Fed’s Muriburiland: Fed Keeps Pumping Air Into Asset Prices (S&P 500, Commercial Real Estate)

“In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects— if it did not, it would be ineffective and futile. Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

William McChesney Martin, Speech to Investment Bankers Association of New York, October 1955

Perhaps The Fed removes the punch bowl in Muriburi Land, but The Fed certainly didn’t remove the punch bowl in the USA. The S&P 500 index and commercial real estate have both exploded with the perpetual punch bowl.

“We’re not even thinking about thinking about the consequences of our actions.”

Jerome Powell, Chairman, Federal Reserve

Apparently, Chairman Powell lives in financial Muriburiland.

Thanks to Jesse at Jesse’s Cafe Americain for the quotes!

Fed Will Begin Buying Broad Portfolio of U.S. Corporate Bonds (Will Munis, Stocks and Residential Real Estate Be Next??)

Well, it was only a matter of time with foreign central banks buying corporate bonds … and stocks.

(Bloomberg) — The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.

The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.

“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”

The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

The Federal Reserve announced Monday it will begin purchases of individual corporate bonds.

The move comes nearly three months after first unveiling the Secondary Market Corporate Credit facility and one month after it began buying corporate-credit ETFs through the program.

The central bank will “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release. (Like Fed Chair Jerome Powell’s portfolio?)

The Fed’s late-March announcement of its move into corporate bond purchases set a floor for risk assets and helped valuations rebound from their pandemic-induced lows.

Speaking of setting floors on risk assets, does that apply to ETF or residential housing too? How about municipal bonds debt like Chicago’s??

Fed Chair Jerome Powell channeling Thurston The Great Magician!

Bill Allowing Commercial Tenants to Renegotiate, Break Lease Deals Advances in California

Only in California.

As the Commercial Observer reports, last Friday, the California Senate Judiciary Committee advanced a bill that would allow small businesses — like cafes, restaurants and bars — to renegotiate and modify lease deals if they have been impacted by shelter-in-place orders and economic shutdowns. If an agreement isn’t reached after 30 days of negotiations, the tenant can break the lease with no penalty, effectively starting a revolution in the world of credit by retroactively transforming commercial loans into non-recourse debt.

Landlord advocates have, predictably, been mobilizing in opposition, arguing that the proposal is unconstitutional, and that it would “upend” leases around the state. Justin Thompson, a real estate partner with Nixon Peabody, told Commercial Observer that it was illuminating to see so many industry organizations come out “so vehemently opposed” in a short period of time. Having heard from industry groups all week, Thompson said the general consensus in the commercial real estate community is that the bill is “overly broad, overreaching, and it is a bit of a sledgehammer” when something less blunt would do.

“Everyone recognizes that restaurant tenants and smaller non-franchise retail tenants in particular really are in dire straits and in need of assistance,” Thompson said. “But I think the implications of SB 939 are really laying it at the feet of landlords, and putting them in the situation where, even if they have tenants that were going to make it through this, they might now rethink that and leave the landlord in the lurch.”

Senate Bill 939 was initially introduced as a statewide moratorium that would prohibit landlords from evicting businesses and nonprofits that can’t pay rent during the coronavirus emergency. But it was amended in the week to also give smaller businesses the ability to trigger renegotiations if they have lost more than 40 percent of their revenue due to emergency government restrictions, and if they will be operating with stricter capacity limits due to continued social distancing mandates.

If the parties do not reach a “mutually satisfactory agreement” within 30 days after the landlord received the negotiation notice, then the tenant can terminate the lease without liability for future rent, fees, or costs that otherwise would have been due under the lease.

One of the bill’s authors, Sen. Scott Wiener, said during the hearing that the bill is focused on the hospitality sector, which has been most devastated. The renegotiation provision will not apply to publicly owned companies or their businesses. The law would be in effect until the end of 2021, or two months after the state of emergency ends, whichever is later.

