
It will be even more interesting to see NRF earnings when they report again next quarter.
The biggest news to come out of the call from a "market" perspective is that Northstar is now starting to deploy cash. Forget about having to raise equity; they have $295 million available to invest. Also, in a further indication of credit quality (still no non-performers) they had $53 million in repayments during the quarter, and they estimate a possible $200 million in "optional" repayments for all of 2008. This means that their borrowers don't have to repay, but they are choosing to do so because they are finding profitable exits, even in this terrible market
By extension, this also means that Northstar's self-origination model is performing much better than the "whale" strategy employed by some other REITs: Raise a bunch of cash, and then cruise down Wall Street with your mouth open, collecting loans like so much plankton and krill.
Northstar was much more selective, and they did sacrifice short terms earnings as a consequence (all that low yielding cash did nothing for their dividend). However, as things begin to play out, and assuming they maintain their incredible credit discipline, the forward dividend will start looking stronger and stronger.
Why? Because they have cash to deploy now. There are 36 private equity mezzanine funds on the road now, attempting to raise $21.3 billion. 2008 will see a huge increase in the number of these funds and their buying power. We're only half way through the year, and already 14 mezzanine funds have raised $20.3 billion, vs. 29 funds that raised $15.7 billion for all of 2007. You can read the full story here, and a related story here.
These are not all real estate-focused funds, but the distress in this area is no secret, and plenty of them will be focusing on deals like the one that landed in my inbox just this morning: a discounted $231 million commercial and mezzanine loan portfolio with office and multifamily collateral located in New York and Chicago.
This is Northstar's bread and butter, and they are clearly trying to get out ahead of the crowd (the article above notes that prices are already starting to increase). Accordingly, they expect to reduce available liquidity to between $50 and $100 million by the fourth quarter. Based on their available cash and estimated loan repayments, that may mean $400-$500 million of equity invested by year end. They think these investments will generate levered returns in excess of 20%.
With the new players rushing into this market, Northstar is betting that opportunities will start to decline in quantity and quality in 2009 and 2010. It's too early to tell, but unless they can raise cash, this may mean that many of the more broken REITs will simply be left to manage run-off on legacy portfolios (or be wound up, acquired, etc).
There was some interesting "Itolja so" as well. Northstar did in fact buy back some of it's own highly rated CDO debt at a 40% discount to face. As the CEO said, this validates the FAS 159 accounting model, and they booked a $7 million gain on the repurchase. It will be interesting to see how many other REITs choose to take advantage of the same dislocation.
It will be even more interesting to see NRF earnings when they report again next quarter.
Disclosure: At the time of this writing, long NRF
Labels: NRF
posted by RW at
9:48 AM
7 Comments:
It's possible that I am taking drugs but I don't see how repurchasing their CDO debt on the open market at a 40% discount validats FAS159. They still owe the par on that portion that they purchased. They'll book repayments as return on those assets and they don't have enough to collapse the deal. Seems like a stretch to me. As stated previously DCF of the equity position is the most honest way to deal with this issue.
Also I have no clue where the guy lecturing you on b-pieces got his info but he's totally clueless. I have yet to see BB's that are publicly offered. That's but one misapprehension he is laboring under. I can list out more but it seems pointless.
I don't mind a good lecture every now and then, even if it's a bit whacky. One thing I do look forward to is your comments - they are always more informative than they are inquisitive.
As for the CDO repurchases, they sure aren't doing anything for these stocks. I have been looking into it some more and have seen that not only did NRF and GKK do it this Q, but NCT did it this Q AND last Q. The buybacks have been puny so far also. NCT has bought back the most, about $40 million in face, and they are telegraphing that bigger things are yet to come, and now they actually have some cash. They will be interesting to watch re: acquiring enough to collapse a deal, but I don't really think that's realistic for them or anyone else (maybe it now is for Lonestar!), even with the discounts.
In my simple world though, I just look at it as a good trade - they went short on their own debt in the bubble and sold the heck out of it at L+50, now they are buying it back at some other spread (you tell me, L+750 or so, depending on the deal?). And yes, they do still have to pay par, in theory. But in practice people are clearly accepting less, and the nice thing about being the manager is that nobody knows more about what's under the hood (or in the 'hood?!) when they buy this stuff. So they should be able to avoid the lead balloons.
You are ultimately correct though about what really matters: it still ain't doing nothing for valuations and earnings.
Thank you for the kind words. I am a real estate debt/structured finance guy first and last and have little idea how to value a company, so I'm learning a lot here too.
Like I said, the guy on the BB being public was just spouting jargon, but didn't have a clue. People like that annoy me to no end, CMBS investing is not some crazy cult that only the anointed few know about.
I agree that it is a good trade for them. As an issuer, this is a fabulous time to buy your own deal. Not for accounting reasons but as a fundamental value trade. As you said, no one knows more than the manager what is under the hood, both from a collateral and structural stand-point. The market is not drawing huge distinctions in pricing across deals either, so you could capitalize on the information asymmetry pretty handily.
I think L + 750 is really optomistic, you are honestly talking priced to .20-.40 depending on the seniority. It's almost trading exclusively in price terms and not yield terms as the duration of the deals is in some doubt. I mean I guess there is some yield component but you almost just get it worked down to getting paid back in the time frame you think the deal will last and then view the rest as a lotto ticket.
HTH
Just out of curiosity, can you disclose what deal that apartment complex with the $1300 annual expenses was in? I view who the b-buyer is as a key metric for the credit quality of the pool so being able to figure out who's whiffing like that would be helpful. As the guy said it's 8mm exposure so no biggie but it's often death by 1000 paper cuts in this space.
Interestingly enough, that deal was in CSFB 2005 C3, which shares the same special servicer as CD 2007-CD4 - the issue that held Riverton. I have looked at a number of distressed deals and a boom-year CSFB underwriting was common to many (though CSFB was not involved in Riverton).
But if you walk into a Monday morning meeting and the biggest hurdle you have to face is the syndicate manager screaming about clients getting cut back, what are you going to do for the remainder of the week??
When NRF buys back their own CDO, it reduces the liability they have to pay back in par. Say they have 2 billion CDO, they back back 400 million at a discount, then in the future, they only have to pay back 1.6 billon CDO at par, not 2 billion. It's simple math, why you guys say the buyback don't change a company's account picture. It clearly changes, it reduces their liablity in the future
Anonymous;
They do not have a reduced obligation to the piece that they own. Of course it may be one pocket versus the other but they are obligated to pay that back at par. As such they are obligated to pay back all the other pieces they do not own at par as well.
The proper way to treat this (in my opionion) is to keep the liability at par and to book the discount over time, just like you'd do with a discount bond where you are not the issuer. Of course what I think makes sense and what FASB views as proper often diverge.
Put another way, just because you buy back some of your debt, doesn't mean the rest of your debt that is outstanding on the same terms is redeemable at the price you paid.
RW, those deals (CSF 2005-C3 and CD2007-4) do not have the same special servicer. Additionally the special servicer is not always the B-Piece buyer. The B-Buyer for CD4 (Riverton) is not the special servicer. If you check back issues of CMAlert they state who the B-Buyer is when the transaction launches.
Even with your hint on the deal it is in I can't narrow it down to a property. For whatever reason CS doesn't disclose their revenue and expense assumptions on the annex A.
If you have the tape or the prospectus, it's loan #66.
Post a Comment
Links to this post:
Create a Link
<< Home