August ’18

The BAN Report: The $30MM Prime Student Loan Portfolio / Retailers Rock / Millennials Reject Hard Sell / Despite Worries, Fed Stays Course / What Gives on Wages?-8/23/18

The $30MM Prime Student Loan Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $30MM Prime Student Loan Portfolio.” This exclusively-offered portfolio is offered for sale by one institution (“Seller”).   Highlights include:

Loan files are scanned and available in a secure deal room for review.    Based on the information presented, a buyer should be able to complete their due diligence remotely.

Event Date
Sale Announcement Thursday, August 23, 2018
Due Diligence Materials Available Online Monday, August 27, 2018
Indicative Bid Date Thursday, September 20, 2018
Closing Date Thursday, October 11, 2018

Please read the executive summary for more information on the portfolio.  You will be able to execute the confidentiality agreement electronically by clicking on the upper left hand corner of the link to the executive summary.

Retailers Rock

Strong consumer spending is boosting traditional retailers like Target, which reported strong comparable-store sales gains this week, thus boosting its stock price.

Target Corp. ’s stock jumped 3.2% on Wednesday to its first record high since 2015, after the company reported that comparable-store sales rose at the fastest pace in more than a decade. The retail chain’s shares are up 32% this year, far surpassing the S&P 500’s 7% rise.

“Like others, we’re currently benefiting from a very strong consumer environment, perhaps the strongest I’ve seen in my career,” said the company’s chief executive, Brian Cornell, on the company’s earnings call.

Not long ago, retail stocks were in free fall as investors worried that traditional retailers couldn’t compete in the new world of e-commerce. Target shares dropped 9.7% last year even as the broader market surged, marking its third straight year of declines.

While bricks-and-mortar chains have struggled to transform themselves, many are being helped along by Americans’ increasing willingness to spend. Retail sales in July rose by 6.4% from a year earlier, data showed last week, suggesting that U.S. consumers are spending at a much faster pace than inflation as they benefit from a strong economy and tax cuts, economists say.

Grocery stores, department stores, restaurants and clothing stores all saw stronger spending. While consumer sentiment hit a one-year low recently, it remains high by historical comparison.

Target isn’t the only one benefiting. Macy’s Inc. shares have added 49% this year, Kohl’s Corp.  has risen 46%, and TJX Cos.  has gained 38%. The SPDR S&P Retail exchange-traded fund has tacked on 16% this year, including 5.5% in August alone.

Of course, Amazon continues to boost market share, but many retailers like Target, and Walmart are competing very effectively, especially those traditional retailers with strong e-commerce platforms.

Millennials Reject Hard Sell

Auto dealership are struggling to attract and retain workers in their 20s and 30s, many of whom reject traditional ways of selling cars.

Nearly 60% of dealership hires are millennial workers, and more than half of those new hires turn over annually, according to a study by Hireology, a talent and management firm.

Millennials are especially averse to working in dealerships because they carry more debt than other generations and are looking for stable pay, but most dealerships pay salespeople only on commission, Hireology said.

Many millennials say car dealers have an outdated approach to selling that doesn’t always fit their values, even if the jobs have the potential to pay well. Younger workers aren’t interested in haggling with customers and are far less tolerant of the “bait-and-switch advertising” and “old boys’ club” atmosphere that is still common at many dealerships, said Earl Stewart, owner of Earl Stewart Toyota in North Palm Beach, Fla.

“Car dealers are selling cars like it is the 1960s,” Mr. Stewart said.

With more buyers walking into dealerships armed with pricing information pulled from the internet, salespeople are finding it more difficult to retain the upper hand in negotiating a car’s final price. That has caused profits on new-car sales to shrink in recent years, and along with it, the potential commission a sales staffer can earn upon closing a deal.

We think the millennials are right!  For an increasingly sophisticated buyer, the hard sell just doesn’t work very often.

Despite Worries, Fed Stays Course

According to the minutes of the most recent Fed meeting, the Fed plans on continuing to increase rates, despite concerns about tariffs.