Quoted by the Commercial Observer, Wiener argued that the state faces “a mass extinction event of small businesses and nonprofits in every neighborhood,” and the “very real prospect” of them permanently closing due to prolonged mandates that reduce capacity, “chopping in half someone’s business.”

“This would change the face of our state permanently,” he said. “It would severely hamper our ability to recover.”

And while not everyone shares this view, most seem to agree on one thing: one way or another California is screwed. Matthew Hargrove, senior VP of government relations for the California Business Properties Association (CBPA), wrote a letter to the committee saying SB 939 “could cause a financial collapse.”

So, the choice facing California is either a “mass extinction event of small businesses” or “financial collapse.” Sounds about right.

* * *

“This postponement of rents will cause … landlord’s financials to crumble and lead to lenders putting out cash calls to lower loan balance and foreclose when landlords cannot pay, and cripple landlords’ abilities to keep their properties open and maintained,” the letter read. CBPA also argued it is unconstitutional for a state to pass a law impairing the obligation to contracts, and warned it would “allow one party to unilaterally abrogate real estate leasing contracts.”

CBPA is the designated legislative advocate in California for the International Council of Shopping Centers, the California Chapters of the Commercial Real Estate Development Association, the Building Owners and Managers Association of California, the National Association of Real Estate Investment Trusts, AIR Commercial Real Estate Association, and others. Those groups also warned members and clients about the bill, and voiced opposition during the hearing on Friday.

Thompson added that the bill risks crushing foundational landlord-tenant relationships throughout the state. Worse, if it passes in California and is adopted in other states across the country, the very foundations of modern finance would be shaken resulting in catastrophic consequences.

“Everything we do, especially in real estate, runs on relationships,” he said. “I think that when you tip the balance so far in favor of the tenant the way that [SB 939] does, it certainly strikes at the heart of the idea that we are in this together. … This does not make it feel like landlords and tenants are in this together anymore.”

The law firm Buchalter, which has offices in L.A., Orange County, San Francisco and around the West Coast, warned clients that the bill sets a “terrible precedent” that will “upend all your leases.”

“The rights afforded under SB 939 would effectively rewrite every commercial lease in California” other than publicly traded companies, the firm said. It “negates all current commercial leases to the benefit of one business over another.” 

Instead, Buchalter said the state should provide assistance to tenants impacted by the stay-at-home orders, and pointed to the “more reasonable” renter relief proposals introduced by Senate Pro Tem Toni Atkins

Wiener said they are sensitive to the needs of property owners in terms of their loan obligations. 

“It’s a complicated issue. We don’t want these property owners to default on their loans,” he said. “But we also need to be clear: these landlords aren’t going to be able to collect the pre-COVID rents from these restaurants, bars and cafes. That is not the reality. The choice is not between full rent and reduced rent. The choice is between reduced rent and no rent.”

He argued current leases negotiated before the pandemic reflect a “different financial reality.”

“Restaurants, bars, and cafes are expected, frankly, to just suck it up, and magically come up with the high rent that was obtained in pre-COVID circumstances,” he said. “This provision is not for leases to be terminated. It is to provide space and incentive to actually get the renegotiation done. … We know that overwhelmingly, these businesses don’t want to close down. This is their life’s work, they want to find a way to survive.”

Wiener said many commercial landlords are already working with renters, waiving backrents, and restructuring leases.

“It’s not in anyone’s interest where the landlord gets no revenue,” he said. “Sadly, on the other hand, all too many commercial landlords are refusing to renegotiate; are insisting that the pre-COVID, unrealistic rent be paid; are invoking lease-rent escalators; are imposing late fees on backrent. That is happening all over the state.”

During a press conference Thursday, Roberta Economidis, a partner with GE Law Group hospitality law practice, said that in order to survive, “hospitality-related businesses need long-term rent relief, not simply a deferral of high rents now that will become an insurmountable debt later.”

Governor Gavin Newsom already gave local governments authority to halt commercial evictions, and some cities like San Francisco and Los Angeles quickly did soBut SB 939 would cover all California businesses and nonprofits from eviction, whether their local jurisdictions have acted to do so or not.

