Piedmont - Never In Doubt
The Piedmont Office Realty Trust's proxy to investors to extend its listing period for an additional three years passed by an overwhelming margin (78%) earlier in the month. I never thought the vote would be close, despite the efforts of the company, Lex-Winn, that has been trying to buy parts of the REIT for over a year. It can be argued that now is not the time to list a REIT. This REIT should have been listed in 2005 or 2006 when the REIT market was hitting historic highs. I never understood why the Piedmont executives waited until the listing deadline to begin the process. Leo Wells could have put the $170 million that Piedmont paid him in stock in his pocket rather than having it unlisted shares.

Solving the Lending Crisis
The big lenders, Citigroup, Lehman, and Wachovia are diverse enough that they can probably not lend for an extended period. Eventually they will have to start lending. The banks' commercial real estate executives are not going to get the bonuses they (and their wives) are accustomed to by sitting on cash. This will flow up as banks' Return on Equity (ROI) will shrink and the senior bank executives won't get their bonuses. This may sound sarcastic and simplistic, but having worked long enough in corporate America, I realized that most important corporate decisions are based on the bosses' bonus pool. Stockholder wealth maximization my ass. It is in the bank executives' personal interest to start lending. When their bonuses drop they will find a way to start lending.

Reality Bites
There is an article in today's Wall Street Journal that summarizes what I have seen in the Tenant In Common market since last summer. Deals are not getting done because lenders won't lend and this is expected to result in lower commercial real estate prices. Pardon, the pun, but it does not appear that the ground floor has been found where lenders will lend and buyers and sellers can come to terms. Until this happens deal flow will be light. It is ironic that the Blackstone / EOP deal early in 2007 appears to be the catalyst. Blackstone paid so much and then sold portions of the EOP portfolio for even more that it help spook lenders.

GBE Props
I questioned this stock when it dropped, but it popped nearly 7.5% today and at one point during the day was up nearly 15%. Not exactly sure why, but the NNN merger was approved today. I am not sure this approval was ever in question so I doubt this was behind the jump.

Prime Borrowers Used Subprime
Finally. The majority of borrowers who used subprime financing were credit borrowers, not subprime borrowers. I have thought this all along and this article in the Wall Street Journal proves it. Many subprime loans were used to speculate on real estate and many were used for the low teaser rates with the expectation to refinance the loans before they reset. This quote shows the extent of the issue:

In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores (greater than 620) got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.

The article states that many brokers were at fault because subprime loans paid more compensation to brokers than conventional loans, and that borrowers did not understand the complexity of the loans. This may true, because no one knows how much mortgage brokers make on a loan (except the mortgage broker and there is no bigger line of BS than a "zero point" loan). But I still think a bigger issue is the mentality of borrowers. They had been borrowing and refinancing for the past ten years with impunity and saw no reason to stop. Mortgage broker greed just fed this twisted mentality. Plus, everyone knew the difference between the monthly payment amounts of a subprime loan with a low teaser rate and a conventional loan with a higher mortgage rate. Mortgages were viewed as short-term way to play a house's appreciation, not a way to build long-term equity. When houses stopped appreciating the the game of financial musical chairs was over.

Where Can I Buy Some?
Look at this chart from Saturday's Wall Street Journal showing the various mortgage back security tranches:


The AA tranche looks like the deal of the century. I wish I knew how I could buy some of the investments that hold these bonds.

Opps
This week I heard about a reputable TIC sponsor who was syndicating a single-tenant deal where the tenant had shaky credit. The tenant was delisted for poor financial health last week - in the midst of the offering period. I have not heard the status, but this is not good and I am guessing the deal needs to be reworked. This may not be possible in today's tough credit market. I should note that I have seen the offering materials.

Didn't Get My Memo
Apparently the housing market and the market experts did not read my last post. Look at this chart:



Not too encouraging. The housing correction started in August 2005 when the Fed started to raise interest rates. The slump has been in full swing for over two years now. Reading the above articles, while negative, show that lenders are starting to lend again. The spread on jumbos is now approximately 80 bps, lower than over 110 bps in August. Most of the data in the above articles is based on data from last summer. For now, I am sticking by my previous post.

Housing Market Turn?
You heard it here first. The ten-year Treasury is now 3.85%. This is going to spur home buying. While prices may not rise, it should stop the slide. It will also help ease the subprime mess as all the non-subprime borrowers (urr.. speculators) who used subprime debt because of the low teaser payments, can now refinance into a more affordable mortgage due to the lower rates. The demand for loans is going to increase and banks are going to have to lend.

