by Calculated Risk on 2/06/2008 12:23:00 PM

Sorry for any problems this morning. I don't know what was causing the problem, but I've removed most of the ads. If the problem persists, please let me know.

by Calculated Risk on 2/06/2008 11:00:00 AM

BRE is an apartment REIT in the West. Here are some comments from their conference call (hat tip Brian):

“Essentially we have two distinct operational dynamics going on. Two-thirds of our operations, San Francisco, Seattle, Los Angeles, San Diego, are operating a fairly high level. Revenue growth is ranging 4.5 to 9%, occupancy levels are at or about 95%. We have a pretty tight 30-day available levels running between 6 and 7%. It is a little early in the year to start talking about rent growth, but in these markets we have pricing power and we're not being shy about exercising it where we can.

There is another slice of the operations with a single-family housing recession is playing out in full as we expected. Sacramento , inland Empire in Phoenix which represented about 21% of the same store net operating income, operations are struggling, and we expect the struggle to continue throughout the year. We seem to be able to maintain about 92, 93% occupancy but rents are flat year-over-year. We certainly are not expecting rent growth this year. There may be modest revenue growth from these markets, but it will be occupancy driven over our '06 levels.

For the moment Orange County lies somewhere in between with a stronger operating profile than we and maybe others expected at this point. Orange County represents about 14% of same store net operating income, currently 95% occupied, 30 day available stands at less than 7%. Our market rent growth in '07 was just over 3%, about half normal growth levels. Some of this was of our own making. It took almost six months to get our occupancy in a position to grow rents. The loss of jobs certainly triggered a deceleration in traffic and rent growth in the second half of the year. Orange County remains unaffordable from a housing standpoint. Median home prices for existing stock are more than 620,000, and new home prices average more than 850,000. Information on jobs that came out at the end of the year indicated a year-over-year drop of about half a point. Certainly not great, but probably not enough to shake the home prices materially. This market is holding up very well and could generate maybe 2 to 4% revenue growth in rent growth in 2008 which could be a really great performance.”

Q: My second question pertains to single-family moveouts. How is it trending and can you quantify what impact it may be having on your occupancy overall?

BRE CFO: Well, I think coastal California is really a tale of two markets. In coastal California the numbers really haven't budged. Moveouts when we look at our resident turnover and to the extent that the exit interviews or the exit data is correct, moveouts in coastal California are for purchasing a home remain very sticky around that 15 to 20% number. It is like typically 15 to 17%. When you get to an Inland Empire, Sacramento , Phoenix , that number will jump up to 25 and 30%. Look, in Phoenix right now you can rent a 2 to 3 bedroom home for $900 a month. That competes with an apartment every day of the week. We're getting a much higher level -- and that number is probably where historically hugged right around 25% is now in the 30, 35% range, and it is not just move out for home purchases. We have move outs for people going to go rent a single-family house.”
emphasis added

by Calculated Risk on 2/06/2008 10:40:00 AM

From MarketWatch: Toll's home-building revenue falls 22%

Toll Brothers Inc. doesn't see any end in sight to the U.S. housing market's woes as the luxury home builder said Wednesday that first quarter home-construction revenue fell 22% compared to the same period last year.

"The housing market remains very weak in most areas. Based on current traffic and deposits, we are not yet seeing much light at the end of the tunnel," said Robert Toll, chairman and CEO.

On cancellations:

In FY 2008's first quarter, the Company had 257 cancellations totaling approximately $198.0 million, compared to 436 cancellations totaling $318.9 million in FY 2007's first quarter, and 417 cancellations totaling $328.5 million in FY 2007's fourth quarter.

Tracking cancellations is important because the Census Bureau does not adjust new home sales (and inventory) with cancellations. Toll's cancellation rate is usually lower than the industry because historically Toll has required larger deposits than other homebuilders. Although the absolute number of cancellations declined, the Toll cancellation rate in Q1 was 28% vs. 29% in Q1 2007, or essentially unchanged.

by Anonymous on 2/06/2008 10:08:00 AM

Moody's is throwing out some possibilities for changes to its rating system that would give more information to bond buyers, and is inviting comment from the investment community. Mr. Ritholtz over at Big Picture has a suggestion for a disclosure statement that has too many dirty words in it for me to post on my respectable blog, but here's the link.

