Friday, November 28, 2008

Five and Less Than Three
The Dow extended its gains to five days. It is the first time since July 2007 - before the credit crisis started - that the Dow has put together five consecutive up days. The ten-year Treasury dropped below 3% today, ending at 2.96%. This is near its lowest levels since daily tracking began in 1962. I know this low rate indicates deflation, but to me if it translates into lower mortgage rates it may spur the housing market.

Thursday, November 27, 2008

And the Fair Land
The Wall Street Journal has run this editorial every year since 1961 and I read it every year. This year I think it is more appropriate than ever, despite being written forty-seven years ago. Here are a few passages that struck me:
This is indeed a big country, a rich country, in a way no array of figures can measure and so in a way past belief of those who have not seen it. Even those who journey through its Northeastern complex, into the Southern lands, across the central plains and to its Western slopes can only glimpse a measure of the bounty of America.

And a traveler cannot but be struck on his journey by the thought that this country, one day, can be even greater. America, though many know it not, is one of the great underdeveloped countries of the world; what it reaches for exceeds by far what it has grasped.

And it concludes with this:

But we can all remind ourselves that the richness of this country was not born in the resources of the earth, though they be plentiful, but in the men that took its measure. For that reminder is everywhere -- in the cities, towns, farms, roads, factories, homes, hospitals, schools that spread everywhere over that wilderness.

We can remind ourselves that for all our social discord we yet remain the longest enduring society of free men governing themselves without benefit of kings or dictators. Being so, we are the marvel and the mystery of the world, for that enduring liberty is no less a blessing than the abundance of the earth.

And we might remind ourselves also, that if those men setting out from Delftshaven (Pilgrims) had been daunted by the troubles they saw around them, then we could not this autumn be thankful for a fair land.

Happy Thanksgiving.

Tuesday, November 25, 2008

Before You Invest or Approve That Natural Gas Deal...
Here is a post from the naked capitalism blog that has an extensive quote from Platts. In summary, it says that a warm winter could lead to natural gas prices near $4 / MMbtu. Oil and gas deals had trouble paying sizeable distributions over the past year with energy prices soaring. This is due in part to their structure - too many fees - and the cost and expenses of drilling that increase along with energy prices. Now that oil and gas prices have fallen and expenses have likely remained constant, oil and gas deals may have difficulty making distributions.
Mortgage Rates Drop
After the Treasury's announcement this morning, mortgage rates dropped more than 75 basis points, and at one point were down more than a full percentage point. The thirty-year mortgage is now near 5.50% after starting the day at 6.38%. If this rate can be sustained and drop even further, it will should help the housing market.
Three-Day Gain
I just heard that today's gain in the Dow marks the first time since late August that the Dow has put together three consecutive gains in a row. That is pretty amazing.

I am tired of hearing that we are headed for bad recession. We are not headed for a recession, we are in a recession. My guess is that it started sometime in the late spring. The debilitating impact of high energy and commodity prices, when added to the housing mess, started the recession. The financial crisis added fuel to an already growing fire.

If Treasury's move today boosts housing it will have been a success. The recession and financial mess started in housing and needs to end there.

Friday, November 21, 2008

Interesting Tidbits from the 10Qs
I finished the going through the 10Qs for some select non-traded REITs. CNL Income Properties, as a subsequent event (to September 30, 2008), entered into a $100 million line of credit and withdrew all of it for future acquisitions and working capital. This puts its cash position at nearly $300 million. One of its tenants, EAGLE Golf is having financial problems.

Wells REIT II has a $351 million line of credit due May 9, 2009. It has $45 million in cash and has been raising equity at a rate of approximately $60 million per month. I would not be surprised if a big chunk of the $351 million is converted to permanent debt. With the line of credit and term loan, Wells REIT II's leverage ratio is 26%, lower than the other REITs I reviewed. Wells REIT II did not provide FFO data this quarter.

Dividend Capital Total Realty Trust is sitting on $541 million in cash with only $11 million in short term debt.
Harry Dent
Harry Dent is on CNBC talking about The Great Depression ahead. Here is a search on Amazon for Dent's books. Looks like he's a better marketer than economist.

