Down Market Realities
Realtors would never have agreed to sharing commissions in a strong market. But in a moribund housing market, realtors have come to realize that working with discount brokers is not such a bad idea. Realtors will not block the discount brokers' access to the Multiple Listing Service (MLS). On the surface, this is good for consumers, but of course my jaundiced view is that traditional realtors will somehow co-opt the discounters and commissions will not drop that much. Commissions are high and many realtors don't do work commensurate with the level of compensation, but many realtors discount their commission if asked. If the new sharing helps start transactions, then it is a good thing. The justice department should be looking at all the additional fees charged with getting a loan and buying a home. These are the fees that annoy me.
Tuesday, May 27, 2008
Wednesday, May 21, 2008
10-Q Release
The 10-Q for Wells' Timberland REIT was released last week. A quick read confirmed my previous conversations with Wells. Timberland should have enough offering proceeds to make its first $40 million payment on the mezzanine debt at the end of June. I estimate that Timberland needs to raise over $14 million a month in investor equity to get the mezzanine debt down to $60 million by mid-October 2008. This would extend the mezzanine debt to February 2009. If Timberland's equity effort comes up short, the entire outstanding balance of the mezzanine piece is due in mid-October 2008.
The 10-Q for Wells' Timberland REIT was released last week. A quick read confirmed my previous conversations with Wells. Timberland should have enough offering proceeds to make its first $40 million payment on the mezzanine debt at the end of June. I estimate that Timberland needs to raise over $14 million a month in investor equity to get the mezzanine debt down to $60 million by mid-October 2008. This would extend the mezzanine debt to February 2009. If Timberland's equity effort comes up short, the entire outstanding balance of the mezzanine piece is due in mid-October 2008.
Don't Eat Their Own Cooking
American Airlines' management must not fly on American's planes. American's brilliant scheme to add a $15 per checked bag charge means that few bags will get checked. More bags in the cabin means frustrated passengers and stressed-out flight attendants as they struggle with the added bags. Airlines have stopped food and cut in-plane staff, and now this indignity. Flying is going resemble a bus trip in South America.
American Airlines' management must not fly on American's planes. American's brilliant scheme to add a $15 per checked bag charge means that few bags will get checked. More bags in the cabin means frustrated passengers and stressed-out flight attendants as they struggle with the added bags. Airlines have stopped food and cut in-plane staff, and now this indignity. Flying is going resemble a bus trip in South America.
Thursday, May 08, 2008
Cracks?
The Wall Street Journal had an article yesterday on the departure of a Wachovia real estate executive. The executive built Wachovia's real estate lending business, and one of his specialties was the mezzanine loan on top of a more traditional real estate loan. This is exactly how the Wells Timberland REIT financed its lone timber transaction - first loan and mezzanine loan (in additional to the issuance of preferred stock that can be viewed as more leverage) and no initial equity. The REIT is struggling to repay its mezzanine debt and needs to get it down to $60 million by mid-October to extend the final payment to February 2009. Based on Timberland's filings, I estimate that the REIT has approximately $125 to $135 million outstanding at the end of April on its original $160 million mezzanine loan. I wonder how the departure of this executive will impact Timberland REIT if the REIT's equity comes up short and it needs to extend or refinance. The executive's departure does not change the facts and terms of the transaction but may have repercussions for investors.
The Wall Street Journal had an article yesterday on the departure of a Wachovia real estate executive. The executive built Wachovia's real estate lending business, and one of his specialties was the mezzanine loan on top of a more traditional real estate loan. This is exactly how the Wells Timberland REIT financed its lone timber transaction - first loan and mezzanine loan (in additional to the issuance of preferred stock that can be viewed as more leverage) and no initial equity. The REIT is struggling to repay its mezzanine debt and needs to get it down to $60 million by mid-October to extend the final payment to February 2009. Based on Timberland's filings, I estimate that the REIT has approximately $125 to $135 million outstanding at the end of April on its original $160 million mezzanine loan. I wonder how the departure of this executive will impact Timberland REIT if the REIT's equity comes up short and it needs to extend or refinance. The executive's departure does not change the facts and terms of the transaction but may have repercussions for investors.
