Some Toys ‘R’ Us Stores May Be Worthless, Deutsche Bank Says

Beleaguered retail chain Toys ‘R’ Us is packing a punch for CMBS investors.

  • Properties in CMBS backed by 123 stores may be reappraised
  • Subordinated bondholders could lose control with lower value

Some Toys “R” Us stores could turn out to be worthless to commercial mortgage-bond investors.

As many as 26 of the weakest properties in a 2016 commercial mortgage-bond deal secured by 123 Toys “R” Us stores may have little or no value, Deutsche Bank AG analysts Ed Reardon and Simon Mui wrote in a note Wednesday. The stores backing the $512 million bond had an estimated value of around $618 million in 2016 if they were to be vacated and re-leased. But that figure could be one-third lower now because retailers’ revenues have been dropping and more have been filing for bankruptcy.

The properties are probably subject to a new appraisal following the Wayne, New Jersey-based toy store’s bankruptcy filing in September 2017, based on the securities’ offering documents, the analysts wrote. An appraised value of less than $495 million could lead to the most junior bondholders losing control of servicing decisions or taking losses, the analysts wrote.

Toys “R” Us sold the bonds in October 2016, less than a year before it filed for bankruptcy. The largest portion of the offering received AAA ratings from S&P Global Ratings and Morningstar Credit Ratings. The $63 million Class F piece of the deal, which would be the first to take losses, had junk ratings.

Such ‘Flux’

The analysts estimated a new appraisal may value the properties at $407 million. Adding difficulty to valuations are the varying types of store locations — including outside malls, strip centers and standalone locations — and a retail industry “in such a state of flux.”

Real estate investment trusts including Retail Properties of America Inc.DDR Corp.and Kimco Realty Corp. are candidates to purchase some of the spaces in primary and secondary markets because many already operate similar properties, the analysts said. Local real estate investors may be the best option for lower-value lots, but could also end up buying mid-tier spaces if national buyers pass.

Potential replacement tenants “have significant negotiating power” when leasing the spaces, the analysts said. Some loans in the deal have other large vacancies nearby, or other weak tenants that may close stores. In some cases, potential replacement tenants like Michaels Cos. and Dick’s Sporting Goods Inc. already have stores near or in the same shopping strip where a Toys “R” Us is closing, meaning they’re unlikely to step in and lease.

“Buyers of these properties face massive execution risk,” the analysts said, noting that owners of the spaces may face lower-than-expected rents, more retailer defaults or a long leasing process.

The TRU portfolio is truly awful.
And CMBX BB S6 is showing a dramatic decline since mid-2015 as retail concerns mount.

With retail store closings continuing to ramp up, retail REITs and CMBS investors had better watch out.


Fed Comes A Little Bit Closer To Taylor Rule (Raises Target Rate To 1.75% While TR Rudebusch Calls For 6.62% — Only 447 Basis Points To Go!)

Yes, Jay (Powell) and the Americans (FOMC) came a little bit closer to The Taylor Rule (Rudebusch Model) with the FOMC voting to increase their target rate to 1.75%. The lower bound is now 1.50%.


The Taylor Rule (Rudebusch Model) calls for a Fed Funds Target rate of 6.62%. Only 447 basis points left to go, Jay!


The sentiment for 4 rate hikes in 2018 is growing.


The Fed Dots Plot for today’s meeting shows optimism over economic growth.


I was hoping that Jay Powell was going to sing a ballad to former Fed Chair Janet Yellen.


MBA Refinance Index Now At Lowest Level Since 2008 (Down 4.45% WoW)

The MBA refinance index is now at its lowest level since 2008.


The MBA Refi Index decreased by 4.5% from 1159 to 1108, for the week ending on March 16, on a seasonally adjusted basis.

The Conventional Refi Index decreased by 5%, Government Refi Index decreased by 1.5%.


Perfektenschlag! U.S. Starter Homes Are Scarcer, Pricier, Smaller and More Run-Down (Perfect Storm For Affordable Housing)

Combine insane land use restrictions (zoning), influx of millions of immigrants from south of the border, a booming tech industry and super low interest rates from The Federal Reserve and we have  “Perfektenschlag” for US affordable housing policy: the perfectly UNAFFORDABLE HOUSING MARKET (aka, coastal California).

(Bloomberg) – Homebuyers in the U.S. have plenty to grouse about these days. Prices have climbed steeply in many metro areas, mortgage rates are rising and inventory is thin. But for people looking to purchase their first home, it’s ugly out there.

