The Mortage Bankers Association today reported a 98% year-over-year decline in CMBS new issuance, which has continued to leave Morgtage REIT portfolios at the mercy of the thinly traded CMBX in terms of valuations. Pricing pressure on CMBS (as evidenced by the CMBX) has abated recently, but the index is still indicating levels of distress far higher than the current fundamentals:


The relentless climb of the CMBX is partially the result of pure speculation. However, there is another factor at work as well. While the problems in residential mortgages are already manifest, there's a notable difference between CMBS and their residential counterparts. Losses on RMBS typically decline as the loans age (or "season"), but losses on CMBS are largely driven by tenants' ability to pay rent, and that can be undermined at any point by a slowing economy. The graph below shows that historical CMBS defaults typically peak seven years after issuance. This is "tail" risk, and tail risk for CMBS is rather long:



CMBS delinquencies are now rising, as the graph below depicts. To be fair, most of the delinquencies have been led by multi-family sector, which is partially tied to the single family market via failed condo conversions, and another large component of the increase in that sector can be traced to just one borrower. But the slow rise in defaults in CMBS generally is nevertheless causing a great deal of hand wringing.



That CMBS defaults will rise is not in dispute, simply because they have been at historic lows for much of the past year. Estimates of how high defaults could rise vary widely though, and obviously that affects estimates of how high they may or may not travel up the CMBS capital stack. And "tail" risk is no secret; Mortage REIT portfolio managers account for it in their loss assumptions.

However, while fundamentals are holding up and remain firm, there still is a pervasive sense of fear among CMBS investors and real property investors alike. Costar, in its August 26 article entitled A Dud of a Thriller? Commercial Real Estate Drama Lacks a Killer quoted Philip Conner, of Prudential Real Estate Investors, who compared the market to the Samuel Becket play "Waiting for Godot".

In a report entitled "Waiting for Distress" (I don't have a copy), Connor wrote that "though signs of distress remain largely confined to highly leveraged deals consummated at the peak of the investment cycle, in late 2006 and early 2007, there is an undeniable and growing sense of anticipation among investors that U.S. commercial property values are poised to fall and that widespread distress is just around the corner."

However, Connor noted that in the Samuel Beckett play, Godot never actually appears onstage. "His off-stage presence, whether real or imagined, and his expected arrival largely dictate what does and does not happen in the play."

Connor contends that most of the distress is likely to remain "off stage" in the capital markets. However, capital markets is very much "on-stage" for Mortgage REITs, and just as the abundance of ready and available credit pushed asset prices above their fundamental value, so too will the lack of it push prices below their fundamental, intrinsic value. And when the bottom is finally notched, Godot won't be there to ring a bell for us either.

Click here for an updated Mortgage REIT list, including current yields


Disclosure: This play is more interesting.

Graphs courtesy of Markit; Morgan Stanley

A REIT is an entity organized as a Real Estate Investment Trust (REIT) for federal income tax purposes. In order to maintain REIT status on an on-going basis, a REIT must also operate in conformity with the requirements for REIT qualification under the Internal Revenue Code. The advantage of operating as a REIT is that entities organized and operating as REITs are generally not taxable at the corporate level.


REIT Taxable Earnings Must Be Distributed to Shareholders

Because of the generally tax-free status at the corporate level, REIT dividends paid to shareholders are typically taxed at ordinary income rates. However, for individual investors, the most important requirement related maintaining REIT status is the obligation of the REIT to distribute at least 90% of taxable income to shareholders. This gives shareholders a legal claim to at least 90% of the REIT's taxable earnings (assuming the REIT is able to maintain qualification under the Code).

Under the Code, "REIT Taxable Income" excludes net capital gains and certain non-cash income. As a result, a REIT generally may choose to retain all or part of its long-term capital gains and as much as 10% of its ordinary income and short-term capital gains. However, a REIT that chooses to retain capital gains or operating income in excess of 10% would be subject to tax on the undistributed amounts at regular corporate tax rates (currently, the maximum federal corporate rate is 35%). Accordingly, REITs generally distribute at least 90% of all taxable income, regardless of it's composition, and many REITs distribute more.

This distribution requirement is central to the REIT Wrecks investment thesis: To the extent that secular real estate values and associated cash flows are heavily discounted by the broader market, for those REITs with healthy portfolios, the requirement to distribute 90% of taxable earnings creates a compelling investment opportunity in the form of sustainable high yields, followed by capital appreciation as market dislocations ease.

The key to successful investing is the ability to evaluate the credit quality and earnings power of REIT portfolios, which is much discussed here, and the ability of the REIT to maintain its REIT qualification under the Code, and therefore the obligation to distribute at least 90% of taxable earnings to shareholders in the form of dividends. The ability to pay REIT Dividends in cash, not stock is obviously paramount.


REITs Must Comply With Income & Asset Tests

The ability to maintain REIT status is also often directly related to the credit quality of the portfolio, since the majority of the REIT's income and assets must also be derived from "real estate sources". To the extent that a REIT portfolio deteriorates, income and assets from real estate sources will decline as "real estate" assets are written down in value and income from "real estate sources" evaporates. In constrained capital markets environments, REITs in this situation are unable to raise funds to replace these "real estate" assets and can no longer meet the REIT asset and income thresholds. Accordingly, they will, in all likelihood, fail to meet the requirements for REIT qualification.

Specifically, at least 75% of the REIT's gross income must be from real estate-related sources, such as rents from real estate and interest on loans and notes from mortgages on real estate. An additional 20% the REIT's gross income can include other passive forms of income such as dividends and interest from non-real estate sources (like bank deposit interest). Consequently, no more than 5% of a REIT's income can be from nonqualifying sources, such as income from management fees or other non-real estate business income. (However, a REIT can own up to 100% of the stock of a "taxable REIT subsidiary" ("TRS"), a corporation with which a REIT makes a joint election that can earn such income, provided such investments do not exceed 20% of assets). In addition, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property.

To the extent that income and/or assets related to "real estate sources" fall below the above thresholds, the REIT will be disqualified.


REIT Taxable Earnings vs. Operating Earnings

REIT taxable income is adjusted by deducting any net operating loss carryforwards that have been utilized, after offsetting any net realized capital gains with capital loss carryforwards. This may create opportunities for some REITs to shield themselves from the 90% distribution requirement, since taxable earnings could therefore be less than actual operating earnings. For more on why this is so interesting, see REIT Taxable Income Definition Unlocking Opportunities?

In addition to the requirements noted above, REITs must also:

- Be structured as a corporation, trust, or association;
- Be managed by a board of directors or trustees;
- Have transferable shares or transferable certificates of interest;
- Otherwise be taxable as a domestic corporation;
- Not be a financial institution or an insurance company;
- Be jointly owned by 100 persons or more;
- Have no more than 50% of the shares be held by five or fewer individuals during the last half of each taxable year (5/50 rule)

Since most REIT by-laws require majority shareholder approval to "de-REIT", REITs that meet these tests will continue to be required to distribute at least 90% of taxable earnings to shareholders. This claim on earnings is central to succesful high yield REIT investing, and any REIT stocks that are in danger of losing REIT status will quickly lose their appeal as an investment.

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 Retail REITs
Click here for a list of Storage REITs
Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock

The gap between the perception of the risks in mortgage debt and the actual risks is now the exact opposite of where it was just before the credit crunch began.

Let's see, there are a few positive things happening out there and I think I need to write about them before my prescription runs out...

First, it's an election year and not too difficult to make a connection between the calendar and the $300 billion loan modification program housing bill that just passed. We also have 2% Fed Funds rate, and a whole slew of obscure but hugely important Fed programs aimed at restoring liquidity. These programs are unprecedented in scope, and all of it marks a big turnaround from the laissez-faire 5,000 former bear stearns employees days of "largely contained" subprime morgage defaults.

Things will turn around though, they always do, and I think Newcastle is one REIT that may be turning around sooner that some others. I sold NCT late in 2007, which sadly I cannot attribute to any unique insight. I simply got a margin call. That proved to be serendipitous, and a rare bit of good luck for me in what has been an otherwise miserable several months for NCT. In July, the stock hit $4.50.

But Newcastle is no Alesco, and I've been interested in developments there ever since the REIT cut its dividend to less than half its taxable income. REITs are required to pay out 90% of their taxable income to shareholders, so what were they planning to do with all that cash, assuming it wasn't burned up with more losses? Could a special dividend be on the way?

That became an even more pertinent question this quarter, when NCT reported operating earnings (Non-GAAP) which were twice the dividend yet again, a big jump in cash, to $170 million, and $88 million in debt reduction, $57 of which was recourse. 13% of NCTs debt now remains recourse to the Company (less, on a percentage basis, than AHR), and half of that consists of recourse debt on liquid, AAA-implied agency securities.

The Company is also in a similar position to Northstar (The Mortgage REIT With $4 Billion Of Sweet CDOs) with respect to its CDO assets. As loans inside NCT's CDOs get paid off, NCT has been busy replacing them with new assets that are yielding 2-3% more (N.B., NCT's funding costs do not go up, because the poor sots who own the CDOs are stuck with their miserable LIBOR +50). NCT replaced $63 million of CDO assets in the second quarter, and they expect the higher yields on this $63 million alone will generate an additional .06/share annually in earnings.

The Company is also working on further debt reductions, which may occur through asset sales. By the end of the third quarter, if all goes according to plan, NCT plans to be back out in the market aggressively acquiring new assets. They see three primary opportunities, either (1) the repurchase of common stock, which may be the most accretive, (2) the continued repurchase of CDO debt, or (3) the acquisition of new mortgage assets. Obviously, with market spreads being what they are, the ability to do any one of these three things could prove to be lucrative.

That's the good news, and everybody already knows the bad news - or at least they should. In March of 2007, NCT made a contrarian call on the single family mortgage market and announced a $1.7 billion purchase of subprime mortgages. Out of the entire portfolio, almost 40% of the mortgages were in California and Florida.

Back then, the stock was trading at $27. They eventually kicked out $400 million in mortgages - let's hope they were in Stockton and Bakersfield - and closed on $1.3 in May, intending to securitize the loans and retain a $75 million residual. That never happened, and the value of those securities (among other things in their portfolio) clearly kept dropping. NCT was forced to raise cash by selling $1.8 billion of assets in Q1, including $770 million of agency-backed mortgages, which is the good stuff (implied AAA), and take huge write downs on much of the rest of their portfolio they couldn't sell.

Those write downs continued in the second quarter, and in the end the write downs can also be a big driver of taxable income. The question swirling around NCT right now is how big a driver. NCT has now covered their full year dividend nut with just six months of operating earnings. The Company wouldn't give guidance on full year taxable income, but they have consistently said that they intend to make distributions such that they meet meet the 90% requirement. Assuming NCT's current porfolio marks are enough, if NCT can accomplish anything even close to its first and second quarter run rate in the third and fourth quarters, a special dividend gets added to the yield pot in Q4.

Click here for an updated Mortgage REIT list, including current yields



Disclosures: None at the time of this writing

I wish it were the week that wasn't. Concerns about the commercial real estate market bubbled to the top of the news and Research Recap did a great job of compiling it all. This week investors looked back to a June report from Standard & Poor’s showing that the CMBX index was causing commercial real estate capital to dry up. Hmmm, sounds about as exciting as a honeymoon in 2080.

More recently, and more seriously, Moody’s also noted last week that US commercial real estate prices fell for the fourth straight month in June, and the New York Times reported that some worry that commercial property loans will be next. (See also How Could My Big Beautiful Loan Go So Bad, So Quickly).

Fannie Mae and Freddie Mac appear to be inching closer to some sort of potentially hostile takeover by the federal government. According to Research Recap, Fannie CEO Daniel Mudd told public radio’s Diane Rehm that Fannie had neither requested nor been offered a bailout and he did not anticipate asking for one. Asked about Fannie’s subprime debt Mudd described it as "very tiny, actually it rounds out to about zero percent of our overall book."

While nobody expects the number of failures that characterized the savings and loan crisis, Regional US Banks may need to be rescued, according to a well-read post from Oxford Analytica. However, unlike the largest financial firms, regional banks may not be regarded as too big to fail.

Click here for an updated Mortgage REIT list, including current yields


Disclosures: Except for the recent pucker, none at the time of this writing

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Securitization is the process of taking groups of loans and splitting them into different classes of securities, and then selling the different classes of securities to third party investors. The brief video below does a great job of explaining how it all works. Many Mortgage REITs buy Commercial Mortgage Backed Securities (CMBS), which are commercial mortgage loans that have been securitized. Other mortgage REITs buy mainly "whole" loans, which are loans that have not been securitized.

