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Slumping CMBS, nontraded REIT regs and shareholder lawsuits on the docket at REITWise 2016


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Slumping CMBS, nontraded REIT regs and shareholder lawsuits on the docket at REITWise 2016

NAREIT's REITWise conference continuedMarch 31 and April 1, with panels touching on M&A, debt markets and the futureof the nontraded REIT industry. Some highlights:

Debt doubt

MichaelNash, executive chairman of the board of directors at Blackstone Mortgage Trust Inc., said on a panel that newregulations on commercial banks and CMBS originators have affected the availabilityof debt financing for many real estate properties.

Whilebanks such as Wells Fargo & Co.and JPMorgan Chase & Co.are "still very, very active with the market," Nash said, "the waythey do business is changing, and the risks that they're willing to take are changing.And that creates, I think, a bigger void in the debt capital markets than we'veseen historically."

He predictedthat 2016 total CMBS origination will total $50 billion to $60 billion, a sharpdrop-off from the roughly $105 billion to $115 billion originated in 2015.

"That'sjust like $50 billion to $60 billion dollars of debt capital that's, poof, overnight,"Nash said. Combined with scarcer bank financing, he said, "You could see, callit rough numbers, $100 billion in capital that used to be available, no longer availabletoday."

Whileprime properties should have little trouble attracting financing, he added, "Themarket is starting to differentiate in their minds what's good [and] what's lessgood, and some asset types are really having a hard time finding debt and equitycapital."

"Suburbanfull-service hotels, class B or class C malls, there's a whole group of assets thatare giving the market a lot of indigestion, and the CMBS market was a capital sourcefor a lot of those," Nash said.

Later,discussing the long-feared "maturitywall" of CMBS set to expire in 2016 and 2017, he added: "Iwould say pretty much all the good stuff that was financed in '05, '06 and '07,that's been resolved. So what you have left is some really gamey stuff that maynot be deserving of capital."

Ownersof some such properties may seek to restructure, extend or modify their debt, Nashsaid.

"Youcould see some assets having a really hard time chasing debt capital," he added."The banks are not going to take out those assets, and a new CMBS issuer maynot be as interested based on the market conditions, so they'll just trade at amuch lower level, to primarily local equity that is relationship backed."

Glimmers of hope

In aninterview after the same panel, Ronald Dickerman, president and founder of the investmentfirm Madison International RealtyLLC, said new regulationson nontraded REIT fundraising will ultimately benefit the industry but could bepainful for some companies in the short term.

"Ithink, to put it bluntly, there hasn't always been universal transparency and honestyabout valuations," Dickerman said. "Everyone has this hypothetical $10unit that they have to hit, and when you start with 90-cent dollars, investing in2007 or 2006, it's hard to return more than $10, even though it's been 10 years.And I think shareholders tend not to have the whole picture. They're relativelyunsophisticated, and they sort of do what management teams tell them to do."

Still,he said, there are success stories where private REITs have turned the corner aftergoing public.

"They'vedone all the right things, and they have a reasonably good shot at making it asviable public REITs," Dickerman said of those companies. "They have multibilliondollars of market value, and assets that people like, and a well-defined businessstrategy, as compared to just being a hodgepodge of assets."

One suchcompany, he said, is Monogram ResidentialTrust Inc. Recent upheavalon the firm's board surrounding members with ties to the company's former externalmanager, Behringer Harvard, are "a great example of growing pain, trying toextricate themselves from their private REIT universe," Dickerman said.

"Butwe happen to love Monogram, and feel like the asset quality is exceptionally good,"he added. "It's coastal multifamily in 'A' locations and highly amenitizedassets. Probably the youngest vintage, highest-quality multifamily portfolio thatwe see in the market right now."

Wheel of fortune

In apanel appearance April 1, the conference's final day, Adam Emmerich, a partner atWachtell Lipton Rosen & Katz, said lawsuits alleging breach of fiduciary dutyare now inevitable in the aftermath of M&A transactions.

"Thereis nothing that anyone involved in a major multibillion-dollar public company transaction… can do to avoid being sued," Emmerich said. "You will be sued, and thequestion is whether that lawsuit will have any traction."

The natureof modern communication, in which every email and text message is preserved andrecords exist of the duration of many phone calls, means discovery in such lawsuitsis "a huge pain," Emmerich said.

He added:"The hope, when you bring a litigation, is that you find something — whetherit's in the SEC disclosure that comes out afterwards, in the background of the transaction,who talked to who when, what they said, what the board did, whether they had a specialcommittee or not, whether they thought about it, how they thought about it. Thehope is you'll find something that's ugly and you can grab onto it, make a big paradeout of, get a judge to say, 'How could this have happened?'

"Thetruth is, people who are involved in litigation of merger transactions are in abusiness," Emmerich said. "You could say it serves a socially useful function,or you could not feel that way. It doesn't really matter. They're in a businessof suing, in every case, and hoping that there'll be a certain number of them where[they] find something."