Thursday, December 05, 2013

Bloomberg TV

I watch and like Bloomberg TV.  I switched to Bloomberg during the financial crisis for sound, hyperbole-free news and never went back to CNBC.  I read here in this Business Insider article that Bloomberg is in the "midst of some kind of reassessment of its TV business."  I hope that doesn't mean Bloomberg plans to kill its business news channel.  It's level-headed and informative, and if you watch it on a regular basis you won't find it boring.  You also won't switch back to CNBC.  (Fox Business News is horrible and in its own strange orbit.)

Think For Yourself

Back in my corporate days - many years ago - a series of corporate sales left the company I worked for as a twice-acquired company.  The second and final acquirer, then part of one of the largest financial companies in the world, instituted predictive indicator personality tests for all employees.  My test showed that I was too rational, an independent thinker, a "threat" to teamwork, and was an employee who could "potentially" question authority.  (Really?  Mild-mannered me, a corporate subversive?  Awesome.)  This flimsy test was all a group of new, inexperienced managers needed to make life unpleasant for a double-sold employee.  I left the then-behemoth conglomerate not long after the test and in wonderful example of schadenfreude the managers were fired within a year.  Sometimes it's better to read tea leaves than test results.

The test was right:  I am "rational" and do question conventional thinking, which are important qualities for an analyst.  Here is a must-read article from Research Magazine on the perils of following conventional thinking, and the difficulty in challenging it.  The author, Rob Seawright, details historical examples of detrimental collective thought that is eventually proved wrong. 

Questioning conventional wisdom is important, especially as the stock market hits new high and alternative investments - specifically non-traded REITs and business development companies -  are about to see their greatest annual inflow of investor equity.  Sales are more concentrated than ever in just a handful of firms, a clear, cliched case of the rich getting richer.  As the rich get richer, questions and dissent are going to get narrower, which is the opposite of what should be happening.  Not only do the big sponsors need tough scrutiny, but smaller competitors need closer review, too, as they may make risky moves to try and stay competitive.

(As an aside, Seawright mentions the "self-serving bias (where the good stuff is my doing and the bad stuff is always someone else’s fault)."  The owners of the twice-sold company where I originally worked could have their picture in the dictionary next to the definition for this bias.  I still crack a wry smile at some of the admonishments delivered to employees, the self-created, self-congratulatory awards they earnestly gave themselves, and the unabashed usurpment of employee initiative, hard work and success.)

Monday, December 02, 2013

Check Under The Hood

Here is a gem of a Wall Street Journal article (WSJ subscription required) that I hope was not lost in last week's Thanksgiving feasting and traveling.  Collateralized loan obligations (CLOs) are showing up in retail investments, including business development companies (BDCs).  CLOs have multiple tranches that offer varying levels of risk.  In general, I question the transparency of BDC portfolios, and with CLOs appearing in multiple BDC portfolios my suspicions are not allayed. 

Monday, November 25, 2013

Random Articles

I saved two articles from last week.  The first is about Devon Energy's $6 billion purchase of "producing oil properties and other property" in Texas' Eagle Ford shale formation.  The size of the transaction caught my eye along with the seller, GeoSouthern.  Apparently, Blackstone owns a portion of GeoSouthern and will exit its investment in GeoSouthern with the Devon transaction. 

The second article is from Bloomberg and reports that rising home prices are allowing US home owners to re-build equity.  The number of homes with negative equity - home value less than current mortgage balance - in the third quarter dropped to 21%, down from 23.8% in the second quarter.  This is a big drop in under water homes and the picture should improve if home prices continue to rise.  There is a ripple effect across the entire economy when people have home equity.  They can now sell their homes or refinance their mortgages.  Buried deep in the article was this passage:
The shortage of homes for sale has been worsened by investors buying properties to rent, said Lawler, the real estate consultant. Institutional investors including Blackstone Group LP have depleted inventory as they built portfolios of single-family houses to turn into rentals, he said. Blackstone has spent about $7.5 billion acquiring 40,000 homes in the U.S.

While that added to the record pace of price growth, the lower inventory has limited options for private buyers, he said.
This inventory situation is more acute in areas like Las Vegas, Phoenix, and in much of Florida, which were hardest hit by the housing crisis. 

Tuesday, November 12, 2013

CMBS Article

Real estate goes as the financing goes.  Here is a Bloomberg article on commercial mortgage backed securities (CMBS).  CMBS originations are expected to reach $80 billion in 2013 and over $100 billion in 2014.  This is below the amount of CMBS issued between 2005 and 2007 levels, but well above the amount issued for each of the past five years.  When there is money available real estate deals get done.   Here is an idea on lenders' market sentiment:
Investor demand for commercial real estate should grow along with a steadily improving economy, even if interest rates climb, according to the report. The reason, in part, is a rising level of comfort among lenders, including commercial banks, insurers and private investment firms, said Mitchell Roschelle, PwC’s national real estate practice leader and co-chairman of the study, based on responses from more than 1,000 property investors and lenders.

“Some of the credit-quality concerns that people had with real estate have evaporated with time,” he said in a telephone interview from New York, where the professional-services firm is based. “We’ve worked through those problems, and the other thing is what used to be headwinds have changed to tailwinds, in many cases, in the eyes of real estate market participants.”
The horses are at the starting gate.  And away they go....

Columbia Untethered

Columbia Property Trust's (CXP) $300 million modified Dutch Auction tender offer ended last Friday.  Columbia's stock, which ended the week around the auction's $22.50 floor price, has jumped early this week, and as I write this post is trading over $24.00 per share.  Who again supposedly benefits from these tender offers?

Thursday, November 07, 2013

Barbarians At The Gate

You didn't think the more than $16 billion raised in non-traded REITs so far in 2013 was going to go unnoticed did you?  For several years big money Wall Street firms have been playing on the periphery of independent broker / dealer capital through their third party management of business development companies.  Now we have the first (at least first that I can think of) large scale investment by a Wall Street investment firm into a non-traded REIT.  According to a filing yesterday, Starwood Property Trust has made a $250 million preferred equity investment into Griffin Capital Essential Asset REIT to help the REIT close on an 18-property acquisition from Columbia Property Trust.  Yesterday's filing was a press release and states that as part of the acquisition financing, "the balance of the (over $500 million) acquisition was funded with $250 million of preferred equity provided by an affiliate of Starwood Property Trust, Inc."  The terms of the financing were disclosed today in Griffin Capital Essential Asset REIT's 10-Q.

I don't see deals like the Griffin Capital Essential Asset REIT / Starwood preferred equity tranaction as a one time occurrences.   The money flowing to non-traded REITs is too great to ignore.  Total equity in 2013 will likely exceed $20 billion.  This is expensive, small ticket, retail money that hedge funds and private equity have previously ignored.  Combine the large capital inflows to a concentration of sales - American Realty Capital Properties and Cole Real Estate Investments, which are merging, represent a 2013 market share of more than 58% - and it's market ready for new, well capitalized entrants.   While the big Wall Street private equity shops and hedge funds want a piece of a $20 billion passive money pie, the pitfalls are not so obvious.

Independent broker / dealers are a fickle bunch operating on razor thin profits.  They extract a price for doing business because non-traded REITs offer one of the few remaining sources of revenue.  Once a non-traded REIT figures out the broker / dealer override (based on sales) then it's time to get solicited for a conference fee (just because), without which the non-traded REIT gets no tacit or explicit endorsement or exposure.    Each broker / dealer is a little kingdom and the marketing and due diligence areas act as fiefdoms within the realm.  Independent broker /dealers make the idea of herding cats seem like a military parade.  Throw in that independent broker /dealers have an innate distrust of Wall Street because many independent brokers started with big Wall Street brokerages and are now independent for a reason, and you have an immediate barrier.   Hedge funds and private equity firms are going to realize, many for the first time, the true meaning of a "best efforts" selling agreement. 