Here are the proposed options, from Moodys' request for comment:

1. Move to a completely new rating scale for structured securities, for example, numerical rankings of 1-21. These would continue to contain ordinal rankings of expected credit risk and would probably map to corporate ratings.

2. Add a modifier to all structured ratings utilizing the existing rating scale, e.g., Aaa.sf. This would designate the issue as structured, but add no other additional information.

3. Add a suffix to the existing rating scale for structured ratings that contains additional information – for example, estimates of multi-notch rating transition risk. This could be Aaa.v1, Aaa.v2, etc. We would derive these gradations through an analytical process that would be disclosed to the market.

4. Use the existing rating scale for structured securities, and put additional analytical information in a separate scale that would exist in a separate data field. For example, an issue could have a “Aaa rating, with a ratings change risk indicator of v1”. The added field would be analogous to our existing ratings outlooks and watchlists.

5. Make no changes to the rating scale, but provide additional information and commentary through written research.

I personally like the idea of combining alpha ratings with a suffix code that indicates the assumptions built into the ratings models. For instance, a bond could be rated AAA.PONY, indicating that the assumptions built into the ratings were Prices always rise, Owners occupy all units, Nobody lied, and Your own analysts did all the due diligence.

Is that any more bizarre than giving a rating to a security with a "ratings change risk indicator"? Wasn't there a time when the rating given to a bond was supposed to be the one least likely to have to be changed?

by Calculated Risk on 2/06/2008 01:55:00 AM

From the WSJ: A Year of Reckoning

In a closely watched report to be released today, finance professor Edward Altman projects that high-yield, or "junk," bonds will default by a rate of 4.64% this year. That would be the highest rate since 2003 and a nine-fold increase from the 0.51% rate in 2007, which was the lowest rate since 1981. High-yield debt is typically used by lower credit-quality companies to fund operations and acquisitions.

Mr. Altman, whose so-called Altman-Z score is the market standard for predicting bankruptcy, sees as much as $53 billion in high-yield debt defaulting in 2008, up from $5.5 billion in 2007.

And in a related story from the WSJ: 'Anyone for Some Used Corporate Debt?'

The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about $28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value, according to Reuters LPC.

Loans of Freescale Semiconductor Inc., taken private by a consortium of private-equity firms in December 2006 for about $28 billion, are trading at a 15.5% discount to their original value; Tribune Co., which was taken private in April by investor Sam Zell for $8.2 billion, issued loans now trading a 26% discount.

With rising defaults, and limited demand for leveraged loans, the banks will have difficulty syndicating all the $152 billion in LBO debt still in the pipeline.

by Calculated Risk on 2/05/2008 06:55:00 PM

From Fitch: Fitch Takes Rating Actions on 172,326 MBIA-Insured Issues

Concurrent with its rating action earlier today on MBIA Insurance Corp. and its affiliates (MBIA), Fitch Ratings has taken various rating actions on 172,326 bond issues (172,168 municipal, 158 non-municipal) insured by MBIA. ...

Fitch placed MBIA's 'AAA' Insurer Financial Strength (IFS) on Rating Watch Negative following Fitch's announcement that it will be updating certain modeling assumptions in its ongoing analysis of the financial guaranty industry.

Quite a few ripples in the pond.

by Calculated Risk on 2/05/2008 06:30:00 PM

From MarketWatch: S&P cuts Fremont General to CCC+; warns on liquidity (hat tip Carlomagno)

Standard & Poor's downgraded Fremont General to CCC+ from B- late Tuesday and warned that the Californian lender may not be able to meet its debt obligations. "Liquidity at the holding company has deteriorated substantially," S&P credit analyst Adom Rosengarten said in a statement. Liquidity remains strong at the company's banking business.

Here is a memo that was sent to me in Feb, 2007 when many people first started realizing there really was a mortgage problem. Of course, back then, many people mistakenly thought it was just a "subprime problem".

A couple of weeks after sending out that memo, Fremont announced they were postponing the release of results. And a couple of weeks later, the FDIC issued a Cease and Desist Order.

