Tuesday, March 31, 2009

Inland American Stops Subscriptions
Here is the entirety of a letter being sent to shareholders in Inland American:

Dear Stockholder:

There is no need for us to remind you of current economic conditions. The state of this economy requires prudent people to make difficult decisions. As you know, Inland’s primary responsibility is the protection of shareholder value.

Accordingly, we made a determination today that the cash position that we are in is sufficient for the effective execution of our business plan, and that additional capital could have the potential to dilute the overall returns.

Furthermore, we have a large amount of cash in banks. The only F.D.I.C. insured accounts that cover the amount of cash held by our REIT are not allowed to pay interest. Yet, we pay distributions on that amount. Also, given the economy, stock sales for March exceeded our expectations. Accordingly, other than the Distribution Reinvestment Plan, we believe that it is prudent to cease raising capital at this time.

Therefore, ten days after the date of this letter, new investors will not be accepted into Inland American after 5:00 p.m. Central time on Monday, April 6, 2009. All documents and funds must be received in good order by that date and time at our corporate headquarters at 2901 Butterfield Road, Oak Brook, Illinois 60523.

As always, we thank you for your continued investment in Inland American.

This a strange letter. It is a mystery to me why a company with so many legacy assets - i.e. real estate bought before the middle of 2008 - would stop raising money in what sure looks like one of the best buying opportunities in years. If stock sales are exceeding expectations, why not put some of that capital to work by buying real estate and real estate companies. Cap rates today are much higher than when the bulk of Inland American's assets were acquired. Raising the overall cap rate of the portfolio would not be a bad thing for Inland American. I have a feeling that there is more news coming from Inland American.

Monday, March 30, 2009

MGM Doubles Down
MGM made a $200 million debt payment Friday on its high profile $8.6 billion City Center Development located in the heart of the Las Vegas Strip. MGM made the payment because its co-investor in the project, Dubai World, refused to make the payment claiming cost overruns. MGM is taking a huge risk with the payment:

MGM Mirage's decision to cover the entire payment itself raises new questions about how it will meet payments on its $13.5 billion in debt. The decision to make the entire payment was made with approval from MGM Mirage's lenders, the company said.

The casino operator, controlled by billionaire Kirk Kerkorian, narrowly avoided defaulting on bank loans earlier this month. Its auditors warned of "substantial doubt about the company's ability to continue as a going concern" in a regulatory filing earlier this month.

The gambling company's lenders recently agreed to a waiver on MGM Mirage's loan covenants, giving the company until May 15 to resolve its cash flow and debt issues.

MGM had little choice but to make the payment. Without the payment construction on the massive development (the largest in the US, I believe) would have stopped. The impact on Vegas' economy if development on City Center stopped, according to the WSJ article (linked to above) would be "devastating." MGM may have bought some time, but the clock is ticking and time is running short.
Life Insurers Need New Underwriting
Life insurers, with their large bets on variable annuities over the past fifteen years are feeling the pain of the stock market's decline. Further stock market drops could imperil some large insurers. Here is a Wall Street Journal article about Lincoln National pulling a debt offering. Here is a sobering quote:
"If the market takes another steep decline, many of these companies would have little to no excess capital," said Barclays Capital analyst Eric Berg. "If on top of that rating agencies downgrade large numbers of investment-grade bonds, the situation could become grim."
I don't imagine too many insurance companies modeled 33% declines in the S&P in one year, followed by another poor year (so far) when they were designing exotic variable insurance products with fancy riders that paid insurance companies handsomely when markets were increasing, but are providing little relief in the current market. Troubles in the insurance market are a story to watch.