Monday, November 04, 2013

A Real Life Hermione

In the third Harry Potter book, Prisoner of Azkaban, Hermione Granger uses a magical time device that allows her to take a double class load.  I think I found a real life Hermione Granger working at the Carter Validus Mission Critical REIT.  I generally read prospectus biographies with a grain of salt but this one jumped out at me (it was filed last week): 

   Age      Position(s)
Luke Lee
     33       Vice President of Acquisitions and Due Diligence
—Healthcare Division
Luke Lee is the Vice President—Healthcare Division of Carter/Validus Advisors, LLC. Mr. Lee brings 15 years of experience in the West/Southwest United States as a finance and real estate professional with a focus in acquisition, valuation, modeling and analysis of real estate assets. Most recently Mr. Lee was an acquisitions manager at Healthcare Trust of America, Inc. (HTA), a leading publicly traded REIT. In that role Mr. Lee sourced and closed over $500 million in acquisitions and analyzed over $6 billion in healthcare acquisition opportunities. Mr. Lee was also responsible for building argus models, underwriting acquisition opportunities and due diligence. Prior to HTA, Mr. Lee earned his appraisal license in 2010 as a valuation manager at CB Richard Ellis. Additionally, Mr. Lee achieved his CPA designation in 2005 during his tenure at Ernst & Young, LLP, where he was promoted to a manager within the Real Estate Advisory Services Group. Mr. Lee began his career at Raymond James as a financial analyst where he attained his Series 7 and Series 63 licenses in 1999. Mr. Lee’s educational degrees include a Bachelor of Science in Finance from Arizona State University in 2001 and a Master of Science in Accountancy from the University of Notre Dame in 2002.

Mr. Lee has fifteen years of real estate finance experience, which is good.  But he is only thirty-three, which means he started is professional work at eighteen.  He must have used a time machine to work as a real estate professional (at least enough to put on a biography) while earning degrees at Arizona State University and Notre Dame, unless he had the dullest college experience ever and never slept.

Pile of Dog Schiff

I found this Bloomberg article on Peter Schiff's dystopian outlook pathetic.  Here's some optimistic thinking:
Schiff, 50, isn’t fazed that gold is heading for its first annual price drop in 13 years, or that Goldman Sachs Group Inc. has called it a “slam-dunk sell.” He predicts bullion will reverse its 21 percent year-to-date decline and probably surge 52 percent to reach a record $2,000 an ounce within a year. That’s just the beginning: Before President Barack Obama leaves office in 2017 the U.S. will default, the dollar will collapse, hyperinflation will strike and gold will skyrocket, he says.

“I’m waiting for the dollar crash, I’m waiting for the real crisis to hit that I know will benefit gold,” Schiff said Oct. 18 over lunch of spinach-and-beet salad and stewed rabbit in the sun room after the radio show. “The longer it takes, the longer I have to wait for that payday. But the longer it takes, the bigger that payday is going to be.”
Goldman Sachs predicts gold near $1,000 an ounce, half of Schiff's prediction. This passage is encouraging:
The unabashed gold bug’s Euro Pacific Capital Inc. manages a $20 million mutual fund that invests in stocks related to the metal and lost 4.5 percent since it began in July. The Philadelphia Stock Exchange Gold and Silver Index slid 2.9 percent in the same period.
A $20 million mutual fund is nothing, so people aren't flocking to his theories.  The fund has under performed its index by a wide margin, which is probably to due in part to high fees.  Not only has he been wrong in his outlook, he has been worse than the index, and is getting paid for this poor performing, bunker-mentality advice.

Friday, November 01, 2013

Another Blackstone Listing

I noted earlier this week that Blackstone plans four REIT IPOs in the near future.  Not included in the four was Extended Stay, the mid-priced lodging chain that Blackstone owns with investment firms Centerbridge Partners and Paulson & Co.   According to Bloomberg, Extended Stay seeks to raise up to $593 million in an IPO.  Extended Stay's ownership trail is amazing:
Extended Stay was founded 18 years ago by billionaire H. Wayne Huizenga and his longtime business associate George Johnson. The two formed the company in January 1995 and took it public that December with two properties, raising about $60 million. Johnson was chief executive officer of Extended Stay and Huizenga was chairman.

The company had expanded to 472 hotels by the time Blackstone bought it in May 2004 for $3.1 billion, after the 2001 terrorist attacks and recession had depressed travel and hotel-property values.

When the commercial property market peaked in 2007, Blackstone sold Extended Stay to Lightstone Group LLC for $8 billion. After the credit crisis hit, Lightstone couldn’t refinance Extended Stay’s debt and the company filed for bankruptcy protection in 2009.

The following year, Blackstone joined New York-based Centerbridge, a lender who had worked to restructure Extended Stay debt, and Paulson, the hedge fund firm led by billionaire John Paulson, to buy back the hotel chain at a bankruptcy auction for about $3.9 billion.
 Blackstone is expected to have an IPO for its Hilton Worldwide Holdings as early as December.

Thursday, October 31, 2013

The One Houisng Chart You Need

The Price-to-Rent ratio is the one housing statistic that tells you when home prices are getting out of line.  Below, borrowed from Calculated Risk, is a chart on historic Price-to-Rent ratio:

Price-to-Rent is the ratio of a home's cost to its rent equivalent, similar to a stock's price-to-dividend ratio.  For much of the '80s and '90s the ratio ranged from 1.0 to 1.2.  It started to rise in the early 2000s, and exceeded 1.8 at the housing peak.  The ratio dropped to under 1.2 with the housing collapse.  Price-to-Rent is increasing again as home prices rise, but is only at levels of the early 2000s.  Housing prices have been increasing for over a year, but it doesn't appear that the price rise is out of line.

Tuesday, October 29, 2013

Rising Land Values

Here is a BusinessWeek article on rising land values.  It presents data you'd expect:  the areas hardest hit by the housing crisis and that saw land prices plummet, are now seeing big increases in land values.  What was missing from the article was data on lot sales and the shortage of finished lots.  I have read news articles detailing how the shortage of finished lots is pushing up land prices as home builders try to keep up with demand for homes.

Blackstone REIT IPO

Blackstone, according to this Bloomberg article, is listing the first of what could be four real estate investment trust IPOs.  Brixmor Property Group, a lamely named community shopping center REIT, is looking to raise $905.6 million.  Brixmor consists of the former US holdings of Australia's Centro Holdings, which ran into trouble and was scooped up by Blackstone during the financial crisis.  In addition to Brixmor, Blackstone is also expects to list other portfolio companies, including Hilton Hotels, IndCor Properties and Invitation Homes.  That's almost as many listings as American Realty Capital.

There is a point of clarification in the article.  It states that there have fourteen REIT IPOs in 2013:
So far in 2013, real estate IPOs have raised $3.9 billion, compared with $3 billion in all of 2012, the data show. The total was $7 billion in 2004, when the biggest stock sales were BioMed Realty Trust Inc. and CBRE Group Inc.

A Brixmor sale at the top end of the range would exceed the $811.8 million raised by Malibu, California-based house-rental company American Homes 4 Rent (AMH) in July, including overallotments. It would follow only the $1.07 billion offering of Empire State Realty Trust Inc. (ESRT), the New York-based owner of Manhattan’s Empire State Building, for deals this year, according to the Bloomberg data.
Missing from the list of IPOs are all the non-IPO listings of non-traded REITs, including COLE, Columbia and Chambers Street.  (American Realty Capital Trust III and Cole Credit Property Trust II were mergers with other entities, not direct listings.)  None of the non-traded REITs that listed rasied additional equity as part of their listings, which is why they are not considered IPOs.  If the market capitalization of this year's non-traded REIT transactions were added to the IPO figure above the market value of newly traded REITs would be much higher.  

