REIT Wrecks | High Yield REITs and Commercial Real Estate

Mauldin Says Deflation Is Coming: Why He Is Wrong, Stuck "Inside the Box" & Hopelessly Conflicted

2009-07-09T03:00:00.000-07:00

While John Mauldin may read "hundreds of articles, reports, books and newsletters" in order to bring you the one essay each week that will "stimulate your thinking", he will also roll for commissions, and that's pretty much all you need to know about his weekly email. More on that later, but first, what about his most recent electronic dirge, in which his illustrious guest scribe heaped upon us innocents the same lost decade of deflation and despair that befell Japan in the wake of its banking crisis?

Presumably, those who choose to heed the call of Mauldin's high-end affiliate marketing scheme shall be saved from this particular despair, but there's really no need to bother. My colleagues and I spend an awful lot of time thinking about the risks of deflation and inflation relative to commercial real estate investments (ironically, REIT Wrecks also spent the weekend at an undisclosed location with an official from the Treasury Dept., and we happened to talk about this very same issue), and in our carefully considered, pretty much conflict-free opinions, Mauldin's lost decade deflation scare is nothing but a bunch of self-serving, poorly researched crap.

REIT Wrecks is far from achieving Mauldin-like internet nobility, but I'm also not an Introducing Broker. I have actual dirt underneath my fingernails, and a decided lack of sycophantic staff willing to manicure them on a daily basis. However, since I must still add, multiply, divide and subtract on my own, I have decided to use this golden opportunity shooting ducks in a barrel!! to show you, my REIT crazy comrades, why the Mauldins of the world are not to be entirely trusted.

Mauldin's guest "analyst" in last Friday's email was a glorified stock broker named Niels Jensen. He runs a firm called Absolute Return Partners, and he is probably a really nice guy. It's an innocuous compliment and also Wall Street code for not being all that bright. Indeed, the first time I heard that expression used in this manner was when he and I shared the same employer some years ago, and sadly it's the best I can do given the quality of his "analysis". To conclude otherwise would be to claim that his analysis is intentionally misleading...and I will leave that dirty bit up to you.

So what about Jensen's claim that we face the same lost decade as Japan? Is there anything to it? On the surface, the parallels are alarming. It's true, the Japanese did experience a banking crisis, and they learned that "recovering from a deflated credit bubble is a long and very painful affair." Redundantly, barely one paragraph and a colorful but mostly irrelevant chart later, he goes on to write:

Another lesson learned from Japan is that once you get caught up in a deflationary spiral, it is exceedingly hard to escape from its grip. The Japanese authorities have used every trick in the book to reflate the economy over the past two decades. The results have been poor to say the least: Interest rates near zero (failed), quantitative easing (failed), public spending (failed), numerous attempts to drive down the value of the yen (failed); the list is long and makes for painful reading.

Finally, after more gee-whiz gobbledy-gook on such esoterica as the output gap and inelastic commodity demand, he concludes that "the ultimate outcome of this crisis will turn out to be deflation – not inflation. Inflation may eventually become a problem, but that is something to worry about several years from now. The Japanese have pursued an aggressive monetary and fiscal policy for almost 20 years now, and they are still nowhere."

Wow! All those pretty charts and this is the best he can do? Clearly, REIT Wrecks suffers from a chart deficiency, and anyone who can send me some pretty new ones will get a free subscription to Mauldin's newsletter. In the meantime, as usual, I have made my own.

Now, with respect to Japan being "nowhere", there is actually good reason for that, and while the charts below are in fact hand crafted by yours truly, I must credit Foreign Affairs for publishing - barely two months ago - a convenient and timely article on the the "Japan Fallacy", as they refer to it (Volume: 88, Issue: 2, March/April 2009). Evidently, Jensen was too busy churning client accounts to bother reading it, and somehow Foreign Affairs isn't anywhere on Mauldin's radar.

That aside, while it is true that Japan suffered a banking crisis in the early 1990s, and that in response the Japanese government pursued strategies similar to those now being employed by the U.S. Treasury and Federal Reserve, the similarities end abruptly there. Any further comparisons to Japan then and the crisis in United States now are just not accurate.

The reason is that Japan's banking crisis was dramatically different from ours, and for reasons known only to him, Jensen spends no time evaluating those differences. Fundamentally, the crisis in the U.S. was caused by narrow dysfunction in our financial sector, and that caused an economic crisis. In Japan, the problem was pervasive dysfunction in the entire economy:

Japan's malaise was woven into the very fabric of its political economy...weak domestic firms and industries were sheltered from competition by a host of regulations and collusion among companies. Ultimately, that system limited productivity and potential growth. The problem was compounded by built-in economic anorexia. Personal consumption lagged, not because people refused to spend, but because the same structural flaws caused real household income to keep falling as a share of real GDP. To make up for the shortfall in demand, the government used low interest rates as a steroid to pump up business investment. The result was a mountain of money-losing capital stock and bad debt.

The Japan Fallacy: Today's U.S. Financial Crisis is Not Tokyo's Lost Decade. Foreign Affairs, March/April 2009.

The Japanese and U.S. crises differ in numerous other ways, but one of the starkest contrasts is in the response of policymakers. Denial, dithering, and delay were the hallmarks in Tokyo. Jensen doesn't bother to mention that it took the Bank of Japan nearly nine years to bring the overnight interest rate from its 1991 peak of eight percent down to zero. The U.S. Federal Reserve did that within 16 months of declaring a financial emergency, which it did in August 2007. It has also applied all sorts of unconventional measures to keep credit from drying up.

Furthermore, Jensen fails to mention that Tokyo lacked the political will to allow widespread bank failures. The collapse of Lehman Brothers remains the largest corporate bankruptcy ever in the United States, but nothing like it was ever allowed to happen in Japan.

On the contrary, Tokyo used government money to help its banks keep lending to insolvent borrowers and protect their shareholders. The result was a country that became even more deeply indebted, supported by an economy that was not productive enough to pay it all off. Consequently, Japan’s public debt, already the world’s largest (second only to Zimbabwe!), will surge to 197 percent of gross domestic product in 2010, according to the OECD:

The United States, over there near its more quiet neighbor, Canada, is not even close. What about the massive $787 billion fiscal stimulus just signed into law, will that squeeze the U.S. into a cell next to Japan in debtor's prison? It's unlikely. The reason is that the Japanese economy is much smaller than the U.S. economy, and unlike the U.S., Japan's population is contracting. On average, Japan's population is also much older. As a result, Japan is much less productive than the U.S., and even though U.S. government debt is forecast to swell to about 70% of GDP through 2014, that would still be less than half that of Japan today, and far below that which was incurred by the U.S. during World War II:

Note: This graph represents the cumulative total of all government borrowings in U.S. dollars, less repayments. It does not include liabilities related to funds held in trust (like Social Security) or financial assets (like agency securities). "Debt Held by the Public" is not "external debt", which reflects the foreign currency liabilities of both the private and public sector.

Ironically, Jensen does note that most observers condemned the Japanese approach as hopelessly inadequate, which it was, but he also implies that it was identical to what was employed by the U.S., which it wasn't. Is this the kind of work they do over at Absolute Return Partners? If so, why would Mauldin be so devilishly fond of them??

Policy mistakes -- from Japan's mismanaged fiscal and monetary policy to the government's failure to address the loan crisis -- made a bad situation even worse. But even if policymakers had done everything right, Japan's economy still would have stagnated until Tokyo addressed its more fundamental flaws.

A far better comparison might have been the Asian financial crisis, which proved that once financial markets are calmed and policy mistakes are reversed, economies recover. Even clumsy Russia managed to recover from its 1998 financial crisis and currency devaluation. Apparently, neither of these two examples suited Jensen's needs.

As for the hopelessly conflicted Mauldin, what's black and white and read all over? Unfortunately, it's not a newspaper, as nobody reads them anymore. It's the disclaimer in small print located at the bottom of Mauldin's "E-letter", conveniently overlooked by most, and which I have edited slightly for clarity:

Mauldin cooperates in the marketing of private investment offerings with Absolute Return Partners. Funds recommended by Mauldin may pay a portion of their fees to Absolute Return Partners, who will share 1/3 of those fees with Mauldin. Mauldin only recommends products with which he has been able to negotiate fee arrangements.

In other words, Mauldin will treat his loyal readers to the worst ideas from any old crap fund, so long as the fund managers can afford to pay him off for the favor. In Brooklyn, they might call this racketeering, were they not so stupefied as to how it's all completely legal. My advice? Just go read Foreign Affairs.

JP Morgan Likes Brandywine (BDN) and Entertainment Properties Trust (EPT)

2009-07-08T09:44:00.000-07:00

JP Morgan analyst Anthony Paolone is understandably not bullish on commercial real estate fundamentals, but since the public market is typically ahead of the private market in terms of valuations, he does like certain REITs.

Brandwine in particular has both refinanced existing debt, and repurchased its own debt on the open market (for a quick explanation of the accounting behind debt repurchases, read Muddled REIT Book Values Create Opportunity). The ability to delever in this market is obviously muy bueno, even though Brandywine also diluted shareholders to death in the process.

Paolone also thinks (BDN) will pay a special dividend in Q4. Be aware of the fact that JP Morgan was joint lead underwriter on BDN's very dilutive equity offering, so do look carefully beneath the hood before plunging in.

Enjoy the vid!

