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.

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.  

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.

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.

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?

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?

A7.	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:

1.	$22.00

2.	$22.50

3.	$23.00

4.	$23.50

5.	$24.00

6.	$24.50

7.	$25.00

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.

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.

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.