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. 

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?

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. 

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): 

Name		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.

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.

The One Houisng Chart You Need

The Price-to-Rent ratio is the one housing statistic that tells you when home prices are getting out of line.  Below, borrowed from Calculated Risk, is a chart on historic Price-to-Rent ratio:

Price-to-Rent is the ratio of a home's cost to its rent equivalent, similar to a stock's price-to-dividend ratio.  For much of the '80s and '90s the ratio ranged from 1.0 to 1.2.  It started to rise in the early 2000s, and exceeded 1.8 at the housing peak.  The ratio dropped to under 1.2 with the housing collapse.  Price-to-Rent is increasing again as home prices rise, but is only at levels of the early 2000s.  Housing prices have been increasing for over a year, but it doesn't appear that the price rise is out of line.

Rising Land Values

Here is a BusinessWeek article on rising land values.  It presents data you'd expect:  the areas hardest hit by the housing crisis and that saw land prices plummet, are now seeing big increases in land values.  What was missing from the article was data on lot sales and the shortage of finished lots.  I have read news articles detailing how the shortage of finished lots is pushing up land prices as home builders try to keep up with demand for homes.

Blackstone REIT IPO

Blackstone, according to this Bloomberg article, is listing the first of what could be four real estate investment trust IPOs.  Brixmor Property Group, a lamely named community shopping center REIT, is looking to raise $905.6 million.  Brixmor consists of the former US holdings of Australia's Centro Holdings, which ran into trouble and was scooped up by Blackstone during the financial crisis.  In addition to Brixmor, Blackstone is also expects to list other portfolio companies, including Hilton Hotels, IndCor Properties and Invitation Homes.  That's almost as many listings as American Realty Capital.

There is a point of clarification in the article.  It states that there have fourteen REIT IPOs in 2013:

So far in 2013, real estate IPOs have raised $3.9 billion, compared with $3 billion in all of 2012, the data show. The total was $7 billion in 2004, when the biggest stock sales were BioMed Realty Trust Inc. and CBRE Group Inc.

A Brixmor sale at the top end of the range would exceed the $811.8 million raised by Malibu, California-based house-rental company American Homes 4 Rent (AMH) in July, including overallotments. It would follow only the $1.07 billion offering of Empire State Realty Trust Inc. (ESRT), the New York-based owner of Manhattan’s Empire State Building, for deals this year, according to the Bloomberg data.

Missing from the list of IPOs are all the non-IPO listings of non-traded REITs, including COLE, Columbia and Chambers Street.  (American Realty Capital Trust III and Cole Credit Property Trust II were mergers with other entities, not direct listings.)  None of the non-traded REITs that listed rasied additional equity as part of their listings, which is why they are not considered IPOs.  If the market capitalization of this year's non-traded REIT transactions were added to the IPO figure above the market value of newly traded REITs would be much higher.  

Spinning Head

Here is a short article from The Atlantic on gaming credit default swaps.  The article made me dizzy, and I'm both amazed and appalled - but not shocked - at the tactics.  Credit default swaps are insurance products for debt instruments.  One question that came to me as I read the article - I wonder how many loans in business development companies have corresponding credit default swaps?

The Cost of Drilling

Here is a good article from Bloomberg on drilling in the Permian Basin.  I didn't know that the Permian Basin was the second largest oil field in the world after Saudi Arabia's Ghawar.  Hydraulic fracking and horizontal drilling have opened up the Permian's shale fields.  The new drilling is expensive.

This paragraph provides insight into the drilling costs and oil prices needed to breakeven:

Energy producers on average need oil prices around $96 a barrel to break even on wells drilled in Permian layers known as the Cline Shale and the Northern Mississippian Lime, according to Mike Kelly, an analyst at Global Hunter Securities LLC. That compares to average break-even prices of around $78 a barrel in the Eagle Ford Shale a few hundred miles east of the Permian, and $84 in the Bakken of North Dakota. Some areas of the Permian need a price of just $70-$74, Kelly said.

