Friday, May 22, 2009


This will serve as the final notice that the Llenrock Blog has moved to We have undertaken advice from our readership to redesign the site in a new, more user-friendly format. Please check it out by clicking the link above, and don;t forget to update the bookmark for this site!

Thursday, May 21, 2009

The Real Cause of the CREDIT Crisis

And you thought real estate was to blame for the credit's all in the name! CREDIT! Now only if Barack Obama created a news conference to tell us to spend, rather than VISA, we might get out of this recession...


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Wednesday, May 20, 2009


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Tuesday, May 19, 2009

The Next Big Shoe to Drop?

Martin Cohen, Chairman and co-CEO of Cohen and Steers Capital Management, and pioneer in real estate securities investing, gives his outlook on commercial real estate.


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Monday, May 18, 2009


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Light at the End of the Tunnel?

When I asked a colleague recently if he thought there was light at the end of the tunnel for this whole credit crisis debacle, he paused, looked at me calmly and replied, "Yeah, there's a light at the end of the tunnel...and its coming from a train that's about to run us over."

Tongue-in-cheek? Yes.

Truthful? Maybe.

Either way, it hasn't stopped Boston Properties from doing something none of us thought was possible in the current environment last week. Mort Zuckerman's firm obtained a $215 million construction loan to complete a mixed use project currently underway in Boston called Russia Wharf.

Just as you might have suspected, there was no mysterious white elephant to be found, no secret source of capital that the rest of us did not know about. In fact, it took the form of a much smaller deal, where community banks whose legal lending limits aren't big enough to take down the entire loan might pool together and participate with several other financial institutions.

A group of five banks, in this case, led by New York Mellon Corp. provided the financing. That being said, the terms of the loan are about as tough as they get.

Friday, May 15, 2009

The Top 5 Largest Delinquent Loans

The following loans are the largest loans in Fitch’s loan delinquency index. The index consists of loans 60 days or more delinquent in addition to those characterized as nonperforming matured loans, in foreclosure, or REO.

Resorts Atlantic City, CSMC 2007-TFL2

The $175 million loan is secured by a 942-room hotel and casino in Atlantic City, NJ. The loan transferred to special servicing in December 2008 due to monetary default. The property has exhibited declining performance since issuance as a result of the overall negative performance of the gaming industry. The special servicer and sponsor continue to discuss workout options.

Macon Mall/Burlington Mall, Wachovia 2005-C20

The $136.7 million loan is secured by two cross-collateralized regional malls in Macon, GA, and Burlington, NC. The Macon Mall is a 1.4 million-square-foot two-level enclosed super regional mall and the Burlington Mall is a 419,194-square-foot one-level enclosed mall. The borrower, Lightstone, indicated it could no longer continue to fund the debt service shortfall. It also agreed to the appointment of a receiver with the ability to sell the properties. The special servicer appointed a receiver to manage the properties and has initiated foreclosure.

Bethany Portfolio, MLMT 2007-C1

The $130.5 million loan is secured by a portfolio of 11 multifamily properties comprising 2,904 units across Georgia, North Carolina and Virginia. The sponsor of the loan at issuance was The Bethany Group. The loan transferred to special servicing in February 2009 due to payment default. The borrower abandoned the properties in early March. The special servicer appointed a receiver, which is in the process of stabilizing the assets and assessing their financial condition.

The Promenade Shops at Dos Lagos, JPMCC 2008-C2

The $125.2 million loan is secured by a 34,847-square-foot lifestyle/entertainment retail center in Corona, CA, built in 2006-2007. The center is the central portion of a master-planned community that has not been completed due to the residential market decline. Many tenants have asked for rent reductions and many also have lease provisions allowing them vacate the property should occupancy fall below a threshold. These thresholds are likely to be triggered in the next year.

Senior Living Properties Portfolio, GMAC 1998-C1

The $112.2 million loan is secured by a portfolio of health care facilities and has been in special servicing since October 2001. Senior Living Properties experienced extensive operating losses beginning in 2000 due to lower revenues as a result of changes in Medicare and Medicaid reimbursements and filed a voluntary Chapter 11 bankruptcy in May 2002. 48 properties in Texas remain as Senior Living Properties management works to improve operations and consolidate locations. The special servicer recently extended the maturity date of the loan again until Feb. 1, 2010.

Thursday, May 14, 2009

Jokes of the Day

1. A bank worker calls a colleague.

"Hey, how's it been going?"

"Not so bad."

"Oh, sorry, I've definitely called the wrong number."

2. In the face of the financial crisis, I have bravely stood up and am marching forward! That's because ... I can't pay back my loans and the bank has repossessed my car.

3. A Trader: “This is worse than a divorce. I’ve lost half my money and I still have a wife.”

4. What’s the capital of Iceland? About $20.

5. The problem with Investment Bank balance sheets is that on the left side nothing is right, and on the right side, nothing is left.

6. There are 30 billion prime numbers below 700 billion. The rest are all subprime.

7. How do you define optimism? A banker who irons 5 shirts on a Sunday.

8. What's the difference between Investment Bankers and Pigeons? The Pigeons are still capable of making deposits on new BMW's

9. A bank customer goes to their bank:

Bank Customer: Hi, I had this check returned to me. Could you help?

Teller: Sure let me see it. Ah, right here, it says "Insufficient Funds"

Bank Customer: "I know, I just wasn't sure if you were referring to me, or the bank."

10. An elderly lady receives an e-mail from the son of a deceased (but wealthy) African general, asking whether he could transfer millions of pounds into her bank account in return for a 20% cut. All the son needs is the sort code and account number. Not realizing she is the victim of a Nigerian 419 fraud, she e-mails back the details. A couple of minutes later she receives an e-mail back from the general's son: 'Citibank'! What is this, some sort of scam?"

Wednesday, May 13, 2009

You Make the Call

Dovetailing on last friday's post regarding the collapse of the CMBS market, and who, if anybody is going to pick up the slack, I thought it would be prudent to examine the current thoughts about what the fallout might be if there is no securitization market revival. At the same conference I denoted in Friday's post, a different question was posed:

Will there be a securitization market revival, or is the foreseeable future going to revert back towards balance sheet lending?