Real Estate as an Inflation Hedge? Don't Bet On It

2009-07-07T12:36:00.000-07:00

One major reason for investing in commercial real estate and REITs is that real estate is thought of as an effective hedge against inflation, yet commercial properties were an abyssmal inflation hedge in the early 1990s. So why are they still considered to be an inflation hedge if that isn't always the case? As usual, it's mostly about timing and location. (Note: For the time being, I am ignoring the actual likelihood of inflation or deflation - more on deflation here; more on inflation to follow. You may also be interested in a recent Brookings Institute report on recession proof real estate)

As this NAREIT chart conveniently shows, equity REITs (in green) declined in the early 1990s (circled in blue), even though the Gulf War and high oil prices were driving commodity prices (in black) higher:

Even more conveniently, this NAREIT chart, with inflation added in via the CPI, shows that REITs were actually highly correlated to the S&P 500 (i.e. stocks!), and that both performed horribly during the early 1990s:

These NAREIT charts help illustrate that the market value of all types of commercial properties actually collapsed after about 1989, even though the CPI and commodities rose. So why did this happen? The lesson from the early 1990s is that in the short run, private real estate equity and public real estate equities are not effective hedges against inflation if there is a large overhang of supply. Indeed, this video on retail big box vacancies in Orange, CT shows that one result of oversupply is high vacancy rates:

For those of you who prefer more excruciating detail, this study by Wurtzebach, Mueller and Machi (circa 1991) takes an academic approach to explain what may already be intuitive to those of you that own and operate commercial real estate: real estate is an effective hedge against inflation only if the markets are in balance. If the markets get out of balance (defined as vacancy rates above 10%), high vacancy rates make it impossible to raise rents to combat inflation:

Imbalances are especially pronounced after periods of capital markets excess, such as the one we just experienced. No property sector is totally immune to the current imbalance, but retail real estate in particular faces a lot of pressure given bankruptcies at GM, Chrysler, Circuit City, Mervyns, Steve & Barry's, Linen's 'N Things, etc.

In the auto industry alone, 881 car dealerships were closed in 2008, and GM and Chrysler have announced closings of over 2,000 more in 2009. Skyrocketing vacancy rates mean that the vast majority of these sites will languish and sit empty for several years, nevermind generate any income or appreciate in value.

REITs and commercial real estate can be an effective inflation hedge if you have a longer-term investment horizon, or if you invest specifically in REITs that own quality assets in protected markets that provide pricing power (Federal Realty Trust (FRT) being a good example). But not all investors have the luxury of the buy-and-hold approach, and if you're hoping that inflation will be the panacea for a poorly-timed asset purchase in a weak market (e.g., Phoenix, Las Vegas, Tampa), it's definitely time to implement Plan B.

retail REITs
reit investments
reit stocks
commercial real estate
reits and inflation

Agency Mortgage REIT Dividends Get Better & Better

2009-06-25T09:30:00.001-07:00

Shamefully, I haven't done much with Agency Mortgage REITs here, but the times they are a changing. Agency Mortgage REITs are killing it on net interest spreads, and that is causing higher net incomes and increased dividends. What else could an investor want, next to a portfolio of government-guaranteed mortgage debt? Not surpringly, many investors screech to a halt on mention of the latter, and that's one of the reasons these REITs deliver high teens yields quarter after quarter.

But those who had been yawning at the mention of an Agency Mortgage REIT are probably taking a closer look now. (AGNC), which is a relatively new Agency REIT, surprised everybody on Tuesday when they announced a quarterly dividend of $1.50 per share, a whopping 76% higher than the previous quarter (the dividend is payable July 27th, and the ex-dividend date is June 30).

AGNC's dividend increase follows dividend increases from Annaly Capital (NLY) last week and Capstead Mortgage (CMO) the week before.

What's causing all this? The earnings driver is the so-called "steep yield curve", as it's known in industry speak. In this market, a steep yield curve basically means nobody wants to own anything with a maturity beyond next week, especially if it has a mortgage attached to it. This is resulting in a huge spread between short yields and long yields, and Agency Mortgage REITs are busy collecting the difference. The difference between these Mortgage REITs and others is that Agency REITs are doing it with portfolios of AAA-rated government paper, not a bunch of dodgy TRUPS and CDOs.

In AGNC's case, the weighted average yield on its portfolio last quarter was 5.13%, but its average cost of funds was 2.11%, resulting in a margin of 3.02%. This is pretty good work if you can get it, and last quarter AGNC delivered a 24.1% return on equity for sitting in between.

AGNC is not alone. Annaly Capital Management increased its dividend last week - by 20% to $0.60 per share (payable July 29, ex-date is June 25). NLYs net interest margin went from 1.71% to 2.11%, and they rode the recovery in mortgage bonds with a $5 million gain on sale. Combined, this drove earnings to $0.63 per share, up 19% from the year-ago quarter.

CMO's dividend increase was less spectacular, up 4% to $0.58 per share for the third quarter of 2009, but the story is the same: their net interest margin increased to 2.16%, and they have plenty of cash to invest after participating in the recent frenzy of REIT stock offerings.

Other cashed-up REITs investing in agencies, though not exclusively, include Redwood Trust (RWT) and Chimera (CIM). Incidentally, RWT sold its stock in two separate overnight offerings, the latter at a 10% discount to the previous day's close.

Despite these rich dividends, Agency Mortgage REITs are not for widows and orphans. Concerns over the government losing its AAA rating (which Annaly management calls "gossip"), interest rate wories, news about Asians selling their dollar assets, inflation prospects, high leverage ratios and re-investment risk all amount to a big detour sign for a lot of investors. From my perspective, owning these things right now amounts to a front row seat for the greatest show on earth (at the very least), and it's probably worth the risk.

Disclosures: None at the time of publication

Mortgage REITs
reit investments
reit stocks
reits
reit news

20 Recession Proof Real Estate Markets

2009-06-24T09:14:00.000-07:00

Like politics, all commercial real estate is local. The Brookings Institute has just published a study on the 100 largest MSA's in the country, and it concludes that there actually are green shoots in commercial real estate, and many of them are to be found in over-looked, secondary markets in the middle of the country.

The report shows that in 38 of the top 100 metro areas, housing prices remained flat or actually increased over the past year, even as prices nationwide dropped. Most of these metro areas also experienced below-average employment declines, and they lie in some interesting areas somewhat off the beaten path (Pittsburgh, Rochester, Tulsa, Des Moines and Baton Rouge, among others).

All of the top metros also have below-average shares of single family foreclosures, which is not surprising. This is not also not an isolated finding, and I wrote about Zillow's distinction between "hot" markets that were actually "not" in The Best Performing Apartment REIT for 2009.

In terms of extrapolating the findings to other markets that may have similar-recession proof characteristics, it shows that areas with heavy concentrations of education and healthcare-related jobs are performing well, and that cities with concentrations in finance jobs are not all the same. Oklahoma had two cities in ranked in the top 20: Oklahoma City and Tulsa. Other cities doing well include Little Rock, Harrisburg and Albuquerque:

"All metropolitan areas are feeling the effects of this recession, but the distress is not shared equally,” said Alan Berube, the program’s research director and report co-author. "While some areas of the country have experienced only a shallow downturn, and may be emerging from the recession already, people living in metro areas that are now performing the weakest economically should prepare themselves for a long recovery period.”

commercial real estate
reit investments
reit stocks

9 REITs That Had to be Destroyed in Order to be Saved

2009-06-20T12:18:00.001-07:00

In 1968 at the height, so to speak, of the Vietnam War, U.S. Air Force Major Chet Brown was fresh out of ideas and common sense. Tired, frustrated and on the wrong end of a microphone after a battle for the provincial capital of Ben Tre, he famously allowed that it had become necessary to destroy the town in order to save it. Such is the logic surrounding 9 REIT stock offerings in the first half of 2009.

Undercapitalized and over-leveraged, many REITs had no choice but to enter into dilutive transactions in order to survive. But Like Ben Tre, these 9 REITs have been flattened by massively dilutive equity offerings, and nobody can predict when they will be able to meaningfully grow their dividends again.

Most of these "re-equitizations" were completed overnight within hours of being announced, which is no wonder as they were priced at a huge discount (over 10%) to the previous day's close. Many of these REIT offerings more than doubled the amount of shares outstanding.

The decision to sell massive amounts of discounted stock at a time when rents are declining across the board is tantamount to destroying these REITs. Indeed, dividends were cut almost immediately after these offerings closed. While it's unclear how the new shareholders felt about this little welcoming gift, what is clear is that these stock deals were hugely dilutive, and that will make it extremely difficult to show any meaningful dividend growth for at least the next several years:

NINE NOT SO GOOD REIT DEALS
REIT Name	Increase In Shares Outstanding	Dividend Cut	News
Brandywine Realty Trust	+34%	-67%	BDN
Cogdell Spencer	+74%	-51%	CSA
Camden Living	+13%	-36%	CPT
Duke Realty	+40%	-32%	DRE
Kilroy Realty	+27%	-40%	KRC
Kimco Realty	+39%	-86%	KIM
Prologis	+65%	-40%	PLD
Regency Centers	+14%	-36%	REG
Weingarten Realty	+30%	-52%	WRI

There are many good reasons to invest in REITs right now. REITs typically lead property markets into and out of recessions, and these successful equity offerings indicate that the market is anticipating a recovery. Nevertheless, these 9 REITs are best avoided in favor of others that have not had to conduct such radical recapitalizations.

Suggestions: the adventurous could take a look at Simon Property Group (SPG). SPG also just closed a large equity offering, but dividends were not cut and management said recently that SPG would resume paying all cash dividends in early 2010 (SPG is currently paying dividends in stock, click here for a complete list of REITs paying dividends in stock). SPG owns a portfolio quality assets in good locations, and they have cash to pick up more.