Wednesday, April 23, 2008
Opps
From today's (Wednesday 4/23) Wall Street Journal's Plots and Ploys column:
From today's (Wednesday 4/23) Wall Street Journal's Plots and Ploys column:
The loss is 85% of the original $50 million investment. In terms of Inland American's big picture, this is not much more than a blip. It has raised $6 billion in investor equity. It has not released its 10-K yet. Inland American's 10-K will be another interesting read because its whole strategy is to buy shares of REITs rather than individual properties. The decline in REIT prices due should make for interesting valuations and its valuation methods need scrutiny.Sharing the Pain
While the stocks of most real-estate investment trusts have fallen sharply in the past year, few have been clobbered as hard as Phoenix-based Feldman Mall Properties Inc., which owns four malls and holds partial interests in three others.
Feldman's shares have fallen nearly 83% to $2 and weren't helped a bit last week when the company reported disastrous results for its fourth quarter.
It suffered a decline of $2.1 million, or 15 cents a share, in funds from operations for 2007. A key factor was a near doubling of Feldman's operating expenses to $16.5 million, including an extra $1 million provision for missed payments by tenants and $2 million in severance for two departed executives.
But the pain from Feldman's losses isn't limited to its investors. Another victim is Inland American Real Estate Trust, another REIT, which in the past year bought two million preferred shares in Feldman for $25 a share. Starting June 30, 2009, Inland can begin converting its preferred shares to common shares at a ratio of 1.77. Trouble is, Feldman's stock has fallen; if Inland were permitted to convert its shares at today's prices, it would get stock worth only $7.1 million. An Inland spokesman declined to comment.
Wednesday, April 16, 2008
Black Swan
This is the new financial term. It means that large unpredictable, unexpected events have big impacts on the markets. I just saw a numb-nut on CNBC stating that two Black Swans are pending, one the unpredictability of LIBOR and the other is inflation. LIBOR has been out of whack since last summer and is the subject of a front page Wall Street Journal article this morning. Commodity prices have been hitting highs for months and food shortages and related riots are well reported. I have read numerous articles that the large cut in interest rates will lead to inflation - plus, this is Econ 101. Neither event, therefore, fit the definition of a Black Swan. When known events and conditions are called Black Swans the term is irrelevant. Here is a good article from the Financial Times discussing Black Swans.
This is the new financial term. It means that large unpredictable, unexpected events have big impacts on the markets. I just saw a numb-nut on CNBC stating that two Black Swans are pending, one the unpredictability of LIBOR and the other is inflation. LIBOR has been out of whack since last summer and is the subject of a front page Wall Street Journal article this morning. Commodity prices have been hitting highs for months and food shortages and related riots are well reported. I have read numerous articles that the large cut in interest rates will lead to inflation - plus, this is Econ 101. Neither event, therefore, fit the definition of a Black Swan. When known events and conditions are called Black Swans the term is irrelevant. Here is a good article from the Financial Times discussing Black Swans.
Sunday, April 13, 2008
IHM
The IMH 10-K was released two weeks ago. Again, like Timberland, there is significant data to digest. A post will have to wait as other work is pressing. The amount of loans in default shot up in the fourth quarter - which to me, was not unexpected. There have been substantial redemption requests already this year. Defaults and redemptions - yikes. More details soon....
The IMH 10-K was released two weeks ago. Again, like Timberland, there is significant data to digest. A post will have to wait as other work is pressing. The amount of loans in default shot up in the fourth quarter - which to me, was not unexpected. There have been substantial redemption requests already this year. Defaults and redemptions - yikes. More details soon....
S@%t Rolls Downhill
Linens n Things is preparing to file for bankruptcy. There are multiple Tenant in Common deals with Linens as a tenant. This chain was taken private by Apollo Management in early 2006. Linens was not the only retailer that was taken private by hedge funds or private equity firms. Toys R Us, Petco and others were bought during the era of cheap credit. I imagine the hedge funds and private equity firms leveraged the companies and paid themselves huge dividends. Now this leverage is leading to bankruptcy. I will watch how the bankruptcy impacts the TIC deals I saw.
Linens n Things is preparing to file for bankruptcy. There are multiple Tenant in Common deals with Linens as a tenant. This chain was taken private by Apollo Management in early 2006. Linens was not the only retailer that was taken private by hedge funds or private equity firms. Toys R Us, Petco and others were bought during the era of cheap credit. I imagine the hedge funds and private equity firms leveraged the companies and paid themselves huge dividends. Now this leverage is leading to bankruptcy. I will watch how the bankruptcy impacts the TIC deals I saw.