The Fed minutes suggest that officials are concerned that Mr. Trump’s tariffs could hurt the current economic recovery but are waiting to see evidence of any damage in the data. Fed officials are also increasingly worried that trouble is brewing in the residential construction market, based on a recent slowdown in home building.

For now, however, the Fed shows no signs of deviating from its current path to return interest rates to more historically normal levels, despite Mr. Trump’s recent calls for the central bank to stop raising interest rates.

Several officials hinted in the minutes that they are preparing to remove a hallmark phrase of the last decade, one that has indicated the Fed intends to provide support for the economy. Future Fed statements may no longer carry language reading “the stance of monetary policy remains accommodative” as rates continue to rise toward a more historically normal level and the Fed continues to wind down its post-crisis economic stimulus.

That’s Fed-speak for “raise interest rates again” — and the minutes note that investors are overwhelmingly convinced another rate increase is coming next month.

While the economic recovery is strong, the Fed minutes show that officials are cognizant of the disparity between slow growth in nominal wages and the strength of the labor market, but they remain largely convinced those gains are about to accelerate.

Market participants expect at least one, probably two more interest-rate hikes this year.

What Gives on Wages?

With a strong economy and low unemployment, many are wondering why wage increases have been so modest.     Bloomberg studied this conundrum this week.

Unemployment has plummeted to 3.9 percent, the lowest level since the early 2000s. Earnings calls are replete with chief executive officers bemoaning employee shortages. Small businesses are also feeling the pinch. In a July survey by the National Federation of Independent Business, 37 percent of owners reported at least one vacancy, and more than half said there were few or no qualified candidates for the job.

Despite this, wages are creeping higher rather than making the robust gains a hot labor market ought to produce. Accounting for inflation, paychecks actually shrank in July. The disconnect has surprised Wall Street economists and Federal Reserve policymakers alike.

To shed some light on what may be holding down pay, Bloomberg News reporters interviewed employers in three industries in which wages remain low despite persistent reports of worker shortages—construction, long-haul trucking, and child care.

What they found is that the impediments keeping wages from taking off are diverse, and in some cases seem unlikely to change quickly. Still, there are glimmers of hope that a tight labor market might be on the cusp of pushing earnings higher.

In some cases, wage increases do not necessarily change the supply of qualified workers, or companies may be shifting from wage increases to more incentive-based compensation.

The BAN Report: Faking Occupancy / Banks Slam Volcker Changes / Walmart Soars / Turkey Crisis / Housing Starts Rebound While Price Cuts Increase-8/16/18

Faking Occupancy

The FBI, FHFA, and US Attorney are investigating mortgage fraud, as some apartment owners have been accused of deceiving occupancy during site inspections.

One owner of properties investigators reviewed is Robert C. Morgan, the founder of a suburban Rochester, N.Y.-based apartment development company. After a 1991 shooting at his family’s seafood store left him wheelchair-bound, he turned his full attention to real estate and built a business of more than 140 properties with over 34,000 rental units across 14 states, according to its website.

The rapid growth was aided by practices such as creating spreadsheets filled with fake income figures for properties, according to the indictment, returned May 22 in federal court in Buffalo, which charged two executives of his firm. Such conduct “occurred across” the company’s real-estate portfolio, according to a federal search-warrant application for the executives’ emails.

It was at a Morgan property north of Pittsburgh called Rochester Village that the federal indictment alleged the faking of apartment occupancy via radios playing in vacant units. In addition, an executive anticipating an inspection of one building asked a property manager to have employees park their cars in its garage, according to the search-warrant application. The indictment alleged an effort to report apartments as occupied before they even had town occupancy permits.

So far, the probe is investigating loans that total $170 million.    Multi-family lenders do not review and inspect every single lease (perhaps they should), so it is quite easy for unscrupulous borrowers to doctor a rent roll and then fool the site inspectors.    But, this fraud should be easy to detect, as a simple review of utility records will tell you if the property is occupied, although obtaining this information may be difficult.   Time will tell if this is a widespread practice or not.

