S&P Acknowledges Weak Commercial Property Fundamentals

S&P's latest equity research notes this morning acknowledged the weak and still deteriorating commercial property fundamentals that exist in today's environment. The ratings firm specifically identified two corporations - Winthrop Realty (FUR) and CapitalSource Inc. (CSE) - as having a troubling level of exposure to the imploding realm of commercial real estate.

For Winthrop Realty:

"...we think the loan asset and property operating businesses will be hurt by rising delinquency levels caused by the soft economy"

And for CapitalSource:

"CSE's commercial real estate portfolio deteriorated as impaired loans as a percentage of total lending assets increased to 12.1% from 8.2% in Q1"

In today's universe of investment outlooks, the bear camp continues to maintain that the commercial real estate fallout will cause at least a similar level of market disruption as was provoked by the now decimated residential market. The Bulls have chosen to either dismiss this argument as simply not true, or to cite analytically weak differentiating factors between the nature of the commercial and residential boom cycles; most popularly, we are told that CRE neither overbuilt nor lent to sub prime borrowers.

What Bulls seem to ignore is the fact that residential defaults/foreclosures have mostly been the result of millions of individual "business" decisions. That is, the homeowner has realized that he is underwater, and has punted the mortgage accordingly. In commercial real estate, this process will play out even more efficiently to the downside, as all pride/personal affection towards the subject property is thrown out the window. These decisions will be made strictly according to the numbers; and the numbers aren't good.

*no position in FUR or CSE

InfoNgen facilitated this post's research Sphere: Related Content

RealPoint Discloses CMBS Methodology

In a move that is simply too coincidental to be a coincidence, the ratings firm RealPoint on Thursday announced that it will make public the underlying methodology pertaining to three separate CMBS ratings actions. The decision comes on the heels of recent criticism towards Standard and Poor's for that firm's erratic ratings activity in the CMBS realm. Investors are - wisely we believe - questioning the credibility of S&P in light of the fact that CMBS downgrades harm the Government's ability to effectively conduct a number of rescue schemes, including the TALF. S&P's labeling of some securities as AAA - despite having downgraded those securities just a week earlier - cast doubt over whether the ratings firm is operating independently of the United States Government (and it's every wish).

RealPoint must see the current situation as an opportunity to supplant the (three) major ratings firm in the eyes of investors. The pdf below was released as part of the latest RealPoint initiative, and would appear to view commercial securities (at least this specific issue) from a more critical (realistic) perspective than it's more established (by the Government) competitors. We welcome actions such as RealPoint's because, as every good capitalist is aware, it's all about competition.

RealPoint CMBS methodology disclosure Sphere: Related Content

S&P Turns Bullish on REIT's; Justification for CRE Upgrades?

In what appears to be a thinly veiled justification for recent ratings vacillations on commercial mortgage debt, S&P has just released an uber-bullish opinion of REIT's - specifically those that have accumulated large shopping center portfolios. The Mcgraw-Hill (MHP) subsidiary cites, among other supposedly positive factors, the "diversification" of REIT's tenants and locales as a reason to plow your money into the stocks of these Trusts. S&P identifies this positive aspect as being contrary to the experience of developers who, according to S&P, tend to own/operate single tenant locations; the implication being one of having "all your eggs in one basket". The most bizarre comment though, was that "local opposition" to developers seeking approval for new retail centers would benefit these REIT's by preventing neighboring competition. Such a statement caused us to wonder who, exactly, is charging ahead with plans to build new shopping centers right now? And where would the funding come from, especially for these "small developers" that S&P is speaking of.

That this note lacks of any sound reasoning or logic is not surprising. Most likely, S&P is painfully aware of the criticism it has received for it's sudden about face on commercial mortgage debt; specifically the fact that they are choosing to upgrade these securities to AAA status - for no apparent reason, and actually in defiance of what every fundamental indicator is telling the world at present. We wouldn't be surprised to see S&P pepper the world with more bullish CRE opinions in the near future, as they struggle oh so desperately to justify the non-sensible - and likely politically strong-armed - re-labeling of struggling debt to AAA. Sphere: Related Content

S&P Continues It's Commercial RE Downgrade Rampage

The news looks good on the commercial real estate front, as S&P has just announced the downgrade of 384 classes of commercial real estate collateralized debt obligations and re-REMIC(you don't need to know what this stands for). This action alone will affect $17.1B worth of commercial mortgage securities. These and other ratings actions are important because, at this time at least, the Government has said it will limit those assets which can be pledged as collateral in it's balance sheet cleansing programs to AAA securities. No AAA=No program

We commend S&P for at least appearing to possess a modicum of independence in it's ratings decisions, especially as the AAA-needing Treasury Department alphabet programs are struggling to get off the ground. It's actually surprising that the Treasury/Fed has not tried to punish S&P yet for it's rebellious ways. As soon as the Administration starts bandying the term "ratings reform" about, we will at least know what prompted it.

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Is Uncle Sam Creditworthy?

This is a somewhat difficult question to answer, as it is questionable whether any truly objective means of evaluating the creditworthiness of an individual/corporation/nation even exists. However, given that the investment community tends to rely upon a letter based rating system, developed and implemented by a small group of "ratings agencies", we will comment on Uncle Sam from this pseudo-objective standpoint.

Many of the inquisitive minds who frequent this site will remember a declaration that we made on March 19, 2009 in a post entitled The Fed Follows Suit ,forecasting the eventual loss of the United States Government's AAA credit rating. At the time, we were lambasted as a bit "out in left field" for making such a preposterous prognostication. Now however, the idea is starting to gain traction, and has even managed to "earn" a bit of discussion time on the popular stock market "investment" shows. As usual though, the producers of these programs either lack the will or the ability to deliver any content other than the latest pre-packaged storyline from Wall Street.

This story in general began gaining traction yesterday, when the US's feeble associate, the United Kingdom, was warned by Standard & Poor's about the country's ever growing public debt as a percentage of GDP, and put on alert that a AAA rating is a privilege earned, not a right given at birth(or in Britain's case, through conquest). Instead of diverting attention away from Uncle Sam, this announcement served to increase investor scrutiny concerning, to put it simply, just what kind of ship is the US running?

The future of the US's AAA credit rating is quite uncertain, however, we would be willing to speculate, in general terms, just how we see this all "going down". The situation in the coming months, we think, will be quite analogous to that of General Electric-another American entity that had likely come to take its AAA rating for granted. As most of you remember, GE was stripped of its AAA rating by all three agencies quite recently. The official downgrade announcement however, came absent any sort of fanfare, panic, or surprise. The reason: The Market told us all about the looming downgrade long before the ratings agencies did. Similarly, as evidenced by the steadily increasing yield on the 10 year Treasury note, The Market is clearly beginning to question the vaunted AAA rating of the United States of America. The signalling process is in its very early stages however, and a change of course by Washington could still prevent the embarassment of a downgrade. Unfortunately, the sort of ideology/principles that would be necessary to effectuate this change of course are notably absent in both of the major political parties that operate in Washington.  

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