The overwhelming response, was that their will be some type of revival, but it will never get back to the level it was at 18-24 months ago, and it certainly will not happen any time soon. The TALF program is still undergoing some changes, but the program should certainly help with single asset deals and will provide shorter terms. Because of the glut of debt maturation ($400 B by 2013), the market has not stabilized, and toxic assets must get taken care off before we will see any revival of the securitization market.

Part of the problem that is often NOT discussed, is the lack of confidence not in the real estate sector, but in the ratings put out by ratings agencies on collateralized debt. Let us not forget that many of the failed CDO's were insured and rated AAA. There will continue to be no, or little investment if the benchmarks being used to value and rate assets are not trusted.

All of this being said, nobody at the conference doubted the intellect and ingenuity of Wall Street. At some point, Wall Street will figure out another creative way to push securities on the open market. Until then, many people thought that mezzanine providers would pick up the slack of first mortgage originations that are only being levered to 60-70% to get to the more traditional, and buyer preferred 75% LTV. The reason this may work is that while mezzanine financing is typically viewed as unnecessarily expensive, because first mortgage interest rates are historically low, the blended rates wouldn't be that bad, somewhere in the 7.5% range. As we battle inflation and interest rates begin to rise over the next few years, pushing rates back to their historically norms of the same range, investors may be okay with this approach.

Another suggested solution to the CMBS mess, is that in the future, originators may have to take some type of first loss position in the loans, as well as actually having to service the loans. Additionally, instead of slicing up pieces of many different mortgages and pooling them together, it has been suggested that they simply pool whole loans together so that owners can go to one lender to service their loan. This way, everybody's interest are more closely aligned with one another.

What do you think about all of this? Are there any other suggestions out there that make sense? We'd love to hear your thoughts!

Tuesday, May 12, 2009

Sam Zell's Take on the Market

The Master offers his take on current market conditions, valuation techniques, and where we are headed. Very informative stuff!

Monday, May 11, 2009

Will Life Companies Step up to the Plate?

I recently attended a conference in which a simple, but intriguing question was posed: Who is, and who will be picking up the slack in the conduit marketplace's absence?

The answers were as follows:

- Savings banks are out lending, doing 5 year deals.

- Life companies are lending to their existing clients at relatively low leverage (50-60%), being more conservative, and not showing interest in new relationships.

- Big banks, on the flip side, are not extending credit to their clients. 10 year fixed deals are near impossible to find anywhere.

- We should continue to see high yield players exploit that gap to get people through refinancing when their notes come due.

- Equity firms are in the market but aren’t looking at highly leveraged deals, but rather those is the 40-50% range.

- Providing recourse is essential in getting deals done today.

- Structural changes are necessary to the CMBS markets to properly align interests so that the originators have first loss position in deals.

- Centralized underwriting via a third party is being considered, as well as forcing originators to service the actual individual loans.

One of the more interesting points regards life companies. They certainly have the cash to deploy, and while nobody could blame them for being skittish, or at least more conservative in today's environment, the real reason they may not be flooding the market with capital is because of their own recent exposure to the CMBS mess. For example, according to a report by SNL Financial, the top 20 life insurance companies holding commercial mortgage-backed securities held more than $118.67 billion by the end of last year, creating potentially higher exposure for some to CMBS delinquencies.

Hartford Life Insurance Co. held more than $9 billion in total CMBS with $6.29 billion in non-first lien A or lower status, which represented 153.1 percent of capital and reserves. Northwester Mutual held $4.93 billion of its $4.95 billion total CMBS in non-first lien A or lower, but its percentage in capital and reserves was only 36.7%. Allianz held all of its CMBS, $6.85 billion (about one tenth of its total assets), as non-first lien A or lower, 327.1% capital and reserves.


Friday, May 8, 2009

Stress Tests a Mess of Jest?

When you gain some weight, your doctor probably yells at you. When you don't listen to his advice and continue your march towards obesity, he'll likely recommend a stress test in order to ascertain the health of your heart. We've all seen this in the form of the shirtless fat guy running on a treadmill with anodes stuck all over his corpulence (as pictured above).

Similarly, banks have become obese (with bloated books of bad debt rather than donuts and ice cream) and have recently undergone a stress test of their own. Back at the end of February President Obama ordered the 19 biggest banks to undergo a stress test to see how they would fare if the economy was to worsen further.

According to the new Treasury Department guidelines, the banks would have to assume that the economy contracts by 3.3 percent this year and remains almost flat in 2010. They would also have to assume that housing prices fall another 22 percent this year and that unemployment would shoot to 8.9 percent this year and hit 10.3 percent in 2010.

Yet, despite leaked reports that between 10-14 of the 19 banks would fail and be required to raise more capital, their stocks have been surging recently. For example, three regional banks widely believed to need more funding -- Birmingham, Ala.-based Regions Financial (RF, Fortune 500), Cincinnati's Fifth Third Bank (FITB, Fortune 500) and SunTrust Financial (STI, Fortune 500) of Atlanta -- each gained more than 25% earlier in the week. And Wells Fargo (WFC, Fortune 500), considered one of the strongest, also shot up nearly 25% earlier this week -- despite reports that it too may need to raise more capital.

Just yesterday, hours before the scheduled 5pm release of the results, Citgroup and Bank of America stocks rallied further.

Unfortunately, the stock market is exactly that....a market. It is not the underlying companies it represents, it cannot erase the bad bets the banks themselves have made, and their value is only worth what the next guy is willing to pay for it...ya know, kinda like real estate.

As was estimated, 10 banks are going to need to raise more capital. Will you be the first, or second person in line to sell off your bank stock earlier than everybody else this morning?

Thursday, May 7, 2009

FREE Money!!!

Its funny cause its true...of course this guy probably put Matthew Lesko himself out of a job.

