Friday, August 31, 2007

When the Herd Runs Off a Cliff
Here is an article about all the speculators - who just had to get in on the booming housing market - defaulting on their loans. One would hope that there is some relief for people who are working and living in their homes and are going to get crunched by exotic mortgage resets (these people should start talking to their mortgage companies, I think they'd be surprised by their flexibility). The speculators don't deserve any relief. Unfortunately, with no equity in a property, I am not sure what recourse there is against the borrowers. The poor schmucks that actually bought homes and condos to live in next to these speculators are the ones who are going to be hurt.

This chart from the article is amazing:

Harbinger for TIC Deals
The outtake below is from Wednesday's (8/29) Plots and Ploys column in the Wall Street Journal's real estate section, and highlights a securitized debt transaction that may foretell the future for many TIC offerings. TIC offerings all use debt that is packaged an sold in to securities that are described in this article. If this deal gets done it will be good news for the TIC industry. Here is the outtake:

Can Wachovia Capital Markets unload $4.1 billion in commercial mortgage-backed securities in this turbulent credit market? The answer may come as early as this week, as the bank continues to market bonds backed by a loan it gave Lightstone Group LLC to buy Extended Stay Hotels in June.

"I know they're not selling well," says David Lichtenstein, chief executive of Lightstone, a Lakewood, N.J.-based real-estate firm. "But I don't think a lot is selling, period."

Wachovia's offering, one of the biggest this year, comes at a time when the markets for commercial mortgage-backed securities and commercial collateralized debt obligations have been severely pressured by investor skittishness. When Lightstone announced it was buying Extended Stay from Blackstone Group for $8 billion in mid-April, commercial-real-estate lending was still aggressive, but the market was starting to react to warnings about lax lending standards. "We were one of the last deals in," Mr. Lichtenstein says.

Besides the credit-market turmoil, another big drawback for investors is that the Lightstone deal is a so-called single-borrower issue, meaning it doesn't pool loans from different borrowers. Thus, it doesn't have the diversity of assets that many other such issues do.

If the series, which is led by Wachovia but includes other banks, is sold out, it would signal that the markets have regained their footing somewhat in the past two weeks as spreads have narrowed, meaning investors are willing to take lower returns on the bonds. And if not? "Wachovia has a pretty big balance sheet," Mr. Lichtenstein says. Wachovia declined to comment.

Tuesday, August 21, 2007

Piedmont / Wells Update
I spoke to a representative at Wells (not Piedmont) about last month's Wall Street Journal article. The representative said the offer to acquire all the former Wells REIT was never formally made, which is why the REIT's board of directors did not respond to the offer. This matches my unsuccessful search for a formal offer. The only offers I found were tender offers that sought to acquire up to 10% of the REIT, not all of it at two different prices. This information allays concerns about poor fiduciary responsibility. The conversation also revealed that that appraised NAVs were around $9.00 per share or less, with appraised dates of Fall 2006. I expect a listing soon (Fall 2007), although uncertain debt markets could affect the timing.
You Can Run But You Can't Hide
Wells Real Estate Investment Trust has changed its name to Piedmont Office Realty Trust. There is still no word on when the REIT will go public.
The financial markets go to shit and I stop blogging, nice. It's been busy and I expect blogging to be intermittent until after Labor Day. There has been so much financial news I am not sure where to begin to catchup, so I won't. Look for lenders to get back in the market to ease the financial crisis. Lenders have to lend and the appetite for yield is not going away. The pricing will work itself out over the coming weeks or months. Higher debt spreads will lead to a repricing of assets, in particular real estate. Sellers cannot expect the same cap rates if buyers cannot get financing.

Thursday, August 09, 2007

How Big Is the Subprime Exposure?
Markets opened this morning down again due to subprime exposure - this time in Europe. French bank BNP Paribas suspended withdrawals of its three funds. A German bank is also struggling with one of its asset-backed funds. When this subprime mess started early in the year it was thought to be a small portion of the market. I don't think this is the case judging by the global market reaction.

Monday, August 06, 2007

Figured It Out?
A scary thought hit me last night as I searched for clues about today's market opening. Maybe the banks are scared about the subprime mess because, in effect, most mortgages they made over the past six years are subprime loans. By this I mean that the high loan-to-value and loose credit loans were the norm, and encouraged, even for strong credit borrowers. What's the difference between a good credit borrower and a subprime borrower if both bought a house but needed an interest-only mortgage so they could afford the payments. When the mortgages reset, the payments are too high and the equity has vanished both borrowers will been in financial trouble. They will not be able to refinance and will likely give the property back to the lender. There is very little difference between these two borrowers. That is what is scaring the bankers because they know better than anyone how shaky their loans were for the past six years.

Thursday, August 02, 2007

Lemming Watch
This blog has said before the bankers are lemmings. This article proves it. Why stop all lending and slow the economy? Why not make better loans? Bankers need to get better documentation on their borrowers and make sure their loan-to-value ratios are accurate (get tougher on appraisers). This take-away from the article cracked me up:
The fright among investors is forcing lenders to go back to more-conservative practices that were the norm before the housing boom of the first half of this decade. Many now are focusing on loans to borrowers who are willing to document their income, can make a down payment of at least 5% and have a history of paying bills on time.
Documenting a 95% loan-to-value loan is conservative? Verifying a payment history is conservative? It is scary to think what is considered risky. Maybe the lending mess really is only at the tip of the iceberg. It is naive to think that the lemming mentality will stop at subprime and Alt-A mortgages. These bankers are going to choke off all credit - mortgage, corporate, asset-backed, you name it you won't be able to borrow against it - for the next couple of months.

Wednesday, August 01, 2007

Energy Expenses Offset Rise In Energy Prices
Finally, my theory was verified in today’s Wall Street Journal. The theroy is that despite the current high price of oil and gas, the rise in acquisition and extraction costs make oil and gas deals a bad investment. The article details how the costs associated with the oil and gas industry have increased over the past few years. The arbitrage that allowed the oil and gas deals that were syndicated to investors in the late 1990s and early 2000s is gone. Elimination of the arbitrage will eliminate returns for many recent programs. This is bad news for oil and gas syndications and their investors.

The deals sold in the early 2000s benefited from high energy prices as they reached their peak production periods during the low cost high revenue period of the early 2000s. Their costs to acquire leases and drill for oil and gas were much lower than they are today. The returns for these were were much greater than the returns for deals done in the late 1980s and most of the 1990s. The money raised in today's deals, based on these returns, will be disappointed as recent deals will under perform. No sponsor talks about these increased costs. I was at a conference two weeks in Vegas and several energy sponsors spoke about all the opportunities in the energy sector, but rising costs were not mentioned.