All in Good TASE: The Crisis for the American Cohort in Tel Aviv Is Essentially Over


Bondholders in Israel, and bond issuers in New York, were holding their breath for the annual financial reports to drop in March, after a crisis in early 2019 nearly broke the market.

The reports to the Tel Aviv Stock Exchange, from American companies who have issued bonds in Israel, trickled in through the last week of March, with the majority filed at the eleventh hour, on Sunday, March 31.

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The reports include a wealth of knowledge about each of the companies, but there were few if any bombshells, and the market, which has been slowly recovering from a mid-January low, is now firmly back on track.

The Tel Bond Global, an index which tracks the foreign real estate companies on the Tel Aviv bond market, closed the week with an average yield of 8.37 percent. That’s down from double-digit highs during the crisis, but nowhere near the lows of 4 to 5 percent, where the average yield had ranged until then.

Some of the closest watched companies include All Year Management, Starwood (STWD) Capital and Spencer Equity, all of which had faced varying levels of censure from investors and regulators, as well as everyone’s favorite bad boy Gary Barnett of Extell Development Company.

Barry Sternlicht’s Starwood was the worst performer of the American cohort over the last year, and its bonds haven’t recovered from the crisis, which it helped precipitate. The real estate investment giant entered the Tel Aviv market in early 2018 with a portfolio of seven suburban malls under the name Starwood West, and the bonds immediately began to trend downwards. According to its annual report, Starwood West lost $120 million in 2018, due primarily to a $151 million decline in the value of its seven-mall portfolio to $1.6 billion.

Starwood’s assets are encountering the same pressure as most retail malls, and news of store closings from JCPenney, Payless and Sears helped trigger the downward spiral of the company’s bonds. In addition, some bondholders believe that Starwood was not entirely forthcoming about the true value of its assets in their original prospectus, and are suing the company in a Tel Aviv court. The company’s bond series fell precipitously during the market panic in late 2018, and was trading with a sky-high yield of 26.25 percent at close of business Thursday.

The response to All Year’s reports have been somewhat muted, as the bondholders’ primary concern over whether Yoel Goldman could make his payments were alleviated, after Goldman announced the $95 million sale of a Gowanus property back in February.

A closer look at All Year’s finances however may not provide responses to some of the bondholder’s other concerns, particularly regarding Goldman’s system of using master leases to provide immediate income while forfeiting potential future income. Thus, All Year reported an NOI of $15 million at the William Vale hotel in Williamsburg from the master lessee, but it is unclear how the hotel complex is actually performing. On the hotel side, the occupancy rate was 77.4 percent over the last 12 months, while RevPar for the period was an average $283 per room, compared with $299 for similar sites, according to an appraisal report.

Of All Year’s top 20 income-producing properties, the top three, the William Vale and the Dean and Denizen rental developments, all showed slightly lower or flat valuations and NOIs in 2018 as compared with 2017. At the Denizen, which began leasing in July, All Year leased 203 of 443 units by the end of 2018. Of those, 159 were among those leased to a master tenant, and they rented at a rate of $2,929 per unit.

All Year’s bonds reflect some of the remaining skittishness. All Year’s bond series D was trading at 19.2 percent yields as of Thursday, and its series B is second only to Starwood as the lowest performing bond on the Tel Bond Global. However, two other bond series, one of which is secured by the William Vale, have yields below 10 percent, and all four have risen from their crisis-level lows.

As for Extell, the one-time troublemaker on the Israeli bond market has taken a back seat in this year’s drama. Nevertheless, Gary Barnett’s high-stakes developments have always been viewed with some trepidation by Israeli bondholders. In 2018, he successfully financed all of his developments, and leasing launched at three of Extell’s projects, including the Central Park Tower, Brooklyn Point and The Lofts at Pier Village.

However, while leasing may have begun, there were zero contracts signed at any of those projects in 2018, and Extell is looking to sell in an ever more precarious luxury condo market.

At Central Park Tower, the 98-story superluxury supertall, which has just about topped out, Extell is projecting total revenue of $4.5 billion from 179 apartments, which works out to an aggressive $7,450 per square foot. As of the end of 2018, the project costs totaled $1.7 billion with another $1.3 billion remaining in projected costs remaining, for a total of $3 billion. That’s up from roughly $1.9 billion in expected total costs in 2016.  Meanwhile, at One57, which opened its doors in 2014, thirteen units sold for $135 million in 2018 and the first quarter of 2019, with 28 still to go.

Extell’s two bond series had yields of 7.98 and 13.88 at close of business this week, and one of the only American-issued bonds to end the first quarter of 2019 higher than in 2018.

While the worst appears to be over, investors are still traumatized by some of the revelations of 2018, and the knowledge that the regulatory bodies don’t always catch the irregularities they’re supposed to.

Nevertheless, there has already been one bond issue this year from the stalwart Silverstein Properties. With the market settling down, and no explosive news from the reports, it’s not hard to imagine it won’t be the only one.