Tranche Warfare & David vs Goliath in Silicon Valley

Tranche Warfare

AAA is supposed to be the debt you can cuddle at night. The most secure tranche of the CMBS stack, a rating reserved for the best real estate. You give up yield in exchange for the feeling that your money is safe 🤗 

Then comes a series of unfortunate events. Manhattan office towers are no longer the guaranteed boring cash flow they used to be. Even blue-chip sponsors, the kind that speak at business-school commencements, start defaulting on their debt. Opportunistic buyers come in and buy the debt on the cheap, and after all the fee juicing by special servicers and the like 🧃, even AAA bondholders are no longer safe.

This hasn’t happened since the GFC. But it’s just happened. And Patient Zero is Blackstone’s 1740 Broadway.

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Tranche Warfare (cont.)

Buyers of the AAA (rated so by both DBRS and S&P) tranche of the CMBS debt on 1740 Broadway lost 26% of their money this month, the first such case since the GFC, per Barclays. Losses exceeded $40M on the $158M slice, and it goes without saying that the 5 lower-ranking groups of creditors got back nothing.

Tale of the tape: Blackstone paid Vornado $605M for the 600K+ sf tower in ‘14. It then took on $308M in debt, in a single-asset, single-borrower CMBS transaction originated by Deutsche Bank, with investors such as Travelers and Endurance American buying in. In ‘21, anchor tenant L Brands decided to bounce, the worst possible time for Blackstone to try and find replacements. In March ‘22, Blackstone handed back the keys 🔑 . Last month, the special servicer (PNC) sold the note to Isaac Hera’s (more on him soon- interesting guy) Yellowstone Real Estate for $186M. But after all the middlemen wet their beaks, only $117M was left for bondholders.

So far, observers aren’t expecting a ‘08-type meltdown. But 1740 isn’t expected to be an isolated case, either. An unhealthy chunk (31%) of office-backed CMBS is distressed, per KBRA – quick breakdown here – and some cities, like Chicago, have it particularly bad.

“Because we are only in the early stages of office price discovery, we expect this list to expand to include several office deals,” Barclays analysts said in the report, per Bloomberg, flagging properties such as WeWork affiliate-owned 600 California in SF and another Blackstone joint, Chicago’s River North Point.

Blackstone’s response is becoming a classic: Once again, it emphasized that “less than 2% of our owned portfolio is traditional U.S. office,” pointing to its nearly $600B RE empire. And this week, Jon Gray did a man on the street type video hit at the firm’s annual conference, saying that “negative headlines give air cover to invest.” 🛫 

David vs. Goliath in Silicon Valley

When Raphael Toledano uttered the immortal line: “I’m worth a fuckload of money, bro,” I thought it was one of those “only in New York” moments. But it turns out that impulse is shared by at least one legit RE bigwig.

Silicon Valley developer Jay Paul was trying to convince a humble law firm to exit its lease so he could kick off a major redevelopment in downtown San Jose. One of his opening moves was to show the firm’s principals pics of his 190-foot yacht 🛶 

“Check it out, this is me on the Forbes billionaires list,” Paul added, according to the tenant’s account reported in this superb yarn by the SF Standard. It was 2019, and Paul told the partners that he’d one day invite them to cruise the world with him. If only they’d leave…

“Sorry, sir, but your priorities are not our priorities,” one of the partners, Jim Dawson, said. In ‘20, the firm exercised its second lease renewal at the property, where by now they were the last tenant standing – the building’s courtyard is fenced off and the elevator only brings you to the firm’s floor. When Paul tried to hike the rent on them, they successfully sued him, citing market comps. Paul’s dreams of redeveloping CityView were DOA, but in a twist of fate the yearslong legal drama ended up saving him from further exposure to a devastated office market. He’s already had no luck filling his new 1M sf tower at 200 Park – imagine if he had one more.

Quipped Dawson: “You think that offer to go on his yacht still stands?”

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Sternlicht: Now Yous Can’t Leave

Barry Sternlicht’s $10B private REIT is running out of funds to hand back to investors (catch up here), so Sternlicht is taking moves to buy time. The REIT has imposed new restrictions on redemptions, capping monthly withdrawals at 0.33% of NAV - compared to the previous 2% limit.

“[As] a fiduciary to our stockholders, we cannot recommend being an aggressive seller of real estate assets today given what we believe to be a near-bottom market with limited transaction volumes, and our belief that the real estate markets will improve,” SREIT said in a Thursday letter to investors, per the FT, which first reported last week just how tight the situation was – the vehicle has already drawn down $1.3B+ of its $1.55B credit facility. Starwood added that it had already sold $2.8B of RE, and believes that rate cuts are imminent, which would lead to “sunnier skies” 🌞 for further sales. Per the FT, Starwood high leverage (57%) means that to raise $500M to meet redemptions, it would have to sell $1B+ in properties.

“They were wrong this year about rates coming down,” analyst Jeff Langbaum told Bloomberg. “This stretches out their liquidity in hopes that eventually, they’ll be right.” 📿 

CoStar Rubbishes Hotel Price-Fixing Suit

CoStar, which owns key hotel rate benchmarker STR, joined Hilton, Hyatt, Marriott and others in declaring that a price-fixing suit against them is “fanciful,” and that there is no evidence of any such activity. The suit had argued that the STR data "act as the essential 'fuel' propelling pricing algorithms towards the ultimate goal of charging higher prices." (In this, it has strong shades of the price-fixing lawsuit against rental software giant RealPage and several major multifamily landlords - catch up on that saga here.)

The plaintiffs are seeking class-action status, per Reuters, a move that CoStar and the hotels argue would “set new precedent that could upend numerous industries where benchmarking is a common and important market-intelligence tool.”

(Bonus: More on CoStar’s grand CRE and resi ambitions here) 

Quickies

• 📽️ Aby Rosen’s many, many, many troubles 

• An epic condo buyout fumble in Chicago’s Loop 

• Blackstone buys bulk condos from GS on LES in $171M deal

• Major office investor CPP admits it was just better off buying index funds 🇨🇦 👏 

• Kushner, RFR land major – and hella complex – $480M Dumbo refi 

Unquotable Quotes

Programming note: The Promote is off for Memorial Day, so we’ll see you back here Wednesday – have a lovely holiday! Also, for my handful of 🇫🇷 readers - I’ll be in Paris for a week so just reply to this email if you’d like to walk-n-talk 🥖