THE DAILYALTS PLAYBOOK

April 23, 2020

The DailyAlts Playbook: Peloton Purchases, Elliott Fines in France, Negative $100 Oil, and Blackstone’s Real Estate Portfolio.

PRIME OVERVIEW

Good morning,

It’s Christmas here in Estero, Florida.

I’ve purchased either my greatest present to myself or the single dumbest one. Time will tell.

The golf club on which I live had shut down our gym and announced that it would likely remain closed through the summer. There is nowhere to work out.

Meanwhile, a gaggle of wealthy old men in golf carts growled at my wife for daring to take a walk near the third tee while they socially distanced one another from two feet away in the tee box.

So… we sold out and bought a Peloton. I am uncertain spiritually, emotionally, physically, about this decision. I will need to get up and look at it every morning and ask myself if I feel like entering the virtual training room or just jumping in my small pool for 10 minutes and then hanging a wet towel on the Peloton.

Well, suppose that if we do lose power in a hurricane, it will be the single best place to hang laundry from time to time.

The goals I’ve set myself are rather lofty. The only thing I need to do is somehow get Bloomberg World pumped into the screen because if I watch Squawk Box on a nearby TV while riding this bike in the morning, I probably won’t make it very far.

Wish me luck. Let’s dig into Thursday’s news.

MORNING MOMENTUM

PRIVATE EQUITY: Blackstone (NYSE: B.X.) reported earnings before the bell Thursday. The private equity firm reported earnings per share of $0.46, a figure that fell below expectations. The firm also said that it had a loss due to a write-down of its investment portfolio. That said, the firm did experience a double-digit gain in fees. Blackstone COO John Gray appeared on Squawk Box this morning in a solid interview with Andrew Ross Sorkin. Gray said that their biggest holdings are in the logistics space. In apartments, office buildings, and logistics, they see a 5% to 8% decline in payments for April. In the retail space, where it is less expected (6% to 7%), that is where they are not seeing rents paid. He said the same about hotels remain closed. Gray said that real estate has been more resilient – at least for the time being. Gray said that they are looking at retail as a place to consider buying on the international front – and said that the U.S. mall space would likely not receive attention.

FINES:  The Autorité des Marchés Financiers has slapped activist hedge fund Elliott Management with a €20m fine for obstructing an investigation. The fine dates back to a tender offer in 2015 by XPO Logistics to take over French rival Norbert Dentressangle. The French regulator said that the company had “inaccurate and late reports,” failed to disclose its positions, and “obstructed the AMF’s investigation. The fine is one of the largest ever imposed by the agency.

NEGATIVE CRUDE: Think NEGATIVE $34.50 per barrel was bad? How about a situation where oil prices plunge to NEGATIVE $100? That’s a prediction from Mizuho Securities’ Paul Sankey. “We have clearly gone to full-scale day-to-day market management crisis, and as we said when we first called for negative prices, the physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery,” Sankey wrote. With this historic collapse of oil futures, it is straining the legacy of the CME Group, which relies on WTI futures as a major source of revenue.

ACCRUED INTEREST

Blackstone (NYSE: BX) reported earnings before the bell Thursday. The private equity firm reported earnings per share of $0.46, a figure that fell below expectations. The firm also said that it had a loss due to a write-down of its investment portfolio. That said, the firm did experience a double-digit gain in fees. Blackstone COO John Gray appeared on Squawk Box this morning in a solid interview with Andrew Ross Sorkin. Gray said that their biggest holdings are in the logistics space. In apartments, office buildings, and logistics, they are seeing a 5% to 8% decline in payments for April. In the retail space, where it is less expected (6% to 7%), that is where they are not seeing rents paid. He said the same about hotels remain closed. Gray said that real estate has been more resilient – at least for the time being. Gray said that they are looking at retail as a place to consider buying on the international front – and said that the U.S. mall space would likely not receive attention.

Fine: The Autorité des Marchés Financiers has slapped activist hedge fund Elliott Management with a €20m fine for obstructing an investigation. The fine dates back to a tender offer in 2015 by XPO Logistics to take over French rival Norbert Dentressangle.