Before the credit crisis, residential and commercial mortgages were widely securitized, but securitizations have also been done for a wide range of cash-flow producing assets, such as residential mortgages, commercial mortgages, credit card receivables and college tuition loans. Securitization confers a huge advantage to lenders in that it allows the lender to transfer all of the risks around making loans to third party investors.



However, FASB has proposed changes to FAS 140, including the elimination of the QSPE rules which previously allowed for a "true sale" and the complete transfer of risk the lender to the investors (for more on that, see the REIT wrecks post on changes to FAS 140). As the video mentions, the securities were usually "tranched" into different classes, which enhances the credit rating of the resulting securities beyond that of the underlying assets. This is known as Credit Enhancement.

Essentially, issuers take the loans and split them into "tranches" which have different levels of risk (referred to as "subordination"). So, if the entire group of securities would have a credit rating of BBB, and you cut it into several tranches, the highest tranche with no subordination, could have a credit rating of AAA, because it gets paid first, and the only way it would not get paid would be if a huge group of the underlying loans were unpaid (i.e. the highest tranche has the lowest risk). Issuers can also "over-collateralize" the pool.

Tranching is important because different Mortgage REITs invest in different classes, or tranches, of the CMBS pool. Anthracite Capital, for example, invests mainly in the "controlling class" (so-called because AHR can take "control" of the defaulted assets) portion of CMBS deals. This is also known generally as the "B Piece". Aside from the equity, which is unrated, the "B piece" is the highest risk and lowest rated portion of the securitization. If large numbers of mortgages default in a CMBS issuance, the controlling class has the most subordination and is the first to take a loss. Therefore, if a Mortgage REIT like Anthracite owns the controlling class securities of a securitization with extremely high rates of default, the REIT's entire investment in that CMBS issuance can be wiped out. If you want to learn more about tranching and over-collateralization, see the REIT wrecks post on CDOs.

Click here for an updated Mortgage REIT list, including current yields

Disclosure: None at the time of this writing

Sam Zell, a self-proclaimed "professional opportunist," founded his privately-held firm with a fraternity brother in 1968. The two bought up cheap real estate throughout the U.S. from distressed owners, and then kept buying when values recovered and boomed.

In this interview, he speaks about the need to support Fannie Mae (FNM) and Freddie Mac (FRE) debt, at the expense of shareholders, the opportunities he now sees in the distressed debt sector and the environment for some REIT Stocks.

He says real estate is "fairly" priced (not overpriced) and that his focus on investing in distressed debt is just a natural outgrowth of his focus on value - he sees more of it in the debt than he does in the equity. He also says that the credit crisis has virtually shut down all new apartment development (he is also Chairman of Equity Residential (EQR), a large publicly-traded apartment REIT), so that from a supply standpoint things look very good in apartment REITs, and demand obviously will be driven by all those former homeowners who can no longer get "liar" loans.

REIT Wrecks also believes that Apartment REITs will be the first to recover. In fact, the best performing Apartment REIT for 2009 may be one you've never heard of. See also REIT Definition for more background on how REITs work. 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 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 list of all REITs
Click here for a list of REITs paying dividends in stock

Information on how REITs work can be found in the post REIT Definition.


Disclosures: None at the time of this writing

A few days ago, I was talking with a friend who until very recently had been in charge of capital markets at a privately-held "hard money" lender. Hard money is a rough and tumble world of last resort, where borrowers who are out of both time and luck go for quick cash, priced at prime plus ten and three points on closing.

My friend left because he refused to participate in a quiet, back-room shell game designed to conceal the true health of the firm's loan book from their accountants and lenders. The scheme basically involved trading bad loans back and forth with competitors, then disguising the trades as repayments and refinancings. All they did was replace one piece of illiquid, rotting swamp sludge with another, but it made the companies and their portfolios look much healthier than they actually were.

While I found what he told me to be pretty disturbing, I dismissed the practice as a product of that particular environment, excacerbated by the fact that this firm was privately held. After all, Sarbanes-Oxley was written specifically to increase disclosure at public companies, and didn't Andy Fastow and Jeff Skilling go to prison for falsifying financial records? And then Phil Bennett at REFCO after them?

So imagine my alarm when I read of similar financial contortions going on over at Fannie Mae, (FNM) and Freddie Mac (FRE). Foreign investors, particularly Asian central banks that had been huge buyers of Fannie and Freddie debt have pulled back in recent weeks, and that left Fannie and Freddie with no resort but to play "let's make believe" with their debt sales last week.

In its online edition, The Economist wrote "Fannie, Freddie and Lehman ensure August is anything but quiet" that a five-year issue by Freddie Mac on August 19th sold for 1.13 percentage points over treasury bonds, the highest spread for at least a decade, and almost double what Freddie had to pay just a few months earlier. But extraordinarily high yields are only part what Fannie and Freddie had to offer.

According to The Economist, the banks that manage the agencies' debt issues are pulling out all the stops to ensure their success, even to the point of artificially boosting demand through deals known as "switches". In such an arrangement, an investor agrees to buy into a new issue in return for being able to sell back to the banks an equal amount of an old one, thus ensuring its net exposure does not rise.

If enough of these deals are struck, large amounts of debt can be shifted even when demand is thin. A recent $3.5 billion issue by Fannie was helped along by "very significant" amounts of switching, said one banker involved in it. With $223 billion, or one-seventh, of the agencies' debt falling due before the end of September, those peddling it will have their work cut out for them, especially if the Asian investors continue to be put off by unkind headlines.

Fannie Mae and Freddie Mac are now clearly out of time and luck, and it looks like we taxpayers will soon become the hard money lenders of last resort. Bernanke signaled just such an outcome last week in Jackson Hole, and both common and preferred equity holders will soon be completely wiped out. Unfortunately, we have no choice. As The Economist wrote: "loss of faith in the firms' equity is one thing, ebbing confidence in their vast pile of debt is altogether scarier."

Disclosures: None at the time of this writing

Numerous Mortgage REITs took advantage of the credit bubble to issue Collateralized Debt Obligations (CDOs), which funded their purchase of a variety of mortgage assets. Many REITs got into trouble with this relatively indiscriminate, undisciplined form of cheap capital. Still others didn't seem to care, issuing them furiously in return for the management fees they could collect from running them.

In a nutshell, REITs would purchase mortgage debt or real estate related assets for investment, create a CDO, and then fill it with the mortgages or real estate assets they had purchased. In theory, the cost of the CDO debt was much lower than the yield on the mortgages, and REIT investors would benefit from the spread (arbitrage) income. It didn't always work out so well, and for those of you that want to learn more about CDO structures, I have posted these excellent video tutorials. It would also be beneficial to re-read my post on FAS 159 (Muddled Mortgage REIT Book Values Create Opportunity) after you watch the videos. FAS 159 is closely connected to "legacy" Mortgage REIT CDOs and very important relative to the book value debate. In this market however, this is mainly an academic excercise. Don't ever forget that operating cash flow is king, not GAAP income.

By way of introduction, Mortgage REITs issued synthetic, or arbitrage CDOs. They sold the debt to third party investors (in some cases, other CDOs), and held the equity. Since the debt was sold and the equity held, Mortgage REITs can never lose more than the amount of their equity investment:




Mortgage REITs also earned a yield on the equity investments they held. However, the concept of subordination meant that the equity yield would disappear if the senior lenders were put at risk. In order to get investment grade ratings on the senior tranches, any losses would first be applied to the junior tranches (the equity and mezzanine tranches). This was the result of tranching and overcollateralization, and this next video introduces those concepts:




In addition to tranching, the senior tranches were also (in theory) protected by "overcollateralization", or that the investors would be holding assets that were greater in value than the total value of the securities they had purchased. This also relates to "over-collateralization tests", that were designed to divert cash flows away from the equity and to the more senior tranches if and when a certain amount of defaults occurred in the reference portfolio:



Do read the REIT Wrecks summary of FAS 159, it may be easier to understand after watching these videos. It may also be helpful to read my other post on the mechanics of mark to market accounting. It is doubtful that the CDO market will ever come back in the same form for Mortgage REITs, but with so many legacy assets out there, and the opportunity for Mortgage REITs to repurchase their own high yielding CDO debt, understanding CDOs, FAS 159 and mark to market accounting is a critical foundation for conducting accurate research and due diligence on Mortgage REITs.

In an earlier article ("Mortgage REIT Yields Still Look Safe, But Stick to the Seasoned Veterans"), I wrote that high yield Mortgage REITs with relatively "seasoned" portfolios offered much better safety and value than those with portfolios stuffed full of more recent vintage CMBS. Now, analysts at Barclays Capital also say that the pricing on some earlier CMBS are not fully reflecting the safety of the risk-free treasury securities that replaced the original collateral on many of those earlier vintage pools.

Later vintage CMBS is now under a very bright popular media spotlight on news that a $225 million loan for a New York City apartment complex is heading toward imminent default ("How Could My Big Beautiful Loan Go So Bad, So Quickly"). That loan suffered from egregiously aggressive 2007 underwriting standards and had virtually no hope of being repaid. As a result, "headline risk" is again high and many CMBS traders and portfolio managers are once again shooting first and asking questions later.

However, not only were underwriting standards much stronger in earlier vintage CMBS, but many pre-2005 CMBS loans have also been "defeased" by the original borrowers. Defeasance occurs when highly rated collateral, always AAA-rated US government securities, are deposited into an escrow account for the benefit of the lender. The treasuries are sufficient to make all remaining principal and interest payments under the loan, and the lender's security interest in the underlying real estate is replaced by a security interest in the treasury bonds.

Why does this happen in the first place? Because of the highly restrictive provisions on repayments contained in every loan destined for CMBS pools, borrowers are "locked out" from paying off the loans for at least five years. After that, prepayment is subject to terms that protect the lender (and ultimately the CMBS investors) from "re-investment risk", which is what happens when you get a pile of money back in an unfavorable (low) interest rate environment. Nevertheless, owners of property purchased in earlier years that had been financed via the CMBS market needed to have some way to pay off the loans and cash out when they sold, particularly in the ebullient years of 2005-2007.

This was accomplished by defeasing the loan, a practice that got off the ground for CMBS in 1999 (it was already widespread in other markets). Defeasing CMBS loans grew in popularity, and by 2002 the business had taken off. Many, many earlier vintage CMBS loans were defeased and are now backed by AAA rated government securities, instead of beaten up shopping malls full of Bennigan's and Steve and Barry's.

While the effect of higher credit enhancement is widely recognized, the Barclays analysts think that the market is nevertheless "grossly mispricing" heavily defeased CMBS. They contend that the 2005 to 2007 surge in defeasances left many older vintage collateral pools with over 25% in risk-free government collateral. Such risk-free assets should command a premium in today’s uncertain environment, although they say current market spreads do not reflect that or maybe the Chinese are just dumping every treasury-related security they can lay their hands on.

Pricing on high defeasance paper is roughly five to 10 basis points tighter depending on the vintage — but the analysts think that bonds with high defeasance should command an additonal a 20 to 40 basis point premium compared with non-defeased senior tranches as a result of the more favorable risk profile.

Clearly value does remain in CMBS and the collateral; the real question hovering around the room late at night is what is the value of the real estate supporting it? Analysts agree that cash flows are holding up, but that investors are simply continuing to pay less and less for those cash flows. And that whistling sound you hear in the background is just a lot of people in the graveyard, wondering how much longer that will go on.

Click here for an updated Mortgage REIT list, including current yields


Disclosures: None at the time of this writing

The following is a comprehensive list of all REITs, updated and sorted alphabetically by company name along with links to the home page of each REIT and to price and stock data via Yahoo. Links to REIT lists sorted by sector (with prices and yields updated daily at the close), are at the bottom of the page.

