Vegas Housing

Here's a post from Calculated Risk on the Las Vegas housing market.  Las Vegas has seen the largest drop in home prices of any of the Case-Shiller composite 20 cities, according to the post.  Through December 2011, Las Vegas home prices were off 61.8% from the peak, and were down 9% in 2011.  There is good news:

Sales in 2011 were at record levels, more than during the bubble, and it looks like 2012 will be an even stronger year - even with some new rules that slow the foreclosure process.

And this:

From the LVGAR: GLVAR reports increasing home sales, prices, decreasing inventory. First on a record sales pace:

According to GLVAR, the total number of local homes, condominiums and townhomes sold in February was 3,794. That’s up from 3,591 in January, and up from 3,371 total sales in February 2011.

Compared to one year ago, single-family home sales during February increased by 17.8 percent, while sales of condos and townhomes decreased by 5.0 percent.

The Calcualted Risk post ends with this:

So 71.3% of the sales were distressed, and over half were purchased with cash.

One of the keys is the decline in inventory. Note that the GLVAR reports both total inventory, and inventory excluding "contingent" listings (usually short sales). Total single family inventory was down 15.4% from a year ago, and excluding contingent listings, inventory was down 45.6%!

This is good news and one of the reasons why I am a housing bull.  I have read other articles supporting my belief, and will try and link to them.

Home Investing

Here is a good article from Bloomberg on private equity investors buying foreclosed homes as rental properties.  The properties should generate good cash flow to sustain investors until the properties are sold.  I'm not sure I buy this thesis:

In starting Waypoint, Wiel and Brien set out to show institutional investors that by using technology they could amass single-family homes the same way Sam Zell’s Equity Group Investments Inc. (EQR) and other real-estate giants gather apartment units in cities from New York to San Francisco.

The home rental market boasts a total property value of $3 trillion, according to Morgan Stanley (MS) housing analyst Oliver Chang. Yet institutions have long shunned it as too scattered and impractical to be profitable.

Wiel and Brien are using cloud computing, proprietary algorithms and iPads to create a virtual assembly line for buying, renovating and renting houses on a large scale. They’re also betting that many former homeowners who have jobs but couldn’t afford their mortgages will still want to live in the same communities as renters.

“The economics never made sense for a big investor to come into the market, and the technology for managing all that complexity didn’t previously exist,” says Brien, who still possesses the steely stare of a field goal kicker. “The confluence of those two events has provided a window of opportunity for large investors to enter this space.”

The article mentions that Waypoint has over 1,100 homes.  The exit strategy is still selling the homes individually, which will take months, and likely years.  This will test the institutions' patience.  Institutional money is great, but local knowledge is critical.

Shifting Sands' Job Gains

Here is a good Bloomberg BusinessWeek article on job growth in sand states (Florida, Arizona, Nevada and California).  These states had the most job declines during the recession, but are now leading the nation in job growth.  The BusinessWeek article seemed surprised at this trend.  What I'd like to know, and what's not addressed in the article, is what impact the collapsing housing market had on the job losses and what impact a rebounding housing market is having and will have on job recovery.

Creativity Fail

Inland Western REIT has changed its name to Retail Properties of America, Inc.   American Realty Capital is already offering a similar product, Retail Centers of America, Inc.  Why would Inland Western change its name to almost match a competitor's exisitng product?  Maybe imitation is the best form of compliment, or maybe it's a case of dialing it in.  It's creativity failure either way.  To me, it's more likely that Inland is distancing itself from a product that has struggled so that Inland can protect its brand for its current and future offerings.  

The former Inland Western's Net Asset Value per share is 30% below its original offer price, and while it has worked hard for investors to keep paying a distribution, and has increased it nine quarters in a row, the current distribution (2.6% annualized) is well below the REIT's original distribution.  In the REIT's defense it raised and deployed capital in the mid-2000s in retail real estate, one of the real estate asset classes most impacted by the recession and housing slump.  The former Inland Western also fought to refinance debt that matured near the worst of the credit crisis.  Inland should have put more thought and originality into the name change.

