Australian Firm's Financial Problems Impacting More Than 18,000 U.S. Apartment Units
Babcock and Brown Ltd., an international investment firm based in Sydney, Australia that owns or controls at least 100 U.S. apartment complexes with more than 20,000 units, was placed in voluntary administration this month, an action similar to U.S. bankruptcy protection.
The investment giant is facing a number of challenges including high financial leverage, aggressive growth and a complex corporate structure and is now paying the consequence of declining investment values and fee income, constrained access to capital markets, heightened refinancing risk and greater risk of financial covenant breaches, according to Moody's Investors Services.
The Babcock & Brown action has also resulted in Standard & Poor's Ratings Services placing the ratings of four commercial mortgage-backed securities on CreditWatch with negative implications. The CMBS deals that could be impacted are Credit Suisse Commercial Mortgage Trust's Series 2006-C2, 2006-C3, 2006-C4 and 2006-C5.
Standard & Poor's preliminary analysis of the Babcock & Brown's loans indicates an average valuation decline in the properties of 32% since 2006.
The Babcock & Brown CMBS loans are backed by 64 multifamily properties totaling 18,812 units.
The properties are located throughout the U.S. with concentrations in Texas (58.9% of all units), Virginia (10.1%), South Carolina (9.4%) and Georgia (6.1%). The remaining properties are in Nevada, Florida, Alabama, Missouri, North Carolina and Maryland.
( For a complete list of Babcock & Brown's U.S. multifamily properties, download the Watch List Newsletter in pdf format here.)
According to the respective special servicers, the loans were transferred to special servicing due to imminent default as a result of the borrower's current financial situation and inability to address deferred maintenance issues at the properties.
Property condition reports have been received by the special servicer for properties securing the Babcock & Brown FX2 portfolio, part of the CSMC 2006-C2 transaction and preliminary inspections have been performed for the properties securing the other three portfolio loans. These reports and inspections indicate that deferred maintenance issues exist at the collateral properties.
Details of each transaction and its Babcock & Brown-related loans are as follows.
Credit Suisse Commercial Mortgage Trust 2006-C2. The Babcock & Brown FX1 loan ($157.4 million) in this transaction is secured by 13 multifamily properties containing 4,990 units. The loan was transferred to the special servicer, Centerline Servicing Inc., on March 18. According to the master servicer, most of the properties in Texas have deferred maintenance issues and unresolved damage caused by Hurricane Ike. For the year ended Dec. 31, 2007, Standard & Poor's calculated debt service coverage of 1.03x. Replacement reserves for the portfolio total approximately $104,000.
Credit Suisse Commercial Mortgage Trust 2006-C3. The Babcock & Brown FX2 loan ($197.9 million) in this transaction is secured by 17 multifamily properties containing 5,145 units. The loan was transferred to the special servicer, Midland Loan Services Inc. on Feb. 4. For the year ended Dec. 31, the debt service was 1.16x. According to Midland, there is a reserve totaling approximately $922,000 that was established with the insurance proceeds collected as a result of the flood damage that occurred at the Windsor Harbor property.
Credit Suisse Commercial Mortgage Trust 2006-C4. The Babcock & Brown FX3 loan ($195.1 million) in this transaction is secured by 14 multifamily properties containing 3,719 units. The loan was transferred to the special servicer, LNR Partners Inc. on Feb. 5. For the year ended Dec. 31, the debt service coverage was 1.14x. Replacement reserves for the portfolio total approximately $155,000.
Credit Suisse Commercial Mortgage Trust 2006-C5. The Babcock & Brown FX4 loan ($193.9 million) in this transaction is secured by 20 multifamily properties containing 4,958 units. The loan was transferred to the special servicer, LNR on Feb. 9. For the year ended Dec. 31, the debt service coverage was 1.19x. Replacement reserves for the portfolio total approximately $425,000.
Babcock & Brown has appointed David Lombe and Simon Cathro of Deloitte Touche Tohmatsu as voluntary administrators. The two held their first meeting with creditors this week. Australian laws require that a second mandatory meeting be held within 20 days, but Deloitte is likely to seek an extension.
Last fall, Babcock & Brown said its days of living on the high levels of liquidity in the capital markets left it with a too high level of debt.
"Over the last few years in particular, Babcock & Brown has been very successful at achieving substantial growth based on the high levels of liquidity in the capital markets. This has led to the group being too highly leveraged and not sufficiently focused," said Michael Larkin, the new managing director and CEO of Babcock & Brown.
Larkin took on that role in September, replacing Phil Green, the former holder of the position, who moved to a non-executive board post.
Babcock & Brown intends to refocus on its origination and asset management businesses, including infrastructure, real estate and operating leasing. But in reducing its "risk profile," the company said it could dispose of some assets and reduce the level of its investment activities.
In December Babcock & Brown said it would manage its real estate assets until it was successful in selling them off.
In addition to its U.S. apartments, Babcock & Brown manages 22 shopping malls in 11 states totaling more than 15 million square feet, through Gregory Greenfield & Associates, a company it acquired in August 2007. Eight of the malls are owned in a joint venture with Oxford Properties, under which Babcock holds a 51% ownership interest.
Download this story and all of the stories in the Watch List Newsletter here.
The Adobe pdf version also includes all of this week’s leads of distressed properties and loans of concern, lease cancellations applied for in bankruptcy proceedings, all of the local and national facility closures & layoffs, banks with distressed real estate portfolios and lists of loans approaching their maturity date. Plus the pdf version contains bonus news items not found in these columns or the CoStar Group web news pages.
Receive notice when a new Watch List Newsletter column is published by receiving The Watch List E-Mail Alert. It's free and the quickest way to link directly to the news and leads you want. Just e-mail me your name, title, company, company business, city, state, and e-mail address. You can reach me by clicking on the byline above or e-mailing me at Mark Heschmeyer