Wednesday, May 6, 2009

The Most Interesting Banker in the World

Imagine its 2006. You are a banker. You have tons of clients, and you are happy to finance their real estate transactions. As a matter of fact, its happening left and right. Your boss likes you. You are putting the bank's money to work. Nobody in your portfolio has defaulted in years, so you keep lending more and more money. The bank is making piles of money in interest payments due to your efforts. Life is good. Really good. You think to yourself, "maybe by 2009 I can make Chief Lending Officer...."

Of course, by now you know that those loans you made weren't such smart decisions after all. A good portion of your sponsors have either missed a payment, or you are scared they are going to. You are terrified you are going to lose your job, because your bank isn't lending money anymore. To anyone. Which kind of makes your job obsolete. Its now 2009.

But who could have foreseen such a cataclysmic event in the capital markets? Like a fourth grader caught for being naughty, you can only cling to the "but everyone else was doing it" excuse. Everyone that is, except for banker contrarian, Andy Beal.

Bankers typically graduated from a good university, with a good GPA. Andy Beal was a college dropout. Bankers don't typically like to gamble, certainly not with the bank's money. Andy Beal played in the World Series of Poker in $2 million dollar cash games against poker legends and held his own. Bankers usually rely on mandates, not their gut. Andy Beal didn't make a single commercial real estate loan between 2004-2007. Not one. In fact, for three long years, Beal barely made any loans, period.

While his banking cohorts were cleaning up, he idly sat on the sidelines, biding his time, and waited. Others bankers asked why. Regulators probed why, assuming he was up to no good or insane for not taking advantage. Waited for what, you ask? For this. For the imminent disaster he knew would strike sooner or later. For the credit markets to collapse. For bankers to lose their shirts along with their borrowers. And of course, for the once in a lifetime opportunity to capitalize on all this mess.

While Andy Beal's story is too long to tell on this blog, read the whole story, as reported in a article here. Here are the highlights:

In the last 15 months Beal has put $5 billion to work, tripling Beal Bank's assets to $7 billion

Beal is building 28 branches from Miami to Seattle, up from 7 at the end of last year

Beal has barely got a dime from the feds

He owns 100% of his bank, aptly named, "Beal Bank"

In 2000 American Banker declared Beal Bank the most profitable bank in the nation as measured by its five-year return on equity of 50%

Beal has offered a $100,000 prize to anyone who can solve a number-theory puzzle

"Every deal done since 2004 is just stupid," Beal says.

If he ever thinks of investing in hedge funds or private equity, he says, "Just shoot me."

His thoughts?

"Banks are on a prayer mission that somehow prices will come back and they won't have to face reality," Beal says. "Unemployment is going over 10%, commercial real estate hasn't even begun collapsing and corporate credit defaults are just getting started," he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.

Here's that link one more time....You're welcome.

Tuesday, May 5, 2009

Sesame Street Layoffs

Maybe you can use this to explain what's going on to your kids...

Monday, May 4, 2009


You would think that a real estate investment bank, by definition, would be right in the mix for any mergers and acquisitions deals involving the more than 130 Real Estate Investment Trusts that exist today. Sorry to disappoint, but that's not really what we do. That being said, there has been more and more speculation, A. D. Pruitt of the Wall Street Journal Online being one of the loudest and most recent, that REITs will go the M&A route.

One of the biggest and most obvious reasons for this is that many REITs are struggling right now, saddled with too much debt from frothy acquisition plays they made during the boom years of 2004-2007. Better positioned REITs, in an ironic twist, may be well suited to acquire the struggling REITs because they are lower levered and can take on some of the debt burden that would come with acquiring such a massive entity.

Of course, there is a more prudent approach given the way everything seems to be going more slowly and more judiciously in the current environment. Stronger REITs may elect to simply wait until the weaker REITs fail and go bankrupt so they can simply bid on portions of the distressed assets available at auction in order for the failed REITs to pay creditors. Just like vulture funds, they might have their pick.

However, given that many trophy assets may or may not be available for sale under bankruptcy proceedings, healthy REITs may simply elect to acquire they entire company.

General Growth Properties will be a very interesting case study. While many had speculated that its biggest rival, Simon Property Group, was going to acquire it last month, instead GGP filed for bankruptcy. The courts and creditors will now ultimately determine which properties in GGP's portfolio will be made available to the public for sale.

REITs, which own about $600 billion of commercial real-estate assets, were established in the 1960s to give individuals an easy way to invest in income-producing real estate. If credit markets don't thaw soon with the help of federal aid initiatives, some companies will be hard-pressed to survive if they can't refinance their debt. The outlook gets more dire in 2011 when $500 billion of commercial real-estate maturities come due, according to a report from the National Association of Real Estate Investment Trusts, citing data from Goldman Sachs Group Inc. and Securities and Exchange Commission filings.

With more than 30% of REIT stocks valued under $5 a share, there are certain to be many, especially those who can't raise equity through public offerings, who will bow out of the race.

My question to you is, given that REITs amazingly only own about 6% of the total volume of commercial investment properties nationwide, how much of an impact on the commercial real estate market would it have if 10-20 of them went belly up?

Friday, May 1, 2009

Stick 'em Up. I Want to Apply for a Loan.

Thanks to Mark Stein of Conde Nast Portfolio online...I couldn't have written a better article myself.

Lots of builders are in trouble with their banks these days, but not many try to work out a solution by kidnapping their bankers. That's what one Spanish contractor attempted today in the Mediterranean resort of Malaga.

According to police reports, the unidentified contractor approached his victim in the bank parking lot, pulled a pistol, and forced him back into his car. After threatening the banker's family, the kidnapper demanded a 50,000 euro loan -- and, while, he was at it, the banker's car.

While ostensibly arranging the loan by phone, the banker gave a colleague a coded message suggesting he had been taken hostage. Police were called and arrested the builder.

Kidnapping has become a popular reaction to the recession in Europe. Workers at several factories in France, for example, have held their bosses captive while negotiating severance packages in recent weeks.

The "bossnappings," as the actions are called, have affected plants operated by Sony, 3M, Caterpillar, and a British auto parts company called Scapa Group.

If you kidnapped your boss, what would you hold out for?