If A Deal Falls In A Forest.....
I don't have time to probe the Timberland 10-K in depth. I think I have enough information - I have to wait for the 10-Q (due in mid-May) for more relevant data. An anonymous reply says about Timberland:
"It might be hard to sell stock in a black box. That's almost six months without pertinant (sic) financial data."
This is a perfect summation. This deal needs to raise substantial equity over the next six months just to keep its one property, and its current run rate is not encouraging. Timberland has become a high risk, high leverage, speculative investment. The investors and advisors that look to Wells do not, generally, look for high risk, high leverage, speculative investments.
I don't have time to probe the Timberland 10-K in depth. I think I have enough information - I have to wait for the 10-Q (due in mid-May) for more relevant data. An anonymous reply says about Timberland:
"It might be hard to sell stock in a black box. That's almost six months without pertinant (sic) financial data."
This is a perfect summation. This deal needs to raise substantial equity over the next six months just to keep its one property, and its current run rate is not encouraging. Timberland has become a high risk, high leverage, speculative investment. The investors and advisors that look to Wells do not, generally, look for high risk, high leverage, speculative investments.
Tuesday, April 01, 2008
Thornburg Mortgage
This is good news. It looks like Thornburg is going to make it through the credit crisis. Thornburg's equity investors got wiped out but at least it stays in business.
This is good news. It looks like Thornburg is going to make it through the credit crisis. Thornburg's equity investors got wiped out but at least it stays in business.
Saturday, March 29, 2008
Digesting Timberland
I am wading through Wells Timberland's 10-K. There is a significant data to digest. The one parcel of Timberland was acquired in mid-October 2007, so the 10-K reflects one quarter of operations. I have questions that need answers before I can make sensible comments on Timberland's status, especially in terms of timber sales and operations and interest expense.
One item that does not need clarification is that in January and February the REIT raised $12.4 million, and had raised a total of $55.5 million of investor capital. At a $6 million per month run rate, by the end of June Timberland should have an additional $24 million ($6 million for March, April, May and June). At year-end, the mezzanine debt had been paid down by $10.4 million. At the current run rate, it looks like the first $40 million payment (which at year-end was $29.6 million) at the end of June looks likely. The second payment of $30 million in August needs a ramped up run rate.
I am wading through Wells Timberland's 10-K. There is a significant data to digest. The one parcel of Timberland was acquired in mid-October 2007, so the 10-K reflects one quarter of operations. I have questions that need answers before I can make sensible comments on Timberland's status, especially in terms of timber sales and operations and interest expense.
One item that does not need clarification is that in January and February the REIT raised $12.4 million, and had raised a total of $55.5 million of investor capital. At a $6 million per month run rate, by the end of June Timberland should have an additional $24 million ($6 million for March, April, May and June). At year-end, the mezzanine debt had been paid down by $10.4 million. At the current run rate, it looks like the first $40 million payment (which at year-end was $29.6 million) at the end of June looks likely. The second payment of $30 million in August needs a ramped up run rate.
Thursday, March 27, 2008
Too Smart
Dividend Capital's Total Realty Trust is expected to release its 10-K on Monday, March 31, 2008. This non-traded REIT began its offering period in early 2006 at the height of low cap rate real estate. To off-set the low yields on real estate, the REIT purchased high yielding debt securities. These include CDOs and CMBSs, but no subprime securities. These are the type of securities that are giving the large banks trouble, due to their uncertain valuation. I want to know how the REIT is valuing these hard-to-value securities. Dividend Capital has a leveraged closed-end mutual fund , Dividend Capital Realty Income Allocation (DCA), which owns similar-type debt securities. This fund has lost half its value since last summer. DCA has all its assets invested in debt and income producing securities and is leveraged. The REIT has about 20% of its assets in securities, and I don't think it borrowed to acquire them, so the impact is much smaller, and the securities are performing. But it is an item that needs analysis.
