Sunday, December 28, 2008

SRS Warning: Commercial Bailout is Next!

Good Evening Folks!

Its pretty quiet on the news front this weekend.

The one development was further noise around a potential government bailout of commercial real estate. This was one their headline economic stories today. The heats on the Fed's to get this one done IMO. Here is the article from the New York Times:

"Commercial real estate groups have been meeting with members of Congress, the Federal Reserve, the Treasury, the Federal Deposit Insurance Corporation as well as Mr. Obama’s transition team, to press their case. And they say they have a compelling one. Commercial real estate is a significant industry, accounting for $549 billion in construction-related spending and nearly five million full-time jobs in 2007, according to the National Association of Industrial and Office Properties. It also contributes to state and local coffers.
Although commercial real estate remains in better shaper than some other industries — there is a good balance between supply and demand, vacancy rates are modest and loan default rates have so far hovered at a rock-bottom 1 percent, according to trade groups — industry leaders warn that the sector faces significant problems. In particular, tighter credit policies are making it harder for real estate companies to refinance. An estimated $400 billion in loans are expected to come due in 2009 alone, and more than $1 trillion over the next three years, according to industry estimates based on Federal Reserve data.

“We have profound risk on our hands at the moment,” said Bruce Mosler, the president and chief executive of Cushman & Wakefield, a commercial brokerage firm.

Jeffrey DeBoer, the president and chief executive of the Real Estate Roundtable, an industry group based in Washington, agreed. “Commercial real estate debt will be the next major problem that policy makers need to address,” he said
The commercial real estate industry relies on a steady stream of relatively short-term financing; loans are refinanced every several years or so. With the two main sources of commercial funding — bank lending and commercial mortgage-backed securities — effectively shut down, hundreds of billions of dollars worth of loans are in jeopardy of defaulting.

The bulk of the loans coming due, industry executives say, were originated two or more years ago to help finance a rash of deals in office towers, hotels and industrial buildings, many of which are generating healthy cash flow today. “We’re talking about performing loans — that’s the rub,” said Thomas J. Bisacquino, the president of the National Association of Industrial and Office Properties.

Of course, there were also speculative, highly leveraged deals at the height of the economic bubble, when rents and property values looked as if they would rise indefinitely. As vacancy rates climb and values drop, many of these loans will need to be restructured.
Existing properties are only half the problem. New development has also ground almost to a halt because of a lack of financing.

Real estate executives say Treasury officials the transition team to a new Obama administration have been listening. “There’s an openness to serious consideration of all of these things,” said Steven A. Wechsler, the president and chief executive of the National Association of Real Estate Investment Trusts.

The Obama team will have a lot on its plate, but executives were hopeful that measures will be taken early next year."

My Take:

Now that the automotive bailout has been completed its time for the TARP to move on to its next bailout. It appears commercial real estate is next.

This is getting disgusting isn't it?

It looks like the commercial industry is going to follow the automotive playbook: Scare the hell out of Congress by screaming Fire! Fire! Fire! It appears the commercial industry is going to try and one up the automotive industry by warning that 5 million jobs would be lost versus the paltry 3 million in automotive if they don't get their piece of TARP PIE.

Bottom Line:

I think this bailout is going to happen folks. It will be done because the banks can't afford another $1 trillion hit. There are $400 billion dollars of loans that must be rolled over in 2009 alone

Another reason this will be done is because commercial now has zero ways to get financing right now. This is a different lending game folks. You don't get 30 year fixed loans in the commercial market. You refinance and roll over your debt every 3,4, or 5 years. If the banks no longer want to lend to them, and the CDO securitization market is no longer available, these REIT's have zero options for funding. There will be financial chaos if something isn't done here.

The problem here is many of the loans done in 2004-2006 were done using terrible lending standards. This is another mess ladies and gentleman.

The Fed must find a way to allow these loans to get refinanced or there will be no retail in this country. We all know that's not going to happen. Expect the Treasury to extend some type of lending program to the commercial that allows them to roll over their good debt.

It will be interesting to see wha they do with the bad loans. Do the taxpayers once again take the hit so that these REIT'S that made poor decisions don't go under? My guess is of course! Why would their bailout mentality stop now? God forbid anyone's allowed to fail anymore in this country.

The possible bailout here makes SRS unplayable right now in my book. Its too risky. If the REIT's get a sweet deal, SRS is going to get pummeled. If the government decides to send a message of "no more bailouts" or severely damages them via warrants, SRS could soar.

The only trade I see here is to buy SRS on any dip if a bailout is announced.

Enter this sucker at your own risk.


flipdippy said...

How can you be so bullish on SRS a couple weeks ago and so bearish today?

Not sure this bailout gets done in a way beneficial to REITs. The government is learning some lessons about how to hold these companies accountable...if they do get bailed out it will be on much tougher terms than the banks or auto industry for certain.

And current events are doing their thing, the world looks like it may be very volatile in early 2009.

John Maynes said...

REITS would have to give up their dividend if they wanna get bailout money. That would be the beginning of the end for them and very bullish for SRS.

Jeff said...


You need to be nimble on these inverse ETF's. Two weeks is an eternity in a market this volatile.

No one knew this was where the TARP money was heading next.

SRS should do well long term. My point is fighting the Fed's balance sheet could make going long SRS painful in the short term.

Every bailout announcement to date has caused the stocks involved in the sector to pop in the short term.

If you want to flip a coin and front run the Fed by buying go for it. Traders may sell the bailout news.