Monday, March 23, 2009

MGM's Oz
MGM's outlook is bleak. Its partner on the $8.6 billion City Center development, a Dubai investor, filed a lawsuit today against MGM and will unlikely make a $100 million debt payment that is due on Friday. The lawsuit and pending debt problems will throw City Center in doubt. City Center is a huge development. It is on 67 acres in the heart of the Las Vegas Strip. It is a mix of casino resorts, condos and retail space. It is huge, and even in its unfinished condition, it dominates the strip. This project needs to be deleveraged and it needs an economic recovery. I would be surprised if MGM ends up finishing the project.
Old Inland Article
Here is an article on Inland from the Wall Street Journal. It is almost a month old, but still relevant. Inland American is throwing its cash around, spending nearly $700 million in the first two months of the year.
Something Happening Here...
Here are two positive articles on housing. The first details the jump in sales in a community near Tracy, California, one of the epicenters of overbuilding and price inflation. Homes are moving at attractive prices, which may lead to a hoped for bottom in home values. The second article is about a jump in February home sales, up 5.1%, the best showing since July 2003.

I suspect the housing recovery is going to start in California, Florida and Arizona, the areas that saw some of the worst in housing excesses. I think Nevada, in particular Las Vegas, will take longer to recover due to the amount of low paying casino jobs and the economic slump impacting Las Vegas' gaming-based economy.

Friday, March 20, 2009

Greenberg and AIG Bonuses
I just saw this article about former AIG head Hank Greenberg's interview on the CBS Morning Show. From the interview:
Former AIG chief executive officer Hank Greenberg said the company under his leadership never had the kind of retention bonus system that has subjected it to withering criticism.

"When I was there, nobody had a contract with the company, including me," Greenberg said in a nationally broadcast interview Friday. "If you didn't do the job, you didn't deserve to be there. We had a bonus plan based on performance."

I said in my previous post that those retention, guaranteed bonuses would not have happened under Greenberg.

Wednesday, March 18, 2009

AIG And Its Bonuses
It is hard to know where to begin with the AIG bonus fiasco. There are so many points and counter points involving the payments: who knew what when, what was promised in the government's rush to "save" AIG last fall, and what is the contractual obligation to pay the bonuses in an essentially failed company (without taxpayer money AIG would no longer exist), to name just a few. I have posted before and will probably post again that I used to work for AIG, and the few things I remember is that the AIG corporate people that dealt with the company I worked for were not that smart, and AIG had a reputation of not paying huge bonuses, at least not at the level being disclosed for AIG's infamous Financial Products division. My recollection is that a large chunk of AIG's bonus structure was in the form of deferred comp and company stock, not large cash payments. Hank Greenberg wanted loyal employees that were going to stick around and benefit when AIG's stock price increased.

I am beginning to think that the AIG Financial Product guys were pulling a fast one over AIG corporate. The guys in this division knew what they were doing was dubious and wanted to get paid cash no matter what happened. This article from New York Times' DealBook blog (thanks Talking Points Memo) has lead me to this conclusion. Here is a long quote from the article:

Hedge fund managers typically only receive 20 percent of the profits and a 2 percent administrative fee. If the funds have losses, the managers receive nothing and they lose substantially because they have a significant amount of money invested directly in the funds itself. The managers are not then paid until they make back these losses.

In A.I.G.’s case, however, employees got 30 percent with very little personal risk (we don’t know how much of their compensation was in stock) and their overhead covered. The arrangement shows the cavalier attitude of A.I.G. management and the power the financial products division had.

Second, back to that risk part and the hedge fund analogy. The agreement confirms that A.I.G. indeed flipped this notion on its head. It also confirms what was publicly disclosed. These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation. The amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. For those hoping that these employees could now be fired, “good cause” is defined in the agreement as a very high standard. This is normal for these agreements.

Here is the clincher:

This was not a boilerplate contract. Rather, it was highly negotiated. And it was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?

It strikes me that the A.I.G. financial products division received an unbelievably sweet deal. Did its managers slip it under the radar? Did the managers act in good faith? And who at A.I.G. signed off on this and did they focus on the risks and rewards? Yet more avenues for possible litigation.

