I wonder what Cuban would say about those REITs currently sporting 20% dividend yields? Some REITs certainly do look enticing, but not all yields are created equal. In fact, Alesco finally came clean last week (Thursday, Sept. 11), announcing that it would be terminating its dividend due to its considerable taxable losses. Alesco might have been one of those REITs that will be using REIT rules to recapitalize, but in addition to saying goodbye to its dividend, it’s also unlikely that Alesco can remain a REIT for too much longer. Consequently, it will no longer have an obligation to distribute 90% of taxable earnings (see REIT Definition), assuming it ever has any.
Notwithstanding the anticlimactic news from Alesco, there was lots of news out on REITs this week. The Fannie Mae/Freddie Mac takeover had the multifamily sector buzzing, there was an International Council of Shopping Centers (ICSC) Capital Markets conference in New York on Tuesday, and the value of Lehman’s commercial real estate portfolio was debated ad-infinitum in the press.
Not engaged in the debate were clients and employees of Lehman, who were both voting with their feet and busy pulling cash out of the firm. Neuberger Berman said it had been dealing with redemption requests all day long on Thursday and Friday, from clients as well as Lehman employees themselves. And those LEH bankers not involved in the weekend garage sale were sneaking off to conference rooms stocked with Brandy and Scotch imported from Short Hills, Westport and Amagansett. Many noted the irony of the firm having survived the attacks on the World Trade Center (Lehman’s World Financial Center HQ had a huge gash torn in it by the falling North Tower) only to be felled by their own mortgage desk almost seven years later to the day.
Yet again, it was a crazy week. Here then, is a compendium of the news that I was reading and hearing, separated by sector, with primary source links. Enjoy, and watch out!
“We just want the business to come back. It’s just crazy that commercial defaults are low and new starts are in check, and yet our spreads are still through the roof.” So said Kieran Quinn, chairman and CEO of Column Financial Inc. in Atlanta and chairman of the Mortgage Bankers Association in Washington, D.C. Column Financial is Credit Suisse’s CMBS mortgage loan origination subsidiary. The article in the National Real Estate Investor, Will Fannie Freddie Bailout Jump Start Economy/CMBS? was one of many that debated the long term impact of the bailout. With the exception of continued support for debt financing of multifamily deals, which should put at least a temporary floor on apartment values, I see little direct long term impact on other sectors. Indirectly, however, it should ease the capital burden on other less fortunate property types. Lehman’s commercial mortgage portfolio, which has been on the block since late July, continues to be a huge overhang on inventory. Accordingly, the takeover seemed to have little impact on already hugely discounted Mortgage REITs that were not investing directly in agency backed securities.
Despite the Wall Street Journal article hyping the overbuilding in the sector (Mall Glut to Clog Market For Years), participants at the ICSC Capital Markets conference in New York see the crunch ending in 2009. Dan Gilbert, executive vice president of NorthStar Realty Finance said “There remains capital for good real estate transactions.” That article in Retail Traffic today, which also covered the ICSC capital markets conference in New York, said that there were still Few Problems Retail Real Estate Finance.
Much of the news, of course, centered around the impact of the Fannie/Freddie takeover. Despite the government’s plan to shrink Fannie’s balance sheet by 10% per year down to $250 billion, Fannie executives were busy telling apartment owners that it was business as usual. The takeover also enabled the Treasury to make open market purchases of agency mortgage backed securities, but many people are nervous about the de-emphasis of simple porfolio purchases in favor of acquisitions for securitizations, which would rely more heavily on the dysfunctional capital markets. Moreover, the plan is not cast in stone and its long term implications remain unclear. The uncertainty, some say, along with the slowing economy and “shadow” rental market may mean that Apartment REITs are headed for a fall. Personally I don’t see it, but I stayed away from the “hot” markets in Phoenix and Miami.
Office & Industrial REITs
Falling real estate prices don’t automatically produce a traditional “buyers” market for cheaper rents. CFO.com says that the current downward drift in commercial real estate prices isn’t translating directly into lower occupancy costs. In fact, faced with the sudden uptick in inflation, landlords are finding ways to collect more money from their lessees. In The Counterintuitive Commercial Real Estate Market, CFO.com says that some landlords are tightening up lease structures, such that they are able to boost effective rents by nearly 20%.
So, after the end of a very long week, especially if you work at 745 Seventh Avenue, there is some good news. Historically, as commercial property prices have weakened, it has signaled the start of a bull run in REITs. REIT.com called it the property paradox, and if this market isn’t exactly that, I don’t know what is. Until next week!
Click here for an updated Mortgage REIT list, including current yields