REIT LIST BY ALPHABET
REIT NAME	Quote/News
Acadia Realty Trust	AKR
Affordable Residential Communities	ARC
Agree Realty Corporation	ADC
AIMCO	AIV
Alexandria Real Estate Equities, Inc.	ARE
Alexander's Inc.	ALX
AMB Property Corporation	AMB
America First Apartment Investors, Inc.	APRO
American Campus Communities, Inc.	ACC
American Financial Realty Trust	AFR
American Home Mortgage Holdings, Inc.	AHH
American Land Lease	ANL
American Mortgage Acceptance Company	AMC
AmREIT Inc.	AMY
AmeriVest Properties Inc.	AMV
Annaly Mortgage Management, Inc.	NLY
Anthracite Capital, Inc.	AHR
Anworth Mortgage Asset Corporation	ANH
Arbor Realty Trust, Inc.	ABR
Arizona Land Income Corporation	AZL
Ashford Hospitality Trust	AHT
Associated Estates Realty Corp.	AEC
AvalonBay Communities Inc.	AVB
Bedford Property Investors	BED
Berkshire Income Realty Inc.	BIR
BNP Residential Properties, Inc.	BNP
Boston Properties, Inc.	BXP
Boykin Lodging Company	BOY
Brandywine Realty Trust	BDN
BRE Properties, Inc.	BRE
BRT Realty Trust	BRT
Camden Property Trust	CPT
Capital Alliance Income Trust	CAA
Capital Lease Funding	LSE
Capital Trust, Inc.	CT
Capstead Mortgage Corporation	CMO
CBL & Associates Properties	CBL
Cedar Shopping Centers	CDR
Colonial Properties Trust	CLP
Corporate Office Properties Trust	OFC
Correctional Properties Trust	CPV
Cousins Properties, Inc.	CUZ
Crescent Real Estate Equities, Inc.	CEI
Crystal River Capital	CYRV.PK
Developers Diversified Realty Corporation	DDR
Digital Realty Trust, Inc.	DLR
Duke Realty Corporation	DRE
Dupont Fabros Technology	DFT
Dynex Capital, Inc.	DX
Eagle Hospitality Properties Trust	EHP
EastGroup Properties, Inc.	EGP
Education Realty Trust, Inc.	EDR
Entertainment Properties Trust	EPR
Equity Inns, Inc.	ENN
Equity Lifestyle Properties	ELS
Equity Office Properties Trust	EOP
Equity One, Inc.	EQY
Equity Residential	EQR
Essex Property Trust, Inc.	ESS
Extra Space Storage, Inc.	EXR
Federal Realty Investment Trust	FRT
FelCor Lodging Trust Inc.	FCH
Feldman Mall Properties	FMP
First Industrial Realty Trust	FR
First Potomac Realty Trust	FPO
First REIT of New Jersey	FREVS.OB
First Union Real Estate Equity & Mortgage Investments	FUR
Forest City Enterprises, Inc.	FCE.A
Franklin Street Properties	FSP
Friedman, Billings, Ramsey & Co., Inc.	FBR
Gladstone Commercial Corporation	GOOD
General Growth Properties, Inc.	GGP
Getty Realty Corp.	GTY
Glenborough Realty Trust Inc.	GLB
Glimcher Realty Trust	GRT
Global Signal, Inc.	GSL
GMH Communities Trust	GCT
Government Properties Trust	GPT
Gramercy Capital Corp.	GKK
Hanover Capital Mortgage Holdings, Inc.	HCM
Hatteras Financial Corp.	HTS
Healthcare Realty Trust, Inc.	HR
Health Care REIT, Inc.	HCN
Health Care Property Investors, Inc.	HCP
Heritage Property Investment Trust, Inc.	HTG
Hersha Hospitality Trust	HT
Highland Hospitality Corporation	HIH
Highwoods Properties, Inc.	HIW
HMG/Courtland Properties, Inc.	HMG
Home Properties, Inc.	HME
Hospitality Properties Trust	HPT
Host Hotels & Resorts	HST
HRPT Properties Trust	HRP
Inland Real Estate Corporation	IRC
Innkeepers USA Trust	KPA
Investors Real Estate Trust	IRETS
iStar Financial Inc.	SFI
Kilroy Realty Corporation	KRC
Kimco Realty Corporation	KIM
Kite Realty Group Trust	KRG
LaSalle Hotel Properties	LHO
Lexington Corporate Properties Trust	LXP
Liberty Property Trust	LRY
LTC Properties, Inc.	LTC
Macerich Company, The	MAC
Mack-Cali Realty Corporation	CLI
Maguire Properties, Inc.	MPG
Maxus Realty Trust, Inc.	MRTI
Medical Properties Trust	MPW
Meredith Enterprises, Inc.	MPQ
MFA Mortgage Investments, Inc.	MFA
Mid-America Apartment Communities, Inc.	MAA
Mills Corporation, The	MLS
Mission West Properties	MSW
Monmouth Real Estate Investment Corp.	MNRTA
National Health Investors, Inc.	NHI
National Health Realty	NHR
Nationwide Health Properties, Inc.	NHP
National Retail Properties	NNN
New Plan	NXL
Newcastle Investment Corp.	NCT
Northstar Realty Finance Corp.	NRF
Omega Healthcare Investors, Inc.	OHI
One Liberty Properties Inc.	OLP
Pacific Office Properties Trust	PCE
Pan Pacific Retail Properties	PNP
Paragon Real Estate Equity & Investment Trust	PRG
Parkway Properties, Inc.	PKY
Pennsylvania REIT	PEI
Plum Creek Timber Company	PCL
PMC Commercial Trust	PCC
Post Properties, Inc.	PPS
ProLogis	PLD
PS Business Parks, Inc.	PSB
Public Storage, Inc.	PSA
RAIT Investment Trust	RAS
Ramco-Gershenson Properties Trust	RPT
Realty Income Corporation	O
Rayonier, Inc.	RYN
Reckson Associates Realty Corp.	RA
Redwood Trust, Inc.	RWT
Regency Centers Corporation	REG
Roberts Realty Investors, Inc.	RPI
Saul Centers, Inc.	BFS
Senior Housing Properties Trust	SNH
Shurgard Storage Centers, Inc.	SHU
Simon Property Group, Inc.	SPG
SL Green Realty Corp.	SLG
Sovran Self Storage, Inc.	SSS
Spirit Finance Corporation	SFC
Starwood Hotels & Resorts	HOT
Strategic Hotel Capital, Inc.	SLH
Sun Communities, Inc.	SUI
Sunstone Hotel Investors, Inc.	SHO
Supertel Hospitality, Inc.	SPPR
Tanger Factory Outlet Centers, Inc.	SKT
Taubman Centers, Inc.	TCO
Thomas Properties Group, Inc.	TPGI
Thornburg Mortgage, Inc.	THMR.PK
Trizec Properties, Inc.	TRZ
Trustreet Properties, Inc.	TSY
United Dominion Realty Trust, Inc.	UDR
Urstadt Biddle Properties, Inc.	UBP
United Mobile Homes, Inc.	UMH
U-Store-It Trust	YSI
Universal Health Realty Income Trust	UHT
Ventas, Inc.	VTR
Vornado Realty Trust	VNO
Washington Real Estate Investment Trust	WRE
W. P. Carey & Co., LLC	WPC
Weingarten Realty Investors	WRI
Windrose Medical Properties Trust	WRS
Winston Hotels	WXH

Click here for a list of Apartment REITs, including current yields
Click here for a list of Healthcare REITs, including current yields
Click here for a list of Hotel REITs, including current yields
Click here for a list of Industrial REITs, including current yields
Click here for a list of Mortgage REITs, including current yields
Click here for a list of Non-Traded REITs
Click here for a list of Office REITs, including current yields
Click here for a list of Retail REITs, including current yields
Click here for a list of Storage REITs, including current yields
Click here for a list of REITs paying dividends in stock
Click here for a list of REIT ETFs

Information on how REITs work can be found in the post REIT Definition.

This is the most complete list of publicly traded Storage 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.

STORAGE REIT LIST Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Yield	News
In Storage REIT, Inc.	$3.99	N/A	IS-UN.TO
Extra Space Storage, Inc.	$8.42	12.40%	EXR
Public Storage	$64.66	3.40%	PSA
Sovran Self Storage, Inc.	$24.13	11.10%	SSS
U-Store-It Trust	$4.75	2.20%	YSI

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 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

storage reits,
reits, reit

The $1.2 trillion market for collateralized debt obligations (CDOs) is draining money from investor's portfolios faster than the mighty Limpopo River flushes monsoon rains into the Indian Ocean. Consequently, investing in a CDO is now about as popular as halitosis, and CDO assets have been marked down as fast as overwhelmed accountants can sharpen their pencils.

While this is obviously very bad for investors, it's potentially very good for some CDO issuers who were on the other side of the trade. Why? Because these borrowers can now dress up as loan buyers trick or treat! and buy these securities back for a fraction of the price at which they were originally issued.

It's the rough equivalent of selling your Miami condo at the height of the market in 2005, and then using that cash to buy it back several years later for half the price.

Background

CDOs were beneficial because they efficiently sliced assets such as real estate loans into several different pieces, each with a different risk profile. In practice, one BBB-rated whole loan could be sliced and diced such that there were several different tranches with much higher ratings than the single loan could earn on its own. Each piece could then be sold to different classes of investors, which optimized the overall price of the resulting debt.

Many Mortgage REITs were voracious issuers of CDOs, and they used the proceeds to fund new real estate loans, which they packaged into still more CDOs. At the height of the market, Mortgage REITs could issue CDOs at a blended cost of about LIBOR plus 50 basis points, while lending the proceeds out at LIBOR plus 250.

If everything goes according to plan, the CDO investors would earn that spread, the CDO issuer (e.g., Northstar, Newcastle) would earn fees to manage the CDO, and the same issuer would earn a spread on the subordinated equity interest that they retained in each CDO issue. In ten years or so, depending on the CDO, the loans would all pay off, and that would be that.

The CDO debt was non-recourse in many cases, which meant that the REITs enjoyed all the benefits of that cheap leverage, but none of the risks. The only thing that could really happen, in the event that enough of the underlying loans defaulted, is that the income from the equity interest held in each deal would be diverted to more senior note holders. Because of this and the fact that the CDO debt was generally "matched" to the life of the underlying loans, the CDOs would, in theory, chug along, dependably paying interest and principle for years and years.

How CDOs Work

CDOs are really pretty simple at heart, and really not much different than getting a mortgage to buy that Miami condo. Were you to buy that condo, chances are you would fund a small portion of the purchase price with equity, and then borrow the rest.

This is basically what Mortgage REITs did when they made a loan. They capitalized a very small portion of the loan with equity, and borrowed most of rest of the money by issuing CDOs to institutional "lenders". Because the CDO debt was non-recourse, the REIT was never at risk for more than its original equity investment, which in most cases was relatively tiny. Unfortunately, and not surprisingly, this made many Mortgage REITs rather careless with their loan underwriting.

Now fast forward to 2008. The loans made by many Mortgage REITs (and others) have gone bad, so now many CDO investors are sitting on a pile of basically worthless CDO paper (it is not paying interest and principle as expected), and they are desperate for cash because of the market melt down. In fact, cash is in such short supply Bernie Madoff with it that the market cannot discriminate between good CDO debt and bad CDO debt.

Enter your friendly REIT, which offers to buy back that "worthless paper" for pennies on the dollar. Why would they do such a thing? Simple, because there are no other buyers with the same intimate knowledge of the CDO collateral.

REITs like Northstar and Newcastle have been paid all along to manage the CDO assets, so they know exactly which loans are good and which loans are bad, how many there are of each, and everything else in between. For a series of quick videos on how CDO's work, see The Encylopedia of CDOs

Now For the Hard Bit: The Accounting

Assuming the CDO is consolidated and accounted for as a financing for GAAP purposes, the repurchase of the CDO debt allows the issuer to exinguish the CDO liability. To date, no REIT that I know of has repurchased an entire CDO issuance, so that particular CDO structure would remain intact to the extent that any CDO debt remains outstanding. The immediate accounting results for the CDO issuer (i.e., a Mortgage REIT) are:

1. Leverage ratios are reduced

2. To the extent that the debt is repurchased below par, a taxable gain is generated, and this creates taxable income

3. The remaining CDO liabilities are "marked to market" in accordance with FAS 159 (see below)

CDO debt buybacks at Grammercy Capital, Newcastle and Northstar are generating pretty significant capital gains. However, there is one very important characteristic of these capital gains that could be very significant in the case of these loss-hobbled Mortgage REITs: since the gains can be paired with capital loss carryforwards in most cases, they may not actually produce any immediate taxable income.

Immediate taxable income would would be distributable, but since loss carryforwards can be paired with the capital gains, one of the main obstacles to buying back REIT CDO debt is eliminated (i.e., where to come up with the cash to pay required REIT dividends on "phantom" taxable income that is suddenly higher than actual operating cash flow? See REIT Definition for more information on REIT dividend requirements).

Accordingly, quality, solvent, senior CDO debt backed by loans that are generating very attractive cash yields can now be bought back at pennies on the dollar, without any immediate obligation to distribute the "phantom" taxable gains produced by the extinguishment of debt. For those REITs with cash, this could be a very effective way to stabilize cash fows, and by extension, dividends. See REIT Taxable Income Definition Unlocking Opportunities? for more scintillating detail on this topic.