Dividend Capital's Total Realty Trust is expected to release its 10-K on Monday, March 31, 2008. This non-traded REIT began its offering period in early 2006 at the height of low cap rate real estate. To off-set the low yields on real estate, the REIT purchased high yielding debt securities. These include CDOs and CMBSs, but no subprime securities. These are the type of securities that are giving the large banks trouble, due to their uncertain valuation. I want to know how the REIT is valuing these hard-to-value securities. Dividend Capital has a leveraged closed-end mutual fund , Dividend Capital Realty Income Allocation (DCA), which owns similar-type debt securities. This fund has lost half its value since last summer. DCA has all its assets invested in debt and income producing securities and is leveraged. The REIT has about 20% of its assets in securities, and I don't think it borrowed to acquire them, so the impact is much smaller, and the securities are performing. But it is an item that needs analysis.
Monday, March 24, 2008
The Waiting Is The Hardest Part
I am waiting for 10-Ks and a 10-Q. IHM Secured Loan's 10-K should be out in a week or so and I'll get to see how its mass of fourth quarter maturities fared. Due to the implosion in housing development, I am not optimistic.
The Wells Timberland REIT's 10-K should be available soon and will give a good picture of its one timber property's operations. The first quarter 10-Q should give the impact of the higher interest rates on its mezzanine loan. Until these are released, not much new information will be known on the REIT.
I am waiting for 10-Ks and a 10-Q. IHM Secured Loan's 10-K should be out in a week or so and I'll get to see how its mass of fourth quarter maturities fared. Due to the implosion in housing development, I am not optimistic.
The Wells Timberland REIT's 10-K should be available soon and will give a good picture of its one timber property's operations. The first quarter 10-Q should give the impact of the higher interest rates on its mezzanine loan. Until these are released, not much new information will be known on the REIT.
Friday, March 21, 2008
TIC Sponsor to Cut Distributions
A large TIC sponsor is stopping distributions on three of its deals and cutting distributions on a fourth. All four are office buildings. Actual operations are not meeting projections due to higher than projected vacancies. I read through the operational summaries on the four deals and it appears to me that the problems are management related and not market specific. The lease expirations and corresponding lower revenue that are behind the distribution cuts were known and reserved, but leasing efforts have been poor. (One property had a lease buyout that added to reserves, but another deal is attempting to get a loan to help with leasing costs as its reserve estimates were insufficient.) To the sponsor's credit (or maybe it's to the lender's credit) at least distributions are not being paid from reserves.
The summaries were poorly written, but it appears that the markets where the four properties are located appear solid with increasing rental rates, increased absorption and limited new construction. One point not addressed in the summaries is the debt coverage ratios and the possibility of technical default on the mortgages. I would bet that the mortgages are conduit loans that were sold into Commercial Mortgage Backed Securities. These loans have debt coverage ratios that must be maintained or the loans go into technical default. Higher vacancies and lower Net Operating Incomes drop the coverage ratios. If the loans had an interest-only period and have not started their amortization, the deals may be in for another set of problems as this will lower their debt coverage ratios.
My opinion on this sponsor, based on the limited number of its deals that I saw, was that it had good properties and poor properties. Each deal needed to be reviewed and it was not enough to approve deals based on the sponsor. This sponsor had a steady flow of product and some of that product would take months to sell in a market where product had a shelf-life of days or weeks. Now we are seeing why the market was giving pause to some of this sponsor's deals.
A large TIC sponsor is stopping distributions on three of its deals and cutting distributions on a fourth. All four are office buildings. Actual operations are not meeting projections due to higher than projected vacancies. I read through the operational summaries on the four deals and it appears to me that the problems are management related and not market specific. The lease expirations and corresponding lower revenue that are behind the distribution cuts were known and reserved, but leasing efforts have been poor. (One property had a lease buyout that added to reserves, but another deal is attempting to get a loan to help with leasing costs as its reserve estimates were insufficient.) To the sponsor's credit (or maybe it's to the lender's credit) at least distributions are not being paid from reserves.
The summaries were poorly written, but it appears that the markets where the four properties are located appear solid with increasing rental rates, increased absorption and limited new construction. One point not addressed in the summaries is the debt coverage ratios and the possibility of technical default on the mortgages. I would bet that the mortgages are conduit loans that were sold into Commercial Mortgage Backed Securities. These loans have debt coverage ratios that must be maintained or the loans go into technical default. Higher vacancies and lower Net Operating Incomes drop the coverage ratios. If the loans had an interest-only period and have not started their amortization, the deals may be in for another set of problems as this will lower their debt coverage ratios.