“Starter homes have become scarcer, pricier, smaller, older and more likely in need of some TLC” than they were six years ago, the real estate website Trulia reported Wednesday after analyzing housing stock across the country.  Trulia began tracking prices and inventory in 2012.

It’s grim all over. American homes are at their least affordable in the report’s history. But the median listing price of available starter homes has risen 9.6 percent in the past year, easily beating out the trade-up and premium categories, while starter-home supply has fallen to a new low this quarter, Trulia reported.

Perhaps the most striking finding is that the very buyers who are typically least able to plunk down a lot of money are confronted with the least affordable homes. The share of income needed by those in the market for a premium home was 15 percent, and for a trade-up home 27 percent. For a starter it was 41 percent.

Adding insult to injury, the homes aimed at first-time buyers are less likely to be ready for human habitation than others, with fixer-uppers accounting for 11.2 percent of the category. They’re about nine years older than they were in 2012, and 2 percent smaller.

On the bright side, 2 percent isn’t a whole lot smaller. Until you learn that homes overall are more than 8 percent bigger.

The markets that are the least affordable are concentrated in California with Boston being the sole market not located in the Golden State. In some of the most expensive places in the country like San Francisco, San Jose and Los Angeles, those income earners at the bottom third of the market would need to spend all their income and more (over 100%) to afford a median starter home.  The starter home price among all ten of these markets has also increased since this time last year.


Combine California Governor Jerry “Moonbeam” Brown and former UC Berkeley economics professor Janet Yellen collaborating on affordable housing policy, and you get the median price of a starter home in San Francisco of $820,550.


Yes, throw in California’s tight land use controls, a legislature that encourages open borders, a Federal Reserve keeping interest rate extremely low for a decade and a booming technology sector and we have an AFFORDABLE HOUSING CRISIS in coastal cities.


Or as Dwight Schrute said, “Perfektenschlag.”


Fed Enters Brave New Forecasting World Beset With Same Old Data (Actual data look very similar to those Fed faced in December)

The Fed’s Open Market Committee (FOMC) is meeting today and tomorrow to decide what to do. Well, it is pretty much a foregone conclusion that the Fed Funds Target Rate (upper bound) will be raised to 1.75% from 1.50%.


But what is different at this meeting than at the last meeting in 2017? In short, GDP is expected to growth at a faster pace and inflation is rising ever so slowly.

(Bloomberg) -By Jeanna Smialek- Federal Reserve officials will face an unusual predicament as they update their economic projections this week: Everything has changed but the data.

In many ways, it feels like a brave new world. Chairman Jerome Powell makes his debut with an expected interest-rate increase, replacing Janet Yellen. Financial conditions have tightened and the five rate increases under Yellen since December 2015 are finally being felt in the real economy, at least in mortgage rates. Tax reform has passed and Congress is lifting government spending caps, boosting the near-term growth outlook.

Yet Fed officials swear by their data dependence, and the numbers look strikingly similar to when the policy-setting committee last met. The inflation pickup officials have been waiting for still hasn’t materialized, wages are ticking higher but hardly surging, economic growth is chugging along and the job market continues to pull people off the sidelines.


And if we look at the Rudebusch Model for the Taylor Rule, it is screaming for a Fed rate hike even with unemployment rate at 4.1% and Core PCE Inflation at 1.52%.


While The Fed forecasts GDP to grow at 2.5%,


the Atlanta Fed’s GDPNow Forecast for Q1 has fallen to 1.8%. Be warned! This is one noisy forecast model!!


Home prices keep growing at over twice that of hourly wage growth.


Part of The Fed’s Brave New World is trying to cope with housing prices rising over twice as fast as wage growth.



Hurricanes! VA Serious Delinquencies Half That of FHA Serious Delinquencies (2% Versus 4%)

2017 hurricanes Harvey, Irma and Maria were among the 5 costliest hurricanes in history, according to USA Today.

As it stands, the serious delinquency rate on Veterans Administration (VA) loans is HALF of the serious delinquency rate on FHA-insured loans.


Federal Housing Administration-insured mortgages had a 146-basis-point increase in their delinquency rate from the second quarter, to 9.4%. This was the largest quarter-to-quarter increase in the MBA survey’s history.


There was a 52-basis-point increase in Veterans Affairs mortgage delinquencies to 4.24%, while the conventional loan delinquency rate rose 50 basis points to 3.97%.