I wonder if these breakeven costs include the investment loads of oil and gas investment funds that are looking to drill in this area.  I doubt it.

ARCP and COLE Merger - Holy Cow!

I wasn't expecting this morning's merger news that American Realty Capital Properties (ARCP) agreed to buy Cole Real Estate Investments (COLE).  After last spring's rancorous battle when ARCP tried to buy non-traded REIT Cole Credit Property Trust III (CCPT III) before it merged into its sponsor and became COLE, I thought the ill will would have left ARCP and COLE adversaries for some time.  It just proves I shouldn't think.

ARCP is buying COLE for $6.85 billion.  ARCP will pay a fixed ratio of 1.0929 ARCP shares for each share of COLE, valuing the transaction at $14.59 per share based on yesterday's close.  ARCP is offering to acquire up to 20% of COLE shares for cash at a price of $13.82 per share.  The boards of each company have approved the transaction and shareholders in both companies must now approve the merger.  The transaction is expected to close in the first half of 2014. 

ARCP expects to raised its dividend to $1.00 per share, up from the current $.94 per share, upon closing the merger.  This is an increase for both COLE and ARCP investors.  The combined company will be the largest net lease real estate company in the United States with over 3,700 properties and a $21.5 billion enterprise value, according to the joint press release announcing the merger.

There is an old James Bond movie called Never Say Never that clearly applies here.  Money helps, too - it's the ultimate business salve for bruised egos and hard feelings.  Today's offer is a premium to ARCP's final offer last spring of $13.59 per share in stock or $12.50 in cash for CCPT III, although that offer didn't include COLE's syndication business, which has exceeded pre-listing expectations. 

This deal is a nice move for COLE shareholders and COLE executives.  The merger represents a 14% premium over yesterday's close for COLE.  As I noted last spring, the breakeven point for COLE to earn its incentive listing fee was $10.45 per share.  At $14.59 per share COLE set for another big pay day.  Based on the table I presented last spring, COLE is set to receive a $224 million incentive listing fee at the $14.59 price, and Chris Cole who owns 10,624,788 shares (much received as part of the non-internalization internalization), sees his stake now worth $155 million, and upon completion of the merger all shares will likely vest, no longer subject to the multi-year lock-up.

There is plenty to consider on this transaction, but on the surface I'm still trying to mentally absorb the big news.

Deep Questions To Ponder

I wonder how many Columbia Property Trust investors are rushing to sell their shares this morning to buy into another non-traded real estate investment trust?

I wonder how many financial advisors are going to get socked in the nose for recommending to Columbia investors that they sell their shares and reinvest into another non-traded real estate investment trust?

Too Stunned For Snark

Columbia Property Trust filed a question and answer this morning on its $300 million modified "Dutch Tender" offer that is planned as part of its listing.  Included in the Q&A was pricing for the tender (copied directly below):

At what price will Columbia purchase common shares in the tender offer?

A7.	The tender offer will be structured as a modified “Dutch Auction,” with the minimum price of $22.00 per share and the maximum price of $25.00 per share, in $0.50 increments, such as:

1.	$22.00

2.	$22.50

3.	$23.00

4.	$23.50

5.	$24.00

6.	$24.50

7.	$25.00

Columbia’s purchase price under the tender offer will be the lowest price per common share from within this range at which common shares have been properly tendered and not withdrawn, which will enable Columbia to purchase the maximum number of common shares having an aggregate purchase price not exceeding $300 million.

All recent Dutch Auctions  - American Realty Capital Trust, Cole Real Estate Investments and Chambers Street - have accepted tendered shares at the lowest offer price.  I am too surprised to comment further on this pricing.

Insidious Managed Futures Funds' Fees

Here is a must-read Bloomberg article on the impact of fees on managed futures funds.  Here is an eye-popping passage:

During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund already had $341.6 million invested during the previous eight years.