Monday, October 28, 2013

Spinning Head

Here is a short article from The Atlantic on gaming credit default swaps.  The article made me dizzy, and I'm both amazed and appalled - but not shocked - at the tactics.  Credit default swaps are insurance products for debt instruments.  One question that came to me as I read the article - I wonder how many loans in business development companies have corresponding credit default swaps?

The Cost of Drilling

Here is a good article from Bloomberg on drilling in the Permian Basin.  I didn't know that the Permian Basin was the second largest oil field in the world after Saudi Arabia's Ghawar.  Hydraulic fracking and horizontal drilling have opened up the Permian's shale fields.  The new drilling is expensive.

This paragraph provides insight into the drilling costs and oil prices needed to breakeven:
Energy producers on average need oil prices around $96 a barrel to break even on wells drilled in Permian layers known as the Cline Shale and the Northern Mississippian Lime, according to Mike Kelly, an analyst at Global Hunter Securities LLC. That compares to average break-even prices of around $78 a barrel in the Eagle Ford Shale a few hundred miles east of the Permian, and $84 in the Bakken of North Dakota. Some areas of the Permian need a price of just $70-$74, Kelly said.
I wonder if these breakeven costs include the investment loads of oil and gas investment funds that are looking to drill in this area.  I doubt it.

Wednesday, October 23, 2013

ARCP and COLE Merger - Holy Cow!

I wasn't expecting this morning's merger news that American Realty Capital Properties (ARCP) agreed to buy Cole Real Estate Investments (COLE).  After last spring's rancorous battle when ARCP tried to buy non-traded REIT Cole Credit Property Trust III (CCPT III) before it merged into its sponsor and became COLE, I thought the ill will would have left ARCP and COLE adversaries for some time.  It just proves I shouldn't think.

ARCP is buying COLE for $6.85 billion.  ARCP will pay a fixed ratio of 1.0929 ARCP shares for each share of COLE, valuing the transaction at $14.59 per share based on yesterday's close.  ARCP is offering to acquire up to 20% of COLE shares for cash at a price of $13.82 per share.  The boards of each company have approved the transaction and shareholders in both companies must now approve the merger.  The transaction is expected to close in the first half of 2014. 

ARCP expects to raised its dividend to $1.00 per share, up from the current $.94 per share, upon closing the merger.  This is an increase for both COLE and ARCP investors.  The combined company will be the largest net lease real estate company in the United States with over 3,700 properties and a $21.5 billion enterprise value, according to the joint press release announcing the merger.

There is an old James Bond movie called Never Say Never that clearly applies here.  Money helps, too - it's the ultimate business salve for bruised egos and hard feelings.  Today's offer is a premium to ARCP's final offer last spring of $13.59 per share in stock or $12.50 in cash for CCPT III, although that offer didn't include COLE's syndication business, which has exceeded pre-listing expectations. 

This deal is a nice move for COLE shareholders and COLE executives.  The merger represents a 14% premium over yesterday's close for COLE.  As I noted last spring, the breakeven point for COLE to earn its incentive listing fee was $10.45 per share.  At $14.59 per share COLE set for another big pay day.  Based on the table I presented last spring, COLE is set to receive a $224 million incentive listing fee at the $14.59 price, and Chris Cole who owns 10,624,788 shares (much received as part of the non-internalization internalization), sees his stake now worth $155 million, and upon completion of the merger all shares will likely vest, no longer subject to the multi-year lock-up.

There is plenty to consider on this transaction, but on the surface I'm still trying to mentally absorb the big news.

Thursday, October 10, 2013

Deep Questions To Ponder

I wonder how many Columbia Property Trust investors are rushing to sell their shares this morning to buy into another non-traded real estate investment trust?

I wonder how many financial advisors are going to get socked in the nose for recommending to Columbia investors that they sell their shares and reinvest into another non-traded real estate investment trust?

Wednesday, October 09, 2013

Too Stunned For Snark

Columbia Property Trust filed a question and answer this morning on its $300 million modified "Dutch Tender" offer that is planned as part of its listing.  Included in the Q&A was pricing for the tender (copied directly below):
At what price will Columbia purchase common shares in the tender offer?

The tender offer will be structured as a modified “Dutch Auction,” with the minimum price of $22.00 per share and the maximum price of $25.00 per share, in $0.50 increments, such as:








Columbia’s purchase price under the tender offer will be the lowest price per common share from within this range at which common shares have been properly tendered and not withdrawn, which will enable Columbia to purchase the maximum number of common shares having an aggregate purchase price not exceeding $300 million.

All recent Dutch Auctions  - American Realty Capital Trust, Cole Real Estate Investments and Chambers Street - have accepted tendered shares at the lowest offer price.  I am too surprised to comment further on this pricing.

Tuesday, October 08, 2013

Insidious Managed Futures Funds' Fees

Here is a must-read Bloomberg article on the impact of fees on managed futures funds.  Here is an eye-popping passage:
During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund already had $341.6 million invested during the previous eight years.

Top fund managers speculated with that cash in a wide range of asset classes. In that period, the fund made $490.3 million in trading gains and money-market interest income.

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns -- not one penny. Every bit of those profits -- and more -- was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.

After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.’s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period.
But remember, this awful performance didn't correlate with the S&P 500, so it's OK and really not as bad as it looks.  Trust me, I have a black box.

And then there is this:
According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.
The charm of managed futures funds is the top-secret algorithms and proprietary "black box" trading schemes touted by managers.   No one, apparently, is smart enough to understand what these managers are doing, so managers can't divulge information on their genius investment strategies. (What if a competitor were to somehow get the information?!?  The horror!!)  I had a friend in middle school whose favorite saying was "If you can't dazzle them with brilliance, baffle them with bullsh*&t."  The quote below shows that the black box nonsense is bunk, and that at least one managed-futures manager is clueless (or brutally honest) about its fancy formulas:
Like most managed-futures funds, Campbell develops algorithms for its black box. Those systems are flawed, Campbell tells investors in annual reports.

“A previously highly successful model often becomes outdated and inaccurate, sometimes without Campbell & Co. recognizing that fact before substantial losses are incurred,” the firm wrote. Keith Campbell, founder and chairman of the firm, declined to comment.
Oops. I may have a hard time spelling algorithm, but I do know how to play darts and pin the tail on the donkey.

This article is classic.  Managed futures had one shining moment in the sun - late in 2008 when the entire financial world nearly collapsed.  These funds have been scrambling since then trying to replicate their doomsday performance, and have been paid handsomely for their courageous efforts.

Leo's Luck

One of these days I expect the stock market to react to Washington's game of chicken.  Let's hope it's not Thursday, October 10th, because that's the date Columbia Property Trust (formerly known as Wells Real Estate Investment Trust II) plans list its shares on the NYSE under the symbol CXP.  This is a huge listing - Columbia raised $6.2 billion of equity.

There are a couple of points to keep in mind as Columbia moves to liquidity.  The listing is a full liquidity event, there are no lock-ups or tranched releases.  Columbia executed a 1-for-4 reverse stock split in August.  It's most recent Net Asset Value per share (December 2012) is a split adjusted $29.32 per share.  (Obviously, an investor's original investment price is now $40 per share).  Finally, Columbia is expected to offer a $300 million dutch tender offer, which is about 4.8% of the $6.2 billion raised in equity, so I'd expect substantial over subscriptions, or over tenders whatever the correct term.