Thursday, April 30, 2009

(Madoff) You Give Jews A Bad Name

(Madoff) You Give Jews a Bad Name - watch more funny videos

For those of you who bashed me for bashing 80s hair band Poison, it's really just because I love Bon Jovi...or should I say, Bon Jew-vi. Enjoy!

Wednesday, April 29, 2009

Call me Anything You Like...

Except a mortgage broker. Many people ask me what I do, and its often difficult to answer them both concisely, and in layman's terms. Even those who know a thing or two about real estate, too often confuse my role with that of a mortgage broker.

A mortgage broker is a matchmaker of sorts, marrying borrower and lender least until one of them wants a divorce. Sometimes the borrower cheats on the lender in the form of shopping for better rates to take out the existing lender through refinancing, and sometimes the lender cheats on the borrower by packaging their loan and selling it off to a third party.

The simple fact of the matter is that while they want to see a successful partnership, mortgage brokers don't work for the borrower, or the bank, but for themselves. Many consumers assume that a mortgage broker works for them for free, in the form of shopping for the best rates and terms, and then gets paid by the lender for providing them the ability to loan money. Funny. That's the equivalent of a commercial broker telling a buyer that they've scoured the market for better deals, and can't find one better than the deal they are listing for sale.

The truth is that if you, as a consumer, aren't paying the broker a fee directly, then the broker isn't working for you. Sometimes lenders will offer brokers a rate to push to their consumers, and the only way a broker makes money is by inflating this rate until the spread reaches a number representing a fee for which the broker is willing to work. The bigger problem however, is that in recent years, banks offered brokers more to push certain loan terms like adjustable rate mortgages. “The ways brokers were paid created a conflict of interest and really meant that the broker to a very large extent was financially rewarded by betraying the trust of the borrower,” said Representative Brad Miller, a Democrat from North Carolina who co-sponsored the legislation in the House of Representatives.

Real Estate Investment Bankers are different for a whole host of reasons. First and most obviously, is that we offer capital solutions spanning the entire capital stack, not just straight debt. This means we can provide access to secured and unsecured mezzanine, and preferred and joint venture equity in addition to debt. We also provide more ancillary services like access to high net worth individuals for credit enhancements, bridge debt, and hard money. It is our network and creativity in addition to our services that provide value to our clients.

Most importantly of course, is that while any intermediary technically has two clients, the seller and buyer, borrower and lender or what have you, investment banking counsel really only works for one of them, the borrower. Lenders are our client in the sense that they are a vital partner to our business. By working closely with them, we can better understand their needs, desires and constraints to doing business, which in turn helps make our job easier on behalf of the borrower, our true client. It is the borrower who retains us for our services. We earn our fee in that we are only paid thereafter for success. Lenders value investment banking counsel for the relationships we bring to them, not any services we provide them.

Borrowers on the other hand value us for an array of things. First and foremost is our access to capital. Banking is a relationship business, and in today's economy specifically, if you don't have a relationship, you've got nothing at all (deposits help a lot, though!). Second is our ability to structure a client's deal in a way that presents their case to potential lending sources in the most favorable light. This means that we increase the likelihood of funding since we understand how bankers want information presented to them. Third is our industry knowledge. By working with lenders frequently, we know what types of deals they want to see, which means we know the most likely candidates to be competitive for each specific deal. Fourth, we save the client time, and time is money. Many of our clients are successful real estate operators, but they didn't become successful by wasting their time on the phone with 100 capital partners, shopping for the best terms. Others are business owners, where real estate is not their forte. In either case, we act as a trusted advisor to our client. Furthermore, no lender would dare call a real estate investment banker's bluff if we told them we can do better.

So next time when you are speaking with your investment banking counsel, remember why they might be upset with you for insinuating they are "simply" a mortgage broker, and choose your words wisely.

Tuesday, April 28, 2009

Aaaand It's Gone!

Monday, April 27, 2009

The Philly 411

For our Philly-centric readership, you will definitely want to check out The Philly 411, a new monthly contribution to, written by Llenrock Group's own Dave Jacobs. The feature discusses interesting commercial real estate related happenings in the greater metropolitan area, including news, rumors, and gossip.

Equity Raising Proves Easier for REITs

Vornado Realty Trust VNO.N, owner of office and retail properties, said last Wednesday it now expects to raise net proceeds of $710 million from its equity offering, up from an earlier $617 million, as underwriters exercised their option to purchase additional shares.

The company, the most recent real estate investment trust to tap the equity markets for capital, said it intends to use the proceeds for general corporate purposes, including repaying debt and funding acquisitions.

Although the debt markets have been reluctant lately to make large loans to commercial real estate companies, equity investors have shown an appetite for new shares.

Property companies that have turned to the equity market for capital over the past month include Simon Property Group Inc SPG.N, AMB Property Corp (AMB.N), Kimco Realty Corp KIM.N and ProLogis PLD.N.

This makes it easier for these big public REITs to acquire, especially to acquire assets of recently bankrupt General Growth Properties.

All of this news of REITs raising equity with public offerings raises an interesting question. Is this the wave of the immediate future? Are REITs better suited than private real estate companies to capitalize on opportunities in the short run, and thus are better poised for success in the long run?

While private real estate companies, much like REITs can be both narrowly focused by product type, as well as well diversified, both have been hit hard during the current economic downturn. There are several advantages each have over the other.

REITs have the clear advantage in the ability to raise capital. In this environment, the astute investor can see an undervalued stock rather easily, since many stocks are based on historical valuations, dividends, growth etc. Since REITs are relatively lower levered than private real estate funds, their purchasing power is higher during the current economic climate. On the flip side, many worried private investors who haven't seen strong returns from their current and previous investments in private funds may be more hesitant to commit capital in the next fund. As any private operator will tell you, fundraising is as tantamount to large scale success in the industry as finding the right deals to buy. REITs also pay dividends, and are very liquid, which means investors can and will see returns on their investments much more quickly. With funds, capital is promised back to investors within a certain time frame, which if necessary can be many years.

