By Dominion Enterprises
On March 1st Homes.com released a mobile real estate search App that enables iPhone or iPod Touch users to quickly find nearby homes for sale or for rent. It offers powerful, fast and full-featured national searches of the 2.5 million listings on Homes.com. Features include Google maps, driving directions, rich property details and includes photo slideshows.
By Cotten Timberlake
March 4 (Bloomberg) -- Saks Inc. Chief Financial Officer Kevin Wills told investors the unprofitable luxury retailer has “very valuable” real estate assets it could tap to raise money if needed.
Easier said than done. Plunging real estate prices and tighter credit markets would make it difficult for New York-based Saks to harness the value of its properties, according to Dan Fasulo, managing director of Real Capital Analytics; Richard Hastings, who tracks the consumer industry for Global Hunter Securities LLC; and retail analyst Patricia Edwards.
“There is no way in a short period of time that they can monetize their real estate and say they are a healthy company,” Fasulo said. “Retail real estate has probably been the worst performer.”
Saks, which had $10 million in cash at yearend, would most likely try to use its real estate as collateral for borrowing if it requires additional funding, Hastings said. It alternatively may seek to sell and lease back its most valuable properties, including the Fifth Avenue flagship store, or try to use the real estate to lure a buyer for the company, he said.
Lender agreements allow Saks to pursue the sale and leaseback of some properties, CFO Wills said on a conference call last week. The company has “ample capacity” under a revolving credit facility, he said.
‘Very Valuable’
“We’re going to be free cash flow positive,” he said. “But we also realize that if we needed to do something, we have very valuable real estate that provides us flexibility.”
Saks owns 30 of its 53 Saks Fifth Avenue locations, including stores in Chicago, Beverly Hills, Las Vegas and Atlanta. It listed its property and equipment at $1.06 billion as of Jan. 31, compared with a $301 million market value at today’s close.
A year ago, Saks’s market value was twice its book value. The stock fell 13 cents, or 5.8 percent, to $2.12 at 4 p.m. in New York Stock Exchange composite trading.
In today’s real estate market, lenders will advance a maximum of 50 percent of value, compared with 80 percent before, said Jeff Bloomberg, a principal at financial advisory firm Gordon Brothers Group LLC in Boston.
“While there is still value there, it cannot be as great today as it was two years ago,” Bloomberg said.
Flagship Store
The retailer’s 350,000 square-foot Fifth Avenue store in Manhattan is now worth $550 million to $600 million, down from as much as $800 million a year ago, according to Faith Hope Consolo, chairman of the retail leasing and sales group at Prudential Douglas Elliman in New York.
The drop in values and credit crunch mean the retailer may not be able to negotiate favorable terms for borrowing, said Hastings, based in Charlotte, North Carolina. A sale-leaseback, would be viewed negatively by investors, who don’t like to see assets wiped off a balance sheet, he said, adding that he is “skeptical” that the company can find a buyer.
Saks spokeswoman Julia Bentley declined to comment on the possible scenarios.
Tiffany & Co. sold and leased back its primary locations in London and Tokyo in separate transactions for $477 million in 2007.
Sales of properties in the U.S. retail sector plunged 74 percent in 2008 from a record the previous year, according to Real Capital Analytics, a real estate data provider.
“The luxury segment of commercial real estate got hit exceptionally hard,” New York-based Fasulo said.
Clearing Inventory
Saks is getting slammed as wealthy consumers spend less on designer apparel and handbags. It reported a fourth-quarter loss Feb. 25 that was almost double analysts’ estimates after it took 75 percent markdowns to clear inventory. The retailer, which competes with Nordstrom Inc. and Neiman Marcus Group Inc., forecast a 20 percent sales decline at stores open at least a year for the first half of 2009.
Chief Executive Officer Stephen Sadove dismissed speculation on the call last week that the retailer would file for bankruptcy. He said it would hear out proposals and may choose to not exercise a so-called poison pill that limits holdings to less than 20 percent, which it reinstated in November after Mexican billionaire Carlos Slim disclosed an 18 percent stake.
Saks expects to have enough liquidity through this year under its $500 million revolving credit facility, which matures in September 2011, and on which it had $157 million outstanding as of Jan. 31, Bentley said, reiterating executives’ comments from the call.
“Two years ago, it probably would have worked perfectly” to extract value from the Saks real estate, Edwards said. “But the rose-colored glasses have been removed.”
To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net
Tampa Bay Business Journal - by Janet Leiser Staff writer
The head of CNL Financial Group, one of Florida’s largest private commercial real estate services firm, said $12 trillion in capital remains on the sidelines because investors “don’t know the rules of the game.”
It’s next to impossible to determine the value of real estate in today’s market and investors are afraid “the knife will fall on them” if they buy amid so much uncertainty, said James Seneff, chairman and chief executive officer of the Orlando-based firm.
Seneff was one of three commercial real estate experts to speak Wednesday night at the University of Florida’s “Real Estate Market Strategies: 2009” forum at the Tampa Marriott Westshore.