Monday, October 07, 2013

Something Had To Give

In a move that should have shocked no one, American Realty Capital Properties (ARCP) and American Realty Capital Trust IV (ARCT IV) changed the terms of their merger agreement this morning.  I have not been through the all changes to the terms of the agreement, but I suspect the new terms take some pressure off ARCP's stock, caused in large part by ARCP's original share price guarantee to ARCT IV investors.  I'll get a summary up in the next day.

Thursday, September 12, 2013

Anti-Gold Bug

I should get a Twitter for random articles like the one I am about to link to.   Here is a Financial Times' Alphaville blog post on market forces - more supply than demand - that should hinder gold prices in the near term.  I'm what is ever the opposite of a gold bug, so I like stories that bash gold.

Thursday, August 22, 2013

Changing Perception

I suspect most people have now read this Bloomberg article on AR Capital that was published last week.  The complimentary tone didn't surprise me, but what caught me off-guard was that even Green Street Advisor's Jim Sullivan was almost positive on non-traded REITs - or, at least not dismissive and negative.  I think this passage and quote may explain his change:
Sullivan expects such transactions (non-traded REIT liquidity events) to continue because of the amount of nontraded REITs in the business that will need to list their shares on stock exchanges or merge with another company as the end of their investment life approaches. Nontraded REITs eventually have to return shareholders’ investments after a set amount of time.

“There’s going to be a lot more M&A activity,” he said.

Ah yes, the potential for business, a strong attitude balm.

Mid-Week Links

Here are a few articles I found interesting over the past few days:

Colony American Homes, one of the largest buyers of single-family homes for rental purposes, and which pulled its IPO last spring, has expanded into lending to other single-family landlords. 

Hotel operating performance is now above pre-recession levels.  This CalcualtedRisk article reports on the surging lodging sector.  Make sure to click on the graph that details yearly changes. 

A Bloomberg article reports on the surge in German real estate.  This article is just one of many I have read in recent weeks that point to a rebound in European real estate.

In Europe, like in the United States, low interest rates and an improving economy are giving investors confidence in unrated debt securities.  Here is a Bloombeg article on Nordic affinity for high yielding debt.

Thursday, August 01, 2013

Housing IPO

B. Wayne Hughes' American Homes 4 Rent's (AMH) initial public offering raised $705.9 million yesterday at $16.00 per share.  The stock is holding steady near this price this morning.  (For old '80's limited partnership trivia geeks, Hughes was the founder of Public Storage.)   AMH, which owns almost 18,000 single-family homes(!), had initially filed to raise $1.25 billion.  AMH and other large single family home owners, including Blackstone and its 30,000 homes (!!), have built an asset class of permenant rental single-family homes.  This opportunity was created by the housing collapse and widespread foreclosures of the late 2000s.  Institutional ownership in the hardest hit areas - like Las Vegas and Phoenix - has accelerated these markets' strong price rebound by eliminating inventory.

Friday, July 26, 2013

Another Liquidity Event

W.P. Carey (WPC) announced this morning that it is buying an affiliated real estate investment trust, Corporate Property Associates - 16 Global, Inc. (CPA 16), in an all-stock transaction valued at $4 billion.  The merger, which requires approval from shareholders in both companies, is expected to close in the first quarter of 2014.  WPC is purchasing CPA 16 at an exchange ratio based on a value of $11.25 per share.  The exchange ratio allows for a price adjustment based on the value of WPC stock before the close of the transaction.

WPC plans to boost its dividend to $3.52 per share, a $.16 per share increase, or 4.76%, upon the completion of the merger.  The combined company will have an enterprise value of over $10 billion, according to WPC's press release announcing the transaction.

The market likes the news.  In early trading WPC's stock is up over 5%.

This transaction comes on the heels of American Realty Capital Properties' planned merger with American Realty Capital Trust IV, which is scheduled to close by the end of the third quarter, and the anticipated listing of Wells REIT II, now named Columbia Property Trust.

Wednesday, July 24, 2013

Short Memories

It's 2005 and 2006 all over again.  Home prices increase for a few months and home buyers abandon caution and prudence.  Here is a Bloomberg article on adjustable rate mortgages, which are at their highest levels since 2008.  Read the quotes; the hard lessons of 2008 through early 2012 are a distant memory. 

Ireland Rising

Here is a Bloomberg article on Ireland's rebounding housing market.  A rising housing market helps the overall economy, whether in the US or abroad.

Tuesday, July 23, 2013


Here is an article on American Realty Capital in today's Wall Street Journal.  I didn't learn anything from the article, but it's a good summary of issues surrounding ARC and the non-traded REIT industry.  I thought the article would have mentioned ARC's and other non-traded REIT sponsors' recent liquidity events.  This sea of unlocked cash helps explain the $17 billion the non-traded REIT plans to recycle raise in 2013.

Monday, July 22, 2013

Another Profile In Courage

I just re-read the InvestmentNews article I linked to earlier today.  It seems lame to me that the broker / dealer that terminated its Cole relationship last week waited so long.  This blog and other publications listed all the fees related to the Cole Holdings / Cole Credit Property Trust III transaction back in March.  Pulling selling agreements then would have sent a stronger, more effective message than waiting four months. 

I guess the supposed (passive-aggressive) punishment is to deny Cole reinvestment dollars when reps sell shares of Cole's two recent liquidity events.  But to me, this begs a bigger issue: BDs are scared of liquidity events because their reps are selling shares of the newly liquid, but established, fully invested REITs and reinvesting back into high commission blind pool REITs.  BDs don't want to tell their reps "no" and deny them a big payday.  I'd bet this thinking was not only behind the Cole termination, but also played a part in the other BDs' decision to suspend sales of American Realty Capital Trust V, despite the excuses given in InvestmentNews.

Stuff Happens

Boy, take about ten days off and stuff happens.  Here is an article from InvestmentNews' Bruce Kelly, which summarizes a few articles from last week, on broker / dealers halting sales of some big named non-traded REITs. 

Tuesday, July 02, 2013

Housing Drives Hiring

The good news related to the housing market is coming too fast for me to note all the articles I read.  But occasionally one story stands out, and this Calculated Risk post jumped out to me.  Actually, the Calculated Risk post links to five articles, some that date from February, but all that predict a home construction hiring boom.   The primary story is a recent Deutsche Bank research report estimating the creation of 300,000 new construction jobs in the second half of 2013.  This is a large increase that would have positive impacts for the entire US economy.


American Realty Capital Properties (ARCP) has entered into a merger agreement to acquire an affiliated real estate investment trust, American Realty Capital Trust IV (ARCT IV).  The value of the transaction is $3.1 billion.  The move comes as no surprise, and was telegraphed (to me at least) by ARCP's and ARCT IV's June purchase of a large portfolio of restaurant properties from GE Capital. 

ARCP is offering 2.05 of its shares for each ARCT IV share, the equivalent of $30.34 per share based on ARCP's closing price of $14.80 yesterday, or cash of $30.00 per share, but ARCP has guaranteed ARCT IV investors that choose stock a floor of $30.62 per share.  In conjunction with closing of the merger (and ARCP's closing of its previously announced acquisition of CapLease), ARCP is raising its distribution from $.91 per share to $.94 per share.

The transaction is expected to close by the end of the third quarter and is a full liquidity event for ARCT IV investors, so there is no share lock-up or tranched share release.

