Glad That Passed

Here is a Bloomberg article on the rebound in junk bonds after a brief sell-off in late July and early August.  Yields on junk bonds have dropped to 5.54%, well below their recent high of 6.01% on August 1.  For a few days there I thought the market had come to its senses and was adding a healthy risk premium to junk bonds.  I guess not.

Note Restructure

InvestmentNews' Bruce Kelly has a good article out this afternoon on the Thompson Note Restructure.  I've had the (dis)pleasure of reading the restructure plan and it affirms my opinion that private notes are tricky, tricky deals.

Kite Completes 1-For-4 Reverse Split

Kite Realty (KRG), which completed its merger of Inland Diversified in early July, finalized its 1-for-4 reverse stock last week.  Investors who originally paid $10.00 per share for their Inland Diversified shares received 1.7 KRG shares in early July, and then these shares were subject to last week's reverse split.  The pre-split breakeven price of KRG's stock for an original Inland Diversified investor was $5.88 ($10.00 divided by 1.7).  The new split-adjusted breakeven price is $23.52, by my calculations ($5.88 times 4).

Today, August 20, 2014, KRG closed at $26.13, or the equivalent of $11.11 to an Inland Diversified investor.

Dented Projections

In the 1990s I sat through several Harry Dent presentations at various financial conferences.  Back then, touting one of his books, Dent predicted the Dow reaching 35,000.  In a reversal, he is now warning of a Dow 6,000 - he has another book to sell!  This CBS Money Watch article from 2013 shows how wrong Dent's guesses have been since the '90s.  Dent is about as worthless as pessimist Peter Schiff.  They can't even prove the saying that a broken clock is right twice a day, because apparently they are broken digital clocks, which are never right.   Together, you can call their speculations dented pieces of schiff.  

Multifamily Starts and Completions

The monthly housing numbers vary widely. According to a Reuters' article on today's housing figures:

Groundbreaking surged 15.7 percent last month to a seasonally adjusted annual 1.09-million unit pace, the Commerce Department said on Tuesday, snapping two straight months of declines.

It is hard to get a good read on housing through one month's data.   Calculated Risk has two good article on today's figures.  The first, here, summarizes the housing report, and the second, here, gives more insight, and both articles put the housing figures into a wider context.  After reading the two posts I am optimistic about housing's continued strength. 

The data on multifamily starts and completions was interesting, especially after reading and posting Monogram Residential Trust's valuation assumptions yesterday.  Calculated Risk has the following graph:

Multifamily construction starts are approaching levels not seen since the late 1980s.  The added supply have to put pressure on cap rates and rental growth rates as multifamily owners compete with one another.

Monogram Q&A

The Monogram Residential Trust Q&A regarding its recent valuation is worth a read.  It is eye-popping.  This blog has discussed valuation methods before and is not going to regurgitate the topic again.  But it is worth noting that Monogram determined its value, while Duff & Phelps was used to verify Monogram's valuation assumptions and methodologies. 

Monogram valued its operating properties using forward cap rates and rental growth assumptions based on various markets across the country.  Rental growth rates ranged from 1.7% to 4.9%, with an average of 3.4% annually.  Cap rate assumptions ranged from 5.0% on the high end to a low of 4.2%.  Properties under development were valued using similar methodologies: 

These inputs included construction costs, completion dates, lease up rates, rental growth rates, operating expenses, occupancy, capital expenditures, exit capitalization rates, and discount rates.

The question I have is how does this REIT come up with a value of only $10.41 per share when it uses forward projections with rental growth rates over 3% and cap rates under 5%?

Can't Tell The Players Without A Program

Dollar General, Dollar Tree and Family Dollar Stores.  I'll admit, it is hard for me to tell the three discount retailers apart, but look at the portfolio of any retail-focused, net lease real estate investment trust and you'll likely see properties leased to one or more of the three companies.  Too add to the confusion, Dollar General is in a bidding war against Dollar Tree to buy Family Dollar Stores.  To help poor saps like me, all three companies should merge and call the new company Super Dollar. 

Tweet Worthy

I need a twitter account for this blog because some things I read are only worth the 140 characters of a tweet.  In an email today pushing its annual conference, REISA highlighted a session called "The Anatomy Of A Successful Oil and Gas Deal."   Besides hosting a fantasy session, apparently REISA forgot that its full name is Real Estate Investment Securities Association.  A look at the companies sponsoring this year's REISA event includes several oil and gas companies and the sponsor of a dodgy note program. (The notes are backed by life insurance policies - i.e. people have to die to pay interest and principal.)  Good times.