SB 939 will be heard in the Senate Appropriations Committee this month; if passed it will trigger the next wave of devastation in the commercial real estate space.

  • Image if this happens in Virginia, Maryland and Washington DC for office market?

US New Home Sales Decline 6.2% YoY In April Despite Near-Record Low Mortgage Rates (Case-Shiller Home Price Index STILL Rising)

According to the US Census Bureau, sales of new homes fell 6.2% YoY in April.

No, it does not look like new home sales from the housing bubble burst of the ALT-A, private label MBS years.

Yes, near record low mortgage rates are helping to mitigate the horrid effects of the COVID-19 fiasco.

Home prices in March, according to the lagged Case-Shiller national home price index rose 4.4% YoY. COVID-19 epicenters Seattle and New York City both managed to see YoY gains in home prices in March. (Phoenix AZ is leading the nation in YoY home price growth at 8.2%, nearly twice the national average).

So far the COVID-19 epidemic does not look like the notorious housing bubble burst of the second half of the 2000-2010 decade of The Big Short frame. But the CMBX BBB- index of commercial mortgage-backed securities is getting crushed by retail, hotel and office losses.

Although this has nothing to do with real estate, this Bloomberg headline grabbed my attention: “Macron Pledges $9 Billion in Stimulus to Help French Carmakers.” Hey Macron, how about telling Renault, Citroën and Peugeot to make cars that buyers in US want to buy!

US GDP Forecast To Decline -34.9% QoQ (S&P 500 Sez “Meh”)

Now ain’t this a kick in the head. The Covid-19 and the government shutdown response is leading to a crushing decline in US GDP for Q2 2020 of … -34.9% QoQ.

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The recent dismal wholesale trade report sent forecast Q2 GDP down -34.9% QoQ.

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The reaction to the declining US GDP? Meh.

discoinnect

The good news? NMHC rent payment tracker finds 80.2% of apartment households paid rent as of May 6.

Worst Property Debt Crash in Years Looms for Workout Specialists (Fitch Says 26% of CMBS Borrowers Asked About Payment Relief)

First it was on-line shopping spearheaded by Amazon that helped crush physical retail space. Then the knock-out punch was the government shutdown of the the US economy.

(Bloomberg) — Emptied out malls and hotels across the U.S. have triggered an unprecedented surge in requests for payment relief on commercial mortgage-backed securities, an early sign of a pandemic-induced real estate crisis.

Borrowers with mortgages representing almost $150 billion in CMBS, accounting for 26% of the outstanding debt, have asked about suspending payments in recent weeks, according to Fitch Ratings. Following the last financial crisis, delinquencies and foreclosures on the debt peaked at 9% in July 2011.

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Special servicers — firms assigned to handle vulnerable CMBS loans — are bracing for the worst crash of their careers. They’re staffing up following years of downsizing to handle a wave of defaults, modification requests and other workouts, including potential foreclosures.

cmbs rate by vintage

“Everything is happening at once,” said James Shevlin, president of CWCapital, a unit of private equity firm Fortress Investment Group and one of the largest special servicers. “It’s kind of exciting times. I mean, this is what you live for.”

No Relief

A surge in residential foreclosures helped ignite the last financial crisis. Now, commercial real estate is getting hit because the economic shutdown has shuttered stores and put travel on ice.

Not all of the borrowers who have requested forbearance will be delinquent or enter foreclosure, but Fitch estimates that the $584 billion industry could near the 2011 peak as soon as the third quarter of this year.

There’s no government relief plan for commercial real estate. Bankers usually have leeway to negotiate payment plans on commercial property, but options for borrowers and lenders are limited for CMBS.

Debt transferred to special servicers from master servicers, mostly banks that handle routine payment collections, is already swelling. Unpaid principal in workouts jumped to $22 billion in April, up 56% from a month earlier, according to the data firm Trepp.