Yet, there are still some clear cut advantages for private companies. The first is return thresholds. Most private real estate funds promise returns in the mid to high teens, sometimes doubling or tripling the returns of many REITs. Private funds are also not subject to the scrutiny of regulators because ownership remains private. As an aside to this fact, private funds aren't focused on quarterly results, and do not have to meet analysts' projections in order to stave off a sell off of their stock, and thus, their capital base. Also, unlike with any public company, with many private funds, returns, to a certain extent are promised, and not subject to the fluctuations of the markets. That being said, if a private operator fails and goes bankrupt, how secure are those returns? An investor is taking a lot of faith that the operator knows what they are doing, and is more innovative than the next guy in being able to remain afloat during unforeseen circumstances, like the tumultuous market we know find ourselves in.

One thing does remain clear in this debate. Cash is king. And REITs have more of it.

What are your thoughts on who is better poised to take advantage of current market conditions?

Friday, April 24, 2009

Meredith Whitney: Part 3

Earlier in the week, we noted the meteoric rise to stardom for Meredith Whitney. She has rode that wave of predictions to her own firm. Yet despite her prowess as an analyst and despite her being a darling of the media, one has to wonder, as David Weidner has done in this Wall Street Journal piece from April 9th, if she is all we think she is. We won't go so far as to say she's a fraud or even a fluke, but the inherent nature of entrusting one individual with the title of "Wall Street Oracle," as Whitney has been dubbed, is nothing short of dangerous.

Weidner says, "But to put it bluntly, Ms. Whitney's call on Citi wasn't that great. It wasn't the first, nor was it the best. Citigroup was already in deep trouble. Citi held a conference call three days after Dick Bove, then at Punk Ziegel & Co., Mike Mayo, then at Deutsche Bank and Charles Peabody at Portales Partners all issued sell ratings on the stock. Ms. Whitney participated in this call and asked three questions of Gary Crittenden, then Citi's chief financial officer, none of which were regarding Citi's dividend or capital position."

Two weeks later, "The Call" was made.

And while Ms. Whitney did go on to make some correct prediction in 2008, and she has clearly demonstrated her intellect, she is no Oracle. The Call did not say Citigroup was stuffed with hundreds of billions of dollars in toxic assets. It did not say that multiple banks will fail unless the government intercedes. It didn't mention Bear Stearns (which she once expected to earn more than $11 a share in 2009), Lehman Brothers or American International Group Inc.

As Weidner correctly points out, "That Ms. Whitney has emerged as a prophet of the financial crisis, mainly on the basis of one call, is a reminder that we tread dangerous territory by crowning messiahs on Wall Street. The Whitney myth is especially relevant considering our current dire straits were in large part created by faith in the financial "masters of the universe" who were deemed too sophisticated – and too highly paid – to misjudge risk."

"How is this guy getting 15+% returns when the market has been tanking? Ahh, who cares, he's making me money!!" These were the same sentiments expressed by those who will be crying on the witness stand for Bernie Madoff's trial in June.

Nobody has all the answers. Not Meredith Whitney. Not even Nouriel Roubini. Nobody should have a messianic complex in this environment. So next time the media falls in love with someone else, remember the words of Chuck D. and Flavor Flav from Public Enemy..."Don't, don't, don't believe the hype."

Thursday, April 23, 2009


As a follow up to our video on Tuesday, perhaps this is what the New CitiBank ads will look like...

Wednesday, April 22, 2009

Meredith Whitney: Part 2

From the increasing popularity caused by correct assessment and prediction after correct assessment and prediction, Meredith Whitney resigned from Oppenheimer on February 19, 2009, just three weeks after the clip above, to establish her own firm, Meredith Whitney Advisory Group LLC. In one of her most recent interviews with Steve Forbes on April 5th, she was asked if we are currently out of the water. To read the entire transcript, click here.

Below, we have excerpted some of our favorite thoughts....enjoy!

STEVE FORBES: Back in the summer of 2008 when a lot of people thought we were out of the woods on the financial crisis, you said no, the worst was to come. First of all, why did you think there was such devastation in the banking sector that was unprecedented? And are we finally climbing out of the thing?

Meredith Whitney: What worried me last summer, summer of 2008 was what happened to IndyMac in the summer, in July, when you had a run on the banks. And what I knew at the time, was that there would be runs on other banks, and those that were heavily weighted towards commercial deposits.

So, at the time, it was a guarantee of $100,000 or below. And so, the commercial deposits, that which you pay your payroll through, there was your 30-plus percent of the banking system, 35% of the banking system, uninsured. And so, if you look at what was, who had the most exposure to the commercial deposits, obviously, those were the first to flight.

So, what you saw then was an effective on the bank of Washington Mutual, and an effective on the bank at Wachovia, and NatCity and some others. And so, what we didn't see was, all of those deals were done inside of the third quarter. So, what you didn't see was what happened to their deposits inside of the third quarter. So, July was part of the third quarter.

And by September, Wachovia and Washington Mutual were part of another entity. We never saw how bad things were. But I saw that on the come. I also knew that it was clear that the banks were carrying bad math assumptions. So, one key variable in evaluating your mortgage, what your mortgage portfolio is worth is, No. 1, what employment is.

But No. 2, where you think home prices are going to go. And as an example, Wachovia, which was, I put a sell rating on Wachovia in July. And the stock was $9 or something. It was a pretty wild call. But I knew that they were expecting home prices to decline by 21%; 60% of their exposures were in California. Case-Schiller is now down 30% in the top 10 MSAs. So, it was clear that they would have to play catch-up. And it is also clear that the banks still have to play catch-up. The banks, all the big banks anyway, carry their mortgage books with an assumption that home prices would decline peak-to-trough 30%, 31%.

Well, we're already there. So, what you'll see in first-quarter results is a catch-up to what now the future of market is doing, viewing the peak-to-trough home prices to be 37%. So, you're constantly having to reevaluate your reserves against loans. That puts earnings pressure on companies.