Calling BS At Forbes

This Forbes article popped up on my Google News feed.  It reads like PR for TNP Strategic Retail Trust, a non-traded REIT that has raised about $65 million in over 2.5 years.  I don't put much credence in Forbes' articles like this after I read an error-filled one from an attorney last fall (my comments are linked here).  The article on TNP Strategic Retail is worth reading for the comments alone, as readers quickly saw through the author's propaganda and called him out.

Inland Western's (Archaic) Listing?

On February 28, Inland Western REIT filed a letter it sent to investors.  The letter is optimistic, and I could write a snarky post poking each sanguine point.   But the key paragraph that caught my eye was at the end of the letter where Inland Western stated:

As previously communicated, we continue to pursue the initial listing of our existing common stock on a national securities exchange. We currently intend to complete the listing in 2012, and we are in the process of finalizing the terms of the phased-in liquidity program that we intend to implement in connection with the listing. As was described in our proxy statement for our special meeting in February 2011, we currently anticipate that we will implement a phased-in liquidity program that will provide for the listing of 25% of your existing shares of common stock concurrent with the initial listing and the listing of an additional 25% of your existing shares of common stock on each of the six-month, 12-month and 18-month anniversaries of our initial listing. We will provide you with further information regarding the expected timing of the listing and impact of the listing of our common stock on your existing holdings as the process progresses. Although we do currently intend to pursue an initial listing within the foregoing timeframe, we cannot guarantee that such a listing will occur and timing could be impacted by overall economic and other conditions and factors.

Inland Western told investors that it plans to list its shares sometime in 2012, but it will only make shares available in 25% increments, with each share release spaced out over six months.  Under this structure, investors will not receive full liquidity for eighteen months after the date Inland Western initially lists its shares.

Inland Western internalized (bought with its stock) its advisor in 2007, at a value of $375 million.  (This fee was approximately 8% of Inland Western's equity, which, based on this metric, was not the cheapest nor the most expensive internalization.)  The internalization generated lawsuits and in July 2010, Inland Western agreed to return 9,000,000 shares, which lowered the internalization to $285 million (assuming the initial valuations were done on the REIT's $10 per share offer price).  Based on Inland Western's current $6.95 net asset value share price, I figure the internalization fee is now 30.5% less than $285 million, or $198 million.  If anyone has more accurate figures, I will post them.  Obviously, at minimum, Inland Western's sponsor is likely subject to the same delayed listing schedule as investors, and the $198 million will fluctuate with the market price for Inland Western's shares. 

(Here is a June 2010 article from CRENews.com that discusses non-traded REIT internalization fees and from which I obtained the $375 million value listed above.  The article has this whopper quote from Stanger's Kevin Gannon:

"There is nothing wrong with non-traded REITs paying to internalize management because they bring in-house good people, who know the REITs and their assets. But sometimes the dollar amounts have been large and there's been some criticism for that," said Kevin Gannon, a managing director with Stanger.

 There's no wonder why non-traded REIT sponsors love this guy.)

There are plenty of other non-traded REITs that raised money in the mid-2000s that have yet to internalize their external advisor.  Unless a REIT sponsor has specifically amended its REIT's documents, most REITs offered in the mid-2000s have the ability to internalize their advisors.   In today's environment, it'd be hard for a sponsor to justify, rationalize or explain a huge internalization fee.  A situation where a REIT's NAV per share is less than the original offer share price per share would make an internalization decision even more difficult.  If a sponsor is raising capital in another REIT, all the fees associated with that offering or offerings would be in jeopardy if broker / dealers cancel selling agreements due to the internalization fees.  Termination agreements may not be wide spread, but what REIT sponsor is going to take the chance.  Let's hope Inland Western is the last non-traded REIT that hits investors with a large internalization fee.

More ARCT Listing

Here is a partial screen shot from yahoo.finance of the closing of ARCT's opening day of trading:

I circled the day's trading range.  I wonder who was part of the trade at $5.54, especially the sell side.  Someone took a nearly 50% loss when ARCT has a tender offer to purchase shares at $10.50 per share.  You can't fix stupid.

ARCT Listing

American Realty Capital Trust is now listed on NASDAQ and and began trading this morning under the symbol ARCT. 

