Condo Tower Feels Bite Of Slumping Real Estate
Project’s modified loans raise red flag for some bank analysts
April 27 2008 - The collapse of the Grand Strand’s condominium market has left a long line of people on the hook: developers who are stuck with empty units they can’t sell; buyers who are desperate to get out of their sales contracts; banks that loaned millions of dollars for projects that now are struggling; and stock market investors who have seen bank shares plummet.
The economic pain has been widespread, felt by even this area’s strongest developers and established banks.
Such is the case with the Anderson Ocean Club condo project in Myrtle Beach and Carolina First, the bank that loaned $30 million to build that oceanfront tower.
Strand Capital Group, the condo tower’s developer, has a long history of successful Grand Strand projects and Carolina First is part of South Carolina’s largest banking company, The South Financial Group.
Neither, however, have been immune to the Grand Strand’s steep real estate decline.
Questions raised
Few analysts were prepared for the losses The South Financial Group reported last week, including $232 million worth of bad loans - most of them real estate-related - during the first quarter of this year.
The bad news sent the company’s stock tumbling, with shares losing about 40 percent of their value in two days and closing at their lowest level in 16 years on Thursday.
Most of the bad loans are for projects in Florida, but The South Financial Group also reported $3.7 million worth of bad condo debt in coastal South Carolina. Most of the bank group’s South Carolina condo loans are in the Myrtle Beach area.
While the official financial data are discouraging, it is in the stacks of loan documents filed in such places as the Horry County Register of Deeds office where the bottom line becomes clearer, some experts say.
Those documents, rarely seen by shareholders, show Carolina First is modifying some of its biggest real estate loans just as they are coming due, or in some cases weeks after the loans would have been considered in default.
The modifications often lower interest rates, allow condo developers to make interest-only payments and extend the amount of time developers have to repay the debt.
Analysts questioned bank executives about the modifications during a conference call last week. They wanted to know if the modified loans, which aren’t reported in quarterly financial statements, indicate even more trouble exists in the bank’s condo portfolio.
“The maturities [due dates] of the loans are getting pushed out further and further,” said Philip Gaucher, an analyst with Del Mar Asset Management. “I’m just wondering if you think that is an accurate or honest depiction of the credit picture in your portfolio?”
Lynn Harton, the bank group’s chief credit officer, said loan modifications are normal, and “there is nothing unusual in looking at maturity dates, renewing maturity dates, moving maturity dates.
“You can’t look at that one piece of information in isolation,” he said.
Mack Whittle, the bank group’s president and chief executive, said modifications are common and don’t mean a loan is in trouble.
“Loans that have a lot of complexities, most of the time they have modifications during the course of the loan,” he said. “They are not necessarily negative.”
However, Millennium Partners analyst K.C. Ambrecht said he is concerned the bank group is putting troubled loans on an internal watch list instead of reporting them as bad debt.
“You have a $107 million residential condo book in Myrtle Beach, but only $3.7 million in nonperforming [loans],” Ambrecht said. “That seems like it’s off.”
Adam Barkstrom, an analyst with Sterne Agee, said after the conference call that he was not satisfied with The South Financial Group executives’ explanation of the loan modifications.
“Nobody else was either,” he said. “Look at the stock.”
Tough times squeeze firm
The $30 million construction note for the Anderson Ocean Club is among Carolina First’s biggest loans, according to statements company officials have made during conference calls and to analysts.
Carolina First made that loan to Strand Capital Group in November 2005, just as this area’s real estate frenzy was peaking.
Strand Capital has built more than a dozen successful projects here, including the Margaritaville restaurant at Broadway at the Beach and the Prince Resort condo tower in North Myrtle Beach. Company partner Bert Anderson is a second-generation member of the Anderson family of hoteliers who helped make Myrtle Beach a regional tourism destination.
Now, two years after construction of the Anderson Ocean Club began, the condo market is depressed and Strand Capital has closed on fewer than one-third of project’s 304 units, according to county property records.
More than a dozen people who signed up to purchase condo units costing as much as $710,000 two years ago now are going to court in an attempt to get out of their contracts. Some claim they cannot get financing for units that now appraise for less money.
Strand Capital is fighting back, suing some reluctant buyers in attempts to force them to close on their units.
The lagging sales and legal battles have squeezed Strand Capital’s cash flow, but it has not kept them from repaying Carolina First, the developers say.
“We are in good shape with the bank,” said Loyd Daniel, Strand Capital’s managing partner. “We are current on our interest payments and right in accordance with the terms of the loan.”