Banks Slam Volcker Changes

The Agencies proposal to revise the Volcker rule was met with stiff resistance by the largest banks, who expected a kinder and gentler Volcker rule after the regulatory bill passed earlier this year.,

Last week, lawyers representing JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and six other banks met with the Federal Reserve to complain about the recent proposal to revise the regulation designed to curb risky trading by banks, people familiar with the matter said. The banks said the proposal, dubbed Volcker 2.0 by financial regulators, could complicate compliance and hamper trading in asset classes not currently covered by the rule.

“I can’t imagine this aspect of the proposal being preferable to the original and current Volcker 1.0 regime,” said Gregg Rozansky, a senior vice president at the Bank Policy Institute, an industry trade group representing the nation’s largest banks. “It could raise prices for student loans, credit cards or auto loans,” he added.

Under the current regime, trading positions held by banks for fewer than 60 days are presumed to violate the rule unless bankers prove otherwise.

The meeting at the Fed revolved around a single provision in the nearly 400-page plan: a new measure to determine which types of assets held on banks’ balance sheets should be held to that burden of proof.

In an attempt to create a “bright line,” regulators are proposing to replace the 60-day standard with one based on accounting definitions, which encompasses a category bankers say is overly broad: available-for-sale securities.

We would be surprised if the final rule was objectionable to the large banks, as the intent of regulatory reform was to reduce the burden, not add to it.

Walmart Soars

Fueled by strong grocery stores, Walmart Inc. reported its best sales in more than a decade this week.

Comparable sales at U.S. Walmart stores rose 4.5 percent in the three months ended in July, the company said Thursday, more than double analysts’ estimates. Grocery sales rose the most in nine years thanks to improved fresh-food offerings, and web revenue growth accelerated from the previous period. The world’s biggest retailer also boosted its full-year forecasts for comparable sales and adjusted profit.

It was “a banner quarter on multiple fronts,” Charlie O’Shea, an analyst at Moody’s Investors Service Inc., said in a note. “The food business continues as a bright spot.”

Walmart has benefited from improved consumer sentiment and tax cuts that have put more money in Americans’ pockets this year. U.S. retail sales rose by more than forecast in July, as shoppers snatched up apparel and school supplies. But investors are still somewhat skeptical that brick-and-mortar retailers can keep pace with online rivals like Inc., evidenced by Macy’s shares plunging Wednesday despite boosting its earnings and sales guidance.

Curbside pickup of online grocery orders is bringing in new customers.    Now offered in 1,800 US stores, this is a great click-and-mortar strategy that other retailers are bound to copy.

Turkey Crisis

Turkey’s troubles are fueling concern among investors of the massive debt levels in emerging markets.   Turkey’s lira dropped to record lows against the US dollar this week.

“Turkey is a symptom of the growing challenges for emerging markets,” said Mr. Subbaraman. “Due to super-low interest rates, investors have been on the hunt for yield — until this year. Now they will be blindsided by the risks.”

In a research note that Mr. Subbaraman published on Monday, he pointed to South Africa, Hong Kong, the Philippines, Chile and Mexico as having the most vulnerable economies. South Africa, for example, has significant levels of dollar debt and a sizable current account deficit.

A country runs a current account deficit if it takes in more money — in investments and trade — from foreigners than it sends to other countries. That leaves the country at the mercy of international investors to keep it afloat financially, and those investors could find other markets more enticing — particularly when emerging markets see their currencies lose value. That is precisely what forced Argentina to go to the I.M.F., the first major emerging market to take such a step during this period of uncertainty. Pakistan may soon have to forge its own deal with the fund for similar reasons.

Mr. Subbaraman said the buildup in cheap dollar credit could ultimately threaten South Korea, Taiwan, Hong Kong, Singapore, Malaysia and even China, whose currency, the renminbi, weakened further against the dollar this week. But analysts have long believed that these economies are strong enough to withstand a traditional contagion attack. By his own account, Mr. Subbaraman has one of the more gloomy views on the future of these markets — earlier this year he published a report titled “Enjoy the Party, but Stay Close to the Door.”