Apartment REITs will benefit from tighter single family lending standards, very favorable long-term demographic trends, and a precipitous drop in the construction of new apartment stock. Check out Mid-America Apartments (MAA), which will definitely be the best performing Apartment REIT for 2009. Equity Residential (EQR) is another Apartment REIT that reported solid Q1 earnings. The Fed's plunge into CMBS via TALF is causing lots of intrigue in the Mortgage REIT world, particularly with Dynex (DX) which invests in both agency and non-agency RMBS and CMBS.

Disclosures: None at the time of publication

commercial real estate
reit investments
reit stocks
reits
reit news

REITs Queuing Up To TALF Trough By the Dozen; Debt is the New Equity

2009-06-18T16:59:00.000-07:00

REITs cracked the capital markets code this quarter. What looked like one of the biggest incipient financial train wrecks since the Great Depression has turned into a scramble for REIT scrip of almost any stripe. The MSCI US REIT index is up 55% from it's March lows, and $15 billion in credit lines have been issued and refinanced with equity faster than slum dog can phone a friend.

This is not be entirely surprising: REITs always lead the private market into and out of real estate recessions, but the alacrity of this recovery probably has champagne corks ready to fly at the Fed. While the Fed's first deadline for issuers seeking TALF funds for CMBS passed this last Tuesday without any takers, all of this REIT stock activity has been in anticipation of REITs being able to borrow again, finally...even if it's from a government-subsidized bailout fund.

Gushers of TALF cash cannot arrest the inevitable bust in commercial real estate prices, but government liquidity can and may already be averting massive, wholesale defaults in REITs and commercial real estate.

And that is the goal. William Dudley, president of the New York Fed, on June 4 underscored the importance of the CMBS TALF program, noting that a continued lack of funding would increase loan defaults and further pressure the capital positions of banks that are holders of commercial real estate assets. Reiterating this, Dudley said the CMBS roll-out is key for the overall success of the TALF program.

So it shouldn't come as any surprise that the availability of TALF cash has creditworthy REITs scrambling to hock every last speck of unencumbered dirt in search of fresh liquidity, even if (ironically) it's in the form of even more debt.

There are at least a dozen REITs working on TALF deals, including a number of Mortgage REITs ready to re-pledge AAA CMBS collateral. One such Mortgage REIT, Dynex Capital (DX) estimates that it can re-pledge existing AAA CMBS to the Fed through TALF and get a funding pickup of 800 bps in the process.

Developers Diversified Realty Corp. (DDR), an Ohio-based retail REIT, could be one of the first REITs to reliquify physical assets through TALF. According to the Cleveland Plain Dealer, DDR is working with Goldman Sachs and Citibank to prepare two groups of properties -- each worth about $800 million -- as collateral for new TALF loans.

The properties DDR has identified are either unencumbered or have near term debt maturities. The latter is obviously be a big, big problem for many highly-leveraged REITs, but the new TALF money now looks like it will alleviate at least some of that risk, as is intended.

Developers Diversified hopes to borrow about $300 million against each of these groups and use the money to repay unrelated debt and/or refinance existing mortgages. Simon Property Group (SPG), another retail REIT, is also in line. Either way you cut it, the ability to swap old debt for new debt makes new debt the new equity, and the first deal should close by early September.

commercial real estate
reit investments
reit stocks
reits
reit news

Iran

2009-06-18T02:20:00.000-07:00

"The issue today is the same as it has been throughout all history, whether man shall be allowed to govern himself or be ruled by a small elite."

Thomas Jefferson

Maguire (MPG) Sells Orange County Property at 40% Discount to Cost

2009-06-15T09:40:00.000-07:00

Maguire Properties (MPG), the Office REIT that bought 24 office properties and 11 development sites from Blackstone for $2.88 billion at the height of the market, just got a market read on its Orange County holdings. According to the Wall Street Journal, Emmes Holdings in New York recently agreed to buy MPG's stake in a newly constructed office property in Irvine, Calif., for about $160 million, representing a 40% discount to its construction cost.

Maguire's heavy concentration in Orange County gives it exposure to the subprime debacle that probably rivals AIG, given that Orange County was subprime central HQ for many mortgage lenders. This exposure is resulting in an epic struggle to dig out from under the debt incurred in that 2007 purchase. Making matters even worse, the FDIC's grim reapers are out in full force in Orange County, shuttering bank offices and rejecting leases without the customary remedies afforded to landlords under Chapter 11.

I am not a lawyer but I live in San Francisco and like to play dress up every now and then and Federal bankruptcy laws are complex, but in general, Chapter 11 default remedies for owner/lessors of commercial real estate typically allow 60 days for bankrupt lessees to affirm or reject their leases. For those leases that are rejected, the properties are thrown back on the market in search of a new lessee, and the owner/lessor receives an unsecured claim get in line, buddy limited to three year's worth of rent.

However, The FDIC's authority to reject leases does not fall under Chapter 11 of the Code, and it is even more draconian. If a lease is rejected by the FDIC as receiver, the owner is simply handed the keys imminent default and the contract is extinguished - with absolutely no claim on the estate of the dearly departed. This obviously makes it tough to pay your friendly banker on the first of every month.

This is exactly what has happened with Quintana, an office property jointly owned by Maguire (20%) and Maquarie Office Trust (80% - ASX: MOF). Maguire announced today that the FDIC has rejected the majority of WAMUs lease at Quintana, which is also in Orange County. According to the press release, the FDIC surprise! is "not obligated to pay any rent or other compensation in connection with the lease termination".

This brings the occupancy of Quintana to approximately 40%, which is unsustainable in relation to the debt (a now completely underwater $106 million CMBS loan maturing in December 2011). Maguire has commenced discussions with the special servicer, and a deed-in-lieu of foreclosure deal is the most likely outcome. This will probably wipe out all of MGP's equity in the property.

With respect to the sale of the aforementioned newly-constructed property to the Emmes Group, it's noteworthy that financing was provided by EuroHypo, itself a struggling lender. But don't get your hopes up - the loan was not new money. EuroHypo simply allowed Emmes to assume the original construction loan in return for injecting fresh equity.

Until Emmes showed up with its $160 million check, EuroHypo was in about as much distress on this deal as MPG. Last month, Maguire took a $23.5 million first-quarter noncash impairment charge on the property, following a $50 million noncash impairment charge on the same property in prior quarter. EuroHypo's $165 million construction loan was set to mature in September 2009, but it will now live on (with principal reduced) as term financing for a brand new borrower. And the beat goes on!

commercial real estate
reit investments
office reits
reit stocks
reits
reit news

Weekend Roundup: How to Make A Fortune with REITs in 2010

2009-06-13T08:30:00.000-07:00

Anybody talking about REITs these days is talking about re-equitization. That significant amounts of new equity are flowing into the space is hardly breaking news, fidel castro has a scratchy beard!! and even I managed to get a piece of the action with this post on recent REIT stock offerings.

What is the real significance of all this fresh cake? Obviously, it's about delevering, but it's also about 2010. These equity offerings are separating the winners from the losers drowning in debt, and the latter will be forced to sell into one of the best buyers markets in decades.

In short, 2010 will bring a flood of distressed assets to the market, and everybody knows it. Cash will be king. Accordingly, REITs with access to equity capital markets will be able participate in this smorgasbord of distress, while those without cash will be locked out. Most important: Public REITs always lead property markets out of recessions, so buying into these freshly recapitalized REITs now could lock in big gains for 2010.

But don't make me prattle on in order to prove it - it's Saturday morning after all. Just sit back, relax and hit the play button (batteries not included...):

When it comes to investing in distressed assets, Mike Kirby of Green Street Advisors thinks REITs will be the only game in town. In this next video clip, he discusses some of the key risks facing REIT investors, as well as the opportunities for public REITS to buy quality assets on the cheap starting in 2010. Kirby foresees a a 1990s-like consolidation, followed by a much bigger REIT industry five years from now:

While Kirby and Pire cover the institutional side of the business, Cramer, everyone's favorite retail hyperventilator, likes Boston Properties (BXP). REIT Wrecks, however, is confused by Cramer's enthusiasm for BXP. The Company has an NOI concentration in New York City and heavy exposure to the financial sector in New York, Boston and San Francisco. Rents are down in the latter city by 40% and are still dropping. The Company has already guided FFO down by 5% for 2009. This pick could become another member of the Cramer Crap Club (alas, CNBC seems to have pulled this vid. If it doesn't load in your browser, you can see it here. Suffice it to say, don't stick with Cramer on this one):

In addition to BXP, Numerous REITs have recapitalized, and an increasing number of brand new REITs are coming public. In anticipation of a recovery, the Dow Jones Equity REIT Index is already up 57% since the lows in March. However, REIT Investors need to be selective.

Obviously, you still need to avoid REITs with high levels of debt. Look for REITs that are covering dividends from operating cash flow, and most of all, look for those REITs with assets in strong, protected markets. This will provide the pricing power they'll need to combat the effects inflation, which seems almost inevitable at this point. For a quick but by no means comprehensive buying guide, see REIT Stocks: 4 Ways to Play the Carnage.

Click here for a list of Apartment REITs
Click here for a list of Healthcare REITs
Click here for a list of Hotel REITs
Click here for a list of Industrial REITs
Click here for a list of Mortgage REITs
Click here for a list of Office REITs
Click here for a list of Retail REITs
Click here for a list of Storage REITs

Click here for a REIT ETF List
Click here for a list of REITs paying dividends in stock

commercial real estate
reit investments
reit stocks
reits
reit news

REITs Quietly Sell Stock Overnight at a Discount; Next Day Pop Fries Shorts

2009-06-08T03:00:00.000-07:00

If Frank Quattrone could start over, he would be a REIT banker. REITs staged a huge rally this quarter, almost $15 billion in new equity has been raised through 45 public offerings this year, and even the Italians are descending upon New York to list new deals. With REIT stocks now being served up like Cannolis on Columbus Day, and consumed almost as fast by shell-shocked but somehow still hungry investors, you may have one question: What is Going On?