Interest Rate Buy-Downs
The credit crisis has spawned interest rate buy-downs where TIC sponsors use proceeds from a TIC offering to "buy down" interest rates. Does this make sense? I am not sure if there is a correct answer, but I am using Net Present Value calculations to determine whether the present value of the savings (increased distributions to investors) is greater than the cost. The trick is the discount rate. I just looked at a deal where the cost made sense if the ten-year Treasury was used for the discount rate. It did not make sense when the bought-down rate was used to discount the savings. Both were close to the cost (i.e. within approximately $10,000) and given the disparity between the two discount rates (4% v. mid-6%) I give the nod to the buy-down.

I Like It
Another title could be "Sharing the Pain." I just say my first TIC deal where the commission has been dropped to 5%. This is amazing. It is from a good sponsor, so I hope it goes over well with advisors. If the advisors are looking out for their clients, it should because the yield starts at 6.73% and then rises to over 7% in later years. I have heard of another plan to pay a smaller up front commission (like 3%) and then a trail commission (like 1%) over several years. I like that plan, too.

Musicians I Never Want To Hear Again
Andrew Sullivan is doing a survey of the best and worst videos of the 80s. I voted for Duran Duran's Girls on Film, in a slight edge over Peter Gabriel's Sledgehammer. The Girls on Film video sums up the 80s, plus its Duran Duran's best song. I liked Robert Palmer's videos and thought they would have made the list. I have not voted for the worst yet, but on so many levels, who can be worse than Lionel Richie?

I have been thinking of musicians and bands I never want to hear again. At the top of my list is David Bowie. I just groan every time one of his songs comes on the radio. I know he was a trend setter in the 70s, but do we still have to be subjected to his music? Another is Steve Perry and Journey - simply horrible - I am glad I don't listen to stations that play this drivel. And talk about worst videos of the 80s, Steve Perry's Oh Sherrie is hands down the 80s' worst video. It takes two minutes before the torture even starts!

UPDATE: Foreigner has to be added to the list of bands never to be heard again.
UPDATE UPDATE: Foo Fighters. Is this the worst band name ever? I have Sirius Radio and it seems like the Foo Fighters get more airplay than any other band. Enough already! Geez, it's not like they're Radiohead.

WSJ As A Tabloid
I am not sure whether it has to do with News Corp's acquisition of the Wall Street Journal, but the new layout for the Wall Street Journal Online looks and feels like a tabloid with its sensational headlines. I don't care that the Bancroft family sold the Journal, they appeared (except for a few) to be either uninterested or slackers looking to cash in, but I always liked and appreciated the Journal's understatement and serious approach to news. If a news item needed hyperbole it was important. Now every title has a snappy heading "Economy Conspires to Dog Cerberus," and "Home Woes Hit Lowe's Again," as examples. I guess I will have to read it closer to determine news and noise. The Journal needs to be careful, because its readers know BS and will look other places for reliable news if its journalistic standards slip. It is still the business paper of record and a great national paper, but this is not assured going forward. I have already started to view the Financial Times as a backup.

Must be Nuts
I made my first post on a stock chat website - I must be crazy. It was on Grubb and Ellis and I alerted the stock gurus that NNN is a real estate syndicator and that some of the assets on NNN's balance sheet they were raving about flows through to NNN's syndications and is not directly NNN's.

Ten-Year Yield
The yield on the ten-year Treasury is approaching 4.00%. At these levels the housing market may start seeing some activity and prices may slow their slide. It will also help the banks.

Goldman Sachs
It is clearly the best firm on Wall Street. Probably the best U.S. corporation, if not the world's best. It's alumni is staggering and it even helped keep A-Rod in New York (and probably salvaged his reputation). This article repeats what I have been telling people. It is amazing - or maybe it's not - that it missed the mortgage mess.

Credit Crunch Curbs Real Estate
This article makes sense. No credit means no deals means real estate values go down. This is not fuzzy math. Banks need to start lending again. This quote is relevant for TIC deals:

Even a slight decline in values could make it difficult for property owners to refinance their mortgages, especially if they have been paying only interest on their existing debt and not paying down principal. Such interest-only mortgages have become increasingly popular.

Every TIC deal I have looked over the past several years has interest-only financing. It was the only financing that allowed sponsors to pay an attractive yield to investors.

GBE Is Off Another 8% This Morning

Grubb & Ellis and NNN
Here is an interesting chart. It is the one-year performance of Grubb & Ellis (GBE). I wonder what the market is saying about the merger between Grubb & Ellis and NNN. The stock's decline started shortly after the merger was announced in late May.


Another, more positive, way to view the chart is to say the the stock performance mirrors the problems in the credit market more than the perception about the merger, because it does mirror the credit problems. The merger of the broker and the syndicator should be complete in mid-December.

All Gossip, All the Time
I heard this morning that a prominent TIC sponsor fired twenty-four employees today. The TIC slowdown caused by the housing market and troublesome debt market is starting to impact sponsors. The syndication-dependent sponsors will be the first to show cracks. My opinion from the start has been that the real estate guys will fare the best in a downturn. We'll see.