More Accounting: FAS 159

These CDO repurchases have real world implications for FAS 159. For more background, read FAS 159 Demystified. The applicability of FAS 159, or any complex accounting provision, is case by case. Those who argue against the validity of FAS 159 accounting have a pretty simple argument. In theory, these people believe that distressed beached, sunburnt, shriveled whales Mortgage REITs will never, ever have enough cash to buy back the billions of dollars of CDO debt they issued, even at pennies on the dollar. So why mark it down as if they could?

Furthermore, people argue, even if they did manage to come up with the cash, they would have to account for the discount as an immediate taxable gain (i.e., the gain on the debt repurchase must be distributed as dividends). Without the loss carryforwards discussed above, this presents cash-flow issues, as the required dividend would most likely exceed actual cash earnings. (In the interest of 100% accuracy, the tax code allows REITs to elect to retain earnings from capital gains, but they rarely make that election, and if they did the code would then require the REIT to pay income tax on those earnings at the full corporate rate.)

But neither can FAS 159 be dismissed completely out of hand. It just doesn't make sense to penalize REITs for an amount that exceeds (in the case of a CDO) their net economic investment in a specific transaction. Back to that Miami condo: if you lost it to the bank, you would only include your equity in the loss. Since you borrowed the rest in the form of a loan, how could you "lose" it, especially if the lender had no personal recourse to you? The money was never yours in the first place, and now you can just walk away with no further obligation. Mortgage REIT equity investments in CDOs are very similar. Not only did they invest a very small amount of equity, but the debt was also completely non-recourse. So who cares??

Moreover, FAS 159 is not just goofy accounting theory, as evidenced by Grammercy Capital's (GKK) partial buyback of it's own CDO debt in the second quarter of 2008. Northstar (NRF), Newcastle (NCT) and Crystal River (CRZ) have also repurchased their own CDO debt. All of these deals proved that FAS 159 can actually be converted to economic reality, and that even distressed beached, sunburnt, shriveled whales REITs can find a way around the frozen capital markets.

GKK's deal was a little different in that they used normal, every day depreciation losses in the portfolio of recently acquired American Financial Realty Trust to shelter the gains on the debt. GKK can do this because the purchase of AFR turned them into a hybrid REIT. Other Mortgage REITs with portfolios of operating real estate include NFR, RSO and RAS, although the latter two have much smaller portfolios. Presumably, GKK could also have matched the gains against its enormous loss carry forwards. But were it not for those depreciation losses, or the loss carryforwards and the fees paid to the bankers who printed the AFR trade the buyback could most likely never have been done. Sadly, the purchase of AFR was horribly timed, and it will be difficult for GKK to survive.

Loss Rationalization

Forget about all the accounting however; CDO buybacks are just an incredibly good trade. The CDO market allowed Mortgage REITs to basically sell their liabilities (debt) short at LIBOR plus 50. That debt was used to make loans. Now, these same REITs can repurchase that same debt for .20 to .40 cents on the dollar, allowing them to earn LIBOR plus 750-1000, net, to the extent the underlying loans are still paying interest and principle.

In theory, REITs still have to pay themselves par to collapse the entire CDO structure, but in practice investors are accepting far less just to be rid of this bad memory. So "par" is just as much of a fiction now as it was then. Listen to one of Northstar's convertible bond holders attempt to publicly negotiate a buyback of NRF's convertible debt on the Q3 2008 earnings call. If and when you do, you'll realize it's really just a matter of who wants "out" more, and it's pretty clear that Hamamoto, the CEO, felt that he owned the play. He sold the debt at the top of the market, and now he is sitting on $250 million in very precious cash. The nice thing about being the CDO manager is that you know when to hold 'em (Northstar), and you know when to fold 'em (Alesco).

Click here for an updated Mortgage REIT list, including current yields

Disclosure: Long NRF at the time of this writing


Reit,Reits,investing,finance,stocks

This is the most up-to-date Industrial REIT list on the web, prices and yields are updated daily at the close. The list is organized by alphabet in ascending order. 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.

INDUSTRIAL REIT LIST Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Yield	News
AMB Property Corp	$18.41	6.30%	AMB
DCT Industrial Trust	$4.25	7.90%	DCT
Digital Realty Trust	$34.05	3.80%	DLR
DuPont Fabros	$9.66	8.00%	DFT
EastGroup Properties	$33.14	6.40%	EGP
First Industrial Realty Trust	$4.82	Suspended	FR
First Potomac Realty Trust	$9.80	8.10%	FPO
Gladstone Commercial	$15.43	10.10%	GOOD
Monmouth Real Estate Investment Corp	$6.16	10.10%	MNRTA
ProLogis	$8.15	7.80%	PLD

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 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 Storage REITs
Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock
Click here for a REIT ETF list, including current yields

Commercial and multifamily mortgage loan originations continued to fall on a year-over-year basis in the second quarter, according to the Mortgage Bankers Association's (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. Overall, second-quarter originations were 63 percent lower than during the same period last year and multifamily property loans saw a 42 percent decrease in the same period.

“Since the onset of the credit crunch, we have seen an overall slowdown in multifamily property sales transactions, Commercial Mortgage Backed Securities (CMBS) loans and issuance of mortgages in general,” said Jamie Woodwell, MBA's vice president of Commercial/Multifamily Real Estate Research. “This is the main reason there is a drop in the loan originations for multifamily.”

Woodwell explains that this is also because of an overall decrease in demand for multifamily mortgages. “In addition, there are differences in investor groups that contribute to this 42 percent drop. Financing from banks, thrifts and life companies has slowed down, though not to the extent the CMBS market has,” he explains.At the same time, Woodwell says the for Government Sponsored Enterprises (or GSEs - Fannie Mae FNM and Freddie Mac FRE<) have demonstrated the strongest second quarter on record.The dollar volume of loans for GSEs saw an increase of 66 percent (see Multifamily Market Stable; Fannie, GSE's Share Growing).

The level of originations for the GSEs was the highest recorded for a March through June period, while the CMBS market saw the lowest level since the MBA survey began in 2001. Among investor types, conduits for CMBS saw a decrease in loan volume of 53 percent compared to the first quarter of 2008, loans for commercial bank portfolios saw an increase in loan volume of 27 percent compared to the first quarter of 2008, life insurance companies increased by 8 percent during the same time span, and GSEs volume was essentially unchanged from the first quarter 2008 to second quarter 2008.

“The slowdown in originations has come from both a decrease in the supply of capital available and a decrease in the demand for new mortgages. It is likely that volumes will remain muted until buyers, sellers, borrowers, lenders and their expectations of rates and terms match closely enough for transaction activity to pick back up," Woodwell explains.

The report also found that second quarter 2008 mortgage originations were two percent lower than originations in the first quarter of 2008 with a 14 percent decrease for multifamily properties.“We saw extraordinary levels of property sales transactions and mortgage originations in 2005, 2006 and 2007 and in some ways, we have now come back from those highs. In addition, there isn’t a high percentage of loans maturing in 2008 (see High Yield Mortgage REITs, the Perfect Storm?), and in the face of the credit crunch, without a huge wave of loans needing refinancing, the decrease is expected,” explains Woodwell.

Woodwell believes that even though multifamily loans are performing very well for the GSEs, any impact on their portfolios due to a possible bail-out of Fannie Mae and Freddie Mac will have an impact on multifamily.


Click here for an updated Apartment REIT list, including current yields



Disclosures: None at the time of this writing

This is the most up-to-date Healthcare REIT list on the web; prices and yields are updated daily at the close. The list is organized by alphabet in ascending order. 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.

HEALTHCARE REIT LIST Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Change	Yield	News
Care Investment Trust	$5.25	+0.05	13.00%	CRE
Cogdell Spencer	$4.36	+0.07	9.30%	CSA
HCP	$21.67	+0.48	8.70%	HCP
Health Care REIT	$34.37	+0.27	8.00%	HCN
Health Care Realty Trust	$17.49	+0.66	9.20%	HR
LTC Properties	$21.03	+0.58	7.40%	LTC
Medical Properties Trust	$6.31	+0.24	13.20%	MPW
Nationwide Health Investors	$27.41	+0.70	8.30%	NHI
Nationwide Health Properties	$25.84	+0.10	6.80%	NHP
Omega Healthcare Investors	$15.81	+0.29	7.70%	OHI
Senior Housing Properties Trust	$16.94	+0.62	8.60%	SNH
Universal Health Realty Trust	32.16	+0.64	7.60%	UHT
Ventas REIT	30.38	+0.52	6.90%	VTR

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 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 Storage REITs.
Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock
Click here for a list of REIT ETFs


healthcare reits,
reits, reit

This is the most up-to-date Retail REIT list on the web; prices and yields are updated daily at the close. The list is organized by alphabet in ascending order. The list contains links to the home page of each REIT stock, and links to Yahoo news. Links to additional REIT lists by property type can be found below the table.

RETAIL REIT LIST Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Yield	News
Acadia Realty Trust	$13.37	5.50%	AKR
Alexanders, Inc.	$276.76	N/A	ALX
Agree Realty Corp	$18.16	10.90%	ADC
CBL & Associates	$5.61	8.20%	CBL
Cedar Shopping Centers	$4.80	9.60%	CDR
Developers Diversified Realty	$5.13	16.40%	DDR
Equity One	$13.53	8.90%	EQY
Federal Realty	$52.23	5.10%	FRT
General Growth Properties	$1.82	Eliminated	GGWPQ.PK
Glimcher Realty Trust	$2.90	14.90%	GRT
Inland Realty	$7.27	8.30%	IRC
Kimco Realty	$10.20	2.40%	KIM
Macerich Company	$17.94	13.80%	MAC
National Retail Properties	$17.81	8.80%	NNN
Pennsylvania Real Estate Investment Trust	$4.96	11.80%	PEI
Ramco-Gershenson Properties Trust	$10.05	9.60%	RPT
Realty Income Corp.	$22.24	7.90%	O
Regency Centers	$35.37	5.30%	REG
Saul Centers, Inc Mortgage	$30.10	5.30%	BFS
Simon Property Group	$51.35	4.70%	SPG
Tanger Factory Outlet Centers, Inc.	$32.54	4.80%	SKT
Taubman Centers	$27.05	6.20%	TCO
Urstadt Biddle Properties	$14.62	6.70%	UBA
Weingarten Realty Investors	$14.81	6.90%	WRI

Check out Retail Traffic Magazine's great blog "Traffic Court" for the latest information on retail real estate. Information on how REITs work can be found in the post REIT Definition. Scroll down for more REIT stock news, resources and links. If the economy doesn't pick up soon however, you might as well buy cheap penny stocks instead.

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


retail reits, commercial real estate, reit, reits

This is the most up-to-date Hotel REIT list on the web; prices and yields are updated daily at the close. The list is organized by alphabet in ascending order. 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.

HOTEL/LODGING REIT LIST Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Change	Yield	News
Ashford Hospitality Trust	$2.79	-$0.02	Suspended	AHT
Diamond Rock Hospitality	$6.44	+$0.18	16.20%	DRH
Entertainment Properties Trust	$21.02	+$0.42	12.80%	EPR
Felcor Lodging Trust	$2.55	+$0.09	24.50%	FCH
Golf Trust of America	$1.25	+$0.00	N/A (de-REITed)	GTA
Hersha Hospitality Trust	$2.53	+$0.05	7.80%	HT
Hospitality Realty Trust	$12.43	+$0.44	26.20%	HPT
Host Hotels	$8.18	-$0.21	2.40%	HST
InnSuites Trust	$1.32	+$0.00	0.80%	IHT
Lasalle Hotel Properties	$12.38	+$0.04	0.30%	LHO
Strategic Hotels & Resorts	$1.15	+$0.04	Suspended	BEE
Sunstone Hotel Investors	$5.37	+$0.02	57.90%	SHO
Supertel Hospitality, Inc.	$1.76	-$0.06	17.90%	SPPR

Click here for a list of Apartment REITs
Click here for a list of Healthcare 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 Storage REITs
Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock
Click here for a list of REIT ETFs

Information on how REITs work can be found in the post REIT Definition. At this rate however, you might be as well learn how to buy penny stocks!

hotel reits, reit, reits

This is the most complete, up-to-date Mortgage REIT list on the web; prices and yields are updated daily at the close. The list is organized by alphabet in ascending order, categorized by type: Residential Mortgage REIT (Agency or Non-Agency) or Commercial Mortgage REIT. It includes working links to the home page of all REIT stocks on the list but one (Webster Preferred), and links to Yahoo news.