Emerging countries cannot generally issue debt in their own currencies, so when the US raises rates, it can make future borrowing difficult.

Housing Starts Rebound While Price Cuts Increase

After a sluggish start to the year, housing starts rose in July to its highest levels in a decade.

Some 175,000 homes were authorized but not yet started in July, the most since February 2008, signaling that builders will stay busy in coming months.

Another encouraging sign was that single-family permits in the South were the highest since July 2007, the report showed.

At the same time, potential buyers are facing headwinds including rising property values and higher mortgage rates. For their part, builders remain limited by higher construction costs amid tariffs on imported materials including Canadian lumber. They also say they face shortages of qualified workers and ready-to-build lots.

Meanwhile, sellers on existing homes are beginning to cut their process, according to a new report from Zillow.

After several years of rich home price gains, the market appears to have found a limit to what people can afford. Sellers are finally responding by increasingly lowering prices.

Approximately 14 percent of all listings in June had seen a price cut, that’s up from a recent low of 11.7 percent at the end of 2016, according to a new report from Zillow. In addition, home price growth is slowing in nearly half of the 35 largest U.S. metropolitan markets.

Increased supply and more realistic sellers should improve velocity in the housing market, but many sellers have a long way to go before they find takers.

The BAN Report: Show Me the Money! / Reinventing Former Bank Branches / Puerto Rico Cuts Deal / Short-Term Rentals Boom-8/9/18

Show Me the Money!

With one tweet, Elon Musk created a frenzy as investors want to know how he could finance an $82 billion deal to take Tesla private.   The SEC is investigating whether his initial tweet was factual.

Wall Street and Washington have the same question for Elon Musk: Where’s the money?

Two days after he vowed on Twitter that he had “funding secured” for a spectacular $82 billion deal to take Tesla Inc. private, he has offered no evidence to back up the statement. No one has stepped forward publicly — or privately — to say they’re behind the plan. People with or close to 15 financial institutions and technology firms who spoke on the condition of anonymity said they weren’t aware of financing having been locked in before Musk’s tweet.

All of which could be problematic as the Securities and Exchange Commission starts investigating the matter. Regulators have asked the company if what Musk tweeted was factual and why such a disclosure was made via social media rather than in a filing, according to the Wall Street Journal, citing unidentified people familiar with the matter. Judith Burns, an SEC spokeswoman, declined to comment. Tesla also declined to comment.

“When Musk tweeted this, was he saying this was something that was definitely going to happen? Something that might happen?” said Ira Matetsky, a partner at Ganfer & Shore in New York, outlining questions the SEC might ask. “How would a reasonable investor interpret that and was it consistent with the facts as they existed at the time?”

Naturally, Wall Street is salivating over the fees it would generate, but this is about as strange a way to make a corporate announcement as possible.    Here is the exact tweet:

“Am considering taking Tesla private at $420. Funding secured.”

Define secured.    Does he have a commitment letter from a bank and capital commitments from investors?    The SEC San Francisco office is investigating and could open a formal enforcement investigation.

Reinventing Former Bank Branches

As banks reduce their branch networks, developers and investors are figuring out creative ways to repurpose space.

Former bank branches have been reincarnated as pizza parlors, fast-food outlets, health care sites, massage chains, credit unions, educational institutions, churches and mobile phone stores. Some serve as locations for Starbucks, CityMD Urgent Care, CVS and other chains.

The number of bank branches in the United States has fallen to about 89,860 in 2017 from a peak of nearly 100,000 in June 2009, according to the Federal Deposit Insurance Corporation, which insures deposits and monitors the banking system. Last year, the number of branches dropped by nearly 2,000, a 2.2 percent decline from 2016.

The closings reflect the industry’s shift away from the “branch on every corner” concept and toward a strategy to provide “anytime, anywhere access” through the internet and mobile apps, according to an assessment by JLL, a global commercial real estate firm. JLL researchers predict that bank branches could face a further 20 percent reduction in the next five years.

