Why Apartments Suck
This tidbit was buried in a Wall Street Journal article about hotels last week:

On the recent $15.2 billion buyout of Archstone-Smith Trust, an apartment REIT based in Englewood, Colo., buyers Tishman Speyer Properties and Lehman Brothers Holdings Inc. will have a capitalization rate in the low-to-mid-4% range, well below the cost of capital, expected to be about 6%, according to analysts. Tishman Speyer Properties and Lehman Brothers declined to confirm those numbers, but the estimates have been widely accepted by Mr. Marks and other analysts.

Why do a deal with such a low return? Tishman and Lehman are betting that rents and underlying asset values will increase rapidly enough that its return will eventually rise.

A low- to mid-4% cap rate. Nice. What kind of debt do you put on a deal like this? And will the property have rents increase enough so that the leverage ever becomes positive? And how low does the cap rate go when acquisition costs are added to the price? In a TIC deal the cap rate would have to drop to the low-3% range. Thanks but no thanks.

Boston Capital REIT Throws in Towel
I heard today, and confirmed through its filings, that Boston Capital has suspended sales in its REIT. This happened April 18th and it since has hired Wachovia to help it explore "strategic alternatives." I never liked this REIT and I guess I was not alone. There was significant dealings with other Boston Capital entities. Loans to affiliated entities were costing the REIT 9% or more, but the REIT was only paying a 6% dividend, which was probably a high percentage of principal. The loan paid 9% and the cap rates on apartments are less 6%. This is serious negative leverage.

Lender Roundup
The Wall Street Journal has had three excellent articles this week on the new lending environment. The first explains the favored tool of private equity, CLOs , the second details Wall Street's, and in particular Lehman Brothers', descent into the ugly world of subprime lending. Finally, an article in tomorrow's Journal provides insight into the problems borrowers are having in the changing credit market. On the positive side, it looks like the market is rejecting the crap deals being peddled and lending standards are improving. On the negative side, there was a lot of crap sold over the past several years that is being held by mutual funds and other investment managers and how this debt will behave in the future is a huge wild card.

The Cutting Edge of GM
I was watching CNBC this morning and saw a Cadallic commercial with The Pogues' The Sunnyside of the Street as its song. I almost choked on my Cheerios. At first I thought that whoever was picking the music for GM had good taste and was giving GM props. Then I figured out that GM is using my music against me to sell Cadillacs. Clever sons of bitches. When I hear a commercial with Boys from the County Hell, Streams of Whiskey or one of my favorite rock & roll Christmas songs, Fairytale of New York, I will go test drive an Escalade.

Who's Smart?
People who bought too much house with too much mortgage were viewed as having little financial acumen. Maybe it's the smart money who's lacking the financial savvy. A borrower with little equity and a low payment can easily walk away from his obligation when a rate reset causes the monthly mortgage payment to jump and a new valuation reveals no equity. The smart money, like Bear Stearns, cannot walk away, no matter how much they want to. They have invested and borrowed too much, and now the stakes are too high. I do believe the subprime mess is going to get worse, unfortunately. The near-term financial landscape is going to change. Rising subprime mortgage defaults and devalued housing prices will impair now-healthy parts of the mortgage and housing market. Home mortgage ills will spread to other debt sectors - i.e., commercial mortgages, high yield debt and emerging market debt - that will lead to a global reevaluation of pricing and risk. Easy credit is over. Lenders are lemmings. Many people and businesses (and politicians, but that is another post) benefited when credit was easy, now many good borrowers will be punished for banks' overreaction and herd mentality.

Why I'm a Libertarian
This is nuts. It's scary, too. Activist judges on the Right are as bad as those on the Left. How could anyone be harmed by this, unless someone slipped and fell on some ice from laughing too hard.

Interesting Blog Post on Brookstreet
I found this blog tonight from the OC Register. Make sure to read the comments.

Bear Steps Up
Bear Stearns moves to salvage at least one of its two troubled hedge funds. Wall Street needs to take a breath and look back to Autumn 1998 and the fall of Long Term Capital Management. This was a leveraged hedge fund that made a wrong bet and creditors began calling their debts. For a few weeks after LTCM's implosion there was no market in emerging market debt and the spread on high yield debt widened. Wall Street panicked but the markets came back fast. It is the same for the subprime debt. It looks dire now, but with each passing day Wall Street is figuring how to better price it and how to better factor in its risk. In a short time, Wall Street will be able to price the assets in the two Bear Stearn's funds. Firms that get too anxious and dump their assets at fire-sale prices are hurting themselves.

Wow
I am not sure what to post about Brookstreet's sudden collapse. This is amazing. The brutality of markets should never be underestimated. I don't know the details of the implosion, but it's hard to imagine a firm, especially an independent broker/dealer, having that much exposure to one security or one class of securities that it could self-immolate.

The End of the World as I Know It
The B-52s are playing a casino. What's next a high school prom? All-you-can-eat crab with your Rock Lobster.

Not Good
It looks like Bear Stearns cannot stop the subprime fallout. Merrill's approach appears myopic.

President Bloomberg ?
This gets my attention.