Ahhh, memories.

by Calculated Risk on 2/05/2008 04:04:00 PM

From Fitch:

Fitch Ratings announced today that in light of consensus movement towards a view of increased loss projections for U.S. subprime residential mortgage backed securities (RMBS) that is now held by various market participants and observers, including Fitch, that the agency will be updating certain modeling assumptions in its ongoing analysis of the financial guaranty industry. Fitch believes it is possible that modeled losses for structured finance collateralized debt obligations (SF CDOs) could increase materially as a result of these updated projections. The need to update loss assumptions at this time reflects the highly dynamic nature of the real estate markets in the U.S., and the speed with which adverse information on underlying mortgage performance is becoming available.

Fitch believes that a sharp increase in expected losses would be especially problematic for the ratings of financial guarantors -- even more problematic than the previously discussed increases in 'AAA' capital guidelines, which has been the primary focus of recent analysis of the industry. Expected losses reflect an estimate of future claims that Fitch believes would ultimately need to be paid by a guarantor. A material increase in claim payments would be inconsistent with 'AAA' ratings standards for financial guarantors, and could potentially call into question the appropriateness of 'AAA' ratings for those affected companies, regardless of their ultimate capital levels.

Fitch expects in addition to increases in expected losses, that its capital guidelines are likely to increase materially as well.

An increase in both expected losses and capital guidelines would place further downward pressure on the ratings of those five financial guarantors - Ambac Assurance Corp. (Ambac), CIFG Guaranty (CIFG), Financial Guaranty Insurance Co. (FGIC), MBIA Insurance Corp. (MBIA) and Security Capital Assurance Ltd. (SCA), the parent company of XL Capital Assurance Inc. - that Fitch has previously identified as having material subprime exposure within their insured portfolios. Ratings on three of these guarantors - Ambac, FGIC and SCA - were recently downgraded by Fitch, and their ratings remain on Rating Watch Negative. In separate releases in conjunction with this announcement, Fitch has also placed the 'AAA' insurer financial strength ratings of CIFG and MBIA on Rating Watch Negative.
emphasis added

This bears repeating: The new modeled losses could "call into question the appropriateness of 'AAA' ratings for those affected companies, regardless of their ultimate capital levels." Regardless of capital levels. That really says it all.

by Calculated Risk on 2/05/2008 01:53:00 PM

From Bloomberg: CDO Market Is Almost Frozen, Merrill, JPMorgan Say

Buying and selling of collateralized debt obligations based on mortgage bonds, high-yield loans or preferred shares has ground to a near-halt, traders said at the securitization industry's largest conference.

``We're definitely in a period of very low liquidity at the moment, which has actually been dropping precipitously in the last few weeks,'' Ross Heller, an executive director at JPMorgan Securities Inc., said yesterday ...

The credit crunch just won't go away. And just wait until some of the LBO debt blows up too.

Twenty-seven percent of the approximately $74 billion in bonds used in LBOs the last two years classify as ``distressed'' because they yield at least 10 percentage points more than Treasuries, Bloomberg data show.

by Calculated Risk on 2/05/2008 12:18:00 PM

From Jeffrey M. Lacker,President, Federal Reserve Bank of Richmond: The Economic Outlook for 2008

A particularly dramatic change is likely to occur in commercial construction, which is a key segment of business investment. Construction spending for new stores and offices grew by a healthy 10 percent after inflation last year, but we have heard reports from our District contacts of a significant softening of conditions lately, with major projects being deferred or cancelled outright. In addition, vacancy rates for retail space have increased over the last year, which should lead to less construction going forward. The most recent investment data we have are for December, and those reports indicate continued growth in construction activity and new orders for business equipment.
emphasis added

As Lacker notes, the December data for non-residential construction was still solid. Please allow me to repeat a couple of recent graphs to add to Lacker's point.

Click on graph for larger image.

This graph shows private residential and nonresidential construction spending since 1993 through December 2007.

Over the last couple of years, as residential spending has declined, nonresidential has been very strong.

As Lacker noted, as of December, a slowdown in nonresidential spending still hasn't shown up in the construction spending numbers.

But the second graph suggests Lacker's "dramatic change" in CRE investment is imminent.

This graph compares investment in non-residential structure with the Fed's loan survey results for lending standards (inverted) and CRE loan demand.

Based on Lacker's comments, it sounds like the CRE slump has arrived.