Industrial Income Trust Re-Price

The non-traded real estate investment trust (REIT), Industrial Income Trust, filed various documents this week, including an updated S-11, in preparation for its follow-on (continued) equity offering, which will begin as soon as its current equity offering period ends its nearly two-and-a-half year offering period in mid-April.  The follow-on offering is for two years, which will make the combined time the REIT raised equity nearly four-and-a-half years.  Industrial Income's board of directors has determined that the REIT will price its follow-on offering at $10.40 per share, up from the current $10.00 per share price of the initial offering.  Industrial Income's follow-on offering is expected to start on April 17, 2012,  giving Industrial Income's sales force approximately six weeks to stress the benefit of buying shares soon to be offered at $10.40 for only $10.00. 

The following is from Industrial Income's Supplement 16 and describes the methodology behind new share price:

Our board of directors arbitrarily determined the offering price in its sole discretion and is ultimately and solely responsible for establishing the fixed offering price for shares of our common stock in the Follow-On Offering. We did, however, engage the services of Duff & Phelps LLC (“Duff & Phelps”), an independent valuation firm, to conduct an appraisal of all of our real estate assets that had been acquired prior to the fourth quarter of 2011. For our assets acquired during the fourth quarter of 2011, Duff & Phelps did not prepare an appraisal but did review each of those properties and concluded that the acquisition prices approximated market value.

Our board of directors also considered certain other factors, including: a discounted cash flow analysis; comparisons against certain publicly-traded industrial REITs with respect to certain operating and financial metrics including occupancy levels, leverage ratios and debt terms, and concentration of properties in top tier markets; the quality and diversity of our properties and tenant base; and the progress in executing our overall investment strategy. However, our board of directors did not consider certain other factors, such as an aggregation premium for the properties in our portfolio or a liquidity discount. Our board determined that the aggregate value of all of our real estate assets, as of December 31, 2011, is approximately $1,162,700,000 (after adjustment for our 51% ownership interest in our existing unconsolidated joint venture). Our board’s valuation for the real estate assets that had been appraised by Duff & Phelps was consistent with the Duff & Phelps’ appraisal. This compares to an original aggregate purchase price (exclusive of transfer taxes, due diligence expenses, and other closing costs) of $1,067,800,000 for these assets. Based on 60.55 million shares outstanding as of December 31, 2011, this appreciation of our real estate assets reflects an implied increase in value of approximately $1.57 per share.

A $1.57 per share increase in real estate asset value, that's nice.  I like how the board included the REIT's "progress in executing our (the REIT's) overall investment strategy" as part of its valuation decision.    According to Industrial Income's third quarter 2011 10-Q, the REIT has never paid any of its distribution in operating cash flow, and the following is from a footnote in the third quarter 2011 10-Q:

For the three months ended March 31, 2010 and June 30, 2010, 100% cash distributions provided by financing activities were funded through offering proceeds. For all other periods presented, 100% cash distributions provided by financing activities were funded through proceeds from our debt financings.

I hope the Industrial Income's board weighed in its valuation decision this REIT's historic inability to pay any of its distribution from operating cash flow.  This is one metric I will follow in 2012.

Washington Slipping

Here is a free Wall Street Journal article on Vornado Realty Trust and its problems due to a weakening commercial real estate market in Washington DC.  I didn't know this market was softening because along with New York and Boston, Washington DC is always listed as one of the strongest real estate markets in the country.  I found these paragraphs interesting:

But Washington's engine of growth has been the federal government. As pressure builds on the government to rein in spending, landlords are getting pinched.

Vornado, a Paramus, N.J.-based real-estate investment trust, declined to comment.

The company's release said 1.1 million square feet was vacated because of a military consolidation program overseen by the Defense Base Closure and Realignment Commission. Vornado projected another 539,000 million square feet will be vacated by the end of 2015. Most of the properties hurt by the program are in Northern Virginia.

Vornado is recommending that seven Northern Virginia properties that secure $600 million of debt go to a special servicer.  Despite the downbeat tone of the article, its states that Washington DC still has the lowest vacancy in the country at 9.4%.