I remember sitting through his presentations in the 1990s, when he was a paid speaker by AIM Mutual Funds, and he was predicting a 30,000 Dow. Oops.

It is comforting that he thinks we are heading to a Great Depression, because we know he will be wrong.

Thursday, November 20, 2008

Did the market reach capitulation today, or is it the beginning of the end. The statistics are ugly and the pit in my stomach is awful. I heard a commentator on CNBC say that today is the bottom as the mood is the polar opposite of when the market was at the top. Let's hope he is correct.

Wednesday, November 19, 2008

Fine Line Between Chutzpah and Stupidity
Executives for the three automakers (Ford, GM and Chrysler) went to Washington with hat in one hand and cup held out in the other looking for a Wall Street-style bailout. Unfortunately, the PR-challenged executives from the cash-strapped automakers all flew into Washington (hat tip Talking Points Memo) on separate corporate jets. It was a case of poor little rich boys and poor judgement.

In another example of of the denseness of the auto executives, any deal with Washington is going to require the replacement of all the executives that paraded in front of congress today. Unfortunately, I don't think these numb-nuts see this irony.
Citi's Gone, Time To Move On
It's been a slow death, but let's face it, Citigroup is done. The sell pressure on its stock is too great. The culmination of its death spiral needs to happen fast because it's dragging down the entire market. The market has been anticipating Citi's death for weeks so there is no need for a Captain Renault moment when it actually happens.
Commercial Mortgage News
Here is a Wall Street Journal MarketBeat blog post on the perceived problems in commercial mortgage backed securities. Note the chart and the low current default rates and the high protection spread. The market is sure expecting the default rates to increase.
Automaker Ambivalence
I am not sure how I feel about a bailout of the automakers. As companies, I don't really care whether the firms succeed or fail. I am more worried about the impact of a bankruptcy on the greater economy, and wonder if an implosion of the auto industry could tip the economy from recession to depression. The auto industry is more than Ford, GM and Chrysler, and the ancillary impact across the Midwest and the entire country is what troubles me.

Eventually, the government is going to get stuck with the auto industry's legacy pension and health care issues. It is just a question of time.

Tuesday, November 18, 2008

Third Quarter Non-Traded REIT Filings
Many non-traded REITs filed their third quarter 10-Qs over the weekend. I have not finished reading them yet, but have not seen any surprises. New equity is down and redemptions are up, but this is not surprising. I will post anything I think is wild, although recent market gyrations and the revelations coming out of DBSI have numbed my sense of shock.

Monday, November 17, 2008

More On DBSI
I missed this in my first read of today's Wall Street Journal article (linked in previous post):
DBSI also had investments in raw land and development projects and raised $275 million from thousands of small investors through private bond placements. It owns several small technology companies.
I knew about the raw land investments. I knew DBSI had offered private debentures before, too. I did not know it still had $275 million in debentures outstanding. What did DBSI do with all the money. In previous articles it was alleged that DBSI relied on syndication fees to support its master leases, not debenture proceeds, and when the credit crisis caused new deal flow to slow there was no longer syndication fees to supplement master lease payments. This is what supposedly caused the bankruptcy.

None of this makes much sense. Syndication fees, while they may be high on a particular offering, cannot support a portfolio of poor performing properties. Blaming the bankruptcy on DBSI's inability to sell new deals is a red herring. This morning, the $275 million in debentures is the big story. Is this number accurate and how did DBSI allocate this money? Even if it used the debenture proceeds for mezzanine financing, the bulk of this should have been repaid, at some point, by investor equity or permanent financing.

Many TIC investors should be OK. They should (and at this point who knows) own the properties. Each TIC investor group will have to deal the properites, and it will be messy, but there is an asset supporting the process. TIC investors need to keep cool and look to the long term. Rash decisions on particular properties could make this situation worse.

