Private Equity Real Estate Summit

Yesterday (May 23, 2013), Cygnus Group (Cygnus), Trinity Capital Advisors (TCA) and 25 Capital Partners (25 Capital) hosted an event for approximately fifty local real estate investors including family offices, institutional, and high net worth investors located in the Charlotte, NC area. The event was titled, "Private Equity Real Estate Summit, Investing in Today’s Real Estate: Residential to Commercial, Paper to Hard Assets." It included 30 minutes of introductory presentations by each firm (Justin Starnes of Cygnus, Shaun Ahmad of 25 Capital and Sean McKinley of TCA) and an hour long roundtable discussion around key real estate issues, opportunities and risks. The three participating panelists included Frank McCollum (Cygnus), Walker Collier (TCA), and Shaun Ahmad (25 Capital). The discussion was moderated by Dr. Cheryl Richards, CEO and Regional Dean of Northeastern University - Charlotte. The roundtable panelists discussed a variety of topics including:

1. What is your opinion on the trajectory of real estate fundamentals in your respective markets?
2. What do you see as your top one or two opportunities for investment in your respective markets?
3. As an asset manager, what key lesson have you learned from the last five years - bubble period leading up to 2007, followed by the credit crisis/recession?
4. As an investor, what do you see as the two most important risks to consider over the next 12 months?
5. What is your outlook on interest rate risk and inflation and how does that affect your market?
6. What's been most surprising to you in 2013 in your particular markets?
7. What keeps you up at night?
8. What are the key headwinds in commercial and residential real estate?

How does the current government regulatory environment affect your businesses?
Key themes included: Opportunities still exist, but require deep due diligence and a platform to execute from, risks are economic downturn, rates and regulatory/governmental uncertainty, opportunities in credit MBS, cash-like MBS, Residential Interest Only strips (IOs), hard assets such as suburban office, raw land for residential development and distressed single family residential mortgages sold by governmental agencies. One recurring point was that government intervention has created enormous opportunities, but has also created new risks.

Feedback from the event has been positive and we expect to host similar events in the future. If you would like to participate in future events or if you would like a copy of the presentations from each group, please email us at info@thecygnusgroup.com.

Florida Retail Loans Undergo Modification

CRENews reported a modification by CWCapital that has become a common workout strategy. The two loans in question were jointly owned by Morgan Stanley Real Estate Fund V and Kitson & Partners with a total balance of over $282mm and 10 separate properties. The properties are mostly centered around Orlando and Fort Lauderdale, as you can see in this map.

•  Kitson paid all of the modification costs, in exchange for a 20% interest in any future proceeds that exceed the new A-notes.
• Kitson remains on the hook for a $8.8mm LOC for TI or CapEx for one mortgage as originally laid out in the docs.
• An existing $4.6mm debt-service reserve will be transferred to a TI reserve account and is expected to be used to cover TI in the near future.
• The coupons remain unchanged.
• The maturity date was extended from this year on one, and from 2017 on the other, to March 2019 in both cases.
• One mortgage was split into an 58%/42% A/B note structure, and the other was split into a 50%/50% A/B note structure.
• In both cases, the expenses are paid first, then to paying down the A note principal, then to replenishing a TI reserve, and then 80/20 to the B-Note and Kitson.

See CRENews.com for the full article - although they require a subscription, this article is offered publicly.

RMBS, CMBS improve, while Treasurys decline

The WSJ reports:

The rotation out of safe-harbor Treasury bonds was mainly driven by some optimism that an official report Friday from China may show the world's second-largest economy fared better last quarter than the 8.3% growth forecast by economists. Commercial mortgage-backed securities whose spreads have blown out this month are snapped back as traders took a rosier view of global growth and stock markets rose. The dealers are focused on commercial-real-estate collateralized-debt obligations, which are a corner of the $47 billion face amount of debt held by the New York Fed portfolio known as Maiden Lane III. They are primarily focused on dismantling the so-called CRE CDOs because the underlying commercial mortgage-backed securities are worth more as individual pieces and could likely generate more trading revenue, the investors said.

Note that the two CDOs in Maiden Lane III are the subject of a previous post.

Potential Auction of Maiden Lane III - $8 billion of CMBS collateral

The Fed announced this week that they may put the Maiden Lane III assets (former AIG assets) up for sale, which include nearly $8 billion of CMBS collateral that is in two MAX CDOs. The CMBS collateral primarily consists of AJs, AMs, and A4s. It is unclear if the CDOs would be broken up or sold in their current form, but we believe it will cause some short-term volatility in pricing.

This would be a lot of supply for the CMBS market to digest, where average daily volume the past year has totaled $1 billion and the largest single day supply was just over $4 billion.