Update:  Here is a Bloomberg article on merger,

Monday, July 01, 2013

Drilling Deep

Here are a couple of short, but informative reads on oil and gas. The first is from the Financial Times' Alphaville Blog and explores whether Europe can replicate the shale boom experienced in the United States.  Short answer:  yes, but Europe is years behind the US.  Here is an interesting fact that shows how far the US leads the rest of the world in drilling technology:
Citing Baker Hughes, Maugeri notes that more than half of the world’s drilling rigs are employed in the United States. Ninety percent of them are equipped to drill horizontal wells, and almost all oil and gas wells in the United States are now fractured to stimulate production. In the rest of the world, by contrast, fracturing is used on fewer than one well in 10.
The second post is from Calculated Risk, and it notes the shrinking spread between the West Texas Intermediate (WTI) crude and Brent crude.  The post notes that at one point a barrel of Brent crude was 25% higher than a barrel of WTI crude, and the spread is now only 7%.  A big part of this drop is improved pipelines and other transportation means that are moving oil from the middle of the United States to demand centers and refineries on the coasts.  The domestic oil lowers demand for higher priced foreign imports, leading to the drop in Brent crude prices

Friday, June 28, 2013

Chef Ptomaine

All the people rushing into Noodles & Co. stock this morning - it has doubled in price in its debut on NASDAQ to over $36 per share since it priced last night at $18 per share - must have never eaten at a Noodles & Co. restaurant. 

Thursday, June 27, 2013

Columbia Preps For Listing

Columbia Property Trust, which was formerly named Wells REIT II, just filed an 8-K that notified investors it has hired investment bankers and attorneys to prepare the REIT for listing on a national exchange.  As part of the preparation, Columbia has suspended its dividend reinvestment plan and share repurchase plan.  These steps are normal as a non-traded REIT moves to liquidity.

Columbia announced a net asset value per share of $7.33 late last year.  It's my opinion that Columbia's valuation process is one of the most conservative - little management input on value calculations - of non-traded REITs, and I'm curious to see market reaction to the listing.   Columbia has approximately $5.4 billion of investor equity (~$6.1 billion in its offering, less ~$700 million of share redemptions), and originally offered its shares at $10.00 per share.

Today's notice to investors did not give any information on timing, although suspension of share repurchase and dividend reinvestment indicates to me a listing sooner rather than later; nor did it mention whether a listing would be immediate or staged over time in tranches, like Piedmont Office Realty Trust (Wells REIT I) used when it listed; or whether Columbia plans to use some form of tender offer to support the listing price.

Anagram My A#%

Behringer Harvard REIT I has changed its name to TIER REIT.  TIER is REIT spelled backward.  Oy vey.  I hope shareholders in the company formerly known as Behringer Harvard REIT I don't get stuck with the bill from the consultant that thought up this brilliant name. 

Tuesday, June 25, 2013

CMBS Slow Down

The jump in Treasury yields has hit the CMBS market.  Here is a Bloomberg article on CMBS issuance.  Investors are demanding higher yields, which impacts banks' profits (which I am guessing is an implication of an issuance slowdown).  The spread between CMBS and comparable swaps hit a low of 72 basis points in February, and yesterday Bank of America sold a CMBS with spread of 120 basis points.  The article has information on the current CMBS market:
Banks ramped up lending to commercial property owners with CMBS issuance poised to climb 50 percent to $70 billion this year, according to Credit Suisse Group AG. (CSGN) Sales had rebounded after plunging to $11 billion amid the credit market seizure in 2008 from a record $232 billion in 2007.
And this:
Loan rates for borrowers have climbed about 100 basis points, or 1 percentage point, over the past two months, JPMorgan analysts led by New York-based analyst Ed Reardon wrote in the June 21 report.
This passage on commercial real estate prices has plenty of percentages from a couple of property indexes, which I had trouble reconciling, but that showed strong gains in prices over the past year:
Commercial real estate prices increased 0.4 percent in April, and have gained 40 percent since bottoming in January 2012, according to Moody’s Investors Service. The S&P/Case-Shiller index of property values increased 12.1 percent from April 2012, the biggest year-over-year gain since March 2006, after advancing 10.9 percent a month earlier, a report showed today in New York.

Friday, June 21, 2013

REIT Links

Here are several articles on REITs.

The first is from this morning discussing the recent drop in REIT pricing, as REIT's react to rising interest rates.

The second is from Tuesday, and goes into detail on the slump in mortgage REIT share prices (which haven't improved since the article was posted).

Finally, the Wall Street Journal reports on net lease REITs.  The article is dated June 18, 2013.

Thursday, June 20, 2013

Chamber's Tender Results

Chambers Street Properties Trust (CSG) - formerly the CB Richard Ellis Trust - a $2.5 billion in equity non-traded REIT, released the results of its Dutch Auction tender this morning.  Chambers listed on the NYSE in May, and it offered a $125 million Dutch Auction tender offer concurrent with the listing.  The $125 million represented approximately 5% of the equity Chambers raised in its offering.   Investors tendered 76,107,253 shares, or 30.57% of the outstanding shares.  Chambers accepted 12,376,237 shares for tender, 16.26% of the amount tendered.

The original share price for the CB Richard Ellis shares was $10.00.  The Dutch Auction had a stated range of $10.10 to $10.60 per share.  All shares were tendered at $10.10 per share.

Update:  Stated another way, the Chambers Street Tender was six times oversubscribed.

Just Sayin'

Day-to-day market moves are unpredictable, but Cole Real Estate Investments couldn't have picked a worse day to list its shares.  Today, the Dow, S&P 500 and NASDAQ were each off more than 2.0%, and the yield on the ten-year Treasury jumped eleven basis points.

Update:  Here is a Bloomberg article on COLE's listing.

Update UpdateHere is a video of COLE CEO Marc Nemer on CNBC's Squawk Box

Open Market

Cole Real Estate Investments' (COLE) stock is trading on the NYSE.   Early this morning Cole announced a $250 million Dutch Auction tender offer, where it will purchase properly tendered shares at prices "not greater than $13.00 nor less than $12.25 per share."  The tender offer expires August 8, 2013.  The $250 million tender offer represents approximately 5% of the equity raised in Cole Credit Property Trust III.  Following the completion of the tender offer, COLE has made available additional $250 million to repurchase shares on the open market.

In a June 5, 2013, filing, COLE stated that it expected to have $500 million available to fund a tender offer and a secondary market purchase program to support liquidity in the period following listing.  So, the $500 million is being split between the tender offer and the share repurchase program.

This morning COLE announced that Christopher Cole agreed to waive a $7.5 million equity award.

COLE, in initial trading, is pricing above the $10 per share paid by investors, but less than the tender offer prices. 

Wednesday, June 19, 2013

COLE-List-mas Eve

I feel like an eight-year old on Christmas Eve!  Cole Real Estate Investments' (COLE) imminent listing is the most exciting event to hit the world of non-traded REITs, since, well, ARC's last liquidity event.  Tomorrow, COLE's $4.9 billion of investor equity - which was raised over multiple years - becomes fully liquid, and we still don't even know the price COLE will offer to tender $500 million of shares.   How exciting!  At least I won't have to wait for the adults to get back from church to open presents.  I expect Santa to deliver a wave of emails filled with COLE filing data by 4:00 a.m. 

It stinks getting old.

COLE Listing

According to InvestmentNews, Cole Real Estate Investments is listing its shares on the New York Stock Exchange tomorrow under the symbol COLE.  COLE raised $4.9 billion in equity through Cole Credit Property Trust III.  InvestmentNews had no information on the pricing for COLE's $500 million tender offer, and I have no additional information on the listing other than what's in the article. 

Who is GSO?

The Franklin Square business development companies (BDCs) are the 800-pound gorillas in the world of non-traded BDCs.  Franklin Square's association with Blackstone Group is touted as a key competitive advantage for its three BDCs.  Look closer, and you'll find that the Franklin Square BDCs are managed by a company Blackstone Group purchased in 2008 called GSO Capital.  GSO is a leader in alternative credit financing, which is a fancy way to say it's now funding companies that banks stopped lending to after the credit crisis of 2008.

