Thursday, September 30, 2010

Hard To Believe - AIG to Repay Government
AIG took over $180 billion in tax payer "bailout" funds during the credit crisis.  It has filed to repay this money.  I thought that the government would never get its AIG money back.  While most other Wall Street firms have repaid their TARP money, I figured the AIG money was lost.  If you don't remember, AIG got in trouble because it provided unregulated insurance, in the form of credit default swaps, to other Wall Street firms, protecting these firms against losses against their subprime debt securities and other, similar, securities.  I still hear complaints about "bank bailouts," but with AIG, the largest recipient of tax payer money, attempting to repay its government money it is hard to argue against the success of TARP.

UPDATE:  Ooops.  I had a typo in the original post.  The correct amount to bailout AIG was $180 billion, not $180 million.

Thursday, September 23, 2010

Inland American Valuation Is $8.03 Per Share
I am traveling and completing research reports, so I will post more on this valuation over the weekend.  Inland American announced this afternoon that an original $10.00 per share investment in the REIT is now worth $8.03.  That is an amazing valuation.  If you figure that 15% of the REIT's initial value was lost to offering costs, the REIT only lost about 5% of its value in the worst commercial real estate market in years.  Who would have thought that the Inland American's focus on hotels and retail properties - two of the worst performing commercial real estate sectors during the slump - in 2006 through 2008 would have proved so prescient.  Somehow Inland American eluded the decline in a commercial real estate market that has lost over 40% of its value from its peak.

Thursday, September 16, 2010

Los Angles Times Article on Housing
I meant to link to this article last month, but didn't for some reason.  Here it is now.   The article discusses how private equity and wealthy investors are buying foreclosed homes and then trying to quickly sell them.  The professional investors are moving in as small investors are getting pushed out.  Many purchases are at court house steps.  This sounds like an easy way to make a quick profit, but it's not that easy.  First you need cash to close the deal.  What would trouble me is buying homes on the court house steps.  These transactions are pretty much "as is," and sight unseen.  You don't know the condition of the home, so it is just a gamble. Here is an example from the article:
Competition at the auctions is brutal, said Bruce Norris of Norris Group, a real estate investment firm in Riverside.

Norris unwittingly bought a house that was the site of a gruesome double murder. No one else bid -- a rare occurrence that showed others knew the history -- leaving Norris with less cash to bid for other houses.

"It's a very lonely place out there," Norris said.

That's only one of many risks in the foreclosure business. People who've lost their homes through foreclosure sometimes vent their anger by smashing walls, knocking over water heaters or ripping out toilets.

"We've literally had people take $20,000 of cabinetry out and feel perfectly justified doing it," Norris said.

Monday, September 13, 2010

What's The Over / Under?
Inland announced today that is releasing the estimate per share value of its non-traded REIT Inland American on September 24.  There is an accompanying conference call late on Friday.   (Is there a coincidence that the 24th is a Friday, the usual day for releasing bad news?)   Inland American's portfolio is full of limited service hotels and retail properties, among other types of real estate.  Inland American raised over $7 billion and bought much of its portfolio in 2006 through 2008.  Does anyone want to start the guessing at a per share valuation?

Here is a quick back of the envelop guess.  Inland American's FFO per share for the first six months was $.2487 per share, and is $.497 on a straight annualization.  Using simple FFO multiples of 9 to 12 gives a per share value of $4.48 to $5.97.  I figure Inland will adjust the number in the REITs favor.  (I am not sure whether a third party is providing the valuation.)  I would set the over / under at $6.25 per share.

Thursday, September 09, 2010

Positive Hotel News
Here is a Bloomberg article on an improving hotel market.  Rents and occupancies are up, and sales are following this trend.  I have been thinking that hotel metrics should be improving making the hotel asset class an attractive investment in the rebounding economy.  The travel deals available a year ago are no longer available.  Here is the heart of the article:

A rebound in business and leisure travel is helping the U.S. lodging industry recover after last year’s recession sent occupancies to a 30-year low. Hotels can boost rates quickly to take advantage of economic growth, while tenants at offices and retail properties tend to sign multiyear leases. 

“Hotels have already absorbed the downturn,” said Richard Jones, executive vice president of acquisitions and operations at Atlanta-based developer Portman Holdings LLC. “It’s not as evident what exactly the impact of this downturn is going to be for other commercial real estate.”

Owners of offices, shopping centers and other buildings with pre-recession leases are now signing agreements that will result in “significant cuts in rental income” said Jones, whose company develops lodging, office and retail properties.

Income for hotels, meanwhile, is rising. Revenue per available room, or revpar, in the top 25 U.S. markets rose to $73.87 during the first half from $71.08 a year earlier, according to Smith Travel Research Inc. of Hendersonville, Tennessee. Occupancies climbed to 63 percent from 59 percent during the period, while remaining below 2008’s 66 percent.
The article goes on to compare and contrast hotels with other classes of real estate, and makes the case that hotels can respond quicker to an improving economy.   One important point that the article did not mention is new construction or lack thereof.  The hotel sector was overbuilt during the heydays of easy credit, and limited service hotels seemed to litter many corners.  I don't suspect there is any pending new hotel construction, except maybe some major metropolitan infill, and would be surprised if any sizable hotel development is even in the planning stage.

Wednesday, September 01, 2010

More Housing
I saw this summary of a government report on Fannie Mae and Freddie Mac last week and thought it interesting.  One third of all mortgages originated in 2005 and 2006 were subprime or Alt-A mortgages.  Over 2005 and 2006, government agencies issued 45% and 44%, respectively, of mortgage backed securities.  This compares to today, where agencies issue of 95% of mortgage backed securities. 

Reading this report, it's clear that government agencies did not cause the housing market bubble.  The market worked well, too well.  People wanted any kind of mortgage to get into the housing market.  When the agencies could not meet demand, or had standards that were too strict, the private market stepped in and created and originated mortgages, and then bought, packaged and sold these into non-government mortgage backed securities.  

The housing market is still recovering from the excess of the mid-2000s.  If the agencies eased their mortgage purchase standards it would help the housing market by increasing demand.