And it creates an environment where it's almost impossible to regenerate your own capital, to grow your own capital. So, you've got to have your hands out for other people's capital. And it's been sovereign wealth fund's capital. It's been U.S. investor's capital. It's been our taxpayer's dollars as capital. And I don't see that ending anytime soon.

SF: Now, in January and February, it seemed, at least to an outsider, that even regardless of what the books said, the banks seemed to be doing very well on a cash-operating basis, the rollover alone. You were paying fees. You are paying fees. You were paying 10,000 points above LIBOR. Do we have a disconnect here? Where on a cash basis, the banks are doing well; where in a statutory, regulatory basis, they're still not out of the woods?

MW: On an accrual basis, that's where you get into problem areas. Because your loan is only as good as it pays you back. And so, the loans are paying back less. As I said, one of the two main assumptions that goes into valuing any of your loans, accrual-based loans, is home price appreciation, but also unemployment.

A lot of the banks were carrying seven-and-a-half to eight percent unemployment. We're already over 8%. So, there are going to be big true-ups this quarter. Some parts of the business are OK. And what's interesting, for a Goldman Sachs, 70% of the capital markets competition has gone away, or dramatically pulled in their horns.

So, it's a smaller pie. But you're getting more of a market. And the government actually is churning a lot of fees for Wall Street. So, there's trading activity there. I don't know how sustainable it is because bank revenues, cash-based revenues on the non-accrual-based loans, should correlate to some multiple of the GDP and global GDP. And as we know, the global GDP is coming down.

It should be clear from this transcript, the numerous TV appearances, and publicized predictions proven correct, that Meredith Whitney knows her stuff. Stay tuned for Friday, however, when we take Ms. Whitney off her pedestal as David Weidner of the Wall Street Journal helps us rip her a new one...we ain't Fox News, but we ARE fair and balanced.

Tuesday, April 21, 2009

The New F******* Citibank

As a tribute to Meredith Whitney's famous "Call," we are featuring two great Citibank sketches today and Thursday....enjoy!

Monday, April 20, 2009

Meredith Whitney: Foresight in Hindsight?

This entire week, Llenrock Blog is dedicating its posts to one of the most talked about banking analysts in recent memory...Meredith Whitney. She has been called the "Oracle of Wall Street" for her correct assertion 18 months ago that Citibank was in trouble. Since then, fanfare and accolades by her peers and the press have sent her to the very top of her business. Today we will take a look at what made her so popular. On Wednesday, we will take a look at a recent interview with Steve Forbes, to see what she predicts for the future. And on Friday, we will take a look at one of her detractors, and why it is so dangerous to place our collective faith in one very interesting person.

If I only knew then what I know now. How many times have you uttered that phrase in your life? Well if you are stock analyst Meredith Whitney, probably not too much. For those of you not in the know, Meredith Whitney has become a polarizing figure in the world of banking. The media loves her. Bankers? Not so much. You see, last summer, when everybody was optimistic and hopeful that the economic downturn had seen its worst days, it was Meredith Whitney who predicted that the worst was yet to come. And she's done it repeatedly in the face of naysayers with astounding success.

First, some background. Whitney graduated with honors from Brown University. In 1993 she joined Oppenheimer & Co. as a research associate covering the Oil & Gas Industry. In 1995, she joined the company's Specialty Finance Group. Later, in 1998, she left the company, eventually becoming the Head of Financial Institution Research at Wachovia. Whitney returned to Oppenheimer in 2004, where she covered banks and brokers.

She made headlines 18 months ago, when she wrote a particularly pessimistic, but accurate report on Citigroup, on Oct. 31, 2007, which got her attention from many Wall Street analysts, and news media. She has since followed this report with similar reports and predictions, which have tended to leave the companies involved with lower stock prices as the market has taken her opinion seriously. One of her claims is that goodwill is built in to a lot of companies share prices, and that as the market moves into dark times, this goodwill will dissipate.

How good was The Call? If an investor sold Citi the next day, they would have saved themselves a 92.8% loss through last week.

In 2007 she was listed as the second best stock picker in the capital markets industry on's list of "The Best Analysts: Stock Pickers", as well as being named "one of NY Post's 50 Most Powerful Women in NYC.

Her extremely bearish view on banks landed her on the cover of the August 18, 2008 issue of Fortune Magazine. Even before the problems in September that befell Merrill Lynch and Lehman Brothers, she is quoted as saying, "It feels like I'm at the epicenter of the biggest financial crisis in history."

Time and time again she has been right. Three months ago, she was asked her opinion on the concept of a bad bank and what it could potentially do to the banking sector. After viewing the clip below, ask yourself if she prognosticated correctly.

On Wednesday, we'll take a deeper look into Whitney's thoughts on where we stand now, and what the future has to bring.

Friday, April 17, 2009

Top Ten List: Business Risks for CRE

Recently in Institutional Investor Online, Ernst & Young contributed a research report listing the top ten business risks for commercial real estate. In a suspenseful twist, we will provide them in descending order, a la David Letterman, and provide our thoughts and commentary thereafter. Without further ado, they are (drum roll please):

10. Volatile Energy Costs (O)

9. Economic Vulnerability and Regulatory Risks in Developing Markets (F)

8. Green Revolution, Sustainability & Climate Change (D)

7. Pricing Uncertainty (F)

6. Inability to Find and Exploit Global and Non-Traditional Opportunities (D)

5. Changing Demographics (O)

4. Global War for Talent (O)

3. Impact of Aging or Inadequate Infrastructure (D)

2. Global Economic and Market Fluctuations (F)

1. Continued Uncertainty and Impact of the Credit Crunch (F)

If we assign these concerns into one of the following three categories: Finance, Development, and Operations, as indicated with (O, D or F), we find that while the top ten issues are somewhat diverse in nature, the top two remain financial concerns.

The issues we chose to tag "Operational," while important, we do not feel are vital to the health of the commercial real estate market. Changing demographics are sure to affect particular markets, especially in the southwest, but will take a while to reach corridors like the northeast. The Global War for Talent is an issue of the future, as anybody who is actually hiring in this market essentially has the pick of the litter from the copious amount of unemployed, likely overqualified candidates. When this does become an issue at some point in the future, it will likely mean the unemployment rate will dwindle from double digits back into the 5-6% comfort zone of a few years ago.