Here is a link to a fascinating, detailed Institutional Investor article on GSO.  It's a must-read piece for anyone working with or buying alternative credit investments, which for retail investors have arrived in the form of BDCs.  The principals of GSO have deep pedigrees in junk and alternative credit, dating back to the 1980s and early 1990s with Drexel Burnham Lambert and DLJ.  (I use the term alternative credit to describe debt investments that are not bank loans or traditional bond financing.) 

GSO is more than just a sub-advisor for the Franklin Square BDCs.  According to the article, it manages $58 billion in assets and has grown five-fold since Blackstone acquired it: 
With $58 billion in assets under management and 235 employees, GSO has grown fivefold under the Blackstone umbrella. Today it offers $27 billion in alternative-investment funds, including the now $4 billion hedge fund, $8 billion in mezzanine funds — financing buyouts for private equity — $8 billion in rescue lending and $7 billion in small-cap direct lending. The firm’s long-only strategies include a $24 billion CLO business, making GSO the largest institutional investor in leveraged loans, as well as closed-end and other funds.

For perspective, the three GSO-managed Franklin Square BDCs have raised approximately $5 billion in equity.

There is plenty of information to absorb in the article, including GSO's thoughts on the current domestic credit markets (cautious) and where it's looking for opportunities (Europe).  The main point I took away is that alternative credit is a big business that's not going away.

Oil Exports

Here is a Bloomberg article on the United States becoming a potential oil exporter.  I didn't know Congress banned oil exports in the 1970s, I just assumed that domestic demand was so great and that we imported so much oil, there was no excess crude to export.  Hydraulic fracturing (fracking) is leading to supply increases, and last year US oil production set a record. 

Tuesday, June 18, 2013

United Realty, We Barely Knew Ye

Non-traded REIT, United Realty Trust, pulled its offering after its distributing broker / dealer, Allied Beacon, ran "afoul of net capital regulations," according to InvestmentNews.   The InvestmentNews article says the REIT has $24.9 million in assets, and that it intends to engage another dealer manager.  United Realty's 10-Q is worth a glance.

Monday, June 17, 2013

Timber Transaction

Weyerhauser is buying Longview Timber for $2.65 billion in the third largest timber transaction in US history.  Most of Longview Timber's land is in the Pacific Northwest, and two-thirds is covered with valuable Douglas Fir.  Bloomberg has the details.  The sale coincides with news that home builder confidence is at its highest level since March 2006.

Thursday, June 13, 2013

Energy Chutzpah

This blog's old friend, Aubrey McClendon, is back (he left Chesapeake Energy at the end of Marcy) and looking to raise $1 billion for his new energy venture, American Energy Partners, LP.  The Wall Street Journal has the details.  Here a few of the passages that stood out to me:
Now that he is pitching Wall Street on his new energy company, Mr. McClendon is asking for a lot of money, an unusually large slice of profits and a high degree of control over his business.

It isn't clear he will get what he wants this time.
In April, after setting up shop in a six-story Oklahoma City building and conducting informal meetings with prospective backers, Mr. McClendon, 53 years old, sent a six-page letter to about a dozen private-equity firms.

The letter said that Mr. McClendon wants to raise between $2 billion and $3 billion of "initial equity capital" for his new exploration-and-production company, American Energy Partners LP.
It sounds like he is asking for complete control of the new investment vehicle and a 50% profit participation.  Further in the article was this section:
Some who have invested with Mr. McClendon in past energy deals or dealt with him on other matters said his strategy may be to ask for a lot, even if some investors blanch, and see what he has to settle for when the time comes to cut a deal.

For now, some private-equity investors said they aren't reaching for their checkbooks.

Several investors who received the letter said they were taken aback by Mr. McClendon's terms. Some of these investors said their own guidelines may prevent them from investing with someone maintaining as much control over a business as Mr. McClendon's letter suggests he would have.

"The number was aggressive and the terms were aggressive," said one energy investor who has regular dealings with Mr. McClendon.
It didn't take long for McClendon to get back to raising capital, and his penchant for self-interest seems unabashed.  

Saturday, June 08, 2013

Are Data Centers Real Estate?

The IRS is questioning whether companies that own data center properites, along with other types of property owners, like outdoor advertisers, meet the qualifications of a REIT.  Bloomberg has some details

Thursday, June 06, 2013

Exemptive Relief

Business Development Companies (BDCs) are regulated investment companies that must follow strict investment and operational guidelines.  BDCs are prohibited from participating in transactions with affiliates.  Because non-traded BDCs are either advised or sub-advised by external companies that originate or can originate investments, the inability to participate in affiliated transactions is viewed by BDC sponsors as a tough restriction.  In response, BDCs have filed for what's known as "exemptive relief" from the SEC to allow them to participate in affiliated transactions while maintaining their status as BDCs. 

The SEC has been selective in granting exemptive relief.  But late last month the SEC granted the CNL / KKR BDC, Corporate Capital Trust, relief, and today all three Franklin Square BDCs - FS Investment Corp, FS Investment Corp II and FS Energy and Power Fund - announced that they have been granted relief.  These BDCs can now participate - and earn origination income - in investments originated by affiliates of their sub-advisers.   I don't know the full impact of this change, but I expect to see a big jump in affiliated investment participations. 

New Listing. Coming Soon!

Yesterday, Colony American Homes Inc. delayed its planned initial public offering due to "market conditions." Colony American would have been the third IPO since December 2012 for real estate investment trusts (REITs) that exclusively buy, lease and manage single family homes.  Reuters has some details on the deal.

Colony American is affiliated with Los Angeles private equity firm Colony Capital.   It's been a rough couple of weeks for REITs and other high yielding stocks and bonds, which I'm sure played into Colony's decision.  I am curious whether rising interest rates and lack of housing supply helped spook investors. 

The following is from Colony American's S-11 and details its holdings and expected cash:
Colony American Homes, Inc. is a market leader in the acquisition, ownership, renovation, leasing and management of single-family properties in the United States. Our growing portfolio consisted of 9,931 homes as of April 30, 2013, which we believe is one of the largest portfolios of single-family homes in the United States. We are externally managed by CAH Manager, LLC, or our Manager, a subsidiary of Colony Capital, LLC, a leading real estate private equity firm that has established 44 investment vehicles and raised over $20 billion of equity capital since its founding in 1991.
As of April 30, 2013, our portfolio consisted of 8,764 wholly owned homes and 1,167 homes owned in a joint venture, which are concentrated in attractive sub-markets within Arizona, California, Colorado, Delaware, Florida, Georgia, Nevada, Pennsylvania and Texas, offering us significant operating efficiencies and economies of scale. Our portfolio is comprised of homes acquired from a variety of sourcing channels by means of various types of transactions, including trustee auctions, Multiple Listing Service, or MLS, short sales, “mini-bulk” portfolios ranging from five to 500 homes, government-sponsored entities, or GSEs, and real estate owned, or REO, from banks. Our strategy is to continue to grow our portfolio in our existing sub-markets and also to strategically expand our footprint to additional markets where conditions support attractive investment returns.
The estimated total cost basis for our wholly owned homes as of April 30, 2013 was $1.4 billion, inclusive of acquisition and actual and estimated upfront renovation costs. The average total cost basis per home, inclusive of acquisition and actual and estimated upfront renovation costs, was approximately $163,000, representing an average estimated investment cost per square foot of approximately $92. For vacant homes, through April 30, 2013, we have incurred, on average, actual and estimated upfront renovation costs of approximately $20,000 per home. In the period from May 1, 2013 through May 17, 2013, we acquired 879 homes with an estimated total cost basis of $151 million, inclusive of actual and estimated upfront renovation costs. In addition to our portfolio of owned properties, as of May 17, 2013, we had 1,437 homes under contract, representing a total purchase price of $226 million. Including homes acquired and under contract through May 17, 2013, we expect to have a portfolio of 12,247 homes with an estimated total cost basis for our wholly owned homes of approximately $1.8 billion, as of May 17, 2013.
Upon completion of this offering and our use of existing cash balances to fund acquisitions through May 17, 2013, we expect to have approximately $860 million in cash available for future acquisitions and working capital. In addition, we currently have no outstanding indebtedness, but are in the process of negotiating to obtain a credit facility to provide us with additional capital to support further growth in our business.
I wouldn't doubt that the market felt $860 million is a significant sum with which to buy homes in a rebounding housing market.   