Sunday, November 16, 2008

DBSI In The WSJ...Again
I tried to take a news moratorium this weekend. But checking tomorrow's headlines quickly brought me back to reality . Here is a detailed article in the Wall Street Journal on DBSI and the tenant in common industry. I don't think it sheds anything new on the situation. Here is one take away to look forward to:
Before anything can be settled, DBSI's investors are left to deal with one of the hairiest legal unravelings in real-estate history. "This will be an order of magnitude that has not been seen in terms of the complexity," says Bradley Williams of Best & Flanagan LLP, a Minneapolis law firm that represents a lender who holds mortgages on some DBSI managed properties. Each TIC investment, which owns a single building, contains as many as 35 investors who must make all major decisions unanimously.

Friday, November 14, 2008

A Big Deal
Hartford is converting to a savings and loan to qualify for federal assistance under TARP. This is a big deal, maybe even a huge deal if the market continues to have days like today. Here is the take-away paragraph from the news story:
The (insurance) industry has been suffering in recent months with billions of dollars of investments losses and concerns about whether the firms have sufficient capital amid emerging problems in their commercial real estate and annuities portfolios.
Variable annuities with their death benefits and riders that guaranteed specific returns are causing concern for insurance companies. No one is hoping for a market rebound more than insurance executives.
DCT Industrial Trust
After my last post on ProLogis, I pulled up information on DCT Industrial Trust (DCT), the formerly non-traded, public REIT, which is now listed. Today, it is trading at below $4.00 per share. I guess it caught the ProLogis flu. Investors paid $10 per share earlier in the decade and it went public at over $10 per share. Based on assets, it is about 80% smaller than ProLogis.

I quickly read through its 10-Q, filed last week. Its ratio of debt to total assets is 42%. DCT's board of directors announced last week it was cutting the dividend by 50% to $.08 per quarter, or $.32 per year. The board's projections for FFO in 2009 is $.50 to $.58, and the difference will help improve its balance sheet. The yield, after the rate cut, is now approximately 8%. Another development to watch is DHL's exit from the United States delivery market. DHL is DCT's largest tenant, although it leases less than 5% of DCT's space (exact figures were not provided in the 10-Q other than to say that no tenant leased more than 5%). DHL announced this week its plans to close its US operations.

It is a strange coincidence that DCT and ProLogis announced 50% dividend cuts within a week of each other.
ProLogis, REITs and the Denominator Effect
ProLogis (PLD), the company started by some of Dividend Capital's principals, is having a tough week and has lost nearly 90% of its value this year. Its CEO resigned and it announced a dividend cut of more than 50%. There are plenty of articles on PLD and I am not going to link to them, just type in its symbol in or the other big financial news sights and you'll receive options for multiple articles. At June 30, 2008, PLD's ratio of long-term debt to total assets was 53%. This ratio does not strike me as out of line for a publicly traded REIT.

ProLogis', and other REITs, have likely seen their assets drop while their debt has stayed fixed. The Wall Street Journal had an article the Denominator Effect earlier this week, in respect to pension funds. The point of the article was that pensions have seen their real estate exposure increase because of the drop in stock prices. This does not account for, as the article states, any change in real estate values. REITs are going to experience the same Denominator Effect for their balance sheets, and what were considered moderately leveraged companies are going to have larger debt ratios than they have had historically.

Wednesday, November 12, 2008

DBSI In Today's Wall Street Journal
DBSI's bankruptcy made today's Plots & Ploys section of the Wall Street Journal. Here is a link to the article. A couple of bullets stood out:
Complicating DBSI's unwinding, the company is unique among TIC sponsors for structuring deals with master-lease agreements in which DBSI guaranteed rental proceeds to the investors. DBSI also used its corporate balance sheet to guarantee each property's underlying mortgage. Lenders can prevent the TIC investors from canceling the master-lease agreements, according to people involved in the case.
I don't see how DBSI can guarantee mortgages and these TIC deals still qualify as a real estate exchange and not a partnership.

And here are the last two paragraphs:
Only 18 of the 237 properties aren't meeting debt service, but overall DBSI wasn't generating enough revenue to pay investors. DBSI ran into problems when fees from originating new deals evaporated as property markets slumped. Then underlying properties saw rental income drop as the economy tanked.

