Many of you have probably seen this and maybe it was posted someone in comments on this site as I know some folks follow ‘Wolf Street’.
Anyway there is a fairly hard hitting piece on some of the lodging REITs that have walked away from properties recently leaving investors to hold the bag on their debt.
So sell the ATH prefs?
Wow ! One of the hotels on the list I have stayed in several times, the Embassy Suites in Walnut Creek, Ca. What a surprise, that one at least is an recently remodeled upscale hotel in a good section of the city across the street from the BART station. Ran a few marathons in the Bay Area and that was a very convenient location with the train right there and all. Never would have guessed that one.
cavear emptor and the same applies to those who finance the real estate deals. It’s been known for years that PE is the leeches of the financial world, nothing new in that information.
Yes, but these are not PE firms… these are publicly traded property REITS.
Pension funds own the CMBS debt, but they are (almost) certain to own the very senior AAA or AA tranches of the CMBS debt. They wont take a hit. It is the equity and the below investment grade tranches of these securitizations that will take the hit due to these foreclosures. I am sure that these equity tranches are owned by funds that can (or should be able to) absorb it.
Ashford is an externally managed REIT at that. To me an externally managed REIT of any kind is uninvertible due to the clear conflicts of interest that management has. In these structures, CEO/CFO have duty of care and duty of loyalty to their employer – not the REIT shareholders. That’s a no go.
Flushing out these REITS and the associated equity and BIG tranches of CMBS securitizations is (to me at least) a healthy process. Market price discovery of these commercial real estate assets is also a healthy process.
As Mr Buffet says when the tide goes out you find out who is swimming naked. Sadly, this is a rather ugly group that I would rather not see naked at the beach ;-).
As a last point – the Ashford portfolio is actually a pretty motley junk drawer of assets located in places like Newark and featuring down market Marriott brands such as Courtyard. Hardly the “upscale” assets they claim.
I always return to: Character, Collateral, Cash, Credit, Covenants, Capacity
This was a great article and the topic has been well covered on this site. IMO.
August, the leverage is unbelievable when your talking about a company doing interest only loans then just rolling them over when they come due. As these fail and the system gets flushed out hopefully the lenders will demand better terms on commercial loans. But then when your using other peoples money maybe not. Having read Blackrock and Blackstone are already collecting money to start up new investments.
Hey Charles – I totally agree with you.
I recall from a recent WSJ article that IO CRE loans increased to 88% of issuance in 2021 from about 51% of issuance in 2013. CRE IO loans have always been with us and recently were used more frequently exactly when interest rates were at their lowest.
Sadly this is the nature of the real estate boom/bust cycle.
As you, I would like to think that lenders will tighten standards next time, but they never do and I am sure they won’t in my lifetime.
At the end of the day – IO loans are not that rare. Corporate bonds are typically IO loans. The difference here is that CRE mortgages are secured by real estate assets and most corporate bonds are not.
I appreciated this comment: “Hilton-spinoff Park Hotels and Resorts [PK], … made the headlines in June when it walked away from a variable-rate interest-only mortgage of $725 million, backed by two large hotels in San Francisco…. Management of that REIT tried to pull a bag over their investors’ heads with a moronic clickbait line about San Francisco, instead of admitting that they’d grossly mismanaged the company, failed to invest in needed updates, and grossly overleveraged the properties.”
Yes, SF has plenty of issues. But when the blame also lies with mismanagement and abrogation of responsibility, let’s lay the blame where it’s due.
https://wolfstreet.com/2023/06/12/ive-had-it-with-stupid-stuff-about-hotels-in-san-francisco-park-hotels-wall-street-screwed-shareholders-bond-fund-holders-and-pension-funds-but-blame-san-francisco/
Tim, Good article and if you read the comments you can get a few nuggets of wisdom from them also. The role private equity is playing in the investment world is rivaling the large banks like GS and MS or even the robber barons of the late 19th century.
I know there has been talk on this site of several hotel preferred and I suppose there is a few quality hotel reits that are worth investing in but after the 2020 crash in all hotel reits I took a hit and have not re-entered them.
In the Wolf article it was mentioned this is going to affect pension funds and bond funds. I think you can add investment funds and insurance to that list.
I found one of the comments especially telling on PE that mentioned these companies will create subsidiaries and transfer all the debt to them and allow them to go bankrupt. Anyone holding preferred of a Blackstone subsidiary?
Also when you read comments look for ones from current and former employees. Kind of like looking at reviews on Glass door.
Read the comments in this SA article
https://seekingalpha.com/article/4616003-jackson-financial-stock-nearing-peak-pessimism-as-investors-fled#comments
Broaden the context of the comments to reflect the whole industry.
If I seem negative, it’s just me being cautious and thinking out loud as I am looking in this area to invest and trying to tell the pearls from the swine.