Strand Capital also is in the condo rental business, Daniel said, and can use that second revenue source to make payments if necessary.
“We’ve got a large amount of collateral and equity in the project,” he said. “There has never been a problem with the loan.”
Modified loans
Horry County property records show the Anderson Ocean Club loan has been modified twice.
The loan originally called for a repayment date of May 15, 2007. The project had not been completed by that time, however, so Carolina First modified the loan to move the repayment date to Feb. 15, 2008.
As legal battles arose over condo closings, Carolina First modified the Anderson Ocean Club loan a second time.
That modification in March called for interest-only payments and gave developers another year - until Feb. 15, 2009 - to repay the debt.
Daniel said the modifications were expected and “are part of the normal course of business as we liquidate inventory.”
He said the loan has never been delinquent and that Strand Capital provided “substantial additional collateral” at the time of the modification.
The loan modification document does not show that any additional collateral was provided, but Whittle said not all loan terms are included in such documents.
Carolina First in recent months has similarly modified at least a half-dozen other commercial real estate loans in Horry County.
One of those, a $2.2 million note to developers of the White Pointe condominium project in North Myrtle Beach, now is in foreclosure.
Carolina First modified the White Pointe loan in July, allowing the developers to make interest-only payments. The developers defaulted when they couldn’t repay the principal in January, according to court documents.
Some banking experts caution that loan modifications aren’t always a bad thing. If a borrower has a strong track record, it makes sense to work with that developer instead of foreclosing.
“If a bank calls a loan, it could wind up with a piece of property that’s half-built and losing value,” said Robert Lamy, a business professor at Wake Forest University. “Banks don’t want to take back property. That doesn’t help anyone.”
The trouble comes, Lamy said, when banks modify loans “just to put off the inevitable.”
Lamy said shareholders should be concerned about loan modifications and banks “need to have full disclosure as best as they can with their investors.”
Potential problems
Barkstrom, a former bank examiner for the Federal Reserve in Richmond, Viginia, said modifications indicate “a potential source of problem loans” and would be one of the first places he would look to assess a bank’s portfolio.
“Quite simply, if there is no problem, why is there a modification?” Barkstrom said.
Steve Fritts, associate director of risk management policy for the Federal Deposit Insurance Corp., said it is not a simple matter to determine whether modifications are a normal part of the loan process or an attempt to delay the inevitable.
Fritts did not speak specifically about any of The South Financial Group’s loans.
“If you keep modifying the [loan] terms, that is a yellow flag,” said Fritts, whose agency insures deposits at Carolina First and other banks.
“But I can’t give you a hard-and-fast judgment,” he said. “You would have to look at a bank’s portfolio and evaluate a lot of information before you could draw any conclusions.”
There could be continued losses in The South Financial Group’s commercial real estate portfolio in the months to come, analysts say, because of the bank group’s exposure in Myrtle Beach - where there is a 30-month inventory of unsold condos - and Florida, where the inventory is much greater.
The average price of condos in Myrtle Beach has fallen 15 percent to 20 percent over the past year, sales statistics show, and price declines in Florida are greater.
“Given the condo exposure to Myrtle Beach and the conditions within that market, we see future losses as unavoidable,” Barkstrom said. “This along with a further slippage in Florida could be the second leg down in credit for The South Fiinancial Group.”
Ultimately, Barkstrom said, the bank group might be forced to raise additional money through a stock offering or by selling assets to maintain capital levels required by federal regulators.
Retired Tampa, Fla., bank president Jack McMullen - one of The South Financial Group’s largest individual investors with 285,000 shares - said “shareholders are unhappy, not just a few of them but all of them.”
McMullen has repeatedly called for The South Financial Group to sell itself to another bank, a move he now admits would be unlikely given market conditions and the company’s poor financial performance. McMullen said last week he thinks more bad news is on the horizon.
“In my 30 years of banking, I learned that things are always worse than they appear to be on the surface,” he said.
Daniel said he is confident this area’s condo market will start to turn around within 18 months, and he already is seeing some positive results from Strand Capital’s nationwide marketing campaign that touts the quality of condos available here for prices lower than in Florida.
“We have some challenges, and it will take awhile to get back to normal,” Daniel said. “But we also don’t want to go back to the kind of market we had in 2005. A real estate market at either extreme isn’t healthy.”
Condo tower feels bite of slumping real estate
by David Wren | MyrtleBeachOnline.com