DBSI attorney Stephen Burr, of Foley & Lardner LLP said: "We expect that the bankruptcy proceeding will allow us the time for an orderly transition of the properties to the investors or to new TIC sponsors."
These two paragraphs are huge. Only 18 under water properties triggered the bankruptcy? DBSI is obviously worried about something else. The quote from the attorney is troubling. How can the bankruptcy proceedings allow for an orderly transition of the properties to investors? These were TIC deals, the investors already own the properties. If investors somehow don't own the properties this debacle is going to go from bad to horrendous. Finally, last part of the quote from the attorney indicates DBSI is shopping deals to TIC sponsors. This would have been much easier before a bankruptcy filing.
Monday Was an Awful Day
The bankruptcy of DBSI stole the headlines on Monday, but it was not the only bad news of the day. It was an ominous day for commercial real estate. I don't have time to go through all the news, but the following headlines stood out:
  • Circuit City's Bankruptcy. It was already slated to close 20% of its stores and the bankruptcy will lead to more closures and possibly shutting down the entire chain. More big box space will be available.
  • Las Vegas Sands Demise. More news today, but Monday was a key day. Las Vegas Sands is stopping construction on its residential tower. It is looking for capital to complete its foreign developments.
  • Donald Trump's Windy City Problems: The Donald's development in Chicago is in trouble so he is suing his lenders. (As an aside, the building is butt-ugly. Trump's taste is what should be sued.)
  • General Growth Properties Threatening Bankruptcy. This is not surprising, but more fuel for Monday's bloodbath. It harbingers more problems for retail real estate.
There was probably more bad news, but above struck me as relevant.
Friday is the fourth anniversary of my father's abrupt passing from a heart attack. Several years before he died, he and my mom traveled on the QE2. They had a great time on their trip for a variety of historical and sentimental reasons. I was sad to read this article on the QE2's last voyage. It is traveling to Dubai where it will be partially scrapped and converted into a land locked "hotel, retail and entertainment destination." An inglorious end to an illustrious career. It is ironic that the news of its scrapping broke so close to the date of my father's death. I am sure he and my mom would have been saddened the QE2's fate.
TARP Scraped
Treasury Secretary Paulson announced this morning that the Treasury is scrapping plans to acquire troubled assets from banks, and will use the portion of the $700 billion bailout allocated to troubled assets to instead continue to invest directly into banks. This will improve banks' capital structures. The government is also giving explicit instructions to banks to start lending to businesses and consumers. My immediate opinion of this change in plan tells me that the Treasury determined that the troubled assets have little or no value, and the government's acquisition of these assets would be a financial disaster for taxpayers. Since the assets apparently have no value, the banks need write the assets off and start selling them for whatever they can garner on the open market. This will help clean the banks' balance sheets and inject additional cash into the banking sector.

Monday, November 10, 2008

DBSI has a blog were it will post information:

Here is a section of today's DBSI blog post announcing the bankruptcy:
DBSI's businesses have been significantly impacted by the recent turmoil in the real estate financial and credit markets, the general deterioration of the economy and the historic declines in the stock market. These problems were exacerbated recently by the actions of the various parties and, in the last week, the commencement of legal actions that DBSI submits are without merit and only serve to impede DBSI’s efforts to effectively address its financial difficulties.
This paragraph reminds me of John Belushi's famous line of excuses to Carrie Fisher in The Blues Brothers on why he could not marry her. What does the stock market have to do with real estate? (And why does only six weeks of stock market turmoil trigger more than 140 bankruptcy filings?) What were the "actions of the various parties" and who are the various parties? What is the real estate financial market? DBSI is blaming everybody and everything for its problems. I would expect better writing and more clarity from a middle school student.
It's Official, DBSI Files for Bankruptcy
DBSI Inc, and more than 140 of its entities filed for Chapter 11 bankruptcy in Delaware, earlier today. Here is a link, via CNBC, to a Reuters article announcing the filing. I guess this filing throws the good properties in with the bad properties. I would not doubt that properties that are cash flowing, but subject to the DBSI master lease, will now see their distributions stopped. DBSI, at first glance, appears to be looking out for itself first, and not its investors. I wonder what this does to many of its mortgages? I would not be shocked if even good properties are in technical default now that DBSI filed bankruptcy. There have also been several lawsuits filed that will likely seek class status. Investors' rush to file lawsuits and DBSI's rush to file Chapter 11 has made this a nightmare. At the bottom of the Reuter's article is the meme blaming the bankruptcy on the housing market. This is BS. DBSI's problems started long before the housing market collapse.