Given all that has happened to Mortgage REITs, I included the good, the bad and the ugly, including those that just recently de-REIT'ed, and those that are likely to de-REIT soon. If it still trades, even fitfully, it's listed. Links to additional REIT lists by property type can be found below the table. Unfortunately, investing in some Mortgage REITs has just become an exercise in buying penny stocks.

MORTGAGE REIT LIST Prices & Yields Updated Daily at the Close
REIT Name	Focus	Last Price	Change	Yield	News
Alesco Financial	Commercial	$0.80	+0.01	Eliminated	AFN
American Capital Agency	Agency	$22.31	-0.66	25.30%	AGNC
American Mortgage Acceptance	Commercial	$0.04	-0.01	Eliminated	AMOA.PK
Annaly Capital Mgmt	Agency	$15.26	+0.12	15.90%	NLY
Anthracite Capital	CMBS	$0.68	+0.06	N/A	AHR
Anworth Mortgage	Agency	$7.24	+0.03	16.80%	ANH
Arbor Realty Trust	Commercial	$1.91	+0.16	57.10%	ABR
Ashford Hospitality Trust	Hybrid/Hotel	$2.79	-0.02	Suspended	AHT
Bimini Capital Mgmnt	Residential	$0.09	+0.00	Eliminated	BMNM.OB
BRT Realty Trust	Commercial	$4.20	-0.30	Suspended	BRT
Capital Lease	Commercial	$2.82	+0.06	7.20%	LSE
Capital Trust	Commercial	$1.50	+0.05	Suspended	CT
Capstead Mortgage Corp	Agency	$12.64	-0.07	18.50%	CMO
Chimera Investment Corp	Non-Agency	$3.49	+0.00	9.40%	CIM
Crystal River Capital	Commercial	$1.80	+0.04	22.20%	CYRV.OB
Cypress Sharpridge	Agency	$11.93	+0.03	June IPO	CYS
Deerfield Capital Management (now "Wisdom Tree")	Commercial	$12.69	+0.12	7.93%	DRF
Dynex Capital	Commercial	$8.22	+0.02	11.30%	DX
Eastern Light Capital	Residential Jumbo (concentration in CA)	$4.49	+0.00	Eliminated	ELC
ECC Capital Capital	Residential Subprime	$0.042	-0.003	Eliminated	ECRO.PK
First Republic Preferred Capital Corp	Commercial/Residential	$16.50	+0.00	N/A	FRCCO
First Trust/FIDAC	Commercial/Residential	$16.73	+0.09	7.90%	FMY
Grammercy Capital Corp	Hybrid/Financial	$1.68	+0.07	Suspended	GKK
Hanover Capital Holdings	Residential Non-Agency	$0.14	+0.00	Suspended	HCM
Hatteras Financial	Agency	$27.45	-0.04	15.50%	HTS
Impac Mortgage Holdings	Residential Non-Agency	$1.20	+0.20	Eliminated	IMPM.PK
Invesco Mortgage Capital	RMBS/CMBS Agency/Non-Agency	$19.50	+0.02	June IPO	IVR
iStar Financial	Commercial	$2.79	-0.05	Suspended	SFI
JER Investors Trust	Commercial	$0.4350	+0.085	Eliminated	JERT.PK
Luminent Mortgage Cap	Residential	$0.07	+0.00	Eliminated	LUMCQ.PK
MFA Mortgage	Residential Agency	$7.00	+0.08	13.00%	MFA
Newcastle Investment Corp	Commercial/Agency	$0.66	+0.00	Suspended	NCT
New York Mortgage Trust	Residential/Agency	$5.22	+0.06	18.20%	NYMT
Northstar Realty Finance	Commercial Whole Loans/Net Lease	$2.95	+0.12	13.80%	NRF
Novastar	Residential	$1.25	+0.00	Eliminated	NOVS.PK
Origin Financial	Residential (Mfctrd Housing)	$0.68	+0.00	Eliminated	ORGN
PMC Trust	Commercial/ Small Balance	$6.70	+0.07	9.90%	PCC
RAIT Financial Trust	Commercial/ Net Lease	$1.36	-0.01	118.60%	RAS
Realty Finance Corp	Commercial	$0.05	+0.00	Eliminated	RTYFZ.PK
Redwood Trust	Majority Residential	$15.18	+0.42	6.80%	RWT
Resource Capital Corp	Commercial	$3.18	-0.02	37.50%	RSO
Thornburg Mortgage	Residential Jumbo	$0.0089	+0.001	Eliminated	THMRQ.PK
Two Harbors Investment	Residential Agency	$9.74	+0.00	SPAC IPO (June)	CLA
Vestin Realty Mortgage Trust	Commercial	$2.68	+0.02	Suspended	VRTB
Webster Preferred Capital Corp	Commercial/Residential	$9.50	+1.08	N/A	WBSTP

See also the REIT Definition post, which provides more information on REIT Wrecks's raison d'etre. That definition helps explain why there may be some interesting opportunities in Mortgage REITs. However, especially with Mortgage REITs, investors need to scrutinize REIT dividends very very carefully.

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 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 Storage REITs

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

Click here for a list of Non-Traded REITs

Information on how REITs work can be found in the post REIT Definition.

mortgage reits, reit, reits

This is the most up-to-date Office REIT list on the web; prices and yields are updated daily at the close. The list is organized by alphabet in ascending order. 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.

OFFICE REIT LIST Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Change	Yield	News
Alexandria Real Estate Equities	$36.05	+$0.26	3.90%	ARE
Biomed Realty Trust	$10.62	+$0.39	4.40%	BMR
Brandywine Realty Trust	$7.76	+$0.31	5.40%	BDN
Boston Properties	$48.07	+$0.37	4.30%	BXP
Corporate Office Properties Trust	$29.84	+$0.51	5.10%	OFC
Franklin Street Properties	$13.53	+$0.28	5.70%	FSP
HRPT Properties Trust	$4.32	+$0.26	11.40%	HRP
Govenment Properties Income Trust	$20.43	-$0.10	June IPO	GOV
Mack-Cali Realty Corp	$23.03	+$0.68	8.00%	CLI
Maguire Properties	$0.88	+$0.03	Suspended	MPG
Mission West Properties Trust	$6.99	+$0.16	8.90%	MSW
Pacific Office Properties	$3.80	+$0.08	5.40%	PCE
Parkway Properties	$12.27	-$0.73	10.60%	PKY
PS Business Parks	$49.25	+$0.85	3.60%	PSB
SL Green Realty Corp	$23.10	+$0.16	1.70%	SLG

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 Retail REITs
Click here for a list of Storage REITs
Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock
Click here for a REIT ETF list

Information on how REITs work can be found in the post REIT Definition.

office reits, reit, reits

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

APARTMENT REIT LIST Prices & Yields Updated Daily at the Close
REIT Name	Last Price	Change	Yield	News
American Campus Communities	$22.38	+0.21	6.20%	ACC
AIMCO	$8.98	+0.13	4.50%	AIV
Associated Estates Realty	$5.91	-0.05	11.90%	AEC
Avalon Bay	$56.02	+0.08	6.40%	AVB
BRE Properties	$24.00	+0.24	9.40%	BRE
Camden Property Trust	$27.86	+0.26	6.50%	CPT
Education Realty Trust	$4.49	+0.20	9.50%	EDR
Equity Residential	$22.33	+0.10	8.70%	EQR
Essex Property Trust	$62.63	+0.40	6.60%	ESS
Home Properties	$34.46	+0.36	8.10%	HME
Maxus Realty Trust	$6.98	+0.00	N/A	MRTI.PK
Mid America Apartment Communities	$37.29	+0.58	7.00%	MAA
Post Properties	$13.70	+0.26	5.90%	PPS
Roberts Realty Investors	$0.81	-0.03	N/A	RPI
United Dominion	$10.61	+0.28	7.20%	UDR

Apartment REITs should be among the first to recover from the economic meltdown, and the best performing apartment REIT for 2009 may be one you've never considered. In fact, it could be one of the best REIT Stocks for 2009. Scroll down for more REIT and real estate related news, resources and links.

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 Storage REITs

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

Information on how REITs work can be found in the post REIT Definition.

apartment reits, reit, reits

"The future ain't what it used to be"
Yogi Berra

Crystal River (CRZ) has had an absolutely terrible time of it. The REIT went public at $23 a share in July of 2006, and then blew through about $350 million, or almost $14 per share, in just eighteen months.

The second quarter of 2008 continued to show the unfortunate results of CRZ's ill-timed buying spree. Book value fell even further, to just $2.46/share, after another GAAP loss of almost $90 million, driven again by continued impairment charges (including remodeled future cash flows) and mark-to-market losses. The company has been steadily selling whatever decent assets it has left in order to pay down debt, and this has added insult to injury by further reducing the quality of the earnings available for shareholders.

Consequently, the Company also announced another reduction in its quarterly dividend, this time by more than half, to just $0.10/share. The Company's stock price has been marching relentlessly in one direction (south), and investors tempted to buy into this value trap even three or four months ago have been treated to nothing less than death by one million falling knives. or maybe just a nice pair of cement boots for crystal river's sea of red ink

The Company announced last quarter that it was pursuing "future strategic business opportunities", which is usually a euphemism for selling out run for the hills! or merging. Given that they called off the initiative this quarter, one can reasonably assume they found no takers.

Interestingly, however, the company did manage to generate positive operating earnings of $.67/share. The Company's CMBS portfolio was also looking pretty good, with delinquencies of less than 1% (in line with the market, but this will surely increase), no shaky interest-only loans, and no near-term maturities to worry about. Even more interesting, however, was this little nugget in their earning release: CRZ says that all these losses may actually cause the company’s operating earnings to exceed its taxable income for the next several years.

Is this bit of accounting errata of any real consequence? For this cash-starved REIT, it is potentially very significant. IRS rules require all REITs to distribute 90% of taxable income to shareholders. If there is no taxable income, there are no distributions. However, CRZ is actually generating cash earnings from operations. Because the Company is generating tax losses, this cash operating income will now be sheltered from taxes as well as the requirement to distribute it to shareholders.

There is a saying about pissing on somebody's leg and then telling them that it's actually just raining, but this oxymoronic situation could wind up being very beneficial for CRZ investors. It would give management some crucial breathing room by allowing them an opportunity to reinvest that cash in the continued reduction of short term debt, or the acquisition of new, accretive higher-yielding investments. please, not again

With access to capital in this sector reduced to zero for the foreseeable future, even something is better than nothing. Significantly, the Company's CEO, Bill Powell, announced that he would be making purchases of the stock on the open market after his blackout period ends, and he followed up with a reasonably big purchase. Reasonable, yet also pretty adventurous given CRZ's precariously thin unrestricted cash position of $2 million (the company does have access to its revolver) and the composition nuclear waste of its investment portfolio.

I personally won't be dumping any of my hard-earned clams into this disastrous bubble mania, bed-wetting poster child anytime soon, but it's becoming a more interesting story. Current shareholders may soon owe a debt of gratitute to 2006 shareholders for helping to produce what could turn out to be CRZ's most valuable asset: tax losses

Click here for an updated Mortgage REIT list, including current yields

Disclosure: None at the time of this writing

According to Bloomberg Indexes, REIT investors have beaten the S&P 500 so far this year, especially if they invested in owners of apartments and self-storage buildings. The National Association of Real Estate Investment Trusts reports that apartment equity REITs jumped 11.88% in July, second only to health care REITs, which notched an 11.94% jump for the month. Small comfort to those still trying to dig out from under the rubble of Mortgage REITs:

But now the specter of job losses is beginning to spread the gloom into this sector as well. As would-be renters are doubling up in apartments or moving in with friends and families, rents and occupancy rates on apartments are beginning to fall in many cities. The so-called "growth" in many areas of the country was illusory and tied to the housing boom (construction, mortgage brokerage, remodeling, borrowing on home equity to pay for dinners out, etc.). Long term, the trends have never been better for Apartment REITs, but right now there is just no place to hide.

Click here for a complete Apartment REIT list, including current yields. See also REIT Definition for an explanation of how REITs work. Scroll down for more REIT and real estate related news, resources and links.

Disclosure: None

LandCap Partners, a fully discretionary, 50/50 joint venture between Northstar (NRF) and Goldman Sach's (GS) Whitehall Real Estate Funds, is buying $40 million of troubled land and construction loans from Wachovia Corp (WB), according to The Wall Street Journal.

This $40 million purchase will be the fund's second investment. Northstar committed $175 million to the venture, which is intended to capitalize on the high level of distress in the residential real estate markets. The fund has plans to invest in non-performing loans backed by residential land and equity interests in residential lots, and this purchase certainly fits within that scary scope.

