Neil Victor

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Global distressed assets rising, report says
The global dollar value of defaulted mortgages and failed commercial property companies was more than $55 billion in the first quarter, bringing the total of currently known distressed assets to $153 billion, up 56 percent from fourth-quarter 2008, according to Real Capital Analytics.

In the Americas, first-quarter distressed assets grew by $26 billion year on year, to a total $75 billion. Distressed assets in Europe surged 53 percent to $51 billion, while those in the Asia-Pacific grew by 68 percent to $27 billion. About 85 percent of the current distress is based collectively in the U.S., the U.K., Spain, Australia and Japan, the firm says.

“At this early point in the cycle, far more assets are falling into trouble than are being resolved, because the transaction market is stalled and bidders for distressed assets are often demanding shocking discounts,” reads a Real Capital Analytics report. The stalled deal market means that instead of taking significant losses now, lenders are extending or modifying loan terms in the hope that conditions will improve over the next year.

At the end of the first quarter, at least $36 billion of property debt had been restructured or modified. The assets are still considered distressed and will have to be dealt with during the next year or two. Unsecured debt was recently exchanged for majority equity positions in two high-profile firms — Australia’s Centro Properties Group and Metrovaseca — and each of these firms still faces pressure to sell assets and reduce the remaining mortgage debt.

Layaway returning in a big way
When Wal-Mart nixed its layaway program in 2006, pundits saw another sign that living within one’s means had become a relic. With the collapse of the housing bubble and the onset of the global financial crisis, however, consumers are once again keen on the layaway option. “Everything old is new again,” said John Bemis, executive vice president and leasing director of Jones Lang LaSalle’s retail group.

The buzz about layaway programs started just before the 2008 holiday season, but a growing number of retailers, particularly local mom-and-pops and regional apparel chains, are reintroducing the practice as a way to cope with the spending slowdown, Bemis says. Such nationals as Big Lots, Burlington Coat Factory, Dress Barn, Kmart, Marshalls and T.J. Maxx had in fact never stopped offering layaway. But meanwhile, a grassroots push from shoppers led Sears to reintroduce layaway last fall and also prompted a major layaway-focused promotional campaign at Kmart, says Tom Aiello, a spokesman for Kmart and Sears. “Layaway was not a fad,” Aiello said. “People are still using it in large numbers.”

The tradition has even spread beyond retail stores. Lay-Away.com and eLayaway.com, Internet sites that work with retailers to hold items until they are fully paid for through online bank drafts, report increased traffic. For anxious consumers intent on seizing control of their household budgets, layaway programs make a lot of sense, says consumer advocate Edgar Dworsky, who runs the ConsumerWorld.org Web site. “It turns the clock back God knows how many decades to a time when people budgeted more carefully,” Dworsky said. “Credit cards are just the opposite — you get the item and then you worry about how to pay for it.”

Many Kmart and Sears shoppers used layaway during the holidays to secure hard-to-get toys or video games that might otherwise have gone quickly out of stock, says Aiello. “We also do price-matching,” he said. “If the product you put on layaway goes on sale within a month, you are covered. It is very low-risk.”

But not all retailers are going this route. Notwithstanding rumors to the contrary, Wal-Mart denies having plans to bring back its program, though the company does continue to offer layaway for jewelry. And layaway programs have yet to appear at Target or Kohl’s.

Dworsky sees limits to the trend. He predicts that once the economy recovers, consumers are likely to return to their old spending habits — though not at the old frenzied pace — and layaway will once again fade into the background. “I cannot believe that the events of the past year are going to fundamentally change most people’s attitudes about money and their desire for things.”

Assets: Distressed doesn't always mean unhealthy
To some, a distressed asset conjures the image of a half-completed building or a nearly vacant or derelict property. But in today’s depressed real estate market, distressed properties are more likely to not be troubled at all. Their owners may simply have fallen on hard times, or the problem may involve mortgages that are current but past maturity and which cannot be refinanced, experts say.

About 44 percent of documented distress worldwide involves properties that may still be performing well but are valued far lower than before, according to Real Capital Analytics. Some 40 commercial property investment and development firms worldwide failed between 2008 and 2009, leaving about $67 billion in unpaid debt, the firm says. This excludes home builders, casino/gaming companies and mortgage lenders, which also represent a sizable sum. It also excludes situations in which a company expresses doubts about survival but has yet to file bankruptcy or go into administration. Public companies account for roughly half of total distressed property around the world, and for nearly 90 percent of the troubled debt outstanding. In Japan, Australia and some European countries, the vast majority of distress is at the entity level and unlinked to any specific property.

