06/26/2009

Vornado, Macerich, Inland Mull TALF Deals


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CORRECTION: A June 26 article, "Vornado, Macerich, Inland Mull TALF Deals," cited talk in the market that Alexandria Real Estate Equities explored a TALF-eligible securitization, but discovered that the Federal Reserve was uncomfortable with the REIT's property niche: bio-medical research space. However, Alexandria subsequently said that it wasn't rebuffed by the Fed and that after making an initial inquiry it decided not to pursue a TALF deal because it determined it could obtain more attractive mortgage financing from insurance companies.

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Vornado Realty, Macerich and Inland Real Estate are on the list of REITs lining up to issue commercial MBS deals eligible for government financing.

The companies are among roughly a dozen REITs exploring whether the Federal Reserve's TALF program will push down borrowing rates enough to make CMBS financing economical. Other REITs in the mix, as previously reported, include Developers Diversified Realty, Simon Property and Westfield.

The first CMBS deal eligible for TALF is expected to come out of the gate in July or August. The program, officially called the Term Asset-Backed Securities Loan Facility, will provide relatively low-cost financing to buyers of super-senior CMBS. The Fed is hoping that the subsidized loans will jumpstart the dormant CMBS market. A separate component of the program will finance buyers of seasoned CMBS.

The initial new-issue transactions are expected to involve single companies that raise financing on multiple properties. REITs are working with Wall Street dealers to determine the feasibility of such transactions. For example, Developers Diversified is discussing two possible offerings - one led by Citigroup, the other via Goldman Sachs. J.P. Morgan is working with Westfield and possibly Simon. And Deutsche Bank has long been a lender to Macerich, although it's unclear whether those ties have resulted in an underwriting assignment.

The REITs and their underwriters are in discussions with the Fed, which has to sign off on whether specific properties will be acceptable for TALF deals. Several market players said the Fed has indicated a preference for mainstream properties, at least in the beginning.

There was talk that Alexandria Real Estate Equities, a REIT in Pasadena, Calif., explored the possibility of a deal, but couldn't proceed because the Fed was uncomfortable with its property niche - bio-medical research space. Alexandria did not return calls seeking comment.

The initial TALF deals will be underwritten on an agent basis- meaning that the loan coupon will be determined by how the bonds price. The key issue is whether investors will pay a high enough price for bonds to make the pass-through cost of financing palatable for borrowers.

G. Joseph Cosenza, vice chairman of Inland, said his dealer indicated Inland should be able to get a loan with a 40% loan-to-value ratio at 6.1%, based on prevailing yields. But supplementary mezzanine debt would carry a far higher rate, perhaps 15%, he added. That would bring Inland's blended rate up to 9% - a price Cosenza described as painful, but bearable.

Based on those figures, Cosenza said, TALF will probably be economical only for REITs that are refinancing relatively low-leverage loans. That's because the sharp drop in property prices is making the 40% loan-to-value ratio being cited for TALF deals - already low by historical standards - even more onerous. "If you have an existing loan to refinance that was done at a 50% or 55% LTV, then 40% doesn't sound too bad," Cosenza said. But when a 20%-plus drop in property prices is factored in, he added, the gap in size between the new loan and old one widens.

As an example, he cited a property that was acquired for $10 million in 2006 with a $5 million mortgage that now needs to be refinanced. "TALF will let me borrow 40%, but the new value of the property is $8 million instead of $10 million, and 40% of [$8 million] is $3.2 million. The other $1.8 million will be my B-piece, which I will have to come out of pocket for" or finance with a high-rate mezzanine loan.

Cosenza said his dealer, which he declined to identify, estimated that Inland's all-in borrowing rate would be somewhere around 300 bp over the five-year swap rate - currently 6.1%. "But I will have to pay 15% to get my B-piece, so when you blend the TALF rate and the B-piece rate, you come out with a cost somewhere in the 9% range."

Inland, of Oak Brook, Ill., controls four public non-traded REITs that own and operate some 1,360 retail, multi-family, industrial, hotel, office and student-housing properties in the U.S. and Canada.

The Fed will provide financing at swaps plus 100 bp for 85% of a bondbuyer's purchase price. Market players estimate that the spread on super-senior bonds issued through TALF deals would end up somewhere between 100 bp and 300 bp.

Portfolio lenders said they have already lost lending assignments to TALF. One lender said his firm was in a syndicate that was in discussions to provide a $300 million fixed-rate debt package on 20 strip centers on the East Coast. But midway through the discussions, Vornado pulled out, saying that it would pursue a TALF financing instead, he said.

"Some of these properties are unencumbered," complained the lender. "So this would be fresh debt. I don't think TALF funds are meant to provide fresh loans on unencumbered properties. I think the market should be allowed to take care of that." A Vornado executive didn't return a call seeking comment.

REITs with near-term debt rolling over are among the owners most hard-pressed to line up new capital. Retail REITs especially are having trouble because shopping centers and malls are seen as risky collateral during the downturn. Indeed, many of the REITs exploring TALF deals own retail properties.

Patrick Sargent, president of the Commercial Mortgage Securities Association and a partner with Andrews Kurth, said the trade group is working on recommendations about how the Fed might help to revive the traditional conduit market, under which securitization programs use their own capital to make loans to multiple borrowers and hold the mortgages until enough are amassed for a large transaction. "A big concern of ours is that there is no way to hedge the aggregation risk right now," he said. "But conduit deals are still some distance off."

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