Distress won't come; prove me wrong..
Industrial and lab has been killing it, office leasing isn't as bad as people thought it would be and we'll all be vaccinated by mid-summer, apartments were hit in certain cities but trading sub-4 in others and overall doing fine, hotels will have a tough winter but a few more months won't kill them and banks don't want to take back the keys anyways, and retail was dying anyways because it was overbuilt.
All the money for distress won't be put to work because nothing will get to the levels we were all dreaming of when shit hit the fan in '09 esque fashion, you're not gonna be buying hotels for $0.40-$0.50.
Prove me wrong, and if you agree what do all these distress funds that raised billions of dollars do in this scenario with the money...dissolve the funds?
If anyone is at one of these firms that went out and put together a distressed debt fund mid-pandemic could you opine?
Without wanting to share my personal/professional views on 2021, I will add the observation that something similar occurred post 08 GFC. There were tons of monies raised for distressed, well excessive of the amount of actual distressed deals that came to market. I'd guess it was at least a 10 to 1 ratio (meaning $10 of funds looking to buy for every $1 of distressed assets offered).
The issue was that banks (at the insistence of regulators) did not want to allow distress sales as it could cause a cascade of other defaults and trigger issues in the banks capital bases. So they just "pretended and extended", then the market recovered and the problems resolved via leasing/value creation and normal sales.
There were lots of distressed deals, tons more than could even be possible today, but monies to buy them was just soooo massive, a lot never bought anything. Vacant homes, fractured condos/conversions, stalled construction/land dev deals, and some low quality (like old) assets traded. But very very little "class A" traded at much of a discount, even when vacancies existed. In fact, vacancies quickly found a premium as that allowed for a lease up strategy.
Doing distressed deals is easier said than done now that banks and holders of debt have little pressure to sell at distressed prices.
We own hotels in our portfolio and were under contract to buy a few pre-covid. I love how everyone thinks values will drop 30%+. Reality the discount is more like 5%. Owners not incentivized to sell because they are not under pressure. The banks are giving us a lot of support.
There are a lot of what ifs regarding a vaccine, effectiveness of the vaccine, quickness for mass production, etc. so it will take time for this to develop, experts are saying this will carry into 2021.
In addition, during this time, even if we are under the assumption equity values may have not depressed, there was a real cash flow drainage, from furloughed and laid off workers to corporate restructurings and shoring of the balance sheet that for some have resulted in additional leverage. So the ability for both consumers and corporates to resume the same level purchasing power have deteriorated and will take time to recover. Depending on the timeline, take into consideration that for most sectors that rely on consumer discretionary spending (which includes many economic sectors not named essential services) this may result in up to two years of depressed earnings for both workers and corporations (if 2021 does not end up with a vaccine). For the average consumer, I don’t think the first thing they will do once the pandemic is over is go splurging because during this period they have still had to make mortgage, rent, loan, insurance payments, etc. with reduced earnings. Capital spending is scarce.
Regarding distressed sales, I think it is on a case by case basis and dependent on your respective capital structure and liquidity. Coworking companies and hotel corporations have shuttered locations permanently for business strategic reasons. For others, you have seen bankruptcies, especially in the mall sector. However, for sectors that have long term value, such as multi family and office, again it will be based on capital structure and liquidity. For instance, do you have a land loan coming due and the valuation on the development project was already stretched? Do you have enough liquidity to fulfill loan covenants? On a stabilized building, do you have enough cash in the balance sheet or ability to raise additional equity for debt servicing during this period? Some developers such as HZF Capital are in trouble, while others may have a better balance sheet and lower leverage on asset valuations.
The m2 money supply has had the greatest jump in history, people are saving at an extremely elevated rate and I would imagine this will result in massive spending come the summer when everything is open again.
On top of that we should have at least 60 million vaccine doses by end of January at a minimum. I don’t see how we reach the heard immunity point by the summer when you factor in the many millions of people that have already had it plus the number of vaccine doses that will be distributed.
I really anticipate this will be over by may/June
People are saving because rent/mortgage, student loan, credit card, and other debts are deferred or interest-only. This applies to households and businesses. Some people/firms who can afford to pay their obligations are just hoarding cash.
Keep in mind that the US federal government has literally spent trillions in less than a year to stimulate the economy. Businesses received substantial cash from PPP loans (potentially 100% forgivable), and small businesses with "SBA" loans have been getting 6 months of loan payments covered in full, courtesy of tax payers.
A well known hotel consultant I work with says that business travel won't fully return until Q4 2024, and that's if everything goes according to plan here on out. Keep in mind the hospitality sector is hurting pretty badly, so even when things back to normal, there's gonna be a lot of catching up to do.
Not only is the government planning additional stimulus, but the FED is going to be keeping interest rates low for a long, long time.
Distressed oops will be tough to come by because COVID isn't an isolated issue. It's worldwide, so banks, lenders, governments, etc. are being super accommodative.
I hope so too that it will end soon, very unpredictable although I think hospitality will take longer to recover (I wouldn’t underwrite occupancy and rate projections based on normalcy returning in 2021) and possibly lower margins based on continued costs of increased sanitary cleaning and social distancing resulting in lost revenue. For retail, there continues to be secular headwinds from increased digitalized order fulfillment.
Regarding m2 money supply, I am not a monetary expert but I would like to delve further into the distribution who is holding the cash and assets, whether corporates or consumers, and whether it’s in savings such as Treasury Bonds (in which case, most bonds will be held by asset managers). However, the median US household income is around $70k and I would imagine it is heavily skewed at the higher percentiles.
There won’t be the level of distress expected but there will be plenty of special sits opportunities. Seeing a lot of debt opportunities now in office, hospitality and leisure where bank lenders won’t lend unless there’s certainty of income. Seeing this mostly on recently complete assets or assets which haven’t achieved business plan and debt is nearing maturity.
26% of CMBS hotel loans are in dq/ss vs 3% at the start of the year. You mean to tell me none of that will culminate in distress? ok lol. There's a long list of owners that have already reported to their ss that they are ready to walk away from their properties. And that's just the CMBS picture.
You're right lots of them are willing to walk away from their properties, but the buyer pool for such assets is also huge as well. We're fairly in tune with the servicers. We've bought two deals out of auction on former CMBS assets with them. They told me they have taken out three hotels in 2020 where the owners gave them the keys, they were able to recoup their initial loan and a fair amount of the equity as well. The idea of distress only applies if its across the broader market. Yes CMBS deals will come to the auction block, but the reality is everybody is wanting to buy them.
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