Seneff, Frank Liantonio, the head of U.S. capital markets for New York-based Cushman & Wakefield Inc., and Rudy Touzet, principal of Miami’s Banyan Street Partners LLC, all agreed that there’ll be unprecedented investment opportunities later this year as lenders sell distressed loans and foreclosed properties.
“There will be as great an opportunity as we’ll ever see in our lifetime,” said Touzet, former president of America’s Capital Partners. Commercial mortgage defaults will be at a greater level than seen in the past and will rise to unprecedented levels, Touzet added.
The housing market must hit bottom before the economy can begin to rebound, said Liantonio, who contends the federal government had to intervene in the foreclosure crisis to bring back stability.
“Housing is really what created this,” Liantonio said. “Until we put a floor under housing, we’ll continue to have this death spiral.”
Seneff, however, criticized the extent of the government intervention and said that inflation will follow in the coming years.
“This [recession] is not unprecedented,” Seneff said. “It has happened over and over again throughout history. We can get from there to here.”
Americans “must suck it up” and make it work, he said.
Liantonio pointed out that it cost more to use a Citibank card at an ATM not part of its system than it does to buy a share of the company’s stock, which opened at $1.10 on March 5.
“We’re in a repression,” Liantonio said. “It has sucked the confidence out of the American people.”
As far as the capital on the sidelines, the panelists said more current data points based on sales are needed for investors and lenders to determine the value of properties.
The panelists expect cap rates to continue to rise as investors look for yield in deciding to buy.
Seneff contends a recovery in commercial real estate will follow about six months after the rebound of the stock market.
New development won’t occur for some time, except for user-driven projects.
“Everything we’re seeing is below replacement value,” Touzet said.
But investors will return to commercial real estate, said Seneff, adding, “A whole generation has been destroyed by the stock market.”
“Clearly people will move back into hard assets,” Liantonio said.
NB Real Estate, a growing real estate consultancy business lending advice and service across all aspects of property ownership, management and occupation, recently invested in the Inca Planning budgeting and forecasting tool.
Having previously used Excel spreadsheets David Barrett, Financial Planning Manager at NB Real Estate, knew that they needed a more robust tool. ‘We used Excel to put together our annual budget and monthly cashflow forecast reports’, he says. ‘If we made changes to one part of the model it would not automatically flow through to other sections so there was a lot of manual intervention’. The financial team also found it difficult to extract information from other sources and to automatically populate Excel with that data. ‘The large scope for Human error when using spreadsheets was another factor’, David comments, ‘With two people using the model, we found it difficult to keep track of changes in Excel. Coordinating amendments and controlling report versions hard work.
NB Real Estate was not in the process of looking for a different system to replace the inaccuracies of Excel but David says, ‘we had reached the conclusion that we had to do something so the timing of Inca’s call to us was perfect.’ The company has been growing steadily and the Excel model had evolved gradually with it, eventually becoming rather unwieldy. NB Real Estate did briefly look at some high level products such as Cognos and Hyperion but felt they were too big and expensive for what the company needed.
David says frankly that cost was a consideration in choosing Inca Planning, but also that he felt NB Real Estate would benefit by choosing Inca. In fact, David says ‘We really liked the look of Inca Planning and it was extremely well presented by the Inca team.’ He goes on; ‘Inca showed a real financial understanding and did not appear as salesmen having a guess at what finance teams need. We were confident that they understood what we were talking about.’ David states that ‘the personalities of the Inca team I met had a lot to do with choosing the software’.
Through implementing Inca Planning, NB Real Estate wants to speed up their monthly processes and to make their model more robust and accurate. In addition David feels the company can get much more out of using Inca than Excel and plans to start using rolling forecasts and budgets. ‘We hope that we can quickly update our Inca model with the latest data’, concludes David, ‘Inca will do a lot of the grunt work for us so we don’t have so many manual processes’.
Training and model scoping begin in early February, and NB Real Estate hope to have a working model in place around March.
‘NB Real Estate state that their business is organised to deliver outstanding client service, and we at Inca also adhere to this principle. With this in mind, I am confident,’ says Chris Kerrison, CEO of Inca Software, ‘that we will deliver everything NB Real Estate expects to ensure a more robust financial reporting system, and much more.’
By Martha C. White
As the residential real estate market continues its downward trajectory, the ripple effects of the crisis threaten the $8 trillion commercial real estate market. Offices, stores and industrial buildings are all facing a perfect storm of increasing vacancies and a lack of capital with which to refinance their debt.
“Really since the start of the year the trouble is coming out of the woodwork as far as notices of default, foreclosures, bankruptcies,” said Bob White, founder and president of Real Capital Analytics, a real estate market research firm. “It’s growing alarmingly fast.” Currently, some $50 billion worth of commercial mortgages are in default or foreclosure. White and others in the industry say the worst is yet to come.
“The two key things creating problems are the tenants are having financial difficulties, especially retail tenants, and there’s a dearth of capital out there for even healthy properties to refinance debt,” said Steven Ott, director of the Center for Real Estate at the University of North Carolina, Charlotte.