Make Money

Special servicers make money by charging fees based on the unpaid principal on the loans they manage. Most are units of larger finance companies. Midland Financial, named as special servicer on approximately $200 billion of CMBS debt, is a unit of PNC Financial Services Group Inc., a Pittsburgh-based bank.

Rialto Capital, owned by private equity firm Stone Point Capital, was a named special servicer on about $100 billionof CMBS loans. LNR Partners, which finished 2019 with the largest active special-servicer portfolio, is owned by Starwood Property Trust, a real estate firm founded by Barry Sternlicht.

Sternlicht said during a conference call on Monday that special servicers don’t “get paid a ton money” for granting forbearance.

“Where the servicer begins to make a lot of money is when the loans default,” he said. “They have to work them out and they ultimately have to resolve the loan and sell it or take back the asset.”

Hardball

Like debt collectors in any industry, special servicers often play hardball, demanding personal guarantees, coverage of legal costs and complete repayment of deferred installments, according to Ann Hambly, chief executive officer of 1st Service Solutions, which works for about 250 borrowers who’ve sought debt relief in the current crisis.

“They’re at the mercy of this handful of special servicers that are run by hedge funds and, arguably, have an ulterior motive,” said Hambly, who started working for loan servicers in 1985 before switching sides to represent borrowers.

But fears about self-dealing are exaggerated, according to Fitch’s Adam Fox, whose research after the 2008 crisis concluded most special servicers abide by their obligations to protect the interests of bondholders.

“There were some concerns that servicers were pillaging the trust and picking up assets on the cheap,” he said. “We just didn’t find it.”

Troubled Hotels

Hotels, which have closed across the U.S. as travelers stay home, have been the fastest to run into trouble during the pandemic. More than 20% of CMBS lodging loans were as much as 30 days late in April, up from 1.5% in March, according to CRE Finance Council, an industry trade group. Retail debt has also seen a surge of late payments in the last 30 days.

Special servicers are trying to mobilize after years of downsizing. The seven largest firms employed 385 people at the end of 2019, less than half their headcount at the peak of the last crisis, according to Fitch.

Miami-based LNR, where headcount ended last year down 40% from its 2013 level, is calling back veterans from other duties at Starwood and looking at resumes.

CWCapital, which reduced staff by almost 75% from its 2011 peak, is drafting Fortress workers from other duties and recruiting new talent, while relying on technology upgrades to help manage the incoming wave more efficiently.

“It’s going to be a very different crisis,” said Shevlin, who has been in the industry for more than 20 years.

Ya think?

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We will see shortly if this is a phantom punch or not.

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Black Knight: More than 3.8 Million Homeowners Now in COVID-19-Related Forbearance Plans

No, not Gary Player, golf’s legendary Black Knight. But Black Knight the mortgage data company.

Their most recent report indicates that 6.4% of all mortgages are in Covid-19-related forbearance plans.

• As of April 30, more than 3.8 million homeowners are now in forbearance plans, representing 7.3% of all active mortgages.

• Together, they account for $841 billion in unpaid principal and includes 6.1% of all GSE-backed loans and 10.5% of all FHA/VA loans.

• At today’s level, mortgage servicers would need to advance a combined $3 billion/month to holders of government-backed mortgage securities on COVID-19-related forbearances.

Another $1. 5 billion in lost funds will be faced each month by those with portfolio-held or privately securitized mortgages (some 6.7% of these loans are in forbearance as well).

• Ginnie Mae announced a pass through assistance program through which it will advance principal and interest payments to investors on behalf of servicers, and FHFA announced last week that P&I advance payments will be capped at four months for servicers of GSE-backed mortgages.

• Even so, given today’s number of loans in forbearance (and these numbers are climbing every day), servicers of GSE-backed loans still face nearly $8 billion in advances over that four-month period.

Fannie Mae and Freddie Mac have the majority of loans in forbearance with the FHA & VA in second place.

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And the SEC football conference (Mississippi, Louisiana and Alabama) lead the nation in non-current mortgage percentage.

