Wednesday, July 28, 2010

Bailout Worked
Here is a summary of a new study by economists Alan Blinder and Mark Zandi that gives evidence that the Troubled Asset Relief Program (TARP), and to a lesser extent the stimulus package, worked in keeping the economy out of a depression.  I thought TARP made sense at the time and felt if prevented a complete financial meltdown: 

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.
In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.
Even with the "bailout" the depth of the financial crisis is shocking:

Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.
By comparison, the savings and loan crisis cost about $350 billion in today’s dollars: $275 billion in direct cost and an additional $75 billion from the recession of 1990-91 — or about 6 percent of G.D.P. at the time.
Politicians from both parties need to push back against those that say TARP was a disaster, and those that voted for TARP should be proud.   This article from the New York Times details the backlash against politicians who voted for TARP, including Utah's conservative Bob Bennett who has already been voted out by members of his own party.

Monday, July 26, 2010

Taxes, Deficit Hawks and What's Wrong With The Media
Here are is an interesting blog post from the Financial Times' Martin Wolf that debunks supply side economics.  It is worth reading, especially in light of the pending expiration of the Bush tax cuts.  Here is an excerpt:

True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

No one likes paying taxes and I want the tax cuts that are set to expire to be extended.  Politicians need to get serious about spending cuts, but this is an issue neither side of the aisle wants to deal with.  The areas that need cutting are too popular with voters.   Wolf argues that this is what's so seductive about supply side economics, "Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue."   It's too bad the theory has not worked.  It is my opinion that the economy is too weak to absorb any tax increases, so I'd be surprised if the Bush tax cuts are not extended. 

Rick Santelli, a CNBC on-air editor, was on NBC's Meet the Press yesterday.  He is a huge deficit hawk and stated that he was still against TARP and the stimulus package, and pretty much any government economic assistance that adds to the deficit.  Rick has valid point and his opinions are well known to anyone who watches CNBC.  (I feel that TARP was hugely beneficial in preventing a larger financial meltdown, and that the ultimate cost will be small as most TARP recipients have repaid their loan.)  I like Santelli, he is smart and has excellent analysis, especially on credit markets and interest rates.  I wanted to know his opinion on the expiring tax credits, but Meet the Press host David Gregory chose not to ask Santalli the question, opting instead to ask it to some former Obama administration communication person.  Gregory was obviously turning an economic discussion in a potential political gotcha moment.  The former Obama official gave some convoluted, non-response response, about what you'd expect. 

Gregory failed in not questioning Santelli on the tax cut extensions, especially after asking Santelli his opinion on government spending.  Gregory was practicing political theater, not journalism.  Santelli's opinion on extending the Bush tax cuts is important.  If he is as serious a deficit hawk as he comes across, his answer should be clear - let the tax cuts expire to allow for deficit reduction.  I would have been shocked if Santelli had not given a supply-side answer about the need to extend the tax cuts to allow more money into the economy, and therefore more tax revenue. 

Wednesday, July 21, 2010

CMBS Returns
Here is an article on the CMBS market from today's Wall Street Journal (not sure where it's behind a paywall).  JP Morgan is leading a $650 million CMBS backed by Vornado Realty Trust, and Goldman and Citigroup are sponsoring a $750 million CMBS backed by Flagship Partners.  The proceeds of both deals will mostly be used to refinance existing debt.

The return of CMBS is encouraging for commercial real estate, but not all are able to get access to CMBS debt.  The market is bifurcated, and I have heard this from several sources, where property owners in major markets with equity and resources have access to capital, including CMBS, while others are not so fortunate.  Here is a quote from the article:
Few expect a rush of new CMBS deals in the near term as the real-estate industry braces for more than $1 trillion of maturing debt over the next five years. While the handful of fresh issues have begun to revive one of the most important funding sources for commercial real estate in the past decade, it will likely provide little solace to owners of hundreds of billions of dollars of office buildings, strip malls and other commercial property now worth less than their mortgages.
This also plays into stabilizing valuations for quality properties, in major markets.  I'll have more on this in a later post, but drop in value for quality properties has been less than the overall market.  So far in 2010, as the article notes, there has been $2.1 billion of CMBS issuance, which is a small amount compared to the more than $200 billion issued in each of 2006 and 2007.

Tuesday, July 20, 2010

Housing Numbers
The housing numbers released this morning had some conflicting information.  The big news is that housing starts in June fell to their lowest level since October 2009.  A large portion of the drop was attributed to the 22% decline in multifamily building.  Conversely, building permits for multifamily apartments and condos increased 20%.  Interesting.

Tuesday, July 13, 2010

Miami Condos
Here is an encouraging read from Bloomberg.  The article discusses how Miami's failed condos are having a revival as rentals.  Here are a few informative quotes:

The 7,000 unsold condos in Miami’s core -- a symbol of a building boom that collapsed and dragged the city into recession -- are filling up and giving life to neighborhoods that previously closed after dark. New, year-round residents are cramming into restaurants, nightclubs and bars that didn’t exist a few years ago, and enjoying a lifestyle made possible in part by developers and banks seeking to recoup losses by renting luxury dwellings until the market recovers.