One reason is that REITs cram down desperately need the money, and while not all are teetering on the brink insolvency, most will do almost anything for fresh cash. This includes diluting their long-suffering shareholders bang zoom! to the moon, and cutting dividends prego! to the newly annointed.

How is this happening? Some intellectual honesty is called for here: REITs were simply oversold. Furthermore, no portfolio manager that I know of was willing to scale the ramparts for General Growth, no matter how many bankers GGP put to work pounding the phones, or how much they were being paid. Still, when there's an abundance of supply, demand needs to be stoked, and that's exactly what's being done. Almost all of these REIT equity offerings are being sold in "over-the-wall deals", much like tech stocks were in the late 1990s.

"Over-the-wall" deals are pre-arranged sales with leading investors at discounted prices, executed overnight. The news hits the tape the following morning, and the stock jumps. Basically, if you're not "over-the-wall" you're trapped beneath it, especially if you're short. Indeed, one goal of the strategy - to scare the pants off of short sellers - is surely working. Nobody wants to be short a company whose balance sheet can be de-levered overnight, and that (re-equitization) is the other goal.

Unlike GGP, investors are flocking to these deals like moths to a porchlight. At a securities conference several weeks ago it's just not true, there is a free lunch Mortgage REIT management presentations were standing room only. One of them, Chimera (CIM), had just used an $850 million offering to transform itself from a smoking heap of 2007 trade confirmations into a potential Microsoft of Mortgage REITs. Another, Redwood Trust (RWT) executed not one but two new issues, the latter just days after the conference, raising almost $500 million in equity.

REIT new issues have included such varied names as Alexandria Real Estate Equities (ARE), AMB Property (AMB), Pro-Logis (PLD), SL Green (SLG), Ventas (VTR) and Vornado (VNO). The AMB deal is a good example of how the REIT equity syndicate pot is being stirred. AMB's $575 deal combined pre-launch "over-the-wall" meetings with the chosen ones, followed by overnight execution. The deal was 80% sold before it was even offered to the public - and then upsized 24% for good measure. It was sold at a discount of 8% to previous close, which isn't bad considering that it represented almost 50% of the current shares outstanding, and that the stock traded up 16.5% the next day, resulting in an instant 25% gain for the new shareholders.

Who's next? Everybody wants to know. Significantly, IPOs in registration are dominated by Mortgage REITs. These include Cypress Sharpridge (agency RMBS), Invesco (agency & non agency RMBS; CMBS; TALF loans) Penny Mac (non-agency RMBS), Sutherland (agency & non-agency RMBS) and Starwood Property Trust (CMBS/RMBS). These initial public offerings will list under the symbols CYS, IVR, PMT, SPT and SLD, respectively.

Others in registration are Brookdale Senior Living (BKD) and Investors Real Estate Trust (Nasdaq: IRET). Recent shelf offerings include Northstar Realty Finance (NRF), with JMP Securities (a large investor in New York Mortgage Trust (NYMT) and manager of its mortgage assets) as sole manager.

Even crippled Anthracite (AHR) may be getting into the act. Miraculously, the company was able to restructure its secured and unsecured debt last month, and a round of fresh equity is undoubtedly next on the list. Anthracite's cozy relationship with Blackrock, which backstopped AHR with a line of credit in its darkest days, gives it an almost unparalleled window on the Fed's growing portfolio of "toxic" mortgage assets. In this latest game of "if you're not inside, you're outside" being played with REIT equity, that may be all AHR needs to push it over the finish line.

Disclosures: Long NRF at the time of this writing.

commercial real estate
reit investments
reit stocks
reits
reit news

Cliff Diving With New York City Landlords

2009-06-03T14:00:00.000-07:00

According to Robert Knakal of the eponymous in Manhattan commercial real estate brokerage firm Massey Knakal, the dismantling of Wall Street on September 15th is also dismantling the net worth of hundreds of New York City landlords. It's actually not that simple, but his excellent and striking sales data sets the stage: the New York City real estate market has not experienced sales volumes as low as the first quarter of 2009 in at least twenty-five years.

The worst years, 1992 and 2003, marked the end of recessionary periods and cyclical highs in New York City unemployment. The volume of sales in those years was 1.6%, which Knakal had always assumed was a market baseline representing only those people who had no choice but to sell due to death, divorce, taxes, insolvency, partnership disputes or the like. Then came the first quarter of 2009.

According to Knakal, if one were to annualize volume in the first quarter of 2009, in which only 233 transactions closed, sales volume for 2009 would be less than half of those recessionary 1992 and 2003 sales nadirs.

This graph tells only part of the story, that of multi-family and mixed use sales, but this part of the story is why Wall Street was dismantled on September 15th. In an earlier post about a month before then, I wrote about the bank that was ultimately undone that day, and one of the real estate deals that undid it.

That 2007 deal, the largest ever for apartment buildings, was emblematic of the headlong stampede for yield during the credit bubble inferno. However, as Knakal's data shows, Lehman's deal for Archstone Smith was hardly isolated, and prices still have nowhere to go but south. If your vision is as bad as mine, click on the graph to get a better view shitstorm of what's about to happen with New York City multi-family prices:

This graph's innocuous title ignores the curiously shaped lines on the right, which look precisely like what they are: the jaws of the market about to snap shut on those who bought in Manhattan in 2005, 2006 and 2007. This is hardly news, and Harry Macklowe is already moving through the belly of this slithering python, but it indicates that prices still have another 50 percent to drop before Manhattan reaches the bottom!

For the unitiated, it's not complicated. In the real estate world "GRM" stands for Gross Rent Multiplier, and it is roughly equal to a price/earnings ratio. "Cap Rate" is short for Capitalization Rate, which is an unlevered yield on equity. With P/E valuations still at all time highs, and yields still at all time lows, you've prety much got the picture.

Valuations of walk-ups were similarly absurd, and they remain so, especially given the availability not of credit:

To complete this ugly picture, all you need to do is trot out a handy-dandy solo graph of historical cap rates for Manhattan apartment buildings:

Your view of how much prices still have to drop based on this particular graph just depends on whether you are an optimist (about 40%) or a pessimist (let's skip that figure, shall we?)

Residential sales volumes in New York City are evidently not much better. Manhattan residential broker Coldwell Banker Hunt Kennedy closed its doors this week, after revenue dropped about 75%.

"The rest of the country has been in a real estate recession for several years," an official at the firm said. "We entered a meltdown here starting last September that has been relentless." Indeed, and the worst is yet to come.

commercial real estate
commercial real estate loans
reit investments
apartment reits

Non-Traded REITs Are Designed to be Sold, Not Bought

2009-05-26T09:59:00.001-07:00

There is no real estate investment I would work more diligently to avoid than a non-traded REIT. They routinely pay dividends out of investor proceeds peter or paul? and one of them, Wells Timberland REIT, doesn't even qualify as a REIT. So what gives? It's pretty simple: your friendly neighborhood broker is paid handsomely to sell them, regardless of whether it's in your best interest to buy them.

Almost $9 billion in non-traded REIT equity was raised last year, a record which looks to be shattered in just the first six months of 2009. So far this year, 11 non-traded REITS have registered to raise a combined $19 billion in equity. Officially, they are gearing up to capitalize on opportunities arising from the recession and the distressed property market. Unofficially, it's a fee bonanza for everyone involved, and hapless retail investors are paying the freight.

Indeed, it would be easier and cheaper to hire Johnny Cochran to bail you out of a murder charge than to somehow come out ahead on a non-traded REIT investment. You would also be leaving much less to chance. In addition to the upfront commissions of 9-12 percent paid to your broker, there are individual property/asset acquisition fees of up to 2.75 percent, property financing fees of up to 1 percent, management fees of up to 5 percent, disposition fees of up to 1 percent, and asset management fees of up to 1 per annum, plus expenses. The net result is that out of a $10,000 initial investment, only about $8,000 would be left to actually invest.

Obviously, these fees encourage only two things: sales of non-traded REIT shares and purchases of property - any property - at almost any price. David Swensen, Yale Endowment's chief investment officer, singles out the Wells REITs in his book, "Unconventional Success" (pages 70-75). Swensen obviously knows his way around alternative investments, and his opinion of Wells is unambiguous:

"No rational buyer can compete with the Wells acquisition machine's willingness to overpay for product. As a consequence, investors suffer the double indignity of high fees and poor investment prospects."

How then, are investors convinced to suspend common sense and buy these commission-laden pigs? In theory, non-traded REITs offer price stability and a reliable source of income, and those are the major selling points. But a quick glance glance at almost any prospectus reveals these key "features and benefits" to be nothing more than highly profitable gimmicks.

Officially, the share price is almost always set at something remarkably close to $1o by the REIT sponsor, and almost as remarkably, it never ever changes no matter what. This is true of almost all non-traded REITs, regardless of the quality of their assets, their location, leverage, current market conditions or how long the REIT has been in operation. This lack of transparency is somehow supposed to provide investors with comfort.

Realistically though, how could a brand new REIT with no assets and unproven management be worth the same $10 a share as a 5 year old REIT with $3 billion in diverse assets spread across the country, and the same as a 10 year old REIT with just $200 million in assets concentrated in one small market? It's a $10 coincidence that is just as impossible as it is unbelievable.