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BlackRock, Voya Revive TALF Trade That Returned Double-Digits

Memories of the housing crash and financial crisis of 2008-2009. A Federal Reserve program to allow some to borrow cheap from The Fed and buy distressed assets that earn double-digit returns.

(Bloomberg) — Money managers are reviving one of the most profitable credit trades of 2009, thanks to the Federal Reserve.

Dozens of firms, from BlackRock Inc. and Voya Financial Inc. to credit specialists Palmer Square Capital Management and Varadero Capital, are raising funds to deploy into a central bank lending program that’s being resurrected to support the flow of consumer credit, according to people with knowledge of the matter.

They’re seeking to replicate the windfalls many enjoyed in the aftermath of the financial crisis when, by taking advantage of low-cost loans via the Term Asset-Backed Securities Loan Facility, they were able to notch double-digit returns purchasing top-rated ABS as the economy recovered.

It’s the latest example of how credit managers who spent much of the past decade battling low yields are now raising cash to seize on deep discounts created by the economic fallout from the coronavirus pandemic.

Investors, for their part, have been happy to oblige, piling billions of dollars into funds targeting distressed and dislocated securities as they aim to make up for steep losses elsewhere.

“If you look at what you’re getting an opportunity to invest in, it’s AAA rated paper that’s offering really healthy yields for the risk,” said Chris Long, president and founder of Palmer Square. “This go around, the TALF program is a bit more of a known entity. The fact that TALF proved so successful in 2009 really bodes well for demand.”

Still, some market watchers are already warning that replicating the gains of the last crisis may prove easier said than done.
On the heels of the U.S. housing collapse, asset-backed securities looked a lot more fragile in early 2009 than they do today. Average risk premiums on AAA rated ABS deals reached nearly 8%, according to Bloomberg Barclays index data. This year, they peaked around 3% in March and have since fallen to about 1.4%.

talf

“You’re not going to get 20% to 25% returns like you did in 2009,” said Greg Leonberger, director of research at investment consulting firm Marquette Associates. “The return potential is lower because spreads are lower.”

An example of the availability of distressed assets available is the TRACE number of distressed bonds traded.

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Here is the latest TALF term sheet.

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Washington REIT Fell 8.8% As JPMC Analyst Forecasts Office Occupancy To Fall 300 BPS Through 2021

Back to The Great Recession … at least for the moment.

(Bloomberg) — Washington REIT fell as much as 8.8% after JPMorgan cut its price target and funds from operations estimate due to the Covid-19 pandemic.

WRE PT cut to $22 from $25; 2020 and 2021 FFO/share lowered by about 8% and 14%, respectively.

Analyst Anthony Paolone said he expects, apartment NOI to come down 2-3% in 2020 and another 1% in 2021, and retail NOI to fall by about one-third in 2Q 2020 before improving somewhat.

Expects apartment and retail non-payments to impact FFO immediately, but office non-payments will take longer to show up.

Assumes WRE will tap its ATM program in 2021 for about $100m in order to keep leverage in check.

Maintained underweight rating.

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And this was AFTER WRE had a negative FFO surprise on Feb 13.

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WRE’s EPS doesn’t look too grand even before the COVID-19 struck.

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WTI Cushing Oil Plunges Below $11, Hotel Occupancy Rate Declines 69.8% YoY To 21% (All Time Record Lows)

My Corona!

The lack of demand for oil (and incredible supply build-ups) had led to WTI Crude oil to fall below … $11!

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WTI Crude (Cushing, OKLA) is now at an all-time low.

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Crude oil prices in the Middle East are … negative?

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On the hotel front (government lockdowns are pretty bad for travel and hotels!), in comparison with the week of 7-13 April 2019, the industry recorded the following:

Occupancy: -69.8% to 21.0%
• Average daily rate (ADR): -45.6% to US$74.18
• Revenue per available room (RevPAR): -83.6% to US$15.61

What I like about the government shutdown of the US economy? NOTHING!

Even Jack Torrance can’t get a drink from Lloyd in the shutdown.

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