Energy costs are a necessary evil of the business. Lease type will dictate whether landlord or tenant will be paying for the rise in energy costs, and the government is attempting to implement a wide range of programs aimed at stemming energy costs from crippling the economy. These programs will take a long time to bear fruit, but they are being addressed.

The Development (D) issues are of greater immediate importance in our opinion. However, most are questions of project feasibility as they pertain to financing. If green buildings are not cost effective for landlords or tenants, you simply won't see very many being built, or converted. Likewise, while aging infrastructure is a serious problem, developers will examine the cost basis of various opportunities before building or renovating. Until construction costs drop replacement costs closer to price per square foot figures being paid for existing product, new ground up developments will be fewer and farther between, especially if market demand is sluggish. Which leads us to the last (D) on the list...finding new global and non-traditional opportunities. This issue is probably the most abstract on this list, and so it will take time to figure out exactly what the issues are. More than likely, it was included on this list as a result of so many of the other issues being, well, issues. People fear the unknown.

This of course leaves us with Financial (F) concerns. Pricing uncertainty, regulatory risk, market fluctuations and the credit crisis blow the rest of the aforementioned issues out of the water, in our humble opinion, in terms of what people SHOULD be worried about. Frankly, these four issues would be 1-4 on our list. Of course, unlike David Letterman's Top Ten Lists, which are supposed to make you laugh, ours, like E&Y's, would be more likely to make you cry....

Thursday, April 16, 2009

Grandstanding or a Can of Whoopass?

If you haven't been watching C-SPAN over the last several months, here is an example of some of the meetings on Capitol Hill. Its pretty intense, but somebody needs to say it.

Wednesday, April 15, 2009


Recent reports issued by Deutsche Bank, DBRS and Fitch Ratings find that commercial real estate fundamentals have dramatically weakened across most major property segments and markets, with some starting to reach the depressed levels of the last major recession in the early 1990s. Richard Parkus, head of CMBS Research at Deutsche Bank, projected in his firm's commercial real estate outlook last month that property prices are expected to decline 35% to 45% (or more) overall during this recession. If of course that happens, much of the $700 billion dollars worth of commercial real estate coming due between 2009-2011 will be extremely difficult to refinance, making default rates spike even further.

CMBS collateral performance are currently deteriorating at a historically fast pace and Parkus predicted the total delinquency rate could likely to exceed 3.5% by year-end. That is one of the highest estimates that have been projected by CMBS analysts. Worse still, Parkus added, it could go as high as 6% by 2010. By far the greatest risk facing CMBS loans right now is maturity default/extension risk, not term default risk, Parkus of Deutsch Bank said.

A large percentage of CMBS loans made in 2005-2008 may not qualify for refinancing without substantial equity injections due to much tighter underwriting standards, massive price declines and declining cash flow.

All of this, of course has led to increased pressure on the Obama administration to include commercial real estate on the list of vital industries that need help.

Longer-term debt is critical to saving the commercial real-estate business, which faces a record amount of debt coming due in the next three years. Industry observers are expecting the delinquency rate to double by the end of this year and go higher next year. Problems could be magnified if the credit drought continues and owners of even healthy properties are unable to refinance. This has sparked a lobbying effort to include CMBS in the TALF program.

Currently, TALF makes low-cost loans available to investors who buy securities backing everything from credit cards to auto loans. The first TALF-eligible deals, involving securitized car loans and credit-card cash flows, began in March, but investor response to the program has been anemic. Investors applied for just $1.71 billion in loans on Tuesday in the second round of TALF, according to the central bank. That follows applications for $4.71 billion last month.

Obama administration officials have been promising for weeks that the TALF would be expanded to include commercial real estate. But details have been sketchy and have been a subject of debate between policy makers and the private sector.

The big problem with expanding TALF to commercial real estate is the nature in which both entities naturally function. The government typically doesn't like to make loans, similar to those they are currently making under the TALF program, longer than a year or so. They do this because they like to control liquidity. However, they have already gone to three year loans, outside of their comfort zone, for existing TALF eligible loans. The CMBS loans, on the other hand, are typically five years or longer.

Industry executives hope that the TALF effort will resurrect the CMBS market. In 2007, about $230 billion of securities were sold. That number dropped to zero by last summer. The dearth of financing has frozen sales and sent values plummeting, setting the stage for another wave of defaults that could cripple some banks and other lenders.

Commercial-property debt is expected to be one of the most attractive TALF-eligible assets, because it is collateralized by office buildings, malls, warehouses and other income-producing real estate. It is perceived as less risky than consumer credit such as credit-card debt and car loans.

Anticipating that TALF will be modified, a number of investment firms, including BlackRock Inc., Prudential Financial Inc. and ING Groep NV unit ING Clarion Partners LLC, are positioning themselves to use the TALF program to buy high-quality commercial mortgage-backed securities, or CMBS. Some of them aim to raise billions of dollars for that purpose.

Let's hope, for all of our sake, that these guys are right, and that the government makes good on their promise. It's likely our livelihoods depend on it.

Tuesday, April 14, 2009

Bailout Rejected: Please Help Rich

There are lots of needy, starving bank statements. For only a dollar a day, you can help!

Monday, April 13, 2009

Are You my Landlord or a Carnie?

Ever been to a fair, carnival, or amusement park? Well assuming you have, you certainly know the weird but lovable shucksters that work there, trying to taunt you with the promise of a 13 foot stuffed gorilla with fast talk while your kid's pleas and cries begin to burn a hole in your pocket. These folk operate all of the little games that seem all too winnable, that is until you actually try them (do those rings even fit around the bottles? are those milk bottles glued to the surface?). The bottom line is that these carnival operators, or carnie's, as I like to refer to them as, will do just about anything to get you to spend money at their booth.