Top fund managers speculated with that cash in a wide range of asset classes. In that period, the fund made $490.3 million in trading gains and money-market interest income.

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns -- not one penny. Every bit of those profits -- and more -- was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.

After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.’s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period.

But remember, this awful performance didn't correlate with the S&P 500, so it's OK and really not as bad as it looks.  Trust me, I have a black box.

And then there is this:

According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.

The charm of managed futures funds is the top-secret algorithms and proprietary "black box" trading schemes touted by managers.   No one, apparently, is smart enough to understand what these managers are doing, so managers can't divulge information on their genius investment strategies. (What if a competitor were to somehow get the information?!?  The horror!!)  I had a friend in middle school whose favorite saying was "If you can't dazzle them with brilliance, baffle them with bullsh*&t."  The quote below shows that the black box nonsense is bunk, and that at least one managed-futures manager is clueless (or brutally honest) about its fancy formulas:

Like most managed-futures funds, Campbell develops algorithms for its black box. Those systems are flawed, Campbell tells investors in annual reports.

“A previously highly successful model often becomes outdated and inaccurate, sometimes without Campbell & Co. recognizing that fact before substantial losses are incurred,” the firm wrote. Keith Campbell, founder and chairman of the firm, declined to comment.

Oops. I may have a hard time spelling algorithm, but I do know how to play darts and pin the tail on the donkey.

This article is classic.  Managed futures had one shining moment in the sun - late in 2008 when the entire financial world nearly collapsed.  These funds have been scrambling since then trying to replicate their doomsday performance, and have been paid handsomely for their courageous efforts.

Leo's Luck

One of these days I expect the stock market to react to Washington's game of chicken.  Let's hope it's not Thursday, October 10th, because that's the date Columbia Property Trust (formerly known as Wells Real Estate Investment Trust II) plans list its shares on the NYSE under the symbol CXP.  This is a huge listing - Columbia raised $6.2 billion of equity.

There are a couple of points to keep in mind as Columbia moves to liquidity.  The listing is a full liquidity event, there are no lock-ups or tranched releases.  Columbia executed a 1-for-4 reverse stock split in August.  It's most recent Net Asset Value per share (December 2012) is a split adjusted $29.32 per share.  (Obviously, an investor's original investment price is now $40 per share).  Finally, Columbia is expected to offer a $300 million dutch tender offer, which is about 4.8% of the $6.2 billion raised in equity, so I'd expect substantial over subscriptions, or over tenders whatever the correct term.

Something Had To Give

In a move that should have shocked no one, American Realty Capital Properties (ARCP) and American Realty Capital Trust IV (ARCT IV) changed the terms of their merger agreement this morning.  I have not been through the all changes to the terms of the agreement, but I suspect the new terms take some pressure off ARCP's stock, caused in large part by ARCP's original share price guarantee to ARCT IV investors.  I'll get a summary up in the next day.

Anti-Gold Bug

I should get a Twitter for random articles like the one I am about to link to.   Here is a Financial Times' Alphaville blog post on market forces - more supply than demand - that should hinder gold prices in the near term.  I'm what is ever the opposite of a gold bug, so I like stories that bash gold.

Changing Perception

I suspect most people have now read this Bloomberg article on AR Capital that was published last week.  The complimentary tone didn't surprise me, but what caught me off-guard was that even Green Street Advisor's Jim Sullivan was almost positive on non-traded REITs - or, at least not dismissive and negative.  I think this passage and quote may explain his change:

Sullivan expects such transactions (non-traded REIT liquidity events) to continue because of the amount of nontraded REITs in the business that will need to list their shares on stock exchanges or merge with another company as the end of their investment life approaches. Nontraded REITs eventually have to return shareholders’ investments after a set amount of time.

“There’s going to be a lot more M&A activity,” he said.

Ah yes, the potential for business, a strong attitude balm.