Monogram Seeks To Join Liquidity Bandwagon

Monogram Residential Trust, the formerly named Behringer Harvard Multifamily REIT I, announced yesterday that it plans to list its shares on a national exchange.  Like the Inland American disclosure earlier in the week that it is spinning off its lodging properties, the Monogram news was vague on specifics.  Monogram's board has authorized the start of "the process of exploring a potential listing on a national exchange."  The REIT's board has apparently explored various liquidity options and has decided that a listing provides the best opportunity for investors. 

The REIT made the decision to terminate its share repurchase program and its distribution reinvestment plan even though the listing timing is not clearly defined.  An open-end listing date combined with stoppage of the share repurchase program is an invitation to mini-tender firms to step in and offer low-ball bids for now completely illiquid shares. 

Separately, Monogram announced a new estimated per share value of $10.41 per share, an increase from the $10.03 per share as of March 1, 2013.  I should not have to state this but will any way: remember, the $10.41 is the REIT's estimate per share only and any listing price, or mini-tender offer, will likely vary from this price.

A successful listing - any price near $10.00 per share - for Monogram would not only be positive for investors, but for Behringer Harvard, too.

No Verruca Of A Deal

It was just a year ago when the $10 billion Inland American REIT announced it was selling $2.3 billion of properties to various American Realty Capital REITs.  Inland American didn't distribute any sale proceeds to investors from that sale.  Inland American announced earlier this week it was forming a separate, publicly traded company for all its lodging assets.  This time, Inland American investors will receive shares in the new company, while retaining shares in Inland American.

The new lodging company is called Xenia Hotels & Resorts, Inc., with a symbol XHR.  The spin-off is expected to be completed in four to eight months and include nearly fifty properties.  Key details, like whether investors are going to have their shares locked up for a certain period, or what the estimated value of the lodging transaction is to an Inland American investor, have not been finalized and were not in Inland American's filing or this InvestmentNews article.  Inland American is focusing on three main property types: lodging, multi-tenant retail and student housing. 

I am glad Inland American picked such an easy name for its new company.  Here is the definition of xenia:

xenia |ˈzēnēə, -nyə|
noun Botany
the influence or effect of pollen on the endosperm or embryo, resulting in hybrid characteristics in form, color, etc., of the derived seed.

After reading that crazy definition of a xenia, I am reminded of the goof name Veruca Salt from Roald Dahl's Charlie and the Chocolate Factory.

BREAKING NEWS - INTERVAL FUNDS ARE FUNDS-OF-FUNDS

DATELINE: AUGUST 13, 2014, ALTERNATIVE INVESTMENT UNIVERSE

THIS BLOG HAS DISCOVERED THAT INTERVAL FUNDS ARE FUNDS-OF-FUNDS.  INTERVAL FUNDS RAISE EQUITY TO INVEST IN OTHER INVESTMENT FUNDS, THE DEFINITION OF A FUND-OF-FUNDS.   INTERVAL FUNDS HAVE TWO LAYERS OF FEES... FEES AT THE INTERVAL FUND LEVEL AND FEES AT THE INVESTMENT FUND LEVEL.  ANY RESEARCH OR DUE DILIGENCE REPORT ON INTERVAL FUNDS SHOULD DISCLOSE THIS DATA.

IN A RELATED STORY, THIS BLOG HAS LEARNED THAT THERE IS NOTHING WRONG WITH FUNDS-OF FUNDS.

Cracks in the Credit Facade

Here is a cheery Bloomberg article to start your day.  It goes into detail on a few pending CMBS offerings and how issuers are having to boost yields to get their bonds sold, as investors are worried about credit quality and want to get paid for added risk.  Gee, what a concept.  Like the article I linked to yesterday, there are plenty of facts in this article and I don't want to excerpt key points out of context. 

I will note this quote, though:

Property values in the largest U.S. cities have surpassed their 2007 peaks, encouraging demand, after plunging as much as 42 percent in the aftermath of the credit crisis, according to Moody’s/RCA Commercial Property Price Index .

I have read plenty of articles in recent months about the drop in lending standards.  Investors' search and desire for yield has made them less concerned about credit quality.  It seems a welcome push back has begun.  It needs to spread beyond real estate.  

Big Deal?

I have been away for a week or so recharging the batteries and sharpening my pencil.  I just saw this Reuters article on regulator scrutiny of private equity leveraged loans, which I suspect includes loans made by business development company loans, too.  This seems like a big deal to me and an issue worth watching.    I'm not going to excerpt any portions of the article because no passage makes sense out of context.  The article is short and worth a read.