Thursday, July 31, 2008

When Accomodators Go Bad
Here is an article on a 1031 accomodator who stole investor money. This is the third story like this I have heard in the past two years. The article details the principals' shady past and how they used short-term 1031 proceeds for personal use and nepotism. This is just horrible. One negative point about the article is that it blurs the line between the viability of an exchange and criminal accomodators. It quotes a woman who likely has lost significant sums:
"If I would have known any of this, I would have paid my taxes instead" of attempting a 1031 exchange, she says.
It is important not to mix the viability of an exchange and bad accomodators. Everyone who sells a piece of investment real estate, at minimum, needs to evaluate the benefits of paying the taxes versus the exchange, the exchange property's investement time horizon and the investor's time horizon, and potential estate tax issues. Only reputable accomodators, like large escrow companies, should be used, and sellers need to demand this.

Tuesday, July 29, 2008

Not Going to End Well
Here is a link to the Dallas Business Journal and an article on Behringer Harvard's Opportunity REIT I's investment in Eastern Europe. The fund is:
"investing in a portfolio of 15 retail and industrial properties located in the Czech Republic, Poland and Slovakia."
I have not reviewed this REIT, but if I was an investor this move would give me pause, especially with such a weak dollar and November's Presidential elections that will give a new Administration. With the mortgage crisis, one would think there is enough opportunity in the United States, rather than looking for deals in developing countries in Eastern Europe. Lone Star sure found some domestic opportunities.
Mervyn's Files for Bankruptcy
Not surprising.
It's About Time
This should have happened years ago. I bought Lucent when tech stocks were crashing thinking it would be a conservative way to play any tech rebound. What a moron. I still own the stock although I think it is pretty much worthless, at least based on what I paid for it. It is hard to imagine why the two heads of Alcatel-Lucent, or whatever it's called, kept their jobs for so long. This company has been abysmal for so long I don't see it ever turning around.
Merrill's Mortgages
Merrill Lynch announced more write-downs yesterday and a dilutive plan to raise $8.5 billion in new capital. The market is trying to make sense of this deal, as Merrill's stock was down early this morning but has now turned positive. I think the market is seeing that despite Merrill selling a $30.6 billion portfolio of mortgages for $6.7 billion there was a buyer for the securities. Buyers have been absent for a year and the tentative return is encouraging. I think it's important to watch (and I don't know if this will be possible) the resale of the securities by the private equity firm. It bought the mortgages for $.22 on the dollar, and I am sure its expects higher resale prices, probably in the near future. These transactions will give buyers, sellers and other market participants important valuation information.

Friday, July 25, 2008

I don't know anything about Crocs, Inc., the maker of those funny clog-type shoes. A year ago its stock was incredibly hot and now it's in the tank. Looking at its stock chart (from the Wall Street Journal), you'd think it's a supbrime lender:

Last summer people wearing Crocs were everywhere, this summer I can't remember seeing anyone wearing them. People probably looked in the mirror and realized how ridiculous they looked.

Sunday, July 20, 2008

Private Equity Follies
Here is an article on Mervyn's problems. It was bought by several private equity firms in 2004 and the seller was Target. The retail executives at Target must have laughed their a#$ off dumping dog Mervyn's to the brilliant private equity financiers. The private equity firms did one thing correct when they bought Mervyn's:
That is because when they bought the company they structured the $1.2 billion deal as two separate transactions -- one for the retailer and a second one for the retailer's real estate.

The real-estate arm has been a lucrative investment, according to people familiar with the deal. It leased many of the stores to Mervyn's and has sold and leased certain properties to other retailers. And through sale-leaseback transactions and the appreciation of real-estate values over the past several years, the buyers have more than doubled their money on the real-estate investment. Those profits have far exceeded losses on the retailer, according to these people. In a bankruptcy of the store operations, the real-estate arm would become a creditor.

