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.