THE BOTTOM LINE
CBL & Associates posted $51 million in funds from operations for the first quarter, down from $53.6 million a year ago. The firm attributed losses to investment in Jinsheng Group, a Chinese development firm. Net income, meanwhile, was $1.7 million, down from $6.1 million for the year-ago quarter.

Developers Diversified posted $140 million in first-quarter funds from operations, up from $96.3 million one year before. Net income was $76.8 million, meanwhile, up from $29.6 million a year ago, but net operating income slipped 2.2 percent, which the firm said was mainly a result of retailer bankruptcies.

Kimco said net income for the first quarter fell to $26.6 million, down from $86.6 million a year ago, because of fewer property sales, currency fluctuations and expenses related to job cuts. First-quarter funds from operations declined to $117.8 million, down from $164.4 million a year ago.

PREIT reported $29.3 million in first-quarter funds from operations, off from $34.1 million a year before, while net operating income slipped to $71.9 million from $75.8 million. The firm posted an $11 million loss, versus a loss of $2.9 million for the year-ago quarter. The company blamed bankruptcy-related store closings, the costs of shelving projects and changes in accounting.

Ramco-Gershenson said funds from operations slipped to $11.9 million for the first quarter, down from $13.2 million a year before. First-quarter net income was $2.3 million, down from $11.4 million one year ago. The company blames bankruptcies and weak property sales.

Tanger Factory Outlet Centers said first-quarter funds from operations were up 12.8 percent year on year, at $24.7 million. Net income rose too, to $28.9 million, from $4.9 million for the year-ago quarter.

Taubman posted $24.5 million in first-quarter net income, up from $23.5 million a year ago. Funds from operations increased to $56.5 million, meanwhile, up from $54.7 million one year previously. The company credits an increase in lease cancellation income and a reduction in predevelopment and administrative expenses.

TRANSACTIONS
GAS Distomo, of Long Beach, Calif., paid Los Angeles–based 26 Del Sur Crossroads I $25.5 million for the 91,000-square-foot Crossroads Entertainment Center, Chino Hills, Calif.

Greenacres, Fla.–based Noble Properties bought the Village Shopping Center, a 135,000-square-foot neighborhood center in Jacksonville, Fla., from Developers Diversified for $5.9 million.

THE COMMON AREA
The General Growth Properties bankruptcy will not hurt mall asset values, because other developers are not about to swoop down and rapidly buy up General Growth’s assets, Westfield Co-Managing Director Peter Lowy told analysts. The complexity of that bankruptcy suggests a period of as long as three years, he said. “Looking at some of the commentary made and looking at the market place,” Lowy noted, “we don’t expect a flood of assets coming out of General Growth onto the market in the near future at all.”

To keep shoppers spending, Westfield is rolling out a technology it calls Fabfinds at its 55 U.S. malls. The program will allow customers to get the best deals from retailers each shopping trip. Working with national, regional and local retailers, Westfield will research sales and promotions, some of them exclusive to Westfield, and deliver that information directly to shoppers, at the shopping centers themselves and on each center’s Web site. “We recognize the economic challenges many are facing,” said Alan Cohen, who oversees Westfield’s partnership marketing. “And we’re committed to supporting our customers by helping them get the most value out of each and every visit to our centers across the country. Fabfinds information is available also on Westfield.com.

Buyers are making baby steps back into the market, focusing on smaller deals and single-tenant properties, developers say. Large deals are practically nonexistent, but some investors are snapping up smaller, single-tenant properties. “Buyers include well-capitalized retailers buying back their stores, local buyers that have access to capital and those who are completing 1031 exchanges,” said Developers Diversified Realty CFO Bill Schafer, on the firm’s first-quarter earnings call. Developers Diversified is seeing the most interest in assets priced between $5 million and $25 million, he said. “Despite the number of sellers in the marketplace and the difficult credit environment,” said Dennis Gershenson, CEO of Ramco-Gershenson Properties, on his firm’s earnings call, “we have found a very receptive market for net-lease assets at reasonably aggressive cap rates.”