Wednesday, December 26, 2007

Piedmont - Never In Doubt
The Piedmont Office Realty Trust's proxy to investors to extend its listing period for an additional three years passed by an overwhelming margin (78%) earlier in the month. I never thought the vote would be close, despite the efforts of the company, Lex-Winn, that has been trying to buy parts of the REIT for over a year. It can be argued that now is not the time to list a REIT. This REIT should have been listed in 2005 or 2006 when the REIT market was hitting historic highs. I never understood why the Piedmont executives waited until the listing deadline to begin the process. Leo Wells could have put the $170 million that Piedmont paid him in stock in his pocket rather than having it unlisted shares.
Solving the Lending Crisis
The big lenders, Citigroup, Lehman, and Wachovia are diverse enough that they can probably not lend for an extended period. Eventually they will have to start lending. The banks' commercial real estate executives are not going to get the bonuses they (and their wives) are accustomed to by sitting on cash. This will flow up as banks' Return on Equity (ROI) will shrink and the senior bank executives won't get their bonuses. This may sound sarcastic and simplistic, but having worked long enough in corporate America, I realized that most important corporate decisions are based on the bosses' bonus pool. Stockholder wealth maximization my ass. It is in the bank executives' personal interest to start lending. When their bonuses drop they will find a way to start lending.
Reality Bites
There is an article in today's Wall Street Journal that summarizes what I have seen in the Tenant In Common market since last summer. Deals are not getting done because lenders won't lend and this is expected to result in lower commercial real estate prices. Pardon, the pun, but it does not appear that the ground floor has been found where lenders will lend and buyers and sellers can come to terms. Until this happens deal flow will be light. It is ironic that the Blackstone / EOP deal early in 2007 appears to be the catalyst. Blackstone paid so much and then sold portions of the EOP portfolio for even more that it help spook lenders.

Thursday, December 06, 2007

GBE Props
I questioned this stock when it dropped, but it popped nearly 7.5% today and at one point during the day was up nearly 15%. Not exactly sure why, but the NNN merger was approved today. I am not sure this approval was ever in question so I doubt this was behind the jump.

Sunday, December 02, 2007

Prime Borrowers Used Subprime
Finally. The majority of borrowers who used subprime financing were credit borrowers, not subprime borrowers. I have thought this all along and this article in the Wall Street Journal proves it. Many subprime loans were used to speculate on real estate and many were used for the low teaser rates with the expectation to refinance the loans before they reset. This quote shows the extent of the issue:
In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores (greater than 620) got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.
The article states that many brokers were at fault because subprime loans paid more compensation to brokers than conventional loans, and that borrowers did not understand the complexity of the loans. This may true, because no one knows how much mortgage brokers make on a loan (except the mortgage broker and there is no bigger line of BS than a "zero point" loan). But I still think a bigger issue is the mentality of borrowers. They had been borrowing and refinancing for the past ten years with impunity and saw no reason to stop. Mortgage broker greed just fed this twisted mentality. Plus, everyone knew the difference between the monthly payment amounts of a subprime loan with a low teaser rate and a conventional loan with a higher mortgage rate. Mortgages were viewed as short-term way to play a house's appreciation, not a way to build long-term equity. When houses stopped appreciating the the game of financial musical chairs was over.

Saturday, December 01, 2007

Where Can I Buy Some?
Look at this chart from Saturday's Wall Street Journal showing the various mortgage back security tranches:

The AA tranche looks like the deal of the century. I wish I knew how I could buy some of the investments that hold these bonds.
This week I heard about a reputable TIC sponsor who was syndicating a single-tenant deal where the tenant had shaky credit. The tenant was delisted for poor financial health last week - in the midst of the offering period. I have not heard the status, but this is not good and I am guessing the deal needs to be reworked. This may not be possible in today's tough credit market. I should note that I have seen the offering materials.