The implications seem clear, but I am not sure what to make of it all. The Democratic call to rein in bonuses is an awful idea. Like it or not, fair compensation is a great motivator and is good for the economy. The Republican false outrage and finger pointing at Treasury Secretary Geithner is disingenuous. A Republican administration and Republican appointed Fed stepped in to save AIG. All I know is that these contracts had to have been renegotiated after Hank Greenberg left AIG. He never would have allowed this type of one-sided compensation, especially when the division and people involved had the ability to sink AIG.

The AIG Financial Products guys should get their $165 million bonus. It should be in stock, with the number of shares based on $45 per share price (about what the price was a year ago) and an exercise price of $55 per share. Now that is a retention bonus.

Tuesday, March 17, 2009

Natural Gas Article
Here is an interesting article from Bloomberg on natural gas. To summarize, the drop in natural gas prices ($3.83 / MMBtu this morning) has caused many drillers to shut wells and halt drilling projects. This slowdown in drilling and exploration will lead to gas prices doubling by the end of the year. Ok. I hope the article is right, at least for all the marginal (or worse) oil and gas drilling programs that accepted money from investors and need high gas prices to make any economic sense. Unfortunately, these programs are still saddled with high lease acquisition and drilling costs.

Monday, March 09, 2009

$300 per Square Foot in Manhattan
The New York Times has agreed to sell its headquarters to REIT sponsor WP Carey. I just read this article and it looks like WP Carey is paying $225 million for twenty-one floors and 750,000 square feet. This is $300 a square foot. The interesting part of this transaction is that it's only twenty-one floors in a fifty-two story building. Another entity, Forest City Ratner, owns the balance. The article did not say what WP Carey fund, if any, is involved with the transaction. I am guessing that the purchase is discounted because it's not the whole building, because $300 seems like a cheap price. I saw this building in the summer of 2007, and it is impressive, with stand-out architecture.

Thursday, March 05, 2009

Tipping Point
I like podcasts. I get to listen to what I want when I want, either on my computer or my iPod. Most, but not all, of the podcasts I listen to are outtakes or actual shows that are broadcast on traditional media. A new podcast - The Adam Carolla Podcast - has become the most popular podcast in the country, with nearly two million subscribers in less than two weeks. This is a podcast only, not a rebroadcast of an exisitng show. To me, this is huge and is going to change the broadcast industry.

Adam Carolla was recently fired from 97.1 KLSX in Los Angeles, as the station changed the entire format of the station. Adam's last radio show was Friday, February 2oth, and his first podcast was Monday, February 23. By Wednesday his podcast was on iTunes and became the number one podcast. Carolla's podcast is hilarious but not safe for work (NSFW).

Carolla is going to do the podcast through the end of the year without ads due to his contract with CBS. He will be able to sell advertising, and I would listen to the ads.

Wednesday, March 04, 2009

I posted earlier in the week about Wells REIT II's suspension of its share redemption program. Wells REIT II also announced this week that is maintaining its 6% annualized dividend. So, the dividend is being maintained despite the suspension of redemptions. Look for most of the non-traded REITs to suspend or restrict their share redemption programs in the near future.

Tuesday, March 03, 2009

Bernanke on AIG
Here is a summary of Fed Chairman Bernanke's testimony before the Senate Budget Committee this morning. Here is a passage on AIG:

“Mr. Chairman,” Senator Ron Wyden, Democrat of Oregon, asked at the outset, “at what point will the taxpayer no longer be on the hook for the massive A.I.G. failure? What is the end game for American taxpayers?”

Mr. Bernanke replied that nothing had made him more angry during the months of the sprawling financial crisis than the episode involving the insurance giant that has reported astronomical losses and has been given financial lifelines worth billions of dollars.

“A.I.G. exploited a huge gap in the regulatory system,” Mr. Bernanke said. “There was no oversight of the financial products division. This was a hedge fund, basically, that was attached to a large and stable insurance company.” And this quasi-hedge fund, Mr. Bernanke went on, to nobody’s surprise, made irresponsible bets and took huge losses.