This trend in banking is opening up real estate opportunities, however, as investors convert former financial institutions into an array of other uses.

Nearly 1,650 bank branches or former branches were up for sale across the country in mid-July, according to the CoStar Group, a real estate data and analytics firm. The average asking price was about $350 a square foot, which would be just under $2 million for an average-size bank of about 5,600 square feet, said Justin Bakst, CoStar’s director of capital markets.

Attributes that were attractive to banks in the first place are now selling points for the converted properties. Many occupy corner locations on busy streets with heavy retail traffic. The buildings are often free-standing and well maintained, with sturdy brick construction. Depending on municipal zoning restrictions, canopied drive-throughs can be converted to other uses, such as fast-food pickup, side entrances or patios.

Bank branches are often located in some very attractive locations, as banks often paid top-dollar for coveted corners.   However, converting is not easy, as simply removing a vault could cost tens of thousands of dollars.

Puerto Rico Cuts Deal

In the most significant deal since Puerto Rico entered bankruptcy, Puerto Rico’s sales-tax creditors agreed to restructure $18 billion in debt this week.

Puerto Rico’s sales-tax creditors reached a deal on how to split up future revenue collections among themselves, solidifying a planned restructuring of roughly $18 billion in debt.

The settlement framework announced Wednesday divvies up sales-tax money among senior and junior holders of revenue bonds known as Cofinas, the U.S. territory’s largest single debt obligation.

The agreement, which requires court approval, would mark the largest consensual debt settlement negotiated with creditors since Puerto Rico entered a court-supervised bankruptcy last year. The Cofina debt stack would be slashed by 32%, saving Puerto Rico $17.5 billion in payments to bondholders compared with what they are currently owed.

Senior creditors would receive 93% of their claims in the form of new debt while junior holders would recover 56.4%. Overall recoveries across both Cofina debt classes total 74.5%, according to the settlement terms.

Bond prices surged by as much as 30% after the settlement was announced.    This announcement was the first big step in a very complicated municipal restructuring.

Short-Term Rentals Boom

Demand for short-term rentals has skyrocketed, creating opportunities and challenges for communities.

According to a CBRE research report, Airbnb alone has 3 million listings in more than 19 countries, accommodating 160 million stays over its lifetime.

Lump in other services like HomeAway and VRBO and it begins to become clear that demand for this product is massive, and it’s not going anywhere.

“Demand ultimately wins out…demand wins, and demand is not going anywhere in the world of short-term rentals,” Short-term rental expert and Senior Vice President of RealPage’s short-term rental management platform Kigo Matthew Hoffman told HousingWire.

“Demand has grown so much, it has outpaced the available supply for non-hotel accommodations, or short-term rentals,” he added.

This explosive growth has created issues. More and more municipalities are cracking down on short-term rentals with new legislation restricting and regulating its use within their borders as rowdy vacationers and rising rents have people pointing fingers at the short-term rental activity as a problem that needs to be solved.

It’s not just short-term apartment rentals, but other sectors like retail.   Chicago, for example, is offering pop-up licenses for as little as 5-days.

Mayor Rahm Emanuel will move Wednesday to implement his innovative plan to allow aspiring chefs and new retailers to test their concepts in vacant restaurants and storefronts.

Pop-up permitting was just one of a host of mayoral reforms unveiled last spring to further improve a small business climate that had already benefited from the consolidation of business licenses.

Now that the City Council has approved year-round sidewalk cafes, Emanuel is moving to implement the plan that will allow aspiring chefs and retailers to get started at minimal cost and hassle.

At Wednesday’s Council meeting, Emanuel will introduce an ordinance that will allow restaurants and retailers now required to purchase a two-year license to, instead, choose a license as short as five days.

Short-term rentals do create competition for hotels and other restaurants and retailers, causing obvious disruptions.  Municipalities who do not embrace them lose a potential vital source of revenue.

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