That's Interesting
I was doing research last night and stumbled across a transaction where the Dividend Capital Total Realty Trust, Dividend Capital's latest non-traded real estate investment trust, entered into a joint venture with Developers Diversified to purchase three large shopping centers. On the surface it's a mundane transaction, but it gets interesting because Developers Diversified purchased an Inland sponsored REIT earlier this year.

Subprime Spillover
The housing market is separate from the commercial real estate market. I don't have any figures, but would bet the correlation between the two is lower than most people think. The housing market's subprime problems, despite the differences between the housing and commercial real estate markets, will spill over to the commercial market and the tenant in common market. All the loans on TIC transactions are sold by the lenders to firms that package the loans into Commercial Mortgage Backed Securities (CMBS). To maintain their ability to sell their loans to the packagers, lenders will impose tougher lending standards, require more reserves and command higher spreads. This translates into more expensive financing for TICs, but will allow the CMBS to keep their ratings and marketability. TIC sponsors, and in particular those pushing marginal deals, better get ready for the tougher scrutiny.

A Little Late
Moody's downgraded 131 bonds backed by pools of subprime mortgages. This is not surprising, but its a little late. The whole article is interesting as it highlights the problems with Bear Stearns' two mortgage-focused hedge funds. The outlook for these two funds is not encouraging.

Encouraging
The fuel cell development seems more practical and a better long-term energy solution than ethanol, which takes almost as much fossil fuel to produce as it saves. I wonder what Big Ag is going to do to derail fuel cells? What Big Ag should do is put some of these cells in their huge combines to make the production of ethanol more effective.

More Foreclosure News
All the financial publications I have read today and tonight have articles about the mortgage market. The most troubling is this one about one of Bear Stearns' hedge funds. It invests in mortgages, including subprime mortgages, and earlier this week it had to sell $4 billion of its quality mortgages to meet margin calls. It is not a good sign if a Bear Stearns-related firm is in trouble. Bear Stearns has an excellent reputation and is known for its discipline and risk controls. I am worried about other mortgage surprises lurking in the near future from firms that don't have Bear Stearns' controls.

This article reports that defaults are at record levels, which is stating the obvious. I am waiting for the articles about how higher rates are causing defaults, especially on adjustable mortgages, and how prices are declining because of the rate increase.

I think the rise in rates has peaked. Rates need to drop to protect the housing market. The amount of defaults, and their translation to the overall economy, will begin pushing rates down soon.

Books Before Bars
It would be interesting if Scooter signed a book deal before he gets pardoned. I don't care for current event books - could not get into Bob Woodward's State of Denial, which was the first current event book I tried to read in a long time - but I'd read the reviews and commentary on a Scooter Libby book. For some reason I don't think it would be as sycophantic as this and this.

TIC Article
This article on 1031 exchanges was buried in today's Wall Street Journal. The headline sounds ominous for exchanges, but a closer read shows the opportunity for TIC deals. The article focuses on investors looking for their own properties. Investors are having difficulty finding value in today's market, and many are choosing to pay taxes and not exchange into another property. TIC deals can help these investors by eliminating the property search and paying competitive yields.

Doom and Gloom
Here is more depressing housing data. Housing predictions are worthless. The rise in interest rates is all you need to know about the housing market. If rates stay at this level the housing market is in trouble. In April I linked to a Bill Gross podcast where he predicted that rates would have to drop to 4% to stop the drop in housing prices. Let's hope he is right. (If you believe he's right now is the time to buy longer maturity bonds.)

Tony V. Leo
Tony Thompson, grand poobah at NNN Realty Advisors, has been in the syndication business since the 1980s. Leo Wells, grand poobah at Wells Real Estate, has been in the syndication business since the 1980s. Both men's firms have raised billions of dollars through the broker/dealer channel. Both men are in their 60s and are seeking liquidity events for some of their holdings.

NNN Advisors, a private company, recently merged with Grubb & Ellis, a publicly traded real estate brokerage firm. This will provide a liquidity event for Thompson, the amount of which I do not know, but I suspect it is significant. The merger has been met with skepticism, at least from myself, as there is an impression, at least from myself, that there is more to the merger than building a bigger real estate company.

Leo Wells' first REIT, Wells Real Estate Investment Trust, has filed to go public and the broker/dealer community's response has been one of relief. Finally a Wells syndication is being listed on an exchange, offering investors a chance to sell their shares.

A closer look reveals that Leo should be viewed with the same jaundiced eye as Tony. Reading Wells' new timber REIT's prospectus shows that Leo is 100% owner of all shares of all Wells companies (except of course the syndications where managers and directors receive shares and individual investors own most of the shares). Leo has never shared any ownership with any of his executives, and he has executives that have been with him for years and who have worked hard. Tony has given ownership to various employees over the years. NNN Advisors' public listing will benefit many of its managers, not just Tony. The liquidation of Wells' funds will only have one beneficiary - Leo. The Wells REIT, as part of its listing, will purchase its external advisor, which is 100% owned by Leo, for $175 million.

For years Leo said the "market was not right to sell." I am not sure that now in a time of private equity, rising interest rates, falling REIT prices and REITs going from public to private ownership is the time to list a REIT. But Leo is now in his mid-60s so I think it is more of his timing rather than the real estate market's timing. Look for more Wells "liquidity events" as Leo converts his real estate empire into cash for estate planning purposes.