This concept seems all to familiar to retail landlords of regional malls, power and lifestyle centers. The only thing worse than a rainy day to a carnie is a dark store to a landlord. And landlords aren't being all that shy about it either. A recent article in the New York Times showed that a burgeoning trend to fill up the mounting oceans of vacant space is, well, water.

In more than 12 malls across the country, the Flowrider, an indoor wave pool, is filling up once vacant blocks of space emptied by retailers gone bust.

“Landlords are scared,” said Suzanne E. Mulvee, a real estate strategist with Property & Portfolio Research. “Part of the reason they’re scared is dark space doesn’t pay.”

This phenomenon has begun to grow roots ever since big ticket tenants like Circuit City and Linens N Things filed for bankruptcy. Landlords began scrambling for replacements tenants. Downscale chains that landlords once kept out of shopping centers are suddenly being shown the welcome mat. Temporary stores are popping up. Once-small retailers are being invited to take over big spaces, while the strongest national chains are seizing the moment to move into new cities at low rents. And vast mall spaces formerly occupied by department stores may soon be carved up or turned into community colleges and dance studios.

The Flowrider might ordinarily be a great co-tenant of a swimwear store, a surf shop, or a Chuck E. Cheese. Yet, its making waves (brutal, I know) in regional malls of all shapes and sizes. And it makes perfect sense too.

When the nation’s stores March sales results came out last week, the numbers were down yet again — especially for department stores and mall chains, which have been the weakest performers for months.

That does not bode well for mall owners. As more stores have closed, mall vacancies are at their highest point in almost a decade, according to Reis, a research company, which said the vacancy rate at the end of 2008 was 7.1 percent, compared with 5.8 percent at the end of 2007. Other analysts have slightly lower figures, but all agree that vacancies are rising.

And so, with what is likely great disdain, and a heaping pile of humility, retail landlords are considering what they have to in order to service the bottom line and keep their centers occupied. And while we all may think its a somewhat goofy notion, the underlying theme is one that most of us can relate to. If a Flowrider is more likely to pull you, or your kids, to the mall, then its a win for them. If not, then don't be surprised if they start throwing in free 13 foot stuffed gorillas as an added incentive to get you off the couch and in their stores.

Friday, April 10, 2009

They Say the Neon Lights Are Bright....

John Hancock was famous for his distinctively large signature on the declaration of independence. Psychologists suggest that this is an common mark of someone who is egotistical, cocky, or insecure. As is often the case with insecure people, they often do something to cover up their insecurities by trying to distract the public with something else (if you drive a Ferrari or Lamborghini, I'm looking in your direction). So what was John Hancock so embarrassed about? Well he may not have been clairvoyant, but if he was, he might have been embarrassed by the dearth of activity that the "signature" skyscraper his name bears in Boston, generated at auction recently. Even more embarrassing? The price owner Broadway Partners begrudgingly had to sell the trophy asset for. And you thought the neon lights were bright on Broadway? Turns out the neon lights are dimming, and Broadway may have been better off with the stereotypical Porsche or Viagra.

What Broadway Partners couldn't overcompensate for, however, was the credit crisis, and the disaster overleveraging an acquisition in a declining market would bare. Led by founder and chief executive officer Scott Lawson, the New York based firm was a prolific buyer of real estate assets in the US in the boom years of 2005 to 2007. Having raised just $799 million in two funds, in 2006 Broadway "reviewed 436 transactions with a combined asking price of $75.2 billion," according to fund documents of the Pennsylvania Public Schools Employees' Retirement System.

The John Hancock Tower was part of those deals, after being acquired from Boston-based Beacon Capital Partners as part of a $3.3 billion, 10-building portfolio. The Tower was reportedly sold to Broadway for $1.3 billion.

Like many active buyers during the boom years, debt was key to Broadway's strategy. As the PSERS' document stated, "Broadway continuously monitors the capital markets in order to take advantage of refinancing opportunities and to position the property for the optimal exit strategy."

Of course, strategy and execution are two entirely different things, as Broadway learned the unfortunate hard way. And the end to this fairy tale wasn't a happy one. The auction only generated one measly offer, and the entire process was over in a matter of minutes.

Minimum bids had been set at $20 million dollars (plus the assumption of a $640.1 million dollar mortgage). The winning bid? $20.1 million dollars by a joint venture between Normandy Real Estate Partners and Five Mile Capital Partners. The total capitalization for the deal was just over $700 million dollars, for a building that Broadway paid $1.3 billion for three years earlier. A $600 million dollar loss. That isn't just a haircut, its a scalping!

Yet, this ordeal demonstrates two interesting things. First is that the discounts that savvy real estate investors have been chirping about for months now have started to come to fruition. And if the John Hancock Tower is any indication, there will be some major bargains. The other, more interesting thing of note, however, is just how many players there will be to snatch up these assets.

Perhaps this was a simple matter of a waiting game. Maybe more ready, willing and able buyers are out there, biding their time, sensing that there would be even more pain, and thus better buying opportunities further down the road, than they saw in this opportunity. But only one bidder? For a landmark, trophy asset discounted at nearly 50% of what the seller recently paid for it?

Something tells us this isn't an anomaly. There are too many large real estate operators I know who like to talk opportunity, but in actuality are too busy trying to asset manage thier existing portfolios to truly be focused on vulture acquisition opportunities. Not only that, but even funds that are capitalized well aren't the same as they used to be. The preferred returns they promise investors are ones which they would like to maintain. Without the leverage they were able to get several years ago, especially on bigger sized transactions, buying the same way is almost impossible. Buying with lower leverage cramps down those returns. And lets not forget most opportunity-based funds are investing based on pro-forma returns, not in place current cash flow. Pro-forma today is almost the equivalent of throwing darts at a dartboard. Sure, you can plug in assumptions into your ARGUS model all you like, but assigning probabilities to those assumptions, which make or break the IRR's a model spits out, is anything but easy.

Only time, and more distress will tell the full story. Yet there are many speculators out there who fear that the commercial real estate market, which typically lags economic recession by 18-24 months, will be even worse than the residential debacle. If that is the case, perhaps the John Hancock Tower will seem overpriced in retrospect.