My opinion on this sponsor, based on the limited number of its deals that I saw, was that it had good properties and poor properties. Each deal needed to be reviewed and it was not enough to approve deals based on the sponsor. This sponsor had a steady flow of product and some of that product would take months to sell in a market where product had a shelf-life of days or weeks. Now we are seeing why the market was giving pause to some of this sponsor's deals.
Sunday, March 16, 2008
One Hundred-Year Floods Every Ten Years
After Long Term Capital Management's financial melt down in 1998 I remember "experts" talking about the situation being a one hundred-year flood - i.e. so bad it could only happen every one hundred years. Talk then was of some risk measure called VAR (Value at Risk) that was supposed to measure risk and help prevent financial implosions. I did not understand VAR then and have not heard much of it since. VAR or not, Long Term Capital Management was a case of outsized leveraged bets that went wrong and it impacted the credit markets for a short, unpleasant period. Today's credit crisis is similar, outsized leveraged bets that went wrong - but its on a much bigger scale. From home owners to hedge funds to investment banks, leverage was cheap and easy for an extended period that led to complacency about ever increasing asset values that collateralized the debt. The de-leveraging of financial markets is painful and shows no signs of abating and has led the Fed to make moves it has not used since the Depression and to even invent new ways to add liquidity to markets.
The one hundred-year flood analogy needs to be modified to a ten-year flood, because significant market upheaval seems to happen every ten years. (The ten-year flood is as bad as the one hundred-year flood it's just occurring on a more frequent basis.) The flood of 2008 was preceded by the flood of 1998 caused by LTCM (the stock market declines of 2000 to 2003 were not a one hundred-year flood), the stock market crash of 1987, the hyper-inflation of the late 1970s and the market declines and financial upheaval of 1973 and 1974.
Markets recover after each flood and the brains on Wall Street concoct new products to prevent the next one hundred-year flood. The products getting stressed today are all the derivatives and securities (i.e. CDOs) designed after 1998 to take risk away from banks. I am sure Wall Street is working on the next wave of products that will "prevent" the next flood. Of course it will be impossible to test these products until 2018.
After Long Term Capital Management's financial melt down in 1998 I remember "experts" talking about the situation being a one hundred-year flood - i.e. so bad it could only happen every one hundred years. Talk then was of some risk measure called VAR (Value at Risk) that was supposed to measure risk and help prevent financial implosions. I did not understand VAR then and have not heard much of it since. VAR or not, Long Term Capital Management was a case of outsized leveraged bets that went wrong and it impacted the credit markets for a short, unpleasant period. Today's credit crisis is similar, outsized leveraged bets that went wrong - but its on a much bigger scale. From home owners to hedge funds to investment banks, leverage was cheap and easy for an extended period that led to complacency about ever increasing asset values that collateralized the debt. The de-leveraging of financial markets is painful and shows no signs of abating and has led the Fed to make moves it has not used since the Depression and to even invent new ways to add liquidity to markets.
The one hundred-year flood analogy needs to be modified to a ten-year flood, because significant market upheaval seems to happen every ten years. (The ten-year flood is as bad as the one hundred-year flood it's just occurring on a more frequent basis.) The flood of 2008 was preceded by the flood of 1998 caused by LTCM (the stock market declines of 2000 to 2003 were not a one hundred-year flood), the stock market crash of 1987, the hyper-inflation of the late 1970s and the market declines and financial upheaval of 1973 and 1974.
Markets recover after each flood and the brains on Wall Street concoct new products to prevent the next one hundred-year flood. The products getting stressed today are all the derivatives and securities (i.e. CDOs) designed after 1998 to take risk away from banks. I am sure Wall Street is working on the next wave of products that will "prevent" the next flood. Of course it will be impossible to test these products until 2018.
Tuesday, March 11, 2008
Green - The New Refuge of Scoundrels
The old saying is that patriotism is the last refuge of scoundrels. It looks like patriotism is being pushed aside for the green movement. The sponsor who wants to roll-up its TIC deals registered a real estate investment trust late last year that will focus on sustainable real estate. Good luck. I think the registration's track record section needs updating.