According to the Journal, the loans are collateralized by 2,900 house lots, which are in varying stages of development, in states such as California, Arizona, Florida and Illinois. Wachovia sold the loans as a result of delinquent payments and the plunging values of the collateral. The $40 million purchase represents an almost 50% discount to the original face value of the loans, and by extension, an even higher discount on the original value of the collateral.

Northstar management expects these deals to generate unlevered IRRs of 20-30%, which is absolutely astronomical. There is a downside, however (aside from the obvious), and that is that these investments are not expected to generate meaningful returns until the assets are eventually re-sold, which may be several years from now.

Because NRF's capital has a current-pay requirement, including that for quarterly preferred and common equity dividends, this JV may start to create a near-term drag on earnings as more capital is invested without immediately generating significant cash returns. It's something to keep an eye on, but given NRF's performance thus far, I'm content to wait and see.

Click here for an updated Mortgage REIT list, including current yields


Disclosure: At the time of this writing, long NRF

"The Taliban used to hang the victim's body in public for four days. We will only hang the body for a short time, say 15 minutes. Adulterers will still be stoned to death, but we will use only small stones." Afghan judge Ahamat Ullha Zarif on a kindler, gentler Afghanistan

....And a taxable loss, dear believers, is still a taxable loss.


First, some housekeeping: This is a follow up post to the reader comments I republished in "Anthracite Post Generates Some Heat!" Those comments were originally written in response to the article entitled "High Risk, High Yield Strategy Keeps Anthracite Under Pressure", or something like that. This post is also rather lengthy (but informative, I believe), so come back later if you're almost empty.

The purpose of this post is to address those reader comments in more detail, first because their very premise is incorrect (that the REITwrecks article is inaccurate and must be "subjected to a high degree of scrutiny" due to the characterization of Controlling Class CMBS as BB-rated). And second, despite the forest-obscuring discussion of proprietary loss severity models and the not-to-be-trifled-with Math PhDs in the comments, the primary article's main thesis remains the same and is fully intact: This weakening credit environment is simply no time to go out on a limb at the bottom end of the credit spectrum.

Having said that, the comments were greatly appreciated and I think a lot of people learned from them. So I do not wish to discredit the writer. I would simply like to set the record straight.

First, there are four investment-grade tranches (disregarding, for the moment, the various plus and minus flavors) in a mortgage securitization, they are the tranches rated AAA, AA, A and BBB. The tranches below these four are non-investment grade. These non-investment grade bonds are rated BB, B and CCC, the latter known among some as the dreaded "triple hook". Last but not least are the bonds that are completely unrated. In the CMBS industry jargon, the below investment grade bonds (anything below BBB) are collectively known as the "B-piece". The mix of these bonds and their individual rights are generally the same but vary specifically deal by deal.

It is the "B-piece" to which I was generally referring in the original article, and it was my glib refence to these bonds as BB-rated that gave the comments credibility. The B piece, frankly, gets all the attention because it is the hardest bit to sell. The reason is that the B piece investors are first in line for any losses, thereby insulating the more senior, investment grade tranches from all but the biggest of disasters.

Avoiding losses in respect of CMBS (or any structured debt) is completely analagous to homesteading on the beach for the afternoon. The higher the ground you occupy, the less likely you are to ruin your new Gucci's when the tide comes up.

Why bother to go through all the trouble of carving the loans up in the first place? In theory, the borrowers get a better interest rate because the loan is split into various pieces which are then tailored to fit different investor constituencies, and that optimizes the price.

With respect to whether Controlling Class CMBS is rated or unrated, it was suggested that I take some remedial time to read the company's reports so I could learn again? how these securities work. So I did, and naturally it didn't take long to find the following: (edited for clarity) the things I do for you

Now, with respect to loss estimates, AHR clearly does purchase these securities at a discount to par, but they do not assume 100% loss of invested principle. In fact, "As part of its underwriting process hey joe, would you take a look? , the Company assumes a certain amount of loans will incur losses over time. In performing continuing credit reviews on the 39 Controlling Class trusts, the Company estimates that specific losses totaling $851,920 related to principal of the underlying loans will not be recoverable, of which $399,403 is expected to occur over the next five years. The total loss estimate of $851,920 represents 1.46% of the total underlying loan pools."

Continuing credit reviews are important, because historically low CMBS default levels in the years before the boom convinced many investors that CMBS structures were "over-enhanced". These investors believed that recovery levels for junior note holders would remain higher than forecast, just as they had for subprime. Naturally, competition in the B piece world increased as a result, and buyers had to bid up the bonds in order to be successful.

The "B" piece buyers had always been a limiting factor in overall CMBS issuance. Not only were there not that many of them, but they also had veto power over any individual loan that could decrease their chances of getting fully paid out. As more yield-hungy investors clamored for more "B" notes, they began to exercise their veto rights less often. Underwiters and issuers, who were only in it for the fees and cared not about repayment, were then able to stuff more and more junk into the pipeline, and CMBS issuance ballooned. (please read "How Could My Big Beautiful Loan Go So Bad, So Quickly", including the comments)

This volume increase resulted from a combination of huge demand and a commensurate decrease in underwriting standards, including (among other things), a relaxing of traditional loan-to-value criteria. Moody's estimated that the gap between the Moodys LTV and underwritten LTVs reached record in the first quarter of 2007 (nearly 45%). The Moody's estimate of actual LTV also reached a record of 106.5%. Who needs equity when lenders will give you more money than the property is worth?

Moody's warned that "Junior classes have become exceedingly thin, exposing them to the risk that if one of the larger conduit loans defaults, several classes at a time may be entirely wiped out." It was in this environment that AHR was stepping up its purchases of Controlling Class "B" piece CMBS:

Now, some investors may take comfort in the fact that AHR alone gets access to the "top-secret" loan-level files. Presumably this gets combined with their own "top-secret" proprietary models, and they are thus able to divine the future by virtue of their uber geek Math PhDs who needs smack dealers, anyway? But having originated, structured and sold hybrid debt and equity (via conduits and securitizations, among other structures), and having bid on the wreckage as a principal after reality hits, I can tell you that it's just not that easy.

If you've ever called the guy (or gal) who owns the controlling class and is in charge of the "work out", you'll discover that they often want to talk. This is because they know very little, and they need to know what you know. In one phone call, when I discussed the details of an obviously flawed underwriting on a mortgage behind a set of B notes, I was met with an incredulous "you're kidding??" They then asked how I could possibly know about such micro-level minutiae, and I had but one very simple, honest answer: all I did was read the prospectus.

Disclosure: None at the time of this writing

A Hybrid REIT is a Real Estate Investment Trust that physically owns real estate (e.g., apartment buildings, office buildings, shopping malls), as well as debt instruments secured by mortgages on real estate (e.g., first mortgages, mezzanine debt, CMBS, collateralized debt obligations). A Hybrid REIT therefore generates income from rent and capital gains, like an Equity REIT, as well as interest income, like a Mortgage REIT.

An example of a Hybrid REIT is Grammercy Capital Corporation (GKK), which transformed itself from a pure Mortgage REIT into a Hybrid REIT when it acquired American Financial Realty Trust, an owner and operator of property leased to banks and financial services companies. GKK acquired American Financial Realty Trust on April 1, 2008, for $3.1 Billion.

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 Office REITs
Click here for a list of Retail REITs
Click here for a list of Storage REITs

Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock




Disclosures: None as of the publication date.

Hats off to Deal Junkie for the tip on this hysterical video. Unfortunately, there is also a grain of truth in it: Reuters is reporting that foreigners dumped nearly $11 billion from their holdings of GSE debt in the last four weeks, and analysts say they won't return in force before it's clear if -- and how -- the government will back Fannie and Freddie. GSE yields have reached levels not seen since the weeks prior to the Fed's forced sale of Bear Stearns to JPMorgan...

"It's surprising that you'd have a New York City multifamily [default] happening so quickly," said Manus Clancy, senior managing director at Trepp Research.

Surprising, that is, unless the mortgage payment is more than double the monthly net income. Impossible you say? Not really, this was the beginning of 2007, and almost anything was possible. "Our job is to create loans for securitization," said an official from Wachovia Corp. a few years earlier. "We’re trying to manufacture the product that the investor base wants." And so they did.

Data: Commercial Mortgage Alert

On the surface, this deal looked pretty good. The pro-forma loan to value was 66.18%, and pro-forma debt coverage was a very safe looking 1.73%. It was a "value-add" deal, and the borrowers, Stellar Management and Rockpoint Partners, planned to pump almost $30 million into improvements and then raise the rents. Pretty simple.

That led to the $225 million first mortgage, topped off with a $25 million mezzanine loan from Deutsche Bank. The first mortgage also became one of the top 15 loans by value (about 3.4% of the initial mortgage pool balance) in a nearly $6 billion CMBS deal issued in March of 2007.

Consequently, one would think that this loan would have received a lot of attention from the underwriters, bond traders and CMBS portfolio managers looking at the securitization. Presumably, these sophisticates could evaluate the loan economics more closely, particulary the rather precarious day-one debt coverage ratio of .39x, which meant that the loan had absolutely no hope of being paid through existing cash flow ('let's see now, the guy's income is less than half the amount of his monthly nut....')

But this was 2007 and the property, known as Riverton Apartments, is no ordinary piece of real estate. It is a massive 12 building, 1,232 unit complex sitting on 7.6 acres of prime East River (Manhattan) waterfront property. I wouldn't know, but I guess that this beach-front location and the "air rights" were what justified the $250 million in debt, even though the property was purchased just 12 months earlier for about half that amount ($135 million) just sayin'. The new loan allowed the borrowers to walk away with over $40 million in cash thanks, the keys are in the mail!

At closing, over 90% of the units (1,143 to be exact) were regulated, rent-controlled apartments. The premise of the loan was that these units would be converted to fair market, such that by 2011, more than half of them would be deregulated and rented at full market.

Unfortunately, this is also New York City, and the only thing more coveted than a long weekend in the Hamptons (or perhaps a phat Congressional seat) is a rent-controlled apartment. Consequently, the conversion did not go as planned, and that .39% day-one debt coverage ate up whatever was left in just eighteen months.

This article, published yesterday in American Banker, pretty much sums it up. BBB CMBX spreads, which have been climbing throughout July and August (Markit Group Says "Bienvenido!"), are now about 2500 basis points over Treasuries, which would equate to just about a 30% (!) yield.

Despite the credit crisis—or perhaps because of it—there has never been a better time to invest in fixed-income products, particularly triple-A commercial mortgage-backed securities, according to portfolio managers at Putnam Investments.

The Boston unit of Power Financial Corp. acknowledged that advisers are facing a great deal of uncertainty and a tough economic climate that could take a long time to level off. Nevertheless, Putnam says fixed-income products, such as commercial mortgage-backed securities, municipal bonds, and high-yield bonds, remain very attractive.

Triple-A commercial mortgage-backed securities are attractive because they are protected from losses and "are the best levels we have seen in 20 years," Bill Kohli, a Putnam fixed-income portfolio manager and team leader of portfolio construction, said in a conference call Tuesday. "This is an area that 10 to 20 years from now we are going to look back on at the historic type of values in these securities."

The securities are "well-protected and fundamentally sound," Mr. Kohli said. "We would need an event five to six times worse than the worst market ever before you would experience any type of fundamental loss."

Unlike equity products, commercial mortgage securities will not be able to maintain their low prices for long, he said. "There is a massive liquidation going on today in terms of firms selling their fixed-income assets. Prices this cheap will disappear."

These products are "plain vanilla, very liquid, relatively straightforward to analyze, and well-diversified," Mr. Kohli said. "This is as close to a free lunch as you can get right now."

Putnam expects a potential price return of 7% from triple-A commercial mortgage-backed securities, 7% from investment-grade bonds, and 13% from high-yield bonds.

"When you look at all of these sectors, the spreads are as attractive as we've seen … in our investment lifetime," Mr. Kohli said.

Analysts and industry observers said that during a difficult economic crisis, investors are interested in using fixed-income products to shelter assets.

But W. Christopher Maxwell, a managing partner at the Rock Hall, Md., wealth management firm Conestoga Capital Advisors LLC, said that despite this notion, many investors and advisers are very suspicious of ratings right now and are wary about investing in any commercial mortgage securities, even if they have a triple-A rating.

"There are a lot of smart people out there that are trying to make astute judgments and trying to buy fixed-income products at a discount, but it can be quite difficult to find those values," he said. "The difference between a successful triple-A-rated CBMS and one that is not so successful is not that big."

