Real estate firms flocked to Israel in search of cheap debt. Now the market’s turning.

All Year, Extell, Starwood trading at above 20% yields

TRD NATIONAL /
Dec.December 24, 2018 06:00 PM

The Tel Aviv Stock Market (Credit: Getty Images)

After weeks of declines, defaults, and troubling disclosures, bonds issued by American real estate firms in Israel are falling at unprecedented rates.

Over the weekend, the Tel Bond Global, an index which tracks bonds issued by American real estate companies, fell four percent, closing with an average yield in the double-digits Sunday, and falling a further two points on Monday. Some of the bonds from New York-based companies, including Extell Development, Delshah Capital and GFI Real Estate Limited are trading above 20 percent yields, while bonds from Barry Sternlicht’s Starwood West and Yoel Goldman’s All Year Management are selling for less than 60 cents on the dollar.

The downturn over the weekend can be traced to a series of unsettling financial disclosures made by U.S. companies toward the end of November. Pent-up concern from Israeli investors, coupled with the tailwinds from the U.S. stock market’s battering last week, sent the bonds careening.

While some of the worst performers like Starwood, All Year, and Delshah are confronting specific concerns from investors, others have taken a hit because of widespread alarm about the asset class.

“It’s definitely a crisis,” Kobi Segev, CEO of Ayalim Mutual Funds told The Real Deal. “Israelis now understand that the risks are higher than they anticipated.”

The market has been sputtering since November, when Boaz Gilad’s Brookland Capital stalled trading and announced that it would not be able to meet its debt obligations in 2019 and began negotiations with bondholders.

Then, as the third-quarter reports began coming in, there was more bad news and several reports of misappropriated funds, leading to concerns over several American companies’ ability to repay their debts, especially with so little appetite for further refinancing on the Tel Aviv market.

In early December, All Year Management’s Yoel Goldman, who has raised roughly $650 million in bonds, reported that $3.7 million had accidentally been transferred from the company’s coffers to his personal account, according to documents. Several days later, Moshe Orlinsky, the head of Chosen Properties, reported accidentally withdrawing $2.5 million dollars from his company. The money was quickly returned in both cases, but investors are concerned over how both these incidents were possible for publicly audited companies, according to multiple sources.

In mid-December, the retail property owner Waterstone Properties was put on CreditWatch by Israeli rating agencies, and a weak third-quarter report from Starwood West, a subsidiary of Starwood Capital that raised over $200 million in March of this year, triggered a bond selloff. The bonds, which are backed by a portfolio of seven retail malls, had been declining since March but fell an additional 20 percent in December alone, and were one of the first to begin trading above 20 percent yields.

Investors don’t understand why Sternlicht won’t buy back his bonds, said Segev. “If he believed in his bonds, he would have done it already. That’s what’s concerning the institutional investors.”

A spokesperson for Starwood said the company sees “compelling value” in their assets and believes that “the bonds should be trading at a substantial premium to their current levels.”

Last week, several companies, including Starwood, announced their intention to buy back their own bonds, a move that briefly stemmed the bleeding. But that reprieve appears to be over.

Gary Barnett’s Extell Development announced earlier this month that it would buy back around $50 million in bonds rather than refinance once the bond came due. Barnett had not been especially favored by Israeli investors in the last year or so, but the news of a buyback brought its own fears since it would be a blow to the asset class if issuers choose to exit rather than refinance.

Bonds issued by Michael Shah’s Delshah Capital are also slumping, with yields as high as 25 percent. He reported a $14.3 million loss in the third quarter, due to the loss of value on two properties, according to TASE filings. He said the problems were an “overreaction” to Brookland’s issues. “In the meantime, we feel our bonds are very attractive at those yields.”

While the fallout for American bond issuers is widespread, firms with strong fundamentals, like Larry Silverstein’s Silverstein Properties, and Related Companies, have been relatively unscathed. Both are trading at 5 percent yields.

In a statement on Monday, Extell characterized the tumult thusly: “There was irrational exuberance on the way up and there is irrational panic now.”


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