In fact, the latter example is Whitestone REIT, a non-traded REIT that was the product of one real estate entrepreneur's efforts to consolidate his real estate holdings in Houston. The result was a bitter dispute with Whitestone management that lasted almost a decade. Could this REIT still be worth $10 a share to the investors whose dividends were cut and whose shares can no be longer redeemed? It's improbable, and recent Whitestone insider transactions value it at $5.15 a share, about half the "official" price paid by outside investors.

If egregious fees and lack of transparency weren't enough to perfect this foul smelling stew, why not add conflicts of interest and fraud? For an example of the former, look no further than Inland American REIT, and Inland Western REIT, two non-traded REITs managed by the Inland Group in Chicago. Inland Western needs to repay $1 billion in debt this year, which may be an impossible feat. In fact, as we type, Inland Western is rather desperately trying to raise cash to avoid bankruptcy. Obviously, Inland Western faces the toughest real estate lending climate in three decades.

But that's no matter, especially since Inland Western can easily raise cash by selling its kryptonite to affiliates. Inland Western did just that earlier this year, pocketing $99 million in cash by selling two properties to Inland American. This was done at a time when commercial real estate sales volumes reached all time lows. Whether any of this was truly arms length and representative of fair market value is difficult to tell, but it seems unlikely .

Fraud and misrepresentation complete this cancerous portrait. This particular example is brought to you courtesy of the SEC which recently settled a non-traded REIT kickback scheme with W.P. Carey. According to the settlement, W.P. Carey paid nearly $10 million in undisclosed compensation to a broker-dealer that sold shares of W.P. Carey's non-traded REITs to the public. The arrangement benefited not only the broker-dealer, but also W.P. Carey, because the broker-dealer's sales of REIT shares increased the management and other operating fees paid to W.P. Carey. W.P. Carey and 2 senior executives agreed to pay $30.3 million in disgorgement, interest and penalties.

In terms of the other key selling point, reliable income, non-traded REITs are not so reliable. Many, like Cornerstone Core Properties REIT, are busy funding their dividends from borrowings and returns of capital. Grubb & Ellis Healthcare REIT is a great (but not isolated) example of the lengths to which non-traded REITs will go to maintain their dividends. For the three months ended March 31, 2009, Grubb & Ellis paid distributions of $14,247,000, as compared to cash flow from operations of $5,895,000. In many cases, distributions paid in excess of cash flow ponzi scheme are paid using proceeds from new investors. Slowly but surely, these fictitious dividends are starting to be cut.

OK, so you made a mistake, and now you want out. Good luck brother - you're stuck. As of the end of May, the six largest non-traded REITs have shut down their share repurchase programs. These include Behringer Harvard REIT I, Cole Credit Property Trust II, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust, Piedmont Office REIT and Wells Real Estate Investment Trust II.

Other nonlisted REITs that have either stopped repurchasing shares or that have been unable to repurchase all the shares submitted include Behringer Harvard Opportunity REIT I, Desert Capital REIT, Dividend Capital Total Realty Trust, Grubb & Ellis Apartment REIT, KBS Real Estate Investment Trust and Whitestone REIT. It may be years, if ever, before investors experience a so-called "liquidity event" with these REITs.

There seems to be no boundary around the financial sleight of hand deceit played by some non-traded REIT sponsors. Lightstone Value Plus REIT claims to be on investors' sides by allegedly allocating 100 percent of investor proceeds toward real estate investments and co-investing alongside shareholders. This is quite far from the real economic truth, and even a cursory read of the Lightstone "Value Plus" prospectus shows otherwise (read more on Lightstone's investment prowess midway through this post). There's really nothing not to like about non-traded REITs, except everything.

Click here for a list of non-traded REITs

commercial real estate, non traded reits

What Hypocrisy? FDIC Loan Sales Are A Total Black Hole

2009-05-18T20:34:00.000-07:00

Last week, Zero Hedge made a somewhat tortuous connection between the very disparate dots of "performing" commercial real estate loans sold at a discount by the FDIC and the value of performing CRE loans held by healthy financial firms - presumably the likes of JP Morgan Chase, Goldman Sachs, Morgan Stanley and others. Aside from creating a new platform from which to bellow about "very startling" and "very hypocritical" dealings in the financial world, I failed to understand the purpose.

Having bid on performing and non-performing CRE loans with real money (my own), and having worked directly with the two intermediaries that the FDIC has hired to dispose of these loans, my considered view is that the only connection to be made is to the actual value of the loans that were sold.

"No floor floaters" would be really interesting if they were part of a hip hop performance, but not if they are real estate loans at LIBOR plus 150. "No floor" simply means that there is no floor on the loan's benchmark rate. In the case of a no floor floater at L+150, the new owner of that loan would get a coupon of about 1.85%. In today's market, that's a zombie loan. Add in a crooked borrower with bad collateral, and I'll show you a loan on blocks sitting forever unsold on Indy Mac's front yard.

One of the other revelations in the post was that even performing CRE loans were being sold quick, call the SEC! at an average of 51 cents on the dollar. But whether a loan is "performing" or "non-performing" is really not relevant: it is simply a bureaucratic classification for the current payment status of the loans.

In the real world, many of these "performing" loans are doomed. They were promoted by borrowers and mortgage brokers on the basis of NOI assumptions that can no longer be achieved, underwritten by loan officers who had no idea what they were doing, and ultimately sold to investors whose profit motive (in many cases) was collecting management fees, not interest income. In that case, why not lever yourself silly and buy all you can?

A couple of the loans I looked at had unpaid principle balances that were completely disconnected from the true value of the collateral. The reason: underwriting that seemed to be done by a kindergartner, and probably was.

One of the loans, against a 1960's vintage 164 unit apartment building, assumed that operating expenses would be almost 30% below the national average. Nevermind that launching the Apollo program would be cheaper and easier than fixing the leaks constantly springing from this property's creaky 45 year old plumbing system. Effective gross income also showed red against the original underwriting - something about renters unwilling to pay a premium for kitchens that hadn't been updated since Jack Ruby gave Lee Harvey Oswald a new address.

Another was a Fannie Mae DUS deal in which the borrower had racked up negative retained equity of $2MM in just 4 years. In the most recent year, the borrower lost $250,000 just from trying to meet the property's monthly nut. That loan is current and matures in 2012, so it is classified as "performing". Neverthelesss, there's no way it will get refinanced at par, assuming the borrrower makes it that far, because the property is worth much less than par. How could the loan be worth anything more?

If you think the sole province of bad underwriting is multi-family originations, you should think again and again.

So what happens when you bid on one of these loans? The FDIC does not allow property inspections of any sort. Buyers are afforded the opportunity to review the original loan files, which contain such helpful information as the original, hopelessly out of date appraisal. Assuming you have enough local market knowledge to formulate a bid and "win", you'll have just 7 days to close. There is no futzing around with surveys, title reports and good standing opinions - we're talking an all-cash close on a 7-day fuse.

Once you own the loan, you'll eventually need to foreclose. Quantifying the risks around that is practically impossible. Convincing the borrower to enter into a deed-in-lieu of foreclosure is about the best outcome you could hope for. Assuming the borrower does not declare bankruptcy, in which case you are totally screwed, expenses on a "clean" foreclosure will run you at least 4-5% of the face amount of the loan.

Then you finally get the deed, but it won't be the normal "general warranty" deed that you want. It will be a "limited warranty" deed, meaning the seller (the FDIC) will not vouch for the deed's marketability. This is ideal, as everybody Vladimir Putin and Caesar Chavez likes limited marketability.

After that happens, the town/county/governing authority comes in and wants to authenticate the Certificate of Occupancy. In the case of the 164 unit building above, the county condemned 32 units right off the bat yes we can! So now the purchaser, a small private equity fund in Connecticut, is suddenly 20% vacant just for the privilege of a handshake with the local building inspector. Meanwhile, they're stuck paying property taxes based on some inflated value from 2006. But that's OK - they have unfathomably deep pockets and lots of spare time, and according my friends at Zero Hedge, they're a co-conspirator!

commercial real estate
commercial real estate loans

Commercial Real Estate Loan Originations Show Continued Deterioration in CRE

2009-05-15T13:02:00.000-07:00

The Mortgage Bankers Association has released their quarterly survey of commercial/multi-family loan originations, and it shows continued dramatic deterioration in all CRE lending sectors, including an 80% plunge in bank lending.

Earlier this week, I wrote that commercial real estate transaction volume had declined to practically zero, so it's no surprise that loan originations would show a concurrent decline, but that decline was precipitous: Q1 loan originations declined to the lowest quarterly level in the 7-year period covered by the survey.

The report is unclear as to which tail is wagging this dog, however. Is the decline in loan volume the result of "suicide-tight" underwriting, or simply a lack of buyers transacting on new deals? Anecdotally, there is a lot of equity sitting patiently on the sidelines at the moment, so it's likely the latter. In addition to the 80% decline in bank lending, insurance company loan activity declined by 66% and GSE lending dropped by 26%. It was so bad, I decided to paint a picture. the things I do for you

There were some intriguing data in the survey though (read the full report here). One interesting finding is that while all loan activity decreased, industrial loan activity this quarter decreased the least vs. the year ago period, even less than multi-family. In fact, industrial loan activity from Q4 to Q1 actually increased by 67%. With loan capital still flowing into that sector, well capitalized industrial REITs are still relatively healthy.