I would not bet against Colony Capital, and believe this delay is nothing but a speed bump.  Colony American owns 12,247 single family rental homes, and I am still convinced these, along with other institutional investor owned homes, are now permenant rentals.

Wednesday, June 05, 2013

Cole Filings

Cole Credit Property Trust III is now Cole Real Estate Investments Inc. (CREI).  As it moves to its listing, CREI made two important filings this morning.  The first stated that CREI has changed its name to the aforementioned Cole Real Estate Investments Inc., and declared a 7.0% distribution, an increase from the previous 6.5% distribution.  CREI appointed Jeffery Holland as President and Chief Operating Officer and Stephan Keller as Chief Financial Officer and Treasurer.  CREI has amended its credit agreements to increase the amount it has available to borrow to $518 million.

In a second filing, CREI provided some listing details.  It will list on the NYSE under the symbol COLE in June.  It is a full listing, so 100% of shares are "freely tradeable on day 1."  CREI expects a $500 million tender offer to support its liquidity, which corresponds to the $518 million of new borrowing capability under the amended credit facility.  The filing did not list a tender offer price, stating instead "details to come."    

Monday, June 03, 2013

Bond Market Recap

I saw this Bloomberg article over the weekend summarizing the bond market's awful recent performance.  The article won't brighten your Monday, but it does have good information.

More, More Hunger Games

American Realty Capital Trust IV (ARCT IV), which raised a staggering $1.05 billion in investor capital in March 2013, to close its $1.70 billion equity offering, announced this morning it has acquired a $1.45 billion portfolio of net leased properties from GE Capital.  This follows American Realty Capital Properties' (ARCP) announcement on Friday that it had acquired $800 million of GE Capital properties.  Bloomberg has the details on the ARCT IV's the transaction.  Note that the article appears to confuse the amount of equity ARCT IV plans to use in the transaction.  The REIT is obviously not using its entire $1.70 billion of equity on this acquisition.

Sunday, June 02, 2013

More Hunger Games

On Friday, American Realty Capital Properties (ARCP) announced its second acquisition in a week, acquiring a $807 million portfolio of net leased assets from GE Capital.  Early last week ARCP agreed to acquired NYSE-listed CapLease in a $2.2 billion transaction.  According to Bloomberg, the 471-property GE Capital portfolio consists mainly net leased restaurant properties, including IHOP, Jack in the Box, Burger King and Taco Bell.  The transaction allows ARCP to achieve its 2013 goal of $1.1 billion in acquisitions, and pushes number of properites to over 1,200. 

Friday, May 31, 2013

"Smart Money" Says No To "Stupid Money"

A large institutional single family home buyer, Carrington Holding, has stopped buying single family homes.  This paragraph from a Bloomberg article is the article's exclamation point:
"We just don’t see the returns there that are adequate to incentivize us to continue to invest,” Rose, 55, chief executive officer of Carrington Holding Co. LLC, said in an interview at his Aliso Viejo, California office. “There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”
The large influx of buyers looking for homes to rent and lack of housing supply as foreclosures drop, has lead to rising home prices and made acquiring homes-for-rent a tough market.  Yields on homes have dropped (as prices have increased) making the overall home-for-rent market less attractive to some institutional investors. 

Here is a Business Insider article that plagiarizes is nearly identical to the Bloomberg article.

Just because some institutional investors have stopped buying single family homes doesn't mean they are exiting the housing market.  Carrington has owned and managed 25,000 homes for itself and others. 

The key takeaway from this article, and others that I have read, is that institutional ownership of single family homes is for real and not going away.  I always thought of the institutional play as one giant flip, where institutions swept in with cash after the crash to buy distressed homes at a discount, with the intent to re-sell the homes at a profit in a short period to individual homeowners.  I no longer believe this.  The numbers are too big.  Institutions will largely sell their homes to other institutions.  A large portion of homes acquired after the crash will remain permenant rentals, where they'll be packaged and sold as portfolios.  The Bloomberg article (and its Business Insider copycat) mention two REITs, American Residential Properties Inc. and Silver Bay Realty Trust, which own and operate single family homes as their primary business.  The impact of 2008's credit crisis will be felt for years, and in ways we don't even yet know.

I'll Take Manhattan

I have noticed a few recent, big Manhattan real estate transactions.  Hines sold two office buildings for over $1 billion (Hines REIT owned 11% of both buildings).  The first, a 300,000 square foot tower on Park Avenue sold for $390 million, or $1,300 per square foot, and the second, a 750,000 square foot tower on Lexington Avenue sold for $700 million, or approximately $933 per square foot.  Hines acquired both properites in 2003.  According to Bloomberg, another mid-town Manhattan property, a 27-story building on Madison Avenue majority owned by Carlyle Group, is expecting bids as much as $2,300 per square foot ($1.4 billion), far above the $1,583 per square foot record set in late 2007. 

Thursday, May 30, 2013

Fracking Knowledge Lacking

Apparently (via The Dish), 67% of Americans don't really know what fracking is.  Fracking is hydraulic fracturing, the process of blasting a high pressure mix of water and chemicals into rock formations deep in the earth to release hydrocarbons - oil and gas.  Fracking is one of the most important technological developments in years and could lead to United States' energy independence.  Fracking has serious pros - low energy prices, less dependence on foreign oil, and economic growth - and cons - sustained reliance on oil and gas rather than alternative energy sources, and the potential for irreparable environmental damage.   Fracking is an issue too important to ignore.

Wednesday, May 29, 2013


The Wall Street Journal has a good article on data center real estate investment trusts.  Yes, there are REITs that just buy data centers, the large warehouse-type buildings that house the equipment that support cloud computing and endless internet streaming.  I don't agree with this concern:
Analysts are concerned about capital expenditures, especially costs to maintain equipment and to replace aging buildings. Some say that data-center landlords aren't taking into account increasing technological advances when estimating these costs.

Investor concerns about the companies boiled over earlier this month when Mr. Jacobson accused Digital Realty of underreporting what it will cost to maintain and upgrade properties and equipment. He warned that such costs will skyrocket as the company competes more aggressively for tenants.
Data storage REIT landlords are responsible for a building's infrastructure - power, cooling and security - but not the technology inside, which is the tenant's responsibility.  I see this as a bigger concern:
Analysts are concerned about rising capital expenses and declining rent at data-center REITs. They also worry that technology companies such as Inc. AMZN -0.51% and Google Inc. GOOG -1.17% are increasingly building their own data centers rather than renting space from REITs.

That is decreasing demand for space in the REITs' centers and is further troubling because the big technology companies potentially could compete with REITs by leasing out space to smaller businesses.

"It's fair to say that some of the largest users that are now building their own [data centers]…have definitely sucked some of the demand out of the room," said John Stewart, an analyst at Green Street Advisors.
While Amazon and Google may move to own and control their storage real estate, I don't see them moving into the landlord business full-time. 