Like the residential real estate market, commercial real estate loans were bundled into securities. “The commercial mortgage backed securities market and further derivatives built on that have a very similar structure to the asset backed market the residential mortgages were pooled into,” said David Geltner, director of research at the Center for Real Estate at the Massachusetts Institute of Technology. “You have subordination levels governed by credit rating agencies. Obviously in retrospect, those subordination levels were way too low.”
It’s helpful to think of securitization as an accelerant: It lets returns zoom up during a boom, but it magnifies and spreads the pain of losses in a crash. Now, even stable businesses face guilt by association when they try to refinance: skittish over rising default rates, lenders are tightening up the purse strings for everyone. “Even well-capitalized insurance companies or commercial banks don’t want to catch the proverbial falling knife,” said Victor Calanog, director of research for commercial real estate analysis firm Reis. “Values may still fall.”
Unlike the residential sector, however, experts say that lending practices — at least until the height of the boom — remained conservative in the commercial market. A bruising slump caused by overbuilding that created a glut of unfilled supply in the early 90s was still fresh in the minds of many developers and commercial lenders. By contrast, until last year, the United States had never experienced an across-the-board drop in home prices, making it almost believable that values would never weather a sustained, nationwide decrease.
By 2006 and 2007, though, the commercial market succumbed to bubble thinking. Prices increased and lenders began relying only on recent performance when rating the credit-worthiness of commercial mortgages. “The underwriters for these securitized loans were basically very optimistic about the ability of commercial properties to increase their income,” says Reis’s Calanog. In other words, the maxim of ‘what goes up must come down’ went out the window. Analysts are quick to point out that if commercial real estate lenders hadn’t been as disciplined as they were, the problems the market faces would be even worse than they are now.
The problem runs deeper than bubble economics, though. Thomas Bisacquino, president of the National Association of Industrial and Office Properties, says that most of the industry’s coming crisis isn’t due to irresponsible lending, but rather to the way commercial loans are structured. Unlike home mortgages, which are usually for a few hundred thousand dollars and repaid over a 30-year term, banks lend businesses up to tens of millions in shorter-term increments, usually five to seven years. Unfortunately for millions of commercial-property mortgage holders, their terms ending just as the credit market grinds to a near-complete halt. This lockdown of the credit markets means that loans can’t be refinanced, pushing even healthy businesses onto the foreclosure tracks.
MIT’s Geltner estimated that bubble pricing was responsible for an approximately 15 percent run-up in prices, which would have impacted only the most aggressive borrowers when they fell. Instead, he estimates that the commercial sector overall has dropped by 15 to 20 percent already, and will probably drop by that much again before turning around.
Other industry experts agree. The problem is going to get worse before it gets better. “We’re projecting 17.6 percent vacancy for the office sector through the end of 2010, which is the highest level since 1992,” said Calanog. “The last time we saw this was during the savings and loan crisis.” Rising unemployment numbers illustrate another facet of the problem; when companies cut people, their need for space decreases, as well.
Offices aren’t even the hardest-hit of the sector. Retail space is suffering greatly as businesses ranging from mom-and-pop operations to major department store chains fold. “The sector we are most pessimistic about is the retail sector,” said Calanog. “In 2008 we were quite alarmed when we saw a significant decrease in performance, a decline in occupied stock we’d never seen in this sector before.” Since consumer spending has contracted for the first time in decades, retail owners face a grim outlook in the near term.
Just as commercial real estate’s fall has lagged behind the fate of the residential market, a turnaround won’t take place until well after the home foreclosure crisis has been contained. Right now, most of the government’s energies are focused on keeping people in their homes, which means fewer dollars and resources are being funneled into the commercial sector. While the commercial market will receive some of the money the government has set aside to buy various types of loans via the Term Asset-Backed Securities Loan Facility (aka TALF) program, the bulk of TALF funds are going towards freeing up the consumer lending categories of home loans, car loans and credit-card debt. There’s also no equivalent of government-backed mortgage agencies Fannie Mae and Freddie Mac to which most commercial property owners have access.
“We need the government to step in and provide guarantees for the commercial mortgage-backed securities market,” said NAIOP’s Bisacquino. “There is a lot of private equity sitting on the sidelines. TALF can provide the guarantees to get that to return.”
Industry advocacy group the Real Estate Roundtable has a five-point proposal for turning around the commercial real estate market. It lobbies not only for TALF funding but for greater leeway for loan servicers, allowing them to modify loan terms. The plan also calls for changes to accounting and tax rules and encourages foreign investment in the commercial mortgage-backed securities market.
In the future, many want to the government to introduce legislation that requires accountability. “I think part of the long-term solution to this is people have to have skin in the game,” said MIT’s Geltner. “If you get a bonus it has to be based on long run performance.”
Martha C. White is a freelance journalist in New York. She frequently writes on economics.
At the end of last year, an estimated 13.6 million U.S. borrowers owned more on their homes than their properties were worth, according to Moody’s Economy.com up from 11.8 million at the end of the 3rd quarter of 2008.