Indeed, industrial REIT yields are among the lowest in the sector. This should enable industrial REITs to recover more quickly. Unfortunately, that is small comfort to those who lost their shirts betting on the likes of Pro-Logis (PLD). It's also a sign of hope around increased economic activity, and probably of inflation as well...

Not surprising is that Fannie Mae and Freddie Mac continue to be practically the only game town for apartment lending, which declined by 61% in the quarter from one year ago. Hotel loans were down a whopping 88%, followed by healthcare (down 80%), retail (down 76%) and office lending (down 66%). Aside from the good news for industrial REITs, the only other obvious silver lining is that the rate of decrease in activity has slowed. So things aren't getting much worse, but it's still awfully hard to see anything even remotely shaped like a "V" on the horizon.

commercial real estate
commercial real estate loans
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reits
reit news

BMO Upgrades U.S. REIT Sector

2009-05-11T12:46:00.001-07:00

BMO Capital Markets upgraded the U.S. real estate investment trust industry to "outperform" from "market perform" today, and said it believes REITs are at or nearing a turning point.

"We are raising our sector rating ... based on early signs of economic recovery, the competitively advantaged position of the REITs vis-a-vis the broader real estate industry, and valuation, which we think is much closer to the bottom than the top," BMO analysts wrote in a note.

BMO, which also changed its rating on a number of REIT stocks, said public REITs were much better capitalized than their private peers, and their balance sheets were getting stronger.

"Between equity issuances, debt repurchases and secured and unsecured debt refinancings, balance sheets are improving or stabilized," the analysts said.

The analysts, however, still expect real estate fundamentals to decline over the next 12 months.

BMO upgraded four multi-family REITs, including Camden Property Trust (CPT) and said it remained positive on health care REITs.

At the same time, BMO said it remains cautious on office and self-storage REITs.

Specific ratings changes were as follows:

Upgrades:

* Apartment Investment (AIV) to market perform from underperform
* Camden Property Trust (CPT) to outperform from market perform
* Colonial Properties Trust (CLP) to market perform from underperform
* Home Properties (HME) to outperform from market perform
* Kite Realty Group Trust (KRG) to market perform from underperform

Downgrades:

* BRE Properties (BRE) to underperform from market perform
* Essex Property Trust (ESS) to underperform from market perform

Disclosures: None at the time of this writing. BMO is acting as co-lead for an Inland Realty (IRC) secondary (Merrill is the lead).

commercial real estate
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Commercial Real Estate Investors Brace For Pivotal 4th Quarter

2009-05-11T03:15:00.000-07:00

REIT earnings season got into full swing last week, but there's a lot more on investor's minds these days that last quarter's earnings. Transaction volume has continued to plunge, and CMBS loans placed in special servicing have continued to rise like a poodle in a jetpack.

This can mean only one thing, and in the words David Hamamoto, CEO of Northstar Realty Finance (NRF), it is that there is a growing backlog of motivated sellers who "will begin to transact later this year and who will establish market pricing as deals are completed." That people will need to sell is not in dispute, but exactly what "market pricing" will be is the $64,000 question.

Globally, commercial real estate sales plummeted more than 70 percent in the first quarter from the end of 2008, according to Real Capital Analytics. In the United States, first quarter sales were not only anemic, they may also be a form of karmic justice to CRE brokers who are now fond of saying that distressed buyers simply "overleveraged". Really?

Even apartments, which still enjoy the availability of buyer financing from Fannie Mae and Freddie Mac, saw transaction volume fall 62 percent in 2008, and another 86 percent in the first quarter of 2009 alone. With an average of only 50 apartment sales taking place each month across the entire country, it's simply no wonder that pricing is unclear.

What is clear, however, is that prices are dropping. And as prices drop, "overleveraged" buyers, or those who were basically convinced to overpay for their assets, are unable to refinance their loans. CMBS loans placed in "special servicing", which indicates that the borrower is in some form of distress, were dramatically up and to the right at the end of 2008:

Loans Placed In Special Servicing
(January 2000 through January 2008)

Source: Deutsche Bank

That trend accelerated in the first quarter of 2009. CMBS loans in special servicing jumped another 48 percent (as measured by outstanding loan balance), according to Fitch. "Imminent default" was cited as the reason for 73 percent of the special-servicing transfers. Since the end of 2007, the percentage of CMBS loans in special servicing has grown from 0.54 percent to almost 3 percent or outstanding loans.

Nationally, default and delinquency rates for CMBS rose to 1.76%, or $10.7 billion, in the first quarter, up 62 basis points from the previous quarter and more than triple the rate of delinquencies recorded in Q1 2008 (these figures do not include loans associated with the bankruptcy of General Growth Properties). According to REIS Inc., the CMBS default rate could reach 6% by year’s end.

The lack of transaction volume and the increasing levels of distress perfectly illustrate the current market quandary: lenders are unwilling to foreclose on properties that cover debt service, albeit barely, and sellers are unwilling to sell properties at what they believe to be artificially low prices driven by unsustainably low availability of debt capital.

This face-off will not last. Banks must clear their balance sheets at the same time that capitalization rates are rising and NOI is dropping. Rising cap rates mean that a buyer of an office building at a 6 cap in a strong market like Washington D.C. is staring at a 30% decline in value, peak to trough, assuming NOI has remained the same (which is almost certainly not the case). Buyers in tertiary markets are in even worse shape.

However, just as the excess of ready and available credit led to unsustainably high asset values in 2005-2007, so will the dearth of ready and available credit lead to unsustainably low asset values in 2010. Not surprisingly, some investors smell opportunity, and they are betting with real money. Publicly traded REITs raised $10.6 billion in equity in the first quarter, including $6.51 billion in April alone. This is a tidal wave of cash, and the Bloomberg REIT stock index rose by 30%. Nobody ever rings a bell at the bottom of a market, and $10.6 billion says why bother to listen for it now?

commercial real estate
reit investments
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Analysts See Apartment REITs Posting Strongest Effective Rent Gains In History

2009-04-20T15:24:00.000-07:00

According to RREEF Research (the research unit of Deutsche Bank’s alternative investment management business), the US apartment market faces "one of the most challenging and complex environments in modern history", but also remarkably strong recovery prospects. RREEF sees a recovery in multi-family real estate starting sometime in 2011, and suggests that the recovery in apartments could be accompanied by "the strongest effective rent gains in history".

The Shadow Market Media Myth

While the RREEF report did not specifically refer to the "shadow market media myth", it's worth noting that the shadow market being written about today is much less troublesome than the one that existed in anonymity five years ago.

Back then, applicants with bad credit were routinely being turned down for $600 a month apartments only to walk across the street and get approved for $250,000 first mortgages, no questions asked. These liar loans were also being doled out to applicants with good credit just as fast as AIG could write credit default swaps on their mortgage bonds. Nobody Carlton Sheets on crack! could resist.

This unprecedented combination of fear and greed propelled the U.S. home ownership rate to record levels:

While briefly pushing nationwide average apartment vacancy rates above 10% in 2004:

** The increase in vacancy rates in the 1980's is partly due to tax laws which allowed passive loss deductions to offset earned income. The result was a mini-boom in syndications of real estate tax losses to individual investors. The Tax Reform Act of 1986 eliminated these incentives.

Naturally, all of this had a deleterious effect on the performance of apartment investments. RREEF's 2009 US Real Estate Investment Outlook asserts that the process of unwinding this credit-induced housing distortion in is about to begin, and that it will coincide with several powerfully favorable trends for Apartment REITs:

Employment growth in 2011 will enable huge pent up demand for apartments by "echo boomers" and residents who doubled up during the recession. RREEF estimates that these two population cohorts are comprised of 75 million people, or approximately 25 percent of the US population;
Immigration, forecast to continue at an average rate of 1.8 million annually, will be a sustained driver of demand for multi-family rental housing;
New construction of multi-family rental housing is severely constrained by lack of financing. Deliveries are forecast to drop below 1993-1994 levels, which will facilitate quicker stabilization of occupancies; and
Reversion to historical rates of home ownership will continue as financing is constrained and job seekers prefer mobility in order to pursue employment.

Apartment REITs Should Outperform

RREEF estimates that the massive government stimuli will take hold by late 2010. As demand snaps back, the short-term nature of apartment leases will allow owners to raise rents quickly, and the recovery in rental rates and occupancy levels may be without parallel. This should position Apartment REITs as the best performing of the four major property-sector REITs.

Look For Apartment REITs With Low Leverage

But don't look for all Apartment REITs to participate. Higher quality REITs will prevail as lower quality, highly indebted companies will fail or be purchased by stronger entities. REITs with the greatest risk of failure are those that are over-leveraged and exposed to weak markets. Weak metro areas are those with a severe housing imbalance in both for sale and rental product in tandem with the sharpest employment declines. These include Atlanta, Phoenix, Riverside, Jacksonville, Orlando and Tampa.

Look For Apartment REITs in Healthy Markets

Markets with the strongest prospects, in spite of some near-term pain, are Washington DC, Baltimore, San Francisco, Seattle, San Jose, New York, San Diego and Los Angeles. In general, RREEF says these markets were not excessively impacted by housing oversupply, but they will nonetheless experience some weakness due to continued expected job losses. In the longer-term, they should rebound with relative strength.

