Unlike other dividend cuts, this move may not be one borne of desperation, but of opportunity. According to REIS, the New York area tops the list of MSAs with the largest number of distressed commercial real estate, followed closely by Los Angeles. Increasing numbers of vultures are circling these and other areas hoping to invest at or near the bottom of what may be one of the worst down cycles in commercial real estate we’ve seen for a very long time. However, New York and Los Angeles have both had their share of ugly real estate busts, and they will eventually recover from this one just as they have in the past. Downturns are part of the real estate cycle, and wealth is always created (and lost) at the bottom of the cycle.
New York is SLG’s front porch, so when CEO Marc Holliday said that the dividend cut “ensures that the company will have additional capital to take advantage of the highly attractive investment opportunities which we believe will materialize in our core market”, I took notice. That sure sounds like a future bid on New York to me, and by extension CRE.
At the same time that SLG announced the dividend cut, three month USD LIBOR fell to its lowest since the immediate post-Lehman period and three-month euro and sterling LIBOR have fallen in every session since the beginning of October.
These trends are causing a few intrepid souls to open the purse strings on new investments. A private equity consortium including investment firms J.C. Flowers, Dune Capital Management and the hedge fund Paulson & Co. are expected to close the purchase of IndyMac (IDMCQ.PK), all of its 33 branches, its the reverse-mortgage unit and a $176.0 billion loan-servicing portfolio as early as tomorrow. The FDIC is pushing them along with looser rules on investments in banks by hedge funds, which are not regulated, as well as a desire to rid its books of the Indy Mac carcass by year-end.
Commercial real estate definitely has a few more shoes to drop before turning around, but rehabilitating firms like Indy Mac – and soon – will help cushion the blow. Clearly some investors see opportunity and J.C. Flowers, a firm run by the former head of Goldman Sachs’s financial institutions group, knows its way around the banking sector. Richard Bove of Ladenburg Thalmann Co. agreed and said, “the decline in bank-stock prices has been excessive and … many of these stocks represent excellent values.”
While it’s still too early in the cycle to jump into SL Green, the REIT market usually starts to recover about a year before actual operating fundamentals improve. But if you’re short SLG, you’re betting against New York and one of the savviest operators in that market, and I wouldn’t want to be doing that for too much longer either.
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