Tuesday, May 28, 2013

The Hunger Games

American Realty Capital Properties' (ARCP) acquisition appetite advances unabated.  According to this Bloomberg article, ACRP agreed to acquire CapLease Inc. in a deal valued at $2.2 billion.  CapLease is a net lease REIT that according to Bloomberg:
CapLease, based in New York, owns real estate across the U.S. ranging from single-tenant office buildings to distribution centers. Its largest tenants include the federal government, Aon Corp. and Kroger Co., according to the filing. The acquisition, which is expected to be completed in the third quarter, will add more than 70 properties to American Realty’s portfolio, bringing its total to about 800.
Here is InvestmentNews' article on the merger

Thursday, May 23, 2013


OMG!  Net lease REIT stocks were hit hard yesterday, with declines ranging from 2% to nearly 5%.  American Realty Capital Properties (ARCP) was off 4.83%, WP Carey (WPC) off 2.28%, Realty Income (O) down 4.76%, and Spirit Realty declined 2.64%.  The sell-off is continuing this morning.  Yikes.  Am I to believe that REITs that own properties subject to long-term net leases are sensitive to possible changes in interest rates?  Why wasn't I told?

Oh, the horror of market movements.  Why can't markets always move up?   Why did the ARC REITs and WP Carey REITs list in the first place?  And why are so many other non-traded REITs planning on listing their shares?  I don't care that before yesterday, an ARCT III* investor who still owned his or her shares had a 69% price appreciation since the stock listed in early March.  The sudden price drop is too much for my fragile nerves.   Can't we go back to the good old days (like twelve months ago) where non-traded REITs planned to raise money over extended periods fueled by artificial distribution rates, then cut the unsustainable distributions after completing the equity raise, and ignore stated liquidation dates?  At least back then the share price didn't decline - it was fixed - so investors didn't see that awful drop in value on their computer screens.  Why can't non-traded REIT sponsors take the "non-traded" moniker seriously? 

*  American Realty Capital Trust III was acquired by ARCP in March at a price of one share of ARCT III for .95 shares of ARCP.  So a $10.00 per share initial purchase was worth the equivalent of $16.92 per share ($17.81 * .95) at the market close on Tuesday, May 21, 2013.  So, $16.91-$10.00 divided by $10.00, gives a 69% return.

Wednesday, May 22, 2013

Chambers Street Starts Trading

I wrote this yesterday, but for some reason (operator error) it did not post:

Chambers Street Properties (CSG) started trading this morning (yesterday) on the NYSE.  It has traded around $10.00 per share.

Friday, May 17, 2013

Bruising Battle

If you liked the drama between American Realty Capital Properties and Cole Credit Property Trust III, you'll love this Bloomberg story on the battle for CommonWealth REIT (CWH).  Two outside investors, Corvex Management and Related Management, are attempting to takeover control of the externally advised REIT.  CommonWealth and its management are doing everything they can to thwart the unwanted solicitation. 

Corvex and Related have offered $24.50 for the company, and say its assets are worth over $40, but are constrained by CommonWealth's corporate structure and poor management.  CommonWealth's stock is trading around $20 per share, and was well below $18 per share before the offer.  CommonWealth has rejected the offers using techiques like these:
Stiff takeover defenses awaited the investors. CommonWealth’s poison pill limits investors to holding no more than 10 percent of shares, which caused the activists to cap their stake at 9.8 percent. They now own 9.2 percent. The Dead Hand provides that only board members who approved the poison pill can revoke it.

CommonWealth also has a staggered five-member board, so that different directors, also known as trustees, are up for re-election every year. That requires hostile bidders to seek a two-thirds vote to oust all the directors at once in what’s known as a consent solicitation. Adam and Barry Portnoy are two of the board’s five trustees.
After the offer CommonWealth added these hurdles:
The board adopted a rule requiring that shareholders own 3 percent of the stock for three years before they could initiate a vote to replace directors. That was up from a threshold of $2,000 in stock and just one-year ownership. And it said that its bylaws require that any disputes be settled by arbitration, not in court. 
Meanwhile, after the Meister bid the Portnoys also tried to clarify Maryland law to make it tougher to remove board members, according to a company statement April 15. They lobbied legislators to require that shareholders prove cause to oust a director. While lawmakers didn’t act on the measure, the company said it is interpreting Maryland law to require that directors can only be removed for cause. 
And this is my favorite move:
CommonWealth’s efforts to protects its directors surfaced again this week when the firm ignored a May 14 shareholder vote not to re-elect director Joseph Morea, who was backed by less than 50 percent of the shares. A day after the annual meeting CommonWealth asked Morea to fill the vacancy created by his own resignation, which he accepted. 
I know nothing about CommonWealth, but this is an ugly situation.  One positive point for investors is that CommonWealth's shares are liquid so they can sell their shares. 

Thursday, May 16, 2013

Bubble Talk

Here is an article from Bloomberg on rising home prices and the potential for "bubble threat."  A bubble is a when prices rise to unsustainable levels, presaging an inevitable price decline.  This article was one of the most thoughtful I have read on the fast housing recovery.  Passages like the two below are evidence of a strong housing market:
An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.

U.S. home prices jumped almost 11 percent in March from a year earlier, the biggest gain since the height of the real estate boom in 2006, CoreLogic Inc. reported last week. Values are rising faster than incomes, an indication that prices may fall in some cities once higher mortgage rates erode affordability, Humphries said. Investor purchases will inevitably cool, adding another potential hit to the market, according to Vitner.

I am not convinced that a strong housing market automatically translates to a bubble.  The market only bottomed a year ago, after peaking in 2006 (and earlier in places like California, Las Vegas and Phoenix).  That is six years or more of declines or flat prices.  One year of 11% gains is not going to erase six years of price erosion.  The article states that prices declined 35% from their 2006 zenith, and are still 29% off the top.  To me it seems like the housing market has a long way to run.

Later in the article a more sober assessment is presented:
It’s too early to say another bubble is emerging. So far, the biggest gains are limited to hard-hit markets such as Phoenix and Las Vegas and thriving job centers such as San Francisco, while prices are falling in cities such as Chicago and Indianapolis, according to CoreLogic. Nationally, existing-home sales are about a third off a 2005 peak and home construction is down by 66 percent. Also, in contrast to the easy lending of the boom years, mortgage standards are strict.
The article touches briefly on lack of inventory, which presents a classic supply and demand situation - too many buyers chasing too few homes (see the Brooklyn example above).  In the article, institutional investors get the bulk of the blame for lack of inventory because they have bought so many homes, with Blackstone alone buying 24,000 homes.  Institutional investors aside, there is an overall lack of inventory.  Calculated Risk, through economist Tom Lawler, noted yesterday that inventory is 16% below last year's level.  Low supply is going to push up prices.

It's hard to call a bubble when your in the middle of one.  Denial plays a large part in bubble mentality - "It's different this time" - and I don't see that yet in housing.  

Wednesday, May 15, 2013

Legislate Competition Away

A North Carolina bill backed by car dealerships to ban sales of Tesla cars is just nuts.  I guess free market competition is only good to a point, then its time to call lawmakers to write and pass laws to prevent new competitors. 

Shale Shock

Here is a Bloomberg article from yesterday on the expected impact the shale oil boom in the United States. Here are a few of the key passages:
North America will provide 40 percent of new supplies to 2018 through the development of light, tight oil and oil sands, while the contribution from the Organization of Petroleum Exporting Countries will slip to 30 percent, according to the International Energy Agency. The IEA trimmed global fuel demand estimates for the next four years, and predicted that consumption in emerging economies may overtake developed nations this year.

“The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15,” the Paris-based adviser to 28 oil-consuming nations said in its medium-term market report today.

The development of U.S. shale resources, enabling the nation’s highest level of energy independence in two decades, is creating a “chain reaction” in the global transportation, processing and storage of oil that may escalate as other countries try to replicate the American oil boom, according to the IEA. Crude futures for settlement in 2018 are trading at a discount to current prices, signaling expectations for increasing supplies and constrained demand.
The United States' move towards energy independence is a huge development for the economy and national security.  The only thing missing from this oil boom are decent direct investments.