The unsold condos represent almost a third of the 22,079 units in 75 buildings, mostly opened after 2004, tracked in a study released in March by the Miami Downtown Development Authority. The report focused on central neighborhoods including Downtown, Brickell and Wynnwood/Edgewater.  Occupancy rates in the new buildings, including owner- occupants and tenants, increased to 74 percent in February from 62 percent in May 2009, the study shows. 

Effective rents, the amounts actually received by landlords, rose 4 percent in the first five months of the year after falling 2.9 percent during the same period in 2009, according to Axiometrics, whose data tracks professionally managed rental building. Nationally, rents increased 2.75 percent from January to May.  The occupancy rate for Miami climbed to 95.1 percent in May from 93.8 percent a year earlier, Johnsey said.
The overall tone of the article was positive, and one of the few uplifting real estate stories I have read in a while, especially one about Florida.  The article does not touch on issues related to condo associations, whether condo owners are making any money on their rentals, or how the market will react when owners try to sell individual units in a building with mostly renters.

Monday, July 12, 2010

Is This News?
I heard this news about WP Carey replacing its CEO last week.  Here is an excerpt from WP Carey's press release discussing the interim replacement:

Investment firm W. P. Carey & Co. LLC (NYSE: WPC) announced today that board member Trevor P. Bond has been appointed interim Chief Executive Officer effective July 6, 2010. He will remain as a board member but will resign as a member of the Compensation and Audit Committees of the Board.

Mr. Bond has served as an independent director of the company since April 2007 and served as director of several of the company's CPA® REIT programs from 2005 to 2007. He has over 25 years of management experience in several sectors, including finance, development, investment and asset management across a range of property types, as well as direct experience in Asia. Mr. Bond has been the managing member of Maidstone Investment Co., LLC since 2002, a private investment vehicle investing in real estate limited partnerships. Previously he served in several management capacities for Credit Suisse First Boston from 1992 to 2002, where he was co-founder of CSFB's Real Estate Equity Group, which managed approximately $3 billion of real estate assets. Prior to CSFB, he served as an associate to the real estate and finance departments of Tishman Realty & Construction Co. and Goldman, Sachs & Co. in New York. Mr. Bond received an M.B.A. from Harvard University.

Mr. Bond will serve as interim CEO until a permanent successor is named. Mr. Bond's appointment follows the resignation of Gordon F. DuGan, also effective July 6, 2010. Mr. DuGan said that his resignation is based on a disagreement with respect to the degree of authority and control of the Chairman and a disagreement with the Chairman on the strategic direction of the company.

Wm. Polk Carey, Chairman of W. P. Carey & Co., said, "Trevor brings to this role extensive management experience and a strong commitment to our investors and tenants. I thank him for stepping into this interim position. I wish all the best to Gordon DuGan, who has served W. P. Carey with skill and intelligence for many years. Though Gordon and I have not been strategically aligned in the recent years, I remain an admirer of his abundant investment management and general business talent."

I am sure there is more to this story, but it appears that if your name is on the company, you get to make the decisions.
WSJ on Dividend Capital's Total Realty TrustLast Wednesday's Wall Street Journal (July 7, 2010) had an article on Dividend Capital's Total Realty Trust's $1.3 million acquisition of thirty-two office and industrial properties from iStar Financial.  The article's headline, "Sign of Recovery? Or Not? Successful Sale Had Help," gave the impression that there was something wrong with the deal.  The author's idea of trouble with the transaction was that it included Class A properties with some lesser industrial properties and required substantial equity.  If you acquire thirty-two properties, not all can be trophy properties.  The lesser properties are industrial properties leased to the likes of Google and Fed Ex.  The leverage was 64%, with the REIT throwing in $443 million (the math does not match perfectly for some reason).  The author says that during the boom this deal would have qualified for 90% financing.  That amount of leverage is unavailable in today's market so the point of reference is a red herring.  The portfolio is 99% occupied, has an average lease term of over seven years and was acquired on an 8.1% cap rate.  These figures appear positive for the REIT.

Here are a couple of points the article did not address that I think are worth mentioning.  Total Realty Trust had $489 million of cash at March 31, 2010.  The $443 million of equity utilized most of this cash.  The acquisition had $105.6 million of mezzanine financing provided by iStar.  How does Total Realty Trust plan to repay this mezzanine debt?  It's not raising any more equity and will need to either refinance assets or sell assets.  I don't see it being able to refinance legacy assets and receive any extra cash to apply to the mezzanine loan. 

In the first quarter Total Realty Trust paid out $27,609,000 in distributions, but it only had $15,552,000 of operating cash flow and $14,293,000 of Funds From Operations as defined by the REIT.  How will this huge transaction make up this distribution shortfall?  There is limited cash remaining to support distribution shortfalls so the new portfolio is going to have to generate significant cash flow.