The old saying is that patriotism is the last refuge of scoundrels. It looks like patriotism is being pushed aside for the green movement. The sponsor who wants to roll-up its TIC deals registered a real estate investment trust late last year that will focus on sustainable real estate. Good luck. I think the registration's track record section needs updating.
How Do You Spell Stupid? S-P-I-T-Z-E-R
The idiot was reckless and foolish on so many levels and the revelations are just beginning. The stupidest thing - so far - has to be overpaying for services and having a credit with the agency. The stupidity almost defies belief. A credit with a hooker?!? Did they guy think he was shopping at Target? I bet he'd try to return a service he didn't like. The retard is toast.
The idiot was reckless and foolish on so many levels and the revelations are just beginning. The stupidest thing - so far - has to be overpaying for services and having a credit with the agency. The stupidity almost defies belief. A credit with a hooker?!? Did they guy think he was shopping at Target? I bet he'd try to return a service he didn't like. The retard is toast.
Monday, March 10, 2008
WSJ Gets Back to Reporting
Here is a good article on the commercial real estate market. It states that the downturn will be tempered. Most of the development dollars went to the construction of condos, which are classified as commercial developments during the construction phase. The commercial market did not suffer overbuilding. I looked at existing office properties in South Florida in 2004 and 2005 that were selling for approximately $200 per square foot. When compared to new condo developments that were selling for near $300 per square foot there is no mystery as to why so few commercial properties were built. This dichotomy was repeated in many markets. Some markets missed out altogether, I was in Denver last year, a city that had limited condo development, and it had no office construction either because the market was still weak. I tend to agree with this article more than this one from last week that I thought was shrill.
Here is a good article on the commercial real estate market. It states that the downturn will be tempered. Most of the development dollars went to the construction of condos, which are classified as commercial developments during the construction phase. The commercial market did not suffer overbuilding. I looked at existing office properties in South Florida in 2004 and 2005 that were selling for approximately $200 per square foot. When compared to new condo developments that were selling for near $300 per square foot there is no mystery as to why so few commercial properties were built. This dichotomy was repeated in many markets. Some markets missed out altogether, I was in Denver last year, a city that had limited condo development, and it had no office construction either because the market was still weak. I tend to agree with this article more than this one from last week that I thought was shrill.
Saturday, March 08, 2008
Roll-Up
I was on a conference call Friday held by a prominent Chicago-based TIC sponsor. It has a mish-mash of TIC-owned properties (office, industrial, multi-family and retail) that are mostly master leased and mostly underwater. Apparently many of the properties are not generating the cash to make the master lease payments and the sponsor is reaching the point where it cannot meet its obligations under the master leases. Plus, some of the properties are in technical default on their debt by not meeting their required coverage ratios.
I am unclear on how the sponsor will effect the roll-up. The sponsor wants to somehow roll the deals into a public entity, but each property is owned by tenant in common investors, not a fund, and any sale will require approval from all investors, not just a majority. Plus, on the call it was stated that the public company (unnamed on the call) that would acquire the properties is not a REIT. The sponsor said that the roll-up would not be an immediate taxable event. I called an executive at a public company that seemed to match the description on the call, but was told that it was not the purchaser. The person I called knew details of the troubled sponsor and the contemplated roll-up, which was surprising coming from this executive, especially since news of the roll-up was released on the call. I am not sure I believe this executive's denials.
I was on a conference call Friday held by a prominent Chicago-based TIC sponsor. It has a mish-mash of TIC-owned properties (office, industrial, multi-family and retail) that are mostly master leased and mostly underwater. Apparently many of the properties are not generating the cash to make the master lease payments and the sponsor is reaching the point where it cannot meet its obligations under the master leases. Plus, some of the properties are in technical default on their debt by not meeting their required coverage ratios.
I am unclear on how the sponsor will effect the roll-up. The sponsor wants to somehow roll the deals into a public entity, but each property is owned by tenant in common investors, not a fund, and any sale will require approval from all investors, not just a majority. Plus, on the call it was stated that the public company (unnamed on the call) that would acquire the properties is not a REIT. The sponsor said that the roll-up would not be an immediate taxable event. I called an executive at a public company that seemed to match the description on the call, but was told that it was not the purchaser. The person I called knew details of the troubled sponsor and the contemplated roll-up, which was surprising coming from this executive, especially since news of the roll-up was released on the call. I am not sure I believe this executive's denials.
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