Rough Banking Seas Ahead?

[Elliott]

An ETF of regional banks, yields about 4%. Not saying where it will go from here, but I thought the rough times already have been factored in.

 

[Terrel L. Shields]

The list of companies closing stores is increasing. Part of that is online shopping but that does not account for things like Red Lobster going bankrupt. It does not account for Applebee's and Starbucks under-performing previous quarters. That does not account for many long time food places closing because rents went thru the roof. I read one popular place in Chicago closed after the landlord doubled the rents to $17,000 a month. They tried to rent another site but that deal fell thru so they simply closed.

JC Penney closing many stores. Family Dollar, Express, Macy's, even Walmart closed 11 stores. Walgreens, on and on. They simply are low profit or losing money in many locations. People are pulling in their spending.

 

[Non Sequitur]

From an article on LinkedIn:

"230 Park Avenue's Mortgage Defult: Inside The Helmsley Building

When hearing about a mortgage default or problems stemming from office buildings today, the most common thing you will hear is "join the club".

This very much applies to Park Avenue's most recognized office building; 230 Park Avenue.

The building is a 1.4M Square Foot Class A office building sitting at the mouth of the Park Avenue corridor. It's certainly an NYC icon, and because of the post pandemic office market and monetary tightening environment, it's stuck. This isn't the only time in the life of the building though that its sponsors needed to figure out a strategy.

The building was developed by The New York Central Railroad company in 1928, a few years after Grand Central was built. New York Central merged with Pennsylvania Railroad & formed Penn Central in 1968, but went bankrupt shortly thereafter. The bankruptcy & sale of assets took years and upon Judges decision, was sold in 1975 to New York Bank for Savings. Donald Trump became famous for acquiring the Grand Hyatt (Commodore Hotel) in this bankruptcy sale as well. The building changed hands again in 1977 when Harry Helmsley bought in as a majority shareholder and renamed the building. It was sold again:

$705M in 2005 (Istithmar a Dubai Fund)
$1B in 2007 (Goldman Sachs)
$740M in 2011 (Monday Properties / Invesco)
$1.2B in 2016 (RXR the current owners)

To be clear, the building is 85% leased & the mortgage is being paid monthly, the only issue for now is that the capital markets for an office refinance are ice cold. The original maturity date of the $670M CMBS mortgage was 12/8/2023. This is one of the main weaknesses of a CMBS loan, there's nobody to assist you if things go wrong... no forbearance, no extensions, no head of lending or committee to negotiate with. Nope.. you go to special servicing.

Today, the $670M mortgage hangs in limbo...what was once a conservative 55% LTV, could be exactly what the building is worth.

If you sat in committee, what do you do?

- Keep feeding the building, hoping that when you rent it up you will make get to a 1.1-1.2 DSCR?

- Sell the building

- What else? "

Something will be worked out, you have a partner not a lender with a $670M mortgage. IMO the real trouble ahead is the $670k mortgages, when the feds decide to get tough the loan committees (bank loan committees not capital market committees) will have to make the hard decisions they are now kicking down the road.

 

[DTB]

The only way our taxes will go down is for property values to plummet.

I can think of another way as unlikely as it is to happen.

 

[DTB]

our company has done several appraisals of full-service restaurants in the past few years that are putting massive amounts of money into their property for either construction/ buildout or renovation. It is rarely feasible, so I'm not sure what to make of so many suddenly wanting to do this.

No longer appraising but I see the same thing around me. I know of 2 or 3 restaurants in my inner ring suburb that are renovating to the tune of 2-3 million each!
That's a lot of veal parmesan that has to go out the door.

 

[DTB]

View attachment 89561

It's all these small banks that are potentially in trouble.

Maybe I should put a trailing stop in on OZK.

It's been berry berry good to me. 2 bagger along with a 4% yield on cash.

 

[DTB]

If you sat in committee, what do you do?

- Keep feeding the building, hoping that when you rent it up you will make get to a 1.1-1.2 DSCR?

- Sell the building

Hope is not a plan.

I've never had to face a loss in RE but in trading I do.
Cut bait and move on, I understand enough to know that I'm not a turnaround king. I go fishing in more fertile waters.

 

[Terrel L. Shields]

I can think of another way as unlikely as it is to happen.

Yeah, but when have tax rates been lowered?

 

[Terrel L. Shields]

Maybe I should put a trailing stop in on OZK.

OZK once refused to pay for another appraisers work. Seems the borrower owned 20 or so houses. He put 10 up and she bid on the 10. Then they asked her to appraise the other 10. She did 20 appraisals and they said, "We agreed on the original price - refused to pay for the additional ten appraisals. Threatened to turn all 20 into the state if she tried to collect.

So, any bank that crooked is making money. Personally, I refused to deal with them. The original owners were pretty good folks and my brother was friends with the owner who attended banking school when he did back in the 70s. Originally it was called the Bank of Ozark and originated in the small town of Ozark, AR.

 

[Terrel L. Shields]