Friday, November 07, 2008

Chapter 11
I heard that DBSI and many of its entities are going to file for Chapter 11 bankruptcy. This, I guess, is an attempt to break its obligations under all its master leases. This is the obvious step and therefore, I do not find it much of a shock. Without looking at any DBSI property, I am guessing that problems arose long before the current credit crisis, although the credit crisis will be blamed.
Microsoft and Yahoo
Why does Jerry Yang still have his job? A CEO's job requires corporate stewardship and maximizing shareholder wealth. I don't remember the exact price Microsoft was willing to pay for Yahoo last year, but I think it was in the mid-30s per share. Microsoft is no longer interested and today Yahoo is around $12. Yahoo's board of directors needs to act fast and decisively.
Unemployment and Captain Renault
I posted last week about the market's overreaction to seemingly obvious events. This morning's release of unemployment numbers came in worse than expected (6.5% unemployment actual v. 6.3% expected) and the market is up. I am glad the market is bucking the Captain Renault trend.

Wednesday, November 05, 2008

Election Postmortem
The following are a few thoughts on the election:
  • No one can say this was not an interesting election.
  • The election cycle is too long. It feels like Hillary Clinton started her presidential campaign right after Bush was elected. My guess is that Sarah Palin will start her 2012 presidential bid faster than Clinton did. This is good for talk radio and cable news but bad for the country.
  • The Democratic Congress needs to cool its jets. In my opinion, last night's results did not reflect a huge, national shift left. We are a conservative nation that needed to purge and move beyond the last sixteen years. Yes, I think last night was as much a referendum on divisive government and partisan politics as it was on Obama. Rancor was as much a part of Bill Clinton's presidency as it was George W. Bush's, and Americans are tired of it. From Obama's acceptance speech, it think he understands he needs to govern from the center. And from McCain's concession speech, I felt he too knew it was time, and voter's wanted, to break from politics as usual.
  • Unfortunately, I think Congress may be more divisive as Democratic gains came at the expense of moderate Republicans. Obama will need to bridge this gap.
  • I would not want to be Joe Lieberman.
  • It's the economy, stupid. It's always the economy.
  • Can Sarah Palin please start speaking in complete sentences. And can she stop using "also" repeatedly to connect unrelated fragments.
  • I think Obama will slow his rhetoric on raising taxes. The economy is too weak to withstand any tax increase. He could not do this before the election for political reasons, but I would not be surprised to see the postponement of any tax increase in the near future.

Tuesday, November 04, 2008

Master Lease Mess
Master leases were common structures for tenant in common programs. The structure was the only way certain property types - hotels, retirement homes - worked in a securitized TIC transaction. (I am not going to go into the whys here.) Master leases, like any lease provided investors a stated stream of income over a set period of time. Many of these leases are now in trouble. DBSI, the Idaho-based TIC sponsor that did most of its TIC deals in the master lease structure, is likely going to cancel the leases at it cannot support the lease payments. I heard yesterday that another large TIC sponsor is going to follow suit. One of the problems with master leases was that they were only as good as the credit of the master lessee. The master lessees are going to prove lousy credits.

Investors, in their anger over defaulting master lease payments, need to be careful. Rash decision can have big impacts - i.e. canceling property management agreements that leave no property management, or lead to technical mortgage defaults - that may be worse, much worse, than canceling the master lease and converting to a traditional property management structure.