Tuesday, November 24, 2009

Fitch downgrades Galleria towers debt; owner vows not to default

A high-profile Dallas office project has made the list of major U.S. properties that credit analysts are scrutinizing.

MILTON HINNANT/DMN
Cannon Commercial CEO Kam Mateen says, 'We have never defaulted before and are going to pay our loans.' Fitch Ratings singled out the Galleria office towers – three buildings with more than 1 million square feet next to the shopping mall – in a recent report.

Fitch downgraded and revised its outlook on the towers' financing when it looked at commercial mortgage debt held by a JPMorgan Chase Commercial Mortgage Securities Trust.

But the California-based owner of the properties said Friday that the loan is not in jeopardy.

"What the bond rating agency is saying is baseless," said Kam Mateen, CEO of Los Angeles-based Cannon Commercial Inc. "We are a very big company with lots of reserves.

"We have never defaulted before and are going to pay our loans."

Wall Street rating firm Fitch said in its report that the debt payments on the Galleria buildings are current and that the buildings have a high occupancy rate.

But Fitch also said in the report, issued last month, that it expects the interest-only loan to default and "incur losses of approximately 20 percent."

The loan matures in 2017.

Fitch based its forecast on anticipated declines in cash flow from the Galleria buildings and falling values.

The towers are considered among the most successful properties in the area around the Dallas North Tollway and LBJ Freeway.

Constructed between 1981 and 1990, they were purchased in mid-2008 by Cannon Commercial, which also owns other properties in Texas. The deal was one of the largest in North Texas in a decade and was estimated to be worth more than $300 million.

The buildings are about 90 percent leased, and major tenants include Fedex, Highland Capital and Invesco.

Mateen said that when the Galleria loans come due, his company will pay them off.

Cannon Commercial owns and manages more than 12 million square feet of real estate in six states.

With the shakeout in real estate values and lack of credit for refinancing, thousands of commercial properties around the country are facing debt problems.

It remains to be seen how much of this real estate will ultimately wind up in default or face foreclosure.

"The foreclosure activity has actually been slower than we anticipated," Jim Yoder, managing director at Jones Lang LaSalle, said Friday during a panel discussion sponsored by The Dallas Morning News.

The debt on the Galleria buildings was among 29 "loans of concern" that Fitch detailed in its October debt downgrade.