Mr. Kohli said it is critical to maintain a well-diversified portfolio that includes a variety of fixed-income products.

"The fixed-income landscape is much more complicated than it was 10 to 20 years ago," he said. "Companies need a certain degree of specialization to understand the dynamics. It is hard for a generalist or anyone who takes a general approach to grapple with all the issues in the fixed-income landscape."

Putnam had $166 billion of assets under management as of June 30, including $75 billion of fixed-income assets.

Mr. Kohli said in addition to triple-A commercial mortgage securities, Putnam believes that there are opportunities to invest in high-yield bonds, municipal bonds, and even alternative-A mortgages.

Even though many analysts and industry observers have turned their back on the alt-A market, Putnam has been buying such assets over the past few weeks, he said.

"We are doing our homework," Mr. Kohli said. "We are getting to know the underlying pools and the geographic distribution. We are not just buying plain vanilla alt-A. … We are dipping our toe in the water. We are really just starting to get involved."

Geoffrey Bobroff, an analyst with Bobroff Consulting Inc. in East Greenwich, R.I., said that the alt-A market is a dangerous place to play right now, because it can be "difficult to distinguish the good from the bad."

Burton Greenwald, a Philadelphia analyst with BJ Greenwald Associates, said Putnam is taking a "calculated gamble" by investing in alt-A products to stand out and improve their profile after several years of outflows caused by the poor performance of the company's equity funds.

"Putnam has gone through more than three years of getting hit in the face every time they stick their head out of the trenches," Mr. Greenwald said. "Their equity hasn't shown signs of a turnaround, but they are recognized for having a strong fixed-income record. Now they want to really allow that to shine."

Thailia Meehan, a Putnam portfolio manager and team leader of its tax-exempt strategy, said that municipal bonds remain an attractive investment option, because they are inexpensive when compared with Treasuries.

There is a tremendous buying opportunity when it comes to A-rated and triple-B-rated municipal bonds, Ms. Meehan said. A lot of investors were underweighted in municipal bonds heading into the credit cycle, she said, and this could be a good opportunity to balance a portfolio.

"This is a terrific opportunity, and we are taking advantage of it," she said. "We are buying high-quality munis at attractive levels. We haven't dipped down to lower-quality munis on the curve."

Mr. Kohli said that it remains a very tumultuous economic market, and that it is difficult to make predictions, but he is confident fixed-income products will remain attractive options for advisers and investors.

"I'd love to tell you that three months from now or three weeks from now we will have the most attractive levels," he said.

He added: "But I am comfortable saying that over a three-year or five-year horizon, the growth opportunities are phenomenal. They are off the chart."

You know, it takes a bit of grip to host this pig. Even though the code sits on some server quietly doing its thing somewhere in American Samoa, they hit my credit card every month for at least a topped-off tank of California gas. And I only get about a mile per million clicks, if you know what I mean just push that index finger once, it won't hurt.

Trust me, anonymously spitting up some new interesting REIT story on an almost daily basis while the stock market (and my own net worth) spirals into nothing less than an investment migraine in a closet of full of credit vertigo must be about as bad as making a spot the Chinese midget tag team wrestling squad but still better than being a vegan.

So when I get comments on this turgid, loss-ridden subject matter, it's a bit of a triumph when you only have a hammer, everything looks like a nail, or something like that. The comments help me to be an even better real estate sleuth, and hopefully all of us to become better investors. So when I saw this particular comment (below) appear on the August 10th Anthracite post, I decided I had to re-post it on its own page. I have been looking into ways to make this a more open site, with the ability to post available to more than just me, so what better way to start than with this, which definitely took some time and effort to write. Thanks for the comment 42. (Comment follows)

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Not to take exception with some of your other points later in the piece, but when you start out your blog by quite incorrectly identifying the controlling class as BB rated, I must then only deduce that the content which will follow must be subjected to a high degree of scrutiny. (Update: REITwrecks responds). Typical of the CMBS market (RIP) the BB bonds are publicly offered, the B bonds are privately offered and the NR piece (aka first loss or Controlling Class Certificates) are also privately offered. Why? Because these two classifications (B and NR) of risk are so high, the investors require analytical access to non-public loan files in order to create cash flow models used to predict returns and therefore to price bonds.

First of all, the controlling class certificates (CCC) (otherwise known as the first loss piece) are UNRATED. That is clearly NOT to be confused with any bond that IS rated (including C, B, BB etc.). The CCC/first loss piece of a structured transaction are essentially the “Equity” piece with absolutely no financially secure guarantee of the return of any of the face amount of principal on the certificates themselves.

Therefore, because there is quite literally almost no hope of principal return, these assets trade at deep, deep discounts to the par face amount. Typically these ‘bonds’ trade in the new issue market (i.e. when the deal is initially structured and sold to investors) at prices nearing 17-25% of par. This practice of pricing is essentially driven by a Timing-And-Severity-Of-Losses Model to calculate a projected yield.

AHR assumes ON THE DAY THEY BUY THESE that $0.00 of principal will be recouped from these assets. So who cares about loss rates of 50% when the assumption from day one is 100% losses on principal?

Why would any ‘bond’ investor ever buy a bond and then immediately write the principal down to $0.00? Seems like financial suicide, right? Here’s why: The loans will pay the stated interest on the 100% face amount of the loans for some period of time prior to experiencing any credit deterioration. The Art & Science of the investment process in these CCC/first loss pieces is accurately estimating how long the loan will pay the full interest before it begins delinquency as well as the depth of the deterioration of the credit in that time frame.

Because the CCC investor is paying 17-25% of par and receiving the ‘bond’ coupon (interest) on the full 100% of the par (face) amount, the income from the bond will eventually return a fat profit….as long as it keeps paying. There is a breakeven point in time at which the initial investment (17-25% of par) is surpassed by the interest payments on the full par amount of the bond and it becomes a profitable investment.

So the key to a successful analysis and therefore a successful investment in these assets is BOTH a TIMING OF LOSSES and LOSS SEVERITY prediction (model). Professionals in the structured markets will recognize this as the SDA (Standard Default Assumption). This is a mechanical-standardized-time-ramp model, which describes the historically experienced credit default curve of loans of similar ilk. This model is coupled by investors with a loss severity model which incorporates various timing of workout/recovery amount/period assumptions in order to present a cash flow projection of a given loan/deal/structure.

Combining these models with the cash flow calculator of a specific loan file (which by the way is ONLY MADE AVAILABLE TO THE FIRST LOSS AND B INVESTORS) in order to predict the cash flow, while accurately adjusting the percentages of these models (up or down) to reflect market conditions is where the Math PhDs make their money.

If losses occur earlier than predicted but are of a mild severity, the investment can workout fine. If the losses occur earlier than anticipated and are of a severity equal to or greater than anticipated, the interest stream will obviously be cut off by the losses (losses take the bond face amount down toward $0 by the amount of the realized loss) and the investment can incur a negative yield.

Remember that AHR ASSUMES THAT ALL PRINCIPAL IS LOST ON DAY ONE AND THAT ONLY THE INTEREST CASH FLOW STREAM FROM THE BONDS WILL CONTRIBUTE TO THE YIELD. The TIMING of the losses IS THE KEY and earlier is clearly worse.

The ‘controlling’ classes are so named because they provide to the investor in the most disadvantageous position with respect to losses (caused by poor performing loans) with the authority to direct the actions of the special servicer. The special servicer is essentially a loss mitigation function provider, which is activated at the command of and for the benefit of the controlling class investor upon the recognition of a loan performance snag.

The CCC holder has the right to control the special servicer to take action on their behalf to mitigate losses. They get to dictate the actions of the special servicer as their agent and for their economic benefit. Thus the class is tagged “Controlling Class”. This bondholder gets to call the shots; they are IN CONTROL. And they are in control because they are taking the most risk…AND THAT IS WHY THESE BONDS ARE NOT RATED. They are typically not registered (i.e. Private securities) and are refered to as NR (non-rated) classes in the prospectus.

The annual and the quarterly reports both take a few paragraphs to explain the loss assumptions on the controlling class interests. I suggest that you take some time and read the explanation of these securities, how they work, what factors affect the return and how they are booked on the balance sheet.

The scenarios you shared could be destructive or they could be irrelevant. You have not provided the depth of analysis necessary to provide much other than speculation. Your points might be accurate and have absolutely no effect OR they might have a big effect. Your post fails in its lack of depth of analysis or even an understanding of what these bonds are that you are primarily discussing. What it seems may have become a little obscure to you is that the return of principal is IRRELEVANT.

The Fitch report could be right and losses could mount to 50% over the life a of a deal AND IT COULD PROVE TO BE A COMPLETELY IRRELEVANT ASPECT OF THE RETURN CALCULATIONS FOR THESE BONDS DEPENDING ON THE TIME FRAME FOR THE LOSSES TO BE REALIZED. It is the timing and severity of losses, which are all important.

Your work is widely read and you are to be commended for the valuable service you provide to the market at large. No offense intended because I do respect your work…but, you are just a little out of your league with your last post. It is therefore likely that the net result is that your readers, whom I dare say have not been exposed to the specific nature of these arcane classes within the structured securities realm, will be frightened not enlightened.

42
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Disclosure: I assume 42 is long AHR

If you're thinking about buying pref shares, here it is in a nutshell: Commodity prices are now way down and the dollar up, which may afford room for yet another Fed rate reduction. Because they sit a notch higher on the capital stack, combined with historically high spreads over the current 10 year UST, preferreds are not only a little safer than the common (provided you don't mind much lower liquidity), but also a good value play.

Consequently, they make a good, lower-beta alternative to the higher risk of capital erosion and possible dividend cuts in REIT common stocks, with additional potential upside courtesy of Uncle Ben:

With respect to AVB and ESS specifically (the two picks highlighted in the vid), see the March REIT Wrecks post entitled "Play Subrime Safely With These Residential REITs".

See also REIT Definition for more information on the payout of common dividend. 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 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

Information on how REITs work can be found in the post REIT Definition.



Disclosure: None at the time of this writing.

Where is Mbele and what happened to my money?

Union Homes floats N50b REIT fund. By Gbenga Agbana and Femi Adekoya

AFRICA'S first Real Estate Investment Trust (REIT) fund has been floated by Union Homes Saving & Loans Plc, a subsidiary of Union Bank of Nigeria Plc. The fund manager would be Union Homes Saving and Loans Plc, and the fund would be quoted on the Nigerian Stock Exchange.

The Union Home REIT, is a closed-ended unit trust scheme that aims to move beyond sophomoric email scams achieve long-term capital appreciation of assets by investing in a portfolio of high-quality real estate and mortgage assets.

For its effective take-off, Goldman Assets Management Limited goldman sachs to goldman assets management: can i please have my name back?? acting as financial adviser and lead arranger, alongside Union Capital Market Limited as joint issuing house, is packaging an offer for public subscription of 970.9 million units of N51.50 each in the Union Homes REIT.

According to the prospectus, the funds would invest a minimum of 90 per cent of its assets in real estate and real estate related assets and a maximum of 10 per cent would be invested in quality money market instruments.

Already, the council of the Nigerian Stock Exchange has approved in exchange for certain recompense the admission of the 970.9 million units being offered for subscription on its daily official list, and the units qualify as securities in which trustees may invest under the Trustee Investment Act, Cap T22, laws of the Federation of Nigeria, 2004 as such may be "amended" from day to day!

As a form of mandatory subscription, the sponsors of the Union Homes REIT will subscribe to 10 per cent of the total fund size as mandated by the Securities and Exchange Commission (SEC) rules and regulations guiding collective investment schemes.

Key features of the offer include nigerian law! a forecast cash distribution of N1.50 per unit invested in the 2009 financial year and currency risk! N3.25 per zolo for initial investors. Also there is political risk! a yearly payout of dividend with the minimum payout fixed at 90 per cent what to do with all those precious nigerian niaras! according to the Chairman of Union Homes Saving & Loans Plc, Dr. Batholomew Ebong.

According to the Managing Director of Goldman Assets Management Limited, Mr. Olu Abayomi-Sanya, the Fund would be listed on the stock exchange, post offer, as a separate entity after we have thoroughly looted it!

The offer opens on August 11 and closes hurry! on September 11, 2008.


"I present to you an urgent and confidential opportunity. This is an excellent, 100% risk-free investment in quality Nigerian mortgages and money market instruments, requiring the highest level of trust, security and confidentiality between us..."

