"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. 

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.

WSJ On Data REITs

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 Amazon.com 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. 

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

DON'T LIST

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.

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.

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. 

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.  

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.

Stats of the Day

I paraphrased and stole the title from The Dan Patrick Show, but the following from Calculated Risk (via DataQuick) really are stats of the day, maybe of the week or month:

Last month foreclosure resales – homes foreclosed on in the prior 12 months – accounted for 12.4 percent of the Southland resale market. That was down from a revised 13.8 percent the month before and down from 28.8 percent a year earlier. Last month’s figure was the lowest since it was 10.0 percent in August 2007. In the current cycle, foreclosure resales hit a high of 56.7 percent in February 2009.

The data is for the month of April 2013 and includes market information for all of Southern California.  The entire article linked to above is fully of positive information on the housing market.

The Incredible Shrinking Deficit

A Calculated Risk post on the budget deficit shrinking to its lowest level since 2008, before the recession and credit crisis.  Here is a Bloomberg article on the same topic. The following are the first three paragraphs from the Bloomberg article:

The U.S. budget deficit will shrink by the end of fiscal 2013 to $642 billion, the smallest shortfall in five years, according to the nonpartisan Congressional Budget Office.

The agency yesterday reduced its estimate of the likely shortfall by more than $200 billion compared with its February projections. The agency cited stronger-than-expected tax receipts as well as payments to the Treasury by government-owned Fannie Mae and Freddie Mac as major reasons for the change.

The decline from last year’s $1.1 trillion deficit would mark the first time since 2008 that the gap between taxes and spending slipped to under $1 trillion. It would also postpone the effective deadline for raising the government’s debt ceiling to avoid default until as late as November, the agency said. 

 This is good news.

Making A Bad Investment Worse

It's hard enough to make an equipment leasing investment fund successful as designed.  Throw in some alleged misuse of investor money and it's much tougher.  InvestmentNews' Bruce Kelly reports on Finra's charge that Commonwealth Capital Securities Corporation's CEO Kimberley Springsteen-Abbott misused $345,000 of investor funds over more than three years.  The money was used for home remodels, trips, meals and Christmas decorations:

The Finra complaint includes an exhibit of 27 pages of purchases from Ms. Springsteen-Abbott and other company executives. It includes: $63.43 for a meal at a Hooter's restaurant in 2009; $1,971.11 for a family vacation in 2010 that included Ms. Springsteen-Abbott's husband, daughter, ex-son-in-law and two grandchildren at the Animal Kingdom Lodge in Orlando, Fla.; and $12,414 for a board of directors meeting, also in 2010, at the Princeville St. Regis Hotel in Kauai, Hawaii.

Equipment leasing funds raise money, pay about 12% of the money in the form of upfront fees, and then invest the remaining 88% in depreciating assets.  This is a tough business model, but maybe that board meeting at the Princeville St. Regis Hotel in Hawaii inspired some special investment insight.

Disjointed Article

I saw this Bloomberg article over the weekend.  There are multiple concepts at work in this article - fees, conflicts of interest, struggles for management control - but none are fully or clearly developed.  There some interesting comments, too, like investors in non-traded REITs don't want appreciation or that non-traded REIT sponsors overpay for properties to inflate their fees.  I think the author would have been better served to break the various points into several articles.

Chambers Street Properties Prepares Listing

Chambers Street Properties, formerly named CB Richard Ellis Realty Trust, announced on Monday that it plans to list its shares on the NYSE on or about May 21, 2013.  As part of the listing process, the REIT disclosed in late March plans to terminate its share redemption and dividend reinvestment program.  The REIT plans a Dutch Auction style tender offer to support the stock once it is listed.  The REIT will acquire up to $125 million of its shares at prices between $10.10 and $10.60 per share (which in reality means $10.10 per share).

As part of the listing, the REIT is dropping its distribution from $.15 per quarter to $.125 per quarter, so for an original $10.00 per share investment, this equates to a yield decrease from 6.0% to 5.0%.  According to filings, the Chambers Street Properties has 129 properties, which are mostly triple net leased and mostly in the United States (although this REIT originally positioned itself as a global REIT).   Chambers Street Properties internalized its advisor last year with without an internalization fee.

Chambers Street Properties started raising equity in July 2004, and continued to raised capital until early 2012,  just an epic offering period.  It therefore acquired its assets before and after the credit crisis, and the target price of more then $10.00 per share (based on the Dutch Auction) is a good indication to me of the strength of the rebound in commercial real estate, and the market's favorable attitude towards net leased real estate.