“We had no choice but to try to stabilize the system because of the implications that the failure would have had for the broad economic system,” he said.
I think the whole country is angry with AIG.
Car Sales and the Housing Bust
Automakers are posting horrible sales, again. I do not read the sales figures that closely, but most of the decline in sales is blamed on the economy and fears of job loss. One item I have not seen blamed for the auto bust is the housing bust. I suspect that many of the auto purchases of the mid-2000s were made with home equity loans. These loans were at lower rates and longer periods - therefore lower monthly payments - than traditional car loans, plus they were tax deductible. These loans are gone and car sales are feeling the affect.
From Farce to Insanity
The AIG story would be funny if AIG was not at the center of the financial crisis and if taxpayers were not fitting the bill for its recklessness. The story is getting worse. Yesterday, AIG posted a $61 billion fourth quarter loss, the largest in US history. Now Hank Greenberg, who ran AIG for nearly forty years with an iron first until his forced resignation in 2005, is suing AIG for fraud. Mr. Greenberg is out of touch and his brazenness verges on stupidity. He should lay low and start giving his billions to family members and charity. Felix Salmon has already suggested a clawback of Greenberg's billions, and the more the taxpayers have to pay for AIG's careless disregard for its actions, the more the clawback idea will gain traction.

Monday, March 02, 2009

SEC Charges TIC Sponsor Sunwest
Retirement home TIC sponsor Sunwest Management has been charged with fraud by the SEC. I don't know anything about Sunwest or its TIC deals, but its another black-eye for the TIC industry.
Redemption Suspension
I just read Wells REIT II's 8-K and supplement to its prospectus. The REIT is suspending its Ordinary Redemption program, as of the end of February, until at least the fourth quarter of 2009. The supplement and 8-K leave the door open for an extended suspension. When I was reading the third quarter 2008 10-Qs from Wells and other public, non-traded REITs, I noticed the jump in redemptions over the nine-month period ending September 2008 compared to the same period in 2007. I am guessing as the financial crisis worsened in late 2008 and into 2009, the redemption amount has increased from a high level to an untenable level.

Hines REIT has limited its redemptions to 1/12 of 10% per year, which is not a redemption reduction, but a method to control the redemption rate. This tells me that its redemption requests are running at a high level.

Other non-traded REITs will halt or restrict their share redemption programs in the coming weeks and months. These programs are not designed to handle large scale redemptions, and in the current real estate environment cash is paramount. Temporary redemption suspensions may not be the best marketing move, but they should be a good business move in the long run

Sunday, March 01, 2009

Here is an article on AIG by the New York Times' Joe Nocera. The article clearly explains AIG's credit default business, why the US government can't let AIG fail, and AIG's greed and stupidity.

Here is a standout point:

Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.

That foolhardy belief, in turn, led A.I.G. to commit several other stupid mistakes. When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.
And here is one reason why the money market system almost collasped last fall:
There’s more, believe it or not. A.I.G. sold something called 2a-7 puts, which allowed money market funds to invest in risky bonds even though they are supposed to be holding only the safest commercial paper. How could they do this? A.I.G. agreed to buy back the bonds if they went bad. (Incredibly, the Securities and Exchange Commission went along with this.) A.I.G. had a securities lending program, in which it would lend securities to investors, like short-sellers, in return for cash collateral. What did it do with the money it received? Incredibly, it bought mortgage-backed securities. When the firms wanted their collateral back, it had sunk in value, thanks to A.I.G.’s foolish investment strategy. The practice has cost A.I.G. — oops, I mean American taxpayers — billions.
Here is why the government can't allow AIG to fail:
Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.
I worked for a company that was bought by AIG and have noted before my dealings with the "insurance" people from AIG's headquarters. These people did not impress me with their intelligence. AIG's implosion did not surprise me, but the extent of its stupidity and how other Wall Street firms exploited its stupidity is amazing.