The Best Apartment REIT for 2009 includes a list of Apartment REITs by leverage level, including a sensitivity for increasing cap rates. Click here for a complete list of Apartment REITs, but avoid REITs paying dividends in stock.

apartment reits
reit investment
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reits
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Tim Geithner's TALF Meets Adam Smith's Free Market

2009-04-14T03:30:00.000-07:00

While commercial real estate lobbyists are busy trying to convince Treasury officials to incorporate five-year loans into the Term Asset Lending Facility, the TALF has been busy distinguishing itself as the latest example of the efficacy of central planning. Unfortunately, TALF loans of almost any duration are unlikely to reverse the trend of declining commercial real estate values - that has become a mathematical certainty. Indeed, Adam Smith's infamous invisible hand remains hard at work, and it is demonstrating once again that economic well-being is the result of rational self-interest, not that of government decree.

Smith published The Wealth of Nations in the auspicious year of 1776, and last week three ivy league academicians offered what could be the latest appendix. In a study entitled The Pricing of Investment Grade Credit Risk During the Financial Crisis, the economists used mathematical models to examine credit spreads over time. They concluded rather anti-climactically that "improved investor appreciation" of the risks embedded in structured products is the main culprit for spreads that are now stubbornly wider than the Gulf of Alaska, not the lack of credit. They go on to assert that "policies that attempt to prevent a widespread mark-down in the value of credit sensitive assets are likely to only delay - and perhaps even worsen - the day of reckoning".

However, the TALF cannot be blamed for postponing the day of reckoning in commercial real estate - it would have to be relevant for that to be the case. In fact, TALF still refuses to venture where all lenders fear to tread: long-dated subordinated and unrated tranches of ABS/CMBS paper. Liquidity at these levels is essential for the securitization markets to be recuscitated. Investors who bought these tranches before the crisis are still stuck with the financial equivalent of lead balloons, and there is no way to cleanse their balance sheets of these "legacy assets" without effectively blowing themselves up. With no new buyers for these subordinated tranches, the CMBS market cannot be revived.

While the debate over exactly what's wrong with TALF is relatively academic, the market is not waiting around for the last word. The Fed reported that requests for TALF loans dropped 64% last month. Meanwhile, capitalization rates continue to rise and will almost certainly exceed the 20 year national average of 8.3%. Rising cap rates will perpetuate continued deflation in commercial real estate, and many equity investors who bought at the peak please pass the charmin will be wiped out. Interestingly, public REITs are now trading at an approximately 200 basis point discount to the private market, which may indicate that the creative destruction in commercial real estate is nearing its logical end - without any real help from the TALF.

mortgage reits
equity reits
reits
commercial real estate

Specialty REIT List

2009-04-09T14:46:00.001-07:00

This is the most up-to-date list of publicly traded Specialty REITs on the web; prices and yields are updated daily at the close. The list contains working links to the home page of each REIT, and links to Yahoo news. Links to additional REIT lists by property type can be found below the table.

Arlington Asset Investment Corp
American Land Lease
Equity Lifestyle
Sun Communities
Getty Realty
Washington REIT - invests in DC, all assets

SPECIALTY REITs Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Yield	News
Plum Creek Timber	$34.11	4.90%	PCL
Potlach Corp	$27.30	7.50%	PCH
Rayonier	$39.44	5.10%	RYN
UMH Properties	$7.99	N/A	UMH

See also REIT Definition. Scroll down for more REIT and real estate related news, resources and links.

Click here for a list of Apartment REITs
Click here for a list of Healthcare REITs
Click here for a list of Hotel REITs
Click here for a list of Industrial REITs
Click here for a list of Mortgage REITs
Click here for a list of Non-Traded REITs
Click here for a list of Office REITs
Click here for a list of Retail REITs
Click here for a list of all REITs
Click here for a list of REIT ETFs
Click here for a list of REITs paying dividends in stock

specialty reits,
reits, reit

Diversified REIT List

2009-04-09T14:27:00.001-07:00

This is the most complete list of publicly traded Diversified REITs on the web; prices and yields are updated daily at the close. The list contains working links to the home page of each REIT, and links to Yahoo quotes & news. Links to additional REIT lists by property type can be found below the table.

DIVERSIFIED REITs Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Yield	Yahoo Quote/News
Plum Cer	$34.11	4.90%	P
Potlarp	$27.30	7.50%	P
Thomas Properties Group	$39.44	5.10%	TPGI
St. Joe pany	$26.27	N/A	RYN

diversified reits,
reits, reit

Buy This Residential Mortgage REIT, Says JP Morgan

2009-04-03T19:12:00.001-07:00

For those of you who are pursuing more intrepid REIT investing strategies, the case of Redwood Trust (RWT) may be relevant. The news is old only because it occured on March 16th, but the thesis is definitely more eternal.

Redwood’s primary business is investing in the absolute eye of the storm: single family residential real estate loans. Redwood's current portfolio totals about $133 billion in loans to over 300,000 miscreants whose sole redeeming quality in 2005 and 2006 was their ability to sign where indicated. RWT also invests in a variety of other residential and commercial real estate loans and securities.

Like AIG, RWT has also rented out its balance sheet in order to credit-enhance single family RMBS, although unlike AIG they appear to have actually kept track of their potential liabilities under these arrangements.

On March 16th, JP Morgan initiated coverage of RWT with an Overwieght rating and an $18 price target. The reason? Debt maturities, or more accurately the lack of them. After raising equity in January, Redwood had 65% of its equity in cash with its only recourse debt maturing 28 years from now. This is the theme of the moment, if not the millenium.

Compare RWT to MAC, which is struggling to refinance 2010 debt maturities, or GGP, which is technically insolvent due to near-term maturities. The market has been unkind to both of the latter, while RWT has held up well, in spite of the January dilution and its focus on one of the most unhealthy sectors of the mortgage market.

The lack of leverage will also allow Redwood to weather future volatility by avoiding mark-to-market-related margin calls. "As RWT does not lever its purchases with short-term recourse financing, the company avoids margin call risk brought on by declines in mark-to-market asset values," JP Morgan said in its report.

The cash raised in January has also allowed Redwood to be a true opportunistic player. According to JP Morgan, RWT recently purchased prime credit enhanced AAA-rated mortgage-backed securities at about 65 cents on the dollar. RWT projects returns of 10-18% on those assets, which were underwritten for further home price declines and worsening consumer credit.

RWT intends to continue these mortgage investments, targeting 10-20% unlevered returns. However, the current market turmoil has kept RWT from betting the bank, giving the Company plenty of dry powder going forward.

"We believe Redwood's dedicated team of mortgage credit professionals is well positioned with a clean balance sheet to take advantage of the ongoing dislocation in the housing market, and the lack of leverage will allow the company to weather future volatility by avoiding mark-to-market-related liquidity risks,” JPMorgan said.

If investing in REIT stocks takes you in the direction of RWT, you will be the beneficiary of a well-covered 6% yield. Click here for a complete Mortgage REIT list including current yields.

Disclosures: None
mortgage reits
reit stocks

Dead on Arrival: Geithner's Plan Can't Stop The Tidal Wave of Commercial Mortgage Maturities

2009-03-31T11:02:00.000-07:00

2005 is coming, and nobody can stop it. Like a giant flock of boomerangs, the mortgages originated during the boom years of 2005-2007 are returning home, and the bankers are already struggling to keep up with all the arrivals.

Approximately 80% of new 2008 loans were originated simply to refinance existing maturing mortgages, compared with just 35% from 2000 through 2007. This trend will only increase as record numbers of 2005-2007 vintage commercial mortgages begin to mature in 2010.

In 2009 alone, Foresite Analytics estimates that $250 billion of commercial and multifamily mortgages will mature. This is an all-time high for the real estate debt industry, but the record won't last long. Over the next two years, $594 billion of commercial real estate loans will mature as aggressively underwritten 2006 and 2007 vintage loans come due. That is on top of $220 billion of multifamily mortgages scheduled to mature:

Many equity investors are likely to get wiped out in the tempest that will ensue when these loans mature, and I wrote about the math behind this certainty in The Coming Bust in Commercial Real Estate: Why Developers Are Desperate For the Dole. That post illustrated how a building worth $100 million at the peak is only worth $74 million now, but a 36% decline in value may be the best one could hope for these days. Yesterday, Bloomberg reported that lenders believe the value of the Hancock Tower in Boston may have declined by 50%

The commercial real estate market is now in a full-fledged tail spin. According to Real Capital Analytics, U.S. commercial real estate prices are falling at a similar rate to residential, down about 17 percent year-over-year. The reason is that $1.8 trillion of loans were originated in the U.S. between 2000 and 2007, with the most rapid growth taking place in 2005, 2006 and 2007. Roughly half of that debt was originated during 2004 and 2008, some of the worst years in terms of deterioration in underwriting standards. That debt is starting to come due right now, and there may not be enough new lending capacity to absorb it all.

Many lenders are playing a game of hide the weenie by automatically granting one-year extensions on maturing loans in the hopes that debt markets will miraculously recover in 12 months. This has been almost standard procedure in the CMBS market, where maturing loans are being extended and placed into special servicing at ever increasing rates:

Source: Costar
These loan extensions are only adding to the pressure in 2010, and 2011 is shaping up to be a potentially seminal year in the world of commercial real estate. “If values have rebounded sufficiently by then, the market could avoid widespread defaults. But if the market is still depressed, a significant amount of these maturities could go into default,” said Foresight partner Matthew Anderson.

The delinquency rate among CMBS loans, which hit 1.8 percent in March, could rise to 3.5 percent by the end of the year, and 6 percent by 2010. This is bad news for lenders, but even worse news for property owners who overbought at the peak. In addition to that pesky refinancing issue, most are already wrestling with the recession and rising vacancy rates, lower demand and decreasing rents.