If SRS does drop on the news like I expect it wil, Its going to offer a great buying opportunity.

Look at how the auto and bank stocks acted the day the Fed announced their bailouts. They soared.

I just try and trade the tape Flip. When the TARP decided to come over to commercial it changed everything.

GL with your trades. I am getting out of the way on this one. like I said its going to be a violent move one way or the other depending on how its structured.

Jeff said...


Agreed. They are screwed. However, you know these "bubblehead" longs are gonna try and try to buy them up for a quick pop on the news.

Long term the fundementals look great. If you have the assets to hold it long term its going to work out nicely.

I am just trying to warn and inform when I see news thats could move the market. Especially when I know there are a lot of readers on here that have been in and out of SRS.




SRS price has nothing to do with supply or demand or news. Because the prices are generated off swaps on the REITs. A bailout on commercial is comical at best. The lending program will be for new projects and allow companies to roll short term debt. And that’s it; commercial was even more levered up than residential. The REITs that already own over leveraged over prices assets will still get there head chopped off. You need to be careful when throwing out warnings like this because SRS does not act like a normal stock. Volume news and price action really don't mean anything because of how the swaps are set up. They are set of the REITs in the DJR (Dow Jones Equity REIT Index) If the fed has to bail over commercial via a lend facility it will signal that the market is about to go high order and swaps will blow out than SRS will move to a low orbit. But be very careful with the thing because you can get your head handed to you because only proshares knows how the price is generated.

Jeff said...


Great points.

One thing to add.

The leverage was nowhere near what happened in residential until the last couple of years.

The securitization game in commercial got started very late versus resi. Thats when the loans and leverage got stupid. Before the CDO game started the loans were pretty solid because they weren't turned into "crap sandwhiches" and then sold off.

The slippage on SRS has always been a problem. The swaps definately make this one unpredictable.

I just find it osdd with all of the bad news that SRS keeps pulling back.

Why would this make any sense? SRS was dropping even when the market was down Christmas week.

I gotta think its the bailout rumors thats holding this down.

This one has acted very strange in the last couple weeks.

Jeff said...

Here is a copy of the letter from commercial to the Treasury requesting the money from the TARP.

Avl Guy said...

Let the CRE REIT investors and shareholders take a full haircut!
Let the bondholders take possession of the vacant and half-leased overbuilt properties strewn across America.
No need for a bailout here at all.

Jeff said...


I agree. THe REIT's are taking a hit today. One of the biggies had a divi cut.

One thing that be done in commercial is to give them a lending facility in which they can rollover their good paper. Similiar to what RGD was talking about above.

There are a lot of good loan "babies" that are being thrown out with the bathwater.

Without funding there will be no commercial credit market.

They must come up with a solution to this problem. This isn't a bailout. Its just gives the REIT's who did things right a way to continue operating.

Joey said...


ugh. should not have watched that! it's the stuff nightmares are made of. it's good (really good) though.

Avl Guy said...

Jeff, I am inclined to take exception to some of the rationales you presented in your response to my comment, and my exceptions will all rest on the concept of creditworthiness. You probably recall how I said last month that lending and credit do not exist absent the concept of creditworthiness, and in the case of domestic CRE, there has been a clear and inarguable deterioration in the median creditworthiness of commercial projects, on average, and that is not off-set by ‘REITs who did things right’ or even by projects that thankfully were not foolishly overleveraged.

On average, there has been a marked deterioration in the revenue-generating capacity of leased space (retail and/or office), and hotels, in almost all major markets. Thus, loan performance up to 2008 is no longer an indicator of future loan performance.
On average, there has been a marked deterioration of the quality of the collateral behind these CRE loans that need rolling over, causing a drastic disconnect between past loan performance and likely future loan performance. What was deemed ‘good’ commercial paper may be deemed poor after 2008. What were ‘good babies’ pre-2008 are stinky babies beyond 2008.

Note this sentence from the 11/26 letter from the CRE industry/investors to Paulson: “This facility would allow for the extension of new credit as well as assist in refinancing existing, performing loans held by banks or in CMBS pools.”
Existing, performing loans?
When pre-2008 performance is likely irrelevant to 2009 & beyond?? The creditworthiness of the projects need re-assessing on a case-by-case basis. Yet, there’s no mention of future creditworthiness or future loan performance, only references to a past where retailers were indulged by credit-card-wielding shoppers, hospitality was indulged by travelers who financed travel & vacations via their home as ATM, and new office space was absorbed by firms riding rising bubbles in various sectors. Almost all such pre-2008 business & consumer behaviors have proven unsustainable for 2008 & beyond.

Private-sector lending would take all this into account, global credit freeze or not. As of today, many private lenders would be justified in rejecting many CRE refinance applications; other projects would simply find they only merit onerous refinance terms given the risk they pose for 2009 & beyond. Surely there would be merit in the private sector looking at vast swaths of over-built commercial sectors (hotels, retail, offices) in many over-saturated markets, and coming to the above conclusion. So, wouldn’t public sector intrusion here effectively be a broad-based bailout that refuses to recognize deteriorating creditworthiness and loan performance...on average?

Many folks are not ready to provide taxpayer funded or guaranteed credit to less-than-creditworthy projects, yet a broad-based bailout of CRE does exactly that. Worse, it limits the market's natural need to kill-off projects that performed well in bubbly EZ-times but are too weak or too redundant in lean tough times. Isn't it reasonable for their investors to take a haircut, and for their bondholders to prove their mettle in managing or dispossessing the CRE inventory they subsequently take hold of?