Anthracite reported mixed results on Friday, well shy of the Company's .31/share dividend, noting that it was still receiving margin calls on the 18% portion of its portfolio that was not match funded. The Company's cash levels are low ($38.6MM unrestricted) relative to an amortization payment of $31MM required on September 30th under its newly amended Bank of America credit facility, one of two primary credit facilities.

Anthracite recently established a third credit facility with its parent Blackrock. The support from Blackrock is encouraging, and AHR appears to be using that facility to meet its margin calls. AHR drew down $52.5MM when market conditions worsened around the time of the Bear Stearns failure, then paid it back down to zero in April as the market improved. AHR drew on this facility again on July 28th in the amount of $30MM.

It's worth noting that the Markit Group's analagous BBB CMBX index shot through the roof (up is down) in June and July, at the same time that AHR drew on the Blackrock facility, and a graphical illustration of that index helps put Chris Milner's market commentary in context:

"After a period of relative stability in April and May, the markets suffered another major setback in June and July as continuing economic weakness combined with the challenges faced by the residential mortgage market put significant pressure on financial stocks and credit spreads."

Investors in Anthracite need to continually reconsider the the damage that is being inflicted by this index. The reason is that this damage is divided into two categories: permanent capital losses, which until now have been largely confined to the subprime mortgage sector and related structured products; and temporary mark-to-market losses, which are hitting all credit products, including the securities in which Anthracite invests.

REITwrecks readers say that six times fast know that these mark-to-market losses on CMBS have had little or nothing to do with the underlying performance of the collateral, which with very few exceptions continue to exhibit strong financial performance.

However, more and more observers are questioning whether these paper losses will not soon become permanent capital losses. Obviously, with Anthracite's portfolio concentrated on the lowest rung in the CMBS food chain (BB rated "Controlling Class" CMBS), pressure on the stock has been consistent.

AHR has a fairly well diversified BB CMBS portfolio by geography, but the portfolio summary in the earnings release shows that AHR could be in some trouble with respect to the more recent vintages (2005, 2006 and 2007). These three years comprise almost 75% of the portfolio. Those three vintages also comprise about 49% of the outstanding CMBS market, so it's not surprising that AHR would have a concentration there. In those three vintages, AHR currently estimates that its portfolio will experience collateral losses of almost 50%.

As everyone knows, these particular years were also the height of the bubble, and Fitch recently reported that it believes defaults on CMBS issued in those years could quadruple from their current levels, under a worst-case scenario for the U.S. economy.

According to the Fitch estimates, borrowers would default on an average of 17.2% of securitized commercial mortgages over 10 years if the US economy dips into a recession with 0.2 per cent contraction in growth (compared with current default rates of 4 per cent), which is a rise of 330 per cent. Fitch's London office produced similar dour commentary on the European CMBS market a few days earlier.

Such a scenario corresponds “to the negative predictions currently offered by commercial real estate experts”, analysts at Fitch wrote. This would happen if the economy suffered a similar downturn to 1991, and assumes that the value of properties covered by the deals falls by 25 per cent, and cash flow from rents by 15 per cent.

Under a more mild recession, which Fitch thinks is more likely (0.8 per cent economic growth), the default rate would still rise to 13.7%, roughly double the norm.

"Controlling" Class CMBS: controlling what?

AHR says it likes the controlling class CMBS because it is given control over the collateral in order to effect workouts. But what if there is nothing left to work out? Fitch says the more severe scenario would cause non-investment grade bonds – B and BB rated CMBS – to suffer loss rates of 100% and 95.9%, respectively. Meanwhile, only 30.6% of the lowest-rated investment grade bonds – BBB rated – would experience losses, while loss severities would rise to 37.9% from an historical average of 33.5% (but still a far cry from being completely wiped out).

Clearly, the report suggests that recently issued CMBS were the subject of inflated underlying property values and weaker underwriting standards experienced at the height of the boom in 2006 and 2007. The report's survey covered all Fitch-rated bonds issued during those two years, which were comprised of 74 deals worth $217.3billion. That was about 60% of all CMBS issued during the period.

Is AHR misunderestimating?

Most reasonable people agree that conditions are worsening. Not surprisingly, the Company also reported that it increased the loss assumptions on its controlling class (across all vintages) CMBS from 1.31% of outstanding collateral at December 31, 2007 to 1.44% at March 31, 2008.

However, the Fitch report suggests that losses in the controlling class losses could be much more severe. Indeed, the report notes that under the 1991 scenario, 3.6 per cent of all 2006 and 2007 bonds (not just BB) will suffer losses. Given that 75% of AHR's outstanding BB CMBS collateral consists of deeply subordinated 2005, 2006 and 2007 bonds, AHR's loss estimates could be light.

Nevertheless, even this pessimistic Fitch scenario flies in the face of the losses implied by the CMBX index. That index continues to suggest that losses on some CMBS will exceed the worst levels experienced in the 1990s.

Indeed, Bloomberg reported on Friday that "yields on commercial real estate securities relative to benchmark rates rose to the highest since March on concern that retailers won’t be able to repay debt as consumers cut spending. Spreads on AAA rated commercial mortgage-backed bonds widened 10 bps during the week… to 250.5 bps more than 10-year swap rates… Demand for commercial real estate securities is waning as retailers are forced into bankruptcy during the economic slowdown."

Obviously, the question on everybody's mind is how much worse will the economy get and how long will it last? Amidst the uncertainty however, one thing is clear: as reality unfolds, whatever it may be, AHR's "controlling class" CMBS will be among the very first to receive it. Unfortunately, being a bellwether (bell-weth-er, n. 1. a castrated ram ) in this particular market is not an enviable place to be.


Disclosure: None at the time of this writing.

"Everything secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity." - Lord Acton

The accounting standard known as FAS 157, otherwise known as mark-to-market accounting (see How Mark To Market Turned Mr. Market Into Mr Magoo for detail on how it works), has been criticized by some bankers, notably Blackstone Group chief Steve Schwarzman, for needlessly causing big write-downs and encouraging financial panic. It's defenders include Goldman Sachs, which pointedly left the Institute for International Finance in June, a banking lobby group, over the IIF's anti-mark-to-market stance. Last week Treasury Secretary Hank Paulson defended mark-to-market during a talk he gave at the New York Public Library (which, ironically, is now officially called The Stephen A. Schwarzman Library.)

"I believe in fair value accounting," Paulson reportedly said. Robert Teitelman writes in The Deal that Paulson offered up a spirited defense of mark-to-market accounting, also known as "fair-value accounting." Paulson made several points. First, we can't just throw "fair-value" accounting out the window because of some illiquid markets in a crisis. Second, you can't run an investment bank without mark-to-market. Third, we need to recognize the losses and move on. Fourth (Teitelman made this one up), "stop whining you damn crybabies".

Teitelman's fourth point is interesting and applicable in REIT land, and I quote liberally from his article as a result (if not already blessed with eternal life, my 6th grade writing teacher soon will be after reading this weak attribution. Apologies in advance Ms. Graham!).

Now maybe our Treasury chief is right, Teitelman writes, particularly on point four. But no one is saying -- well, hardly anyone -- that we should just toss out mark-to-market, giving the banks a fat break and move on. The question is more subtle than that: Does mark-to-market need to be applied universally, to all assets classes and financial instruments? Is the prudent duration for all assets a short-term market standard, or just for some? And do the standards or indices we now have work in illiquid markets under stress, or are they prone to failure or manipulation?

Moreover, the entire financial world does not consist of investment banks. There are insurers out there, retail banks, private equity shops, money managers. There is a whole diversity of financial providers that we are trying to jam through the keyhole of mark-to-market accounting. And, yes, given that investment banks make their money (or lose it) in short-term markets every day, it is completely appropriate to apply strict mark-to-market to them.

The fact is, mark-to-market is completely appropriate to any speculative enterprise. The spread of mark-to-market to all corners of the financial world represents not only a blurring of the once-bright line between investment and speculation, but its obliteration. Speculation has won. And the notion that the best snapshot of reality is the one hatched by the markets every day has won. And FASB 159, an extension of FAS 157, is also completely appropriate as well. Sure speculators can speculate, but others can speculate againsts those speculators (by repurchasing their own marked-down debt, for example, as NRF and GKK have done). And as a result of all this, individual investors are less susceptible to to opaque disclosures and smoky, back room deals.

For individual investors, that triumph not only brings opportunity, but also gut-wrenching, bottle-draining stress as the "daily demands of traders and activists" are digested by the second into one's individual net worth.

As Tietelman writes however, fair value, is, of course, by definition, fair. And who can argue with that?

Click here for an updated list of Mortgage REITS", including current yields.

I have already written extensively about Northstar here, here and here, among other places, so I will keep this somewhat short.

The biggest news to come out of the call from a "market" perspective is that Northstar is now starting to deploy cash. Forget about having to raise equity; they have $295 million available to invest. Also, in a further indication of credit quality (still no non-performers) they had $53 million in repayments during the quarter, and they estimate a possible $200 million in "optional" repayments for all of 2008. This means that their borrowers don't have to repay, but they are choosing to do so because they are finding profitable exits, even in this terrible market

By extension, this also means that Northstar's self-origination model is performing much better than the "whale" strategy employed by some other REITs: Raise a bunch of cash, and then cruise down Wall Street with your mouth open, collecting loans like so much plankton and krill.

Northstar was much more selective, and they did sacrifice short term earnings as a consequence (all that low yielding cash did nothing for their dividend). However, as things begin to play out, and assuming they maintain their incredible credit discipline, the forward dividend will start looking stronger and stronger.

Why? Because they have cash to deploy now. There are 36 private equity mezzanine funds on the road now, attempting to raise $21.3 billion. 2008 will see a huge increase in the number of these funds and their buying power. We're only half way through the year, and already 14 mezzanine funds have raised $20.3 billion, vs. 29 funds that raised $15.7 billion for all of 2007. You can read the full story here, and a related story here.

These are not all real estate-focused funds, but the distress in this area is no secret, and plenty of them will be focusing on deals like the one that landed in my inbox just this morning: a discounted $231 million commercial and mezzanine loan portfolio with office and multifamily collateral located in New York and Chicago.

This is Northstar's bread and butter, and they are clearly trying to get out ahead of the crowd (the article above notes that prices are already starting to increase). Accordingly, they expect to reduce available liquidity to between $50 and $100 million by the fourth quarter. Based on their available cash and estimated loan repayments, that may mean $400-$500 million of equity invested by year end. They think these investments will generate levered returns in excess of 20%.

With the new players rushing into this market, Northstar is betting that opportunities will start to decline in quantity and quality in 2009 and 2010. It's too early to tell, but unless they can raise cash, this may mean that many of the more broken REITs will simply be left to manage run-off on legacy portfolios (or be wound up, acquired, etc).

There was some interesting "Itolja so" as well. Northstar did in fact buy back some of it's own highly rated CDO debt at a 40% discount to face. As the CEO said, this validates the FAS 159 accounting model, and they booked a $7 million gain on the repurchase. It will be interesting to see how many other REITs choose to take advantage of the same dislocation. Click here for an updated list of Mortgage REITS", including current yields.

Disclosure: At the time of this writing, long NRF

SNAIL DARTER
(Percina (Imostoma) tanasi)

FAMILY: Percidae

STATUS: On October 9, 1975, this species was officially classified in the Federal Register as endangered.

Resource Capital Corp reported yesterday. Ominously, REIT taxable income for the quarter was less than its declared dividend, and RSO reduced future dividend guidance to .37-.39/quarter. Still, RSO year-to-date earnings are ahead of its year-to-date declared dividends, so it may be too early to sound the red alarm. On the surface, RSO's earnings were not too disimilar to Northstar's (NRF), which last quarter also reported AFFO that was just below its dividend (Northstar reports Q2 earnings on Thursday, August 7th).

The similarities end there, however. Northstar is an internally managed REIT that focuses on one thing: commercial real estate. RSO is externally managed and has a "diverse" - real estate being the largest component - portfolio of cats and dogs that includes everything from equipment leases to real estate loans, bank loans and even REIT TruPs. I love the fact that RSO has both issued TruPs (as a borrower) and invested in them (as a lender).

Regrettably, RSO also commenced operations in 2005, which meant that they faced intense competition for quality assets amidst a frenzy for yield. As a result perhaps, some of their "bank" loans (but not all) carry spreads of up to 6.75 over LIBOR, which indicates a pretty frightening borrower risk profile.

So it shouldn't be surprising that RSO's earnings pressure came partly as a result of both specific loan loss reserves and charge offs, and an increase in general reserves, as well as a huge miss on loan exit fees and loan repayments. Even clumsy IStar (SFI) didn't have such a bad showing on forