Tuesday 16 January 2018

Bondholders descend on New York as market sinks

Extell is developing the One57 tower in New York but investors are getting concerned
Extell is developing the One57 tower in New York but investors are getting concerned

Gabrielle Coppola, Sharon Wrobel and Oshrat Carmiel

Gary Barnett, the developer who touched off a luxury-condo boom in Manhattan, will play host next month to a group of Israeli bond investors who are worried about dimming global interest in New York City's costliest homes.

Barnett's Extell Development Company., which sold debt in Tel Aviv tied to the performance of some of its priciest condo developments in New York, saw his company's bonds sink as low as 86 agorot on the shekel last week, with yields surging as high as 9.9pc. It was the first sign of alarm by Israeli investors who since 2008 have financed a $2.4bn borrowing spree by U.S. property builders.

"It was not at our invitation, but we're happy to host them," Barnett said by phone on March 17. "We're happy to have them here, and to take them through our properties and to show them the quality and the strength of the assets."

U.S. developers have been flocking to Israel's corporate bond market, where they've been able to issue debt that costs roughly half what it would in the U.S. because of differences in credit ratings between the two countries and demand from investment funds flush with pensioners' cash. While other New York-based issuers such as Related Cos. and the Moinian Group have been spared punishment in the Israeli debt market, some investors are growing skeptical of financing faraway real estate in locales where they have no local knowledge.

"Investors will be demanding a higher yield going forward," said Ilan Artzi, chief investment officer at Holon, Israel-based Halman-Aldubi Group, which oversees 14bn shekels ($3.6bn) of assets, including Extell bonds. "Recent developments just show that there is a price you pay for being located far away from where these companies operate and knowing less about the market they are operating in."

Manhattan's luxury development boom, symbolized by record- setting price tags for extra-large and lavish apartments, is showing signs of a slowdown as inventory swells and interest from ultra-wealthy buyers cools amid so much competition.

This year, 5,126 newly built apartments will be added to the Manhattan sales market, the most since 2007, according to Corcoran Sunshine Marketing Group. Of those listings, 63pc are considered "luxury," which the brokerage defines as $2,400 a square foot or more.

"There's a tremendous number of units that are coming on to the market targeting a very tight and high price bandwidth," said Jonathan Miller, president of New York-appraiser Miller Samuel Inc. "The market is not what it was two years ago and the more supply you have, the harder it is to justify the pricing."

It was Barnett himself who ignited the development boom of high-end homes with the construction of One57, the 1,004-foot (306-meter) skyscraper across from Carnegie Hall on Manhattan's west side. Extell began work on that project, planned as the city's tallest residential tower, less than a year after the bankruptcy of Lehman Brothers Holdings Inc. ushered in a real estate downturn.

Barnett acknowledged slowing demand for New York's priciest apartments, but said the risk is mitigated for Israeli creditors because the Extell unit issuing the bonds is backed by a pool of diverse properties that also includes hotels, rentals and less- expensive condos. As for his upcoming luxury developments -- including Central Park Tower on West 57th St. -- Barnett said he acquired land for them years ago at favourable costs, which means he doesn't need to sell condos at record prices in order to see a return.

"One of the things we've tried to make clear to the bond investors is that Extell Ltd. is not dependent on getting these super-high luxury prices," Barnett said. "There are many ways of repaying the debt and we don't anticipate we'll have a problem."

Extell's bonds began to weaken after the company disclosed to the Tel Aviv Stock Exchange earlier this month that it was forming a joint venture with Scott Rechler's RXR Realty LLC, which will lend $463.2m for the construction of a condo tower and two rental buildings. Combined with expected construction loans, RXR's financing, described as a mezzanine loan at 7pc interest, "will enable the company to complete the projects," according to the March 2 filing, written in Hebrew.

While Extell's capital structure dictates that RXR be paid before the Israeli bondholders, Barnett said the deal is good for creditors in Israel because the loan moves him closer to finishing the towers and comes at a "reasonable cost."

Bondholders will also get an upfront injection of part of the RXR loan proceeds, though that depends on Extell securing other construction loans, which should happen in the next month, Barnett said.

Extell has borrowed 1.65bn shekels in the Israeli bond market. The developer sold about 1bn shekels of 4.65pc 5.5-year bonds in May 2014, and another 600m shekels of 6pc bonds due in 2021 in April the following year, data compiled by Bloomberg show. The 6pc securities rose for the first day in four, sending the yield down three basis points to 9.34pc in Tel Aviv.

As a comparison, Related's 847m-shekel offering of 5.1pc debt, which is backed by retail properties in New Jersey and the Bronx as well rental apartments in Manhattan and Chicago, trades at 103 agorot on the shekel to yield 4.3pc.

Other developers seem to have little difficulty selling Israeli corporate bonds at attractive costs. Zarasai Group Ltd, a unit of Pinnacle Group LLC, an owner of rent-stabilized apartments in New York City, tapped the market this week for a third time, selling 256m shekels of 11-year bonds at a rate of 4.35pc, according to a March 20 TASE filing.

Still, because of investor concern about ultra-luxury real estate, Extell may keep paying double-digit yields in Israel, said Lior Grinhouse, who manages 30bn shekels at Psagot Investment House Ltd. in Tel Aviv.

"Current Extell yields at 9 or 10pc reflect a lot of fear and panic, but I think they better reflect the risk- return," Grinhouse said. "It's too early to tell if there is real damage." (Bloomberg)

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