Not to get philosophical, but I do not see how the private equity purchase improved the business. The firms that bought Mervyn's were supposed to be a turnaround specialists but appear to have been better financial engineers than retail experts. The stores are going to close and employees are going to lose their jobs. Mall owners and other tenants will be hurt. Wal-Mart will benefit, but it likely already has. Other private equity acquisitions of retailers have also soured, and expect more to come.

Wednesday, July 16, 2008

Ich Bin Timberlander
Wells Real Estate may have pulled one out of its hat. Wells Timberland REIT has entered into an agreement with a German fund to raise up to an additional $500 million in equity. The fund will be sold by a German bank to its clients, mostly retail investors. Wells expects big money from this new selling group member, although nothing is assured. This deal is just in time, as Timberland's second and third payments on its mezzanine finance loan are due in late August and mid October. More information on the transaction is available through an 8-K.
I Have To Link To It
A snappy, snarky title eludes me for this story. This guy had a Scottsdale mortgage business where he syndicated loans and raised capital through private individuals. Loans soured and before his little empire collapsed he offed himself. The Wall Street Journal hints that this is a indicative of wider trouble in the commercial lending market. Not knowing anything about this company except what I just read, I bet that when the loans are examined it will show poor loan decisions and possibly affiliated dealings, or at least dealings with associates. More an instance of one guy thinking he was smarter than the market than widespread commercial loan troubles. And I bet that many of the soured loans were residential construction loans, not existing commercial property loans. This is not to say that trouble in the commercial mortgage market is not coming. As long as banks are not lending, even good borrowers with solid properties that need to rollover their loans are going to have trouble.

Sunday, July 13, 2008

More Mortgage Meltdown
The headlines for Freddie and Fannie sure are different in the Wall Street Journal and The New York Times. The Journal headlines imply a Treasury and Federal Reserve "bolster" of the two agencies, while the Times implies a government "bailout." The Treasury is increasing the two mortgage companies' line of credit and may buy stock in the two struggling firms. I guess we'll know in a few weeks whether it was a bailout or a bolster. It's kind of like that old song, "You call it bailout, I call it bolster, let's call the whole thing off."

IndyMac is getting the press with its government takeover, but hot on its heals is another pending Orange County banking disaster. Downey Saving's stock closed Friday at $1.69 per share, down from nearly $7o per share at the end of May 2007. At a price of $1.69 per share, I am going out on a limb and guessing that Downey's future looks dismal.
More GBE
I posted in February when Thompson left Grubb & Ellis that I thought it was strange that he would walk away from a company where he owned so much stock. Based on the news that came out Friday, my initial instinct was correct. He has been paying close attention and he's now trying to get control.

Friday, July 11, 2008

OC Real Estate Moguls
Who needs OC Housewives when you have the real drama unfolding in Santa Ana. Scott Peters resigned from Grubb & Ellis today, likely he was fired. According to this blog (which is really good) Tony Thompson has been highly critical of Grubb & Ellis' performance since he left it in January. He is now trying to get reinstated to Grubb's board of directors. Here is Thompson's letter to Grubb's board that was filed with the SEC. Grubb's board met earlier this week, but made no announcement about Thompson's request. It apparently did decide on Peters.
Real Estate Novella
Here is a wild article on Grubb & Ellis. Scott Peters has resigned as CEO, and Tony Thompson, who owns 13.9% of Grubb, has filed a complaint with the SEC about Grubb's recent poor performance. Grubb's stock is at three bucks, down nearly 80% since the Grubb & Ellis / NNN Realty reverse merger was announced just over a year ago. I (and am sure thousands) received a glowing marketing piece several weeks ago about Grubb's prospects - what a bunch of baloney. I am guessing broker / dealers will be reassessing their selling agreements.
Freddie, Fannie and Indy
I am trying to make sense of the collapse of IndyMac and the near collapse of Freddie Mac and Fannie Mae. This does not look good for the mortgage market. I don't see how the government can avoid saving Freddie and Fannie. I suspect it will be another long weekend on Wall Street and in Washington as capital is raised for Freddie and Fannie, and the Treasury and other regulators decide the extent of government's role.