The French regulator said that the company had “inaccurate and late reports,” failed to disclose its positions, and “obstructed the AMF’s investigation. The fine is one of the largest ever imposed by the agency.

OIL: Think NEGATIVE $34.50 per barrel was bad? How about a situation where oil prices plunge to NEGATIVE $100? That’s a prediction from Mizuho Securities’ Paul Sankey. “We have clearly gone to full-scale day-to-day market management crisis, and as we said when we first called for negative prices, the physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery,” Sankey wrote. With this historic collapse of oil futures, it is straining the legacy of the CME Group, which relies on WTI futures as a major source of revenue.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• OPALESQUE: “Global V.C. investment in Q1 2020 dip quarter-over-quarter with US$61 billion raised, though five $1 billion+ mega-deals propped up total investment value, said a study. According to KPMG, the volume of global V.C. deals declined 27%, falling from 5,820 deals in Q4’19 to 4,260 in Q1’20. The number of V.C. deals has not been this low since Q3’13.”
• BUSINESS INSIDER: Tiny hedge funds gained as much as 500% last quarter as their bets against U.S. shale paid off
• BLOOMBERG: Pimco announces $3 billion distressed fund
• ALTERNATIVES: The SS&C GlobeOp Forward Redemption Indicator for April 2020 measured 3.02%, up from 3.11% in March.
• COINDESK: McDonald’s and Starbucks will help test Digital Yuan.
• FUNDS EUROPE: European funds suffer the worst month since the financial crisis
• INSTITUTIONAL INVESTOR: Trading of Private Equity Stakes Will Plummet This Year

QUOTES OF THE DAY

“We are talking about extreme conditions, emergency status – people literally marching to the brink of starvation. If we don’t get food to people, people will die.”

That’s David Beasley, executive director of the World Food Programme. Beasley worries that 30 nations in the developing world are on the verge of widespread famine due to coronavirus. He thinks that almost 1 million people already sit on the brink of starvation.

“If you had a stinking barrel of oil in your backyard, would you pay someone $100/bbl to take it away? Yes, and you would probably be relieved you were not charged $300/bbl.”

That’s Mizuho’s Paul Sankey on the prospect of negative WTI prices in a month. Now, we can’t take physical delivery in our backyard, but there are no shortage of people running around claiming they’d be willing to store crude in their pools.

REAL ESTATE IN FOCUS

This is the perfect storm for commercial real estate markets in the U.S.

As 2020 started, the consensus opinion was that commercial real estate might see a slowdown in growth rates. However, thanks to an economy that was growing slowly but growing and low-interest rates, CRE would still be an attractive investment opportunity.

COVID and Commercial Real Estate Markets

The COVID-19 showed us once again how unreliable even well-informed predictions can be in an uncertain world. Restaurants and shops are empty, and landlords are finding that with the doors closed, tenants cannot pay rents. Most office buildings remain vacant across America. The question is whether occupancy levels will rebound.

With millions of employees working from home, the possibility of office demand dropping as companies opt for remote working for more its workforce, overall demand for office space could decline.

Commercial Real Estate owners and brokers had to feel a shiver run down their spine last week when James Gorman, The CEO of Morgan Stanley (MS), told Bloomberg TV that he expected the financial services giant to come out of the pandemic with “much less real estate.” He pointed to the success that Morgan Stanley has had with remote working this past month. He said that his workforce had proven they could succeed with a much smaller footprint.

The Impact on Credit

Lending markets are tightening up as well. Commercial Mortgage-Backed Securities new issuance will likely drop by half this year.  The reduced rate of issuance could lead to enormous problems for the companies that have more than $60 billion of CMBS debt that needs to be refinanced over the next couple of years.

CMBS default rates were just 2.6% in Mar

ch, but according to analysts at Moody’s, that does not reflect the damage done across the commercial real estate sector yet. As more tenants find themselves unable to pay rents, that number will move higher. Defaults peaked at 10.27 % of the Great Financial crisis, and some observers and participants in the industry think this time might be worse.

The crisis may pass in a few months, but it will take a lot longer for commercial real estate to recover from the economic shutdown.

For more coverage on real estate, visit DailyAlts.com.

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.