While the storms played a critical factor in explaining the rise in the overall delinquency rate, there are other factors to consider, especially given delinquency rate increases in other states not directly impacted by the storms.

First, there were timing issues associated with the last day of the month being a Saturday. Processing for mortgage payments made over the weekend did not occur until Monday, Oct. 2 and thus these mortgage payments were identified as 30-days delinquent per NDS definitions.

Plus, delinquency rates were at historic lows in the second quarter. The FHA delinquency rate was at its lowest point in 21 years, while for the VA, late payments were at a level not seen since 1979.

And if you have FHA insurance, you are a Jet all the way! Particularly if you applied for an FHA loans on or after June 3, 2013.





House Flippers Return In Force, At 11-year High (Memphis, Las Vegas, Phoenix In Top Five, Washington DC Averaged $304K Gross Profit on Flipped Homes)

House flipping was common at the peak of the housing bubble in the last decade. While not near the highs of 2005, house flipping is at its highest since 2006, according to a report by Attom Solutions.


Gross profits from flipping are higher than during the peak flipping years of 2004-2006.


Memphis, Las Vegas and Phoenix are in the top five cities for flipping. And yes, the Washington DC area is back in the thick of things for flipping.


Washington DC flipping has been quite profitable.


House flipping often occurs in markets with high demand and lack of inventory.


They call them flippers!

Let us just hope that rising house flipping isn’t a precursor to another home price crash!



30-year Treasury Auction Strong With $13 Billion Sold To Public (None Bought By The Fed)

Today’s US Treasury 30-year bond auction was strong. $13 billion were sold to the public  and none purchased by The Fed for the first time since the December 12, 2017 auction.


So far, so good. Despite massive Federal spending and projected budget deficits, Treasury auctions are going well.

The 10-year T-Note Volatility index (TYVIX) has declined to around 4.


Fed Boogie: Cboe Equity Put/Call Ratio Nearing Pre-meltdown Levels

The Cboe Equity Put/Call Ratio is nearing pre-meltdown levels. Since the index measures the volume of equity puts versus calls, it will rise on an increase in bearish bets and fall when demand is greater for bullish ones. The ratio peaked this year at .88 on Feb. 9 following the market’s 10 percent drop to start that month.


The CBOE S&P500 Volatility Index (or VIX) is almost back to pre-meltdown levels too,


The 10-year T-Note volatility index is actually below the February meltdown level, but above the January and early February levels.


The market is stabilizing as The Fed engages in The Fed Boogie.


Interest rates: Get up, get up.


Double Whammy! 10-year Treasury Bid-to-cover Ratio Lowest Since ’09 As Treasury Borrowing Increases And Fed Tightens

Based on the number of bids that investors submitted versus the amount sold, average demand for 10-year notes has fallen to the lowest since October 2009. (Bid-to-cover  compares the volume of securities that dealers enter bids for to the volume offered for sale).


Treasury supply is further exacerbating what should be a natural move away from the market as interest rates climb.

The yield on benchmark 10-year Treasuries has already risen around half a percentage point this year and was at 2.89 percent as of 7:30 a.m. Thursday in New York.

The government’s financing needs have already started to grow. As a result of the Trump administration’s tax cuts (not to mention the staggering budget deficits under The Bush and Obama Administrations), the deficit is set to widen and reach almost $1 trillion next fiscal year. The shortfall is on top of the almost $21 trillion of debt the U.S. already owes, more than any other country. (Roughly 70 percent of that total is in the form of Treasuries.)


Excluding short-term bills, the U.S. government plans to borrow $62 billion at debt auctions this week by offering Treasuries due in 3, 10 and 30 years. The total is about $6 billion more than auctions of the same maturities in January. The first batch of enlarged sales last month were “noticeably worse” by most measures, Simons said.
Economists have questioned the value of Trump’s debt-financed tax cuts this far into the post-crisis economic cycle, in part because the stimulus is a departure from prevailing theory and the norm in recent decades. Borrowing has tended to decrease when the Fed is raising rates, and vice versa.

And with Fed officials projecting three rate increases this year, the opposite is poised to happen in 2018.


This “double whammy” of Fed tightening and Treasury increased borrowing is not likely to go away anytime soon as Treasury issuance increases and The Fed continues to normalize monetary policy.

The next 10-year auction is today at 1pm. Let’s see if Whammy is still pitching.