But the significantly lower commercial lending volumes are much, much worse than decreasing rents. Combined with rising cap rates and tougher underwriting standards, many property owners will be left out in the cold when it comes time to refinance. If the value of the Hancock Tower in Boston has fallen by 50%, which seems likely, Broadway Partners and Lehman Brothers, the equity investor and mezzanine lender, respectively, are now completely wiped out. So much for location, location, location.

Disclosures: None
mortgage reits
commercial mortgages,
commercial+real+estate,
commercial real estate loans

Non-Traded REITs Under FINRA's Microscope

2009-03-27T12:26:00.000-07:00

Who is making all the money on non-traded REITs, the investors who put up all the dosh or the the brokers who sell them and the sponsors that manage them? FINRA wants to know, and they have issued a Targeted Examination Request to find out.

Two years ago, Stanger & Company analyzed returns on $11 billion in non-traded REITs (click here for a current list of Non-Traded REITs), which at the time represented about 40% of the market. A WSJ article was christened in order to trumpet the results, but somewhere along the way the Wells REIT public relations people went missing.

The article, unceremoniously entitled Nontraded Real-Estate Trusts Shed Shady Past, Boast Returns, began with the following one sentence paragraph: "Those ugly nontraded real estate investment trusts born out of the limited-partnership industry may finally be looking pretty. But who knows for how long."

That the public relations people were out on the range is no surprise, as the results of this "analysis" were mixed at best. According to Stanger's study, internal rates of return averaged 12.5% without dividend reinvestment and 13.6% with dividend reinvestment. Not too shabby, but not so grand either. What about the other 60% of the market? Did Stanger run the numbers and simply decide more red flags than a military base in china that they were unworthy?

More importantly, how do these reported numbers compare with the rest of the market during that time? As it turns out, it happened to be one of the greatest bull markets in real estate in at least a generation, and had you owned even a dog house in Chihahaua or an igloo in Oaxaca, you would have made heaps of dough:

In 2007, with the torrent of liquidity compressing cap rates to levels not seen in decades, (prices move inversely to cap rates), is a 12.5% IRR really all that impressive? The answer is yuck! not really, and the reason is that the cumulative 15% load (commissions, dealer manager fees, organizational expenses, acquisition fees, asset management fees disposition fees, etc.) stacks the deck in favor of brokers and sponsors, not investors.

FINRA has taken notice, and in a Targeted Examination Letter entitled The Sale and Promotion of Non-Traded REITs issued this month, it seeks to discover just how much. The letter follows in its entirety:

Re: Sale and Promotion of Non-Traded REITs

Targeted Examination Request

March 2009

FINRA’s Enforcement Department is conducting a review of broker-dealer sale and promotion of Non-Traded Real Estate Investment Trusts (REIT). For the purpose of this request a Non-Traded REIT includes: 1) a REIT that is registered with the Securities and Exchange Commission (SEC) but is not listed on an exchange or over the counter market (Non-Exchange Traded REIT); and 2) a REIT that is sold pursuant to an exemption to registration (Private REIT). In connection with this review, and pursuant to FINRA Rule 8210, is requesting the firm provide the following information and documentation.

1. The name of each Non-Traded REIT offered for sale by the Firm;

2. A description of all sales contests, cash and non-cash incentives, as well as other promotions, programs and initiatives that involve, concern or relate to the sale or promotion of Non-Traded REITs. For each item described, indicate to which Non-traded REIT it applied;

3. For each Non-Traded REIT identified in item 1, provide the following information in electronic format:

1. Total number of shares sold to the Firm’s customers;
2. Total dollar amount of shares sold to the Firm’s customers ;
3. Total number of customers purchasing each Non-Traded REIT;
4. Number of customers in the following age groups purchasing each Non-Traded REIT:

1. Under 30
2. 31-54
3. 55-64
4. 65-74
5. 75 and older;

4. Copies of all offering documents for each Non-Traded REIT identified in item 1;

5. For each Non-Traded REIT identified in item 1, provide a registered representative payout schedule or other such document that indicates the commission payout percentage for registered representatives;

6. For each Non-Traded REIT identified in item 1, provide a complete (blank) set of customer application documents;

7. Provide a blank copy of any other customer related documents (not included in your response to item six) used in the sale of Non-Traded REITS, including, but not limited to, customer new account documents, “Accredited Investor” or “Qualified Purchaser” verification forms, risk disclosure documents, checklists, or other documentation concerning REIT yield, liquidity, fees, or per share estimated value;

8. A copy of the portion(s) of the Firm’s written supervisory procedures, compliance manuals or branch manuals that pertain to REITs (Exchange Traded as well as Non-Traded REITs);

9. A copy of the Firm’s suitability guidelines for the sale of Non-Traded REITs, including any guidelines on suggested allocation or maximum percentages for Non-Traded REITs in customer accounts (exclude any information provided in response to item 8). If no responsive documents exist, provide a detailed written description of the guidelines;

10. A list of each type of exception, surveillance or risk monitoring report used by the Firm to monitor activity in Non-Traded REITs. Provide a detailed explanation of the report, including information on the frequency with which the report is run, the type of activity the report is set up to monitor, and the manner in which the data is gathered, interpreted and used by the Firm. In addition, include:

1. Identification of individual(s) responsible for reviewing the report and the names of all individuals receiving copies of the report or a sub-set of the report;
2. Copies of all procedures, explanatory documents or guidelines used in connection with each report;
3. A copy of each type of exception report identified above for the months of June 2008 and December 2008;
4. If no exception or surveillance reports are utilized, provide a detailed explanation of the reviews conducted to monitor the Non-Traded REIT activity at the Firm;

11. Describe the Firm’s risk-based analysis of the Firm’s internal controls and supervisory structure as it relates to REITs;

12. Copies of all customer complaints and arbitration / litigation claims relating to, referring to, or concerning Non-Traded REITS received during the review period. Provide a copy of the Firm’s response;

13. A written description of all internal investigations and/or disciplinary actions related to or concerning REITs or the sale of REITs. Indicate how each matter came to the Firm’s attention;

14. A list in electronic format of customers who purchased Non-Traded REITs during the period January 1, 2008 to the present and have requested to redeem their Non-Traded REIT purchases or who have requested transfers of shares to third parties. The list should include the following fields: (1) customer name (last name, first name, middle initial); (2) name of registered representative (last name, first name, middle initial); (3) registered representative number; (4) date of purchase; (5) date of request; (6) name of Non-Traded REIT for which request was made; (7) number of shares for which redemption or transfer was sought; and (8) whether the redemption or transfer request was honored;

15. Copies of all presentations, marketing materials, advertising and sales literature (as defined in Conduct Rule 2210) that were disseminated outside the Firm, which included information regarding each of the Non-Traded REITs identified in item 1 and Non-Traded REITs in general;

16. Copies of all presentations, marketing materials, written guidance and training materials, including broker-dealer use only material, that were disseminated within the Firm, which included information regarding the Non-Traded REITs identified in item 1 and Non-Traded REITs in general;

17. Provide copies of the 2008 commission run for the Firm’s top 5 REIT producers as measured by total commission.

Click here for a list of non-traded REITs

commercial real estate, non-traded reits

Northstar Going Non-Traded REIT Route

2009-03-13T03:30:00.000-07:00

Just two weeks ago, I speculated about REIT capital shortages and the ability of non-traded REIT equity to fill the gap in the post Averting Massive Sector Wide REIT Defaults: Non-Traded Equity May Be Part of the Answer.

Pacific Office Properties Trust (PCE) had just disclosed their intention to raise $350 million through this market, and now NorthStar Realty Finance Corp. (NRF) is following suit with intentions to raise up to $1.1 billion in non-traded REIT equity. Whether NRF actually intends to raise this much in this market is uncertain. Offering $1.1 billion in non-traded REIT equity would be an absolutely huge undertaking, as it represents more than 10% of the market's entire 2008 initial offering volume.

NRF remains one of my favorite Mortgage REITs, but the market has been just as unkind to NRF as it has to most other REIT stocks. The stock is down almost 70% since NRF's chairman David Hammamoto bought a bunch of stock on the open market at $8.26/share only months ago. Management owns a significant amount of stock, so it's no wonder they are pursuing cost-effective ways to recapitalize their balance sheet.

NRF and PCE are two of the only publicly traded Real Estate Investment Trusts to tap this market, but they are only the latest in a growing list of entities accessing this market. But do yourself a favor and don't even think of buying a non-traded REIT. In just the first three months of the year, five companies have launched efforts to raise $7.2 billion of equity through non-traded REITs. By comparison, $9.6 billion of equity was raised in this market in all of 2008.

For Northstar, a non-traded REIT offering is an incredibly cheap source of equity capital. NRF intends to raise the equity through a new entity, so existing shareholders in NRF common will not be diluted. The new NRF non-traded REIT intends to pay its investors an annual REIT dividend of 8 percent, which would be higher than the 5-7 percent typically paid by non-traded REITs and far better terms on equity than what NRF could get elsewhere.

While the offering is undoubtedly very attractive to NRF with respect to the scant alternatives available, it remains to be seen how well shareholders in the new entity will fare. Investors will pay fees of as much as 7 percent to cover the cost of selling commissions; a 3 percent dealer-manager fee, and 3 percent to cover the costs of organizing the entity. Accordingly, only 87 percent of every dollar raised will actually go toward investing in mortgages.

NorthStar's aim is to execute what it termed a "liquidity transaction" within five years of raising the capital. That could be a sale of assets, merger or listing on a stock exchange. Historical non-traded REIT returns are hard to quantify, because so few have executed their so-called liquidity events. Given how cheap this capital is, it's no wonder.

Disclosures: Long NRF at the time of publication
mortgage reits
office reits,
reit,