Never Ceased to be Amazed
I am reading Behringer Harvard Multifamily REIT I's  2009 10-K, which was released today.  In 2009, it had Funds From Operations of -$700K.  That's right, a negative FFO.  Its operating cash flow was a measly $244K, which was at least positive.  These robust cash returns allowed the REIT declare distributions of $22.7 million.   Well, at least this REIT's mortgage debt was only $51 million on $525 million of total assets. Ahh, but not so fast.  You need to read those pesky footnotes.  The actual amount of debt is higher, much higher.  This additional debt, of which $247 million is the REIT's portion, is off-balance sheet financing and attributable to a joint venture and property-level operating entities that the REIT owns or has ownership in.   I will leave my findings at these gems, because I need to eat dinner soon and for some reason have lost my appetite.

In all seriousness, and the above snarky post is serious, I encourage you to download and read this 10-K.  I only read snippets of this massive document to pull out the teasers above, so I am sure a wider, more comprehensive reading will reveal more material passages.

Today's Housing Figures
The reaction to today's release of the monthly S&P / Case-Shiller index of twenty metropolitan markets has been mixed.  I for one think the news is good.  The index, which was up .3%, showed that the housing market was improving without the Government's tax credit for first time homebuyers.  Yes, the credit is still available, but from what I have read, its impact on the most recent numbers is much less than last fall when buyers rushed to take advantage of the tax credit that was initially set to expire at the end of November.  California was a big beneficiary of the increases with some markets up 1% or more.  

Here is a quote from a naysayer in the LA Times:

"If you look at the last two big real estate bubbles in the late 80s and 70s, you didn't see the market rebound for five years," said Christopher Thornberg, principal of Beacon Economics. "It's amazing to me that people can look at a rebounding market after the largest bubble ever and possibly think this could be sustainable."

He is right of course, but the key is when the bubble peaked.  In California, and other areas like Las Vegas and Phoenix, the bubble peaked much earlier than other parts of the country.  The bubble's peak was not marked by by the subprime explosion in mid-2007, but when values stopped increasing, which lead to the prime and subprime borrowers not being able to continue their cycle of endless refinance.  I reckon that California peaked in the summer of 2005, not the summer of 2007, so we are approaching the magical fifth year. 

Don't Look Now...
Piedmont Office Realty Trust (PDM), formerly named Wells Real Estate Investment Trust, crossed $20 per share this morning.  It had its IPO in mid-February, began trading near $15 per share, and has been creeping up ever since.  As part of its listing process, PDM had a three-for-one reverse split, so to figure an investor's breakeven share price, you need to adjust for the split.  The breakeven share price reflecting the split is $25.14 per share.   The current price of $20 is therefore about 20% under its breakeven.  It is worth considering that PDM raised most of its equity capital and acquired the bulk of its portfolio in the late 1990s and early 2000s, and as noted in a post yesterday, Moody's states that commercial real estate prices are now at 2003 levels.

Commercial Real Estate Prices
I have read several articles over the past few weeks stating that Commercial Real Estate (CRE) prices are increasing, so I figure it's now time to start commenting.  Here is a link to a Calculated Risk post (scroll down) about a Moody's report that CRE prices increased 1% in January.  Overall, CRE prices are 40% off their 2007 high, and near 2003 levels.  I have not seen this article yet, but am waiting for the article equating the increase in CRE prices to an increase in available financing.  Commercial Mortgage Backed Securities (CMBS) are staging a slow comeback that will make for more non-distressed transactions.  Real estate always has and always will be a finance game - if affordable debt is available, there will be buyers and sellers.  Low interest rates and an improving economy are also signaling that a bottom has passed in CRE prices. 

In Praise of Cash Flow
Over the past few weeks I have looked through numerous public non-traded REIT 10-Ks and supplemental financial filings.  All present Funds from Operations (FFO) and Modified (or Adjusted) Funds from Operations (MFFO).  FFO used to be a fairly simple calculation:  Net Operating Income plus depreciation and amortization, and less any cash from property sales.  But over the years, this non-GAAP number appears to have become bastardized, and in my opinion, less reliable.  Non-traded REIT sponsors used to shun this number, but with the rise of MFFO, they are embracing the figure as it has the impact of making distribution coverage look better.  MFFO figures now include items from investing - acquisition fees - and from financing - interest hedging gains and losses - which may or may not be actual cash figures, and are not operational figures.

That is why I am spending more time looking at cash flow from operations, which is a GAAP number and that is adjusted for non-cash items like depreciation, and discounting MFFO figures.  I review all three figures to the amount of total distributions (cash and reinvested) the non-traded REITs have paid during the year.  The more the REIT covers from operating cash and FFO the better.  Lack of operational cash flow coverage is a harbinger of potential future distribution cuts.

Condo Link
Here is a link to a Calculated Risk post on vacant condos in South Florida.  One 32-story high rise condo in Fort Meyers has only one owner living in the building.  The lone owner is fighting the condo developer The Related Group to get out of his condo.  Good luck with that.  Condo developments that only sell portion of their units are a mess because the whole complex is then subject to the condo association, which makes conversion to an apartment rental property difficult.

Non-Starter
I did a cursory review of a tenant in common deal yesterday (yes there are still some available).  This deal acquired the property last summer and is still raising equity.  The property's underlying operations have deteriorated over the past year.  The deal's sponsor felt it had a great buy, which may have been true when the property was acquired, but based on current operations I am figuring a cap rate to TIC investors of less than 5%.  Most of the distribution is being paid from reserves.   Why? Why? WHY? 

This deal has legacy economics (low cap rate, negative leverage (cap rate less than mortgage rate) and supplemented distribution) in a non-legacy world.   Paying the taxes makes sense over investing in this deal.

There are other tenant in common deals raising equity that acquired their properties before September 2008.  Talk about legacy deals.

Financial Times Profiles Stuyvesant Town and Peter Cooper Village
Last Saturday the Financial Times profiled the poster child of real estate excess - Blackrock's and Tishman Speyer's 2006 acquisition of Stuyvesant Town and Peter Cooper Village (STPC).  The $5.4 billion transaction was eye-opening even in an era of wild deals.  Earlier this year the 11,200-unit apartment complex, which started construction in 1943, defaulted on its debt and is now with its special servicer.  Prominent real estate investors are looking at the huge property, and the drama is sure to drag on for a long time.  The estimated value for STPC is $1.8 billion.

One party that gets no press in the whole STPC discussion is Met Life Insurance.  Met Life developed and owned STPC since its inception.  Met Life sold it at the top of the market for a huge price.  Met Life sold other real estate in around New York, including its landmark headquarters.  I'm not sure what Met Life did with the proceeds (hopefully it did not load up on subprime mortgage bonds) but its divestiture strategy was prescient.