The mortgage market, it seems to me, could get much worse than it is now. Housing prices have dropped and, I suspect, the mortgages causing problems for Fannie, Freddie and Indy are the most recent mortgages. With prices now at 2004 levels, the next wave of trouble will be the mortgages made earlier in the decade.

I would not be surprised by a national home saving plan to prevent a further meltdown of the housing market. Bill Gross (and I'm sure others) think the government needs to step in. Here is a blurb from his most recent newsletter, which was formed as an open letter to Obama with the assumption Obama is elected president:
In addition, you’ll need to provide some immediate relief to homeowners in the form of FHA (Federal Housing Administration) subsidies and low mortgage rate loans that somehow have been studied and studied in Congress for the past six months yet still haven’t been passed into law. By January, home prices will be down another 10 percent or so and our Japanese-style property deflation will be in full stride.
The newsletter assumes that congress will not act until January. The way things are moving, January may be too late for the economy.

Thursday, July 10, 2008

TIC Article
Here is an article on a failed TIC program from today's Wall Street Journal. I thought the article was evenhanded. (I think the author got some of her figures wrong by confusing investor equity with the total price (debt plus equity) of the transaction.) The deal seemed doomed from the start, and it signified the type of deal that is going to get in trouble - i.e. deals to weak credits or deals that should not have been in a TIC structure. I had heard of this deal before today's article, and it has become the poster child of a deal gone bad in the TIC industry. It seems to me that the sponsor did a stand-up job in trying to help investors. One thing the article drives home, and at least the investor interviewed for the article seemed to understand, was that the TIC investment was real estate, not a bond, and in real estate when a tenant goes bankrupt it's not good, and when the property only has one tenant, it's bad.

Here is one part of a sentence that stood out to me:
All but one of the investors was over age 65
I don't this this is unique to the deal in the article.

Friday, July 04, 2008

Swift Energy
Below is a chart from the Wall Street Journal showing Swift Energy's (SFY) five-year stock performance - a rise of almost seven times. Swift used to syndicate oil and gas partnerships with the objective to provide steady income over a long period. Most, if not all, of these long-term oil and gas investments struggled to return investors' initial capital and produced inconsistent income. I have not checked their status lately, or even know if they are still in existence. (It'd be a nice story if somehow these deals were exchanged for SFY stock.)

You can bet that none of the investors in a Swift partnership made seven times their money over five years. To be fair to Swift, none of the oil and gas syndicators of the 1980s and 1990s had great deals. The oil and gas deals back then were viewed through a prism of their ability to return investor capital. This is a pitiful benchmark for success. The under performance of the oil and gas partnerships from the '80s and '90s offer a cautionary tale for today's investors scrambling for oil investments.

Wednesday, July 02, 2008

Cars and Oil
The oil companies and the auto industry are clearly moving in opposite directions. Oil hits new highs every day and GM is at lows not seen since the 1950s, and today closed below $10 per share. Exxon is near historic highs. Here is a chart showing the two stocks, GM since 1962 and Exxon since 1970:

You need to look no further than the period from 2000 to 2008 to know the interests of the auto makers and the oil companies are no long aligned. Ultimately this will be good for consumer and the auto makers. The United States is a car country, and Americans are going to drive cars. We will adapt to electric, hydrogen or whatever technology powers our cars. GM is leading the way with its new Volt. GM leading in a new technology seems surprising giving GM's stodgy reputation, but not when it's viewed in terms of its survival. I would not be shocked to see a reversal of recent stock performance - GM up and Exxon down - as viable car technology weans us off our reliance on oil. Of course GM has to survive for this to happen.

Tuesday, July 01, 2008

Interesting Way To Source Deals
Today I received a blast e-mail from a TIC sponsor looking for properties. It's interested in student housing and multi-family properties. I wonder if the sponsor got any response. Maybe another sponsor can off-load a couple of crap deals, because its obvious these guys are not the brightest stars in the sky. Besides the odd premise of the email, I was surprised that the sponsor wanted student housing. Several years ago many sponsors were lulled by the high cap rates of student housing apartments and have since found out why those cap rates were so high.