Monday, June 8, 2009

The Latest Spin On Collapsing REITs And Taxpayer Subsidies

The PPIP is all but dead. But don't tell that to perma-CRE-bull Barry Sternlicht. The owner of such debacles as iStar (last time we checked the all time worst name in the IG11 index) and RevPar plummeting hotel chain Starwood hotels, is hoping to raise brand spanking new capital via an IPO for, of all things, a new REIT - Starwood Properties Trust, and use taxpayer money to buy other bankrupt hotels.

Over the weekend, Sternlicht's W hotel chain made headlines, but not for good reason. REIT Sunstone Hotel Investors decided to simply walk away from Starwood's W property in San Diego, instead of servicing the $65 million in securitized mortgages. As the WSJ notes:
A recent report by the special servicer of the W's mortgage, Centerline Serving Inc., noted that the W San Diego since 2007 has failed to generate enough monthly income to cover both its operating costs and its interest payments. Sunstone has been covering the shortfall since 2007 to keep the loan out of default, but it opted this month to stop doing so.

Sunstone, based in San Clemente, Calif., estimates the W San Diego is worth much less than the $65 million balance on its mortgage. At the end of last year, the hotel posted an occupancy of 69% and generated revenue per available room of nearly $153
Nothing like handing in the keys to the hotel you bought less than 3 years ago for $96 million. And if any other asset manager wishes to fool themselves that any of the other hotels backing billions more in securitiziations are in better shape, please go ahead. In fact, these very managers will be more than happy to purchase into the $500 million Starwood Properties Trust IPO with which Sternlicht hopes to ensnare the last few illiterate fund managers. After all, there is nothing like the shareholder value destruction track record that Sternlicht has developed with the Starwood chain and iStar to convey a sense that the man knows exactly what he is doing (granted when Joe Sixpack is footing the bill for this most recent soon-to-be debacle, the upside/downside equation may make just a little more sense).

From the SPT prospectus:
Starwood Property Trust, Inc. is a newly organized Maryland corporation focused primarily on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, or CMBS, and other commercial real estate-related debt investments. We may also invest in residential mortgage loans, and residential mortgage-backed securities, or RMBS. We collectively refer to commercial mortgage loans, other commercial real estate debt investments, CMBS, other commercial real estate-related debt investments, residential mortgage loans, and RMBS as our target assets.
Luckily Sternlicht has done his homework and the #1 risk factor in the offering is that this whole structure will likely not even work at all in the first place:
The terms and conditions of the PPIP have not been finalized and there is no assurance that the final terms will enable us to participate in the PPIP in a manner consistent with our investment strategy.
So why should investor throw away more of their cash after this latest version of taxpayer subsidies? Simple - lead underwriter Deutsche Bank is likely feverishly working right now to create a comparable REIT vehicle for Hilton or some other troubled hotel chain. The draw: Starwood ends up buying special services Hilton mortgages at par, Hilton reciprocates with defaulting Starwood hotels, both chains pretend the hotels have a thing called "guests" who are paying "lodging fees" while both mark each others' property as unimpaired and take paper profits, while taxpayers eat all the losses compliments of Bernanke, Deustche Bank, and whoever the parasite asset manager is that ends up investing in the SPT REIT (we have some good ideas on who the one and only participating REIT manager may be).

In the meantime, the taxpayer subsidized bail out of everyone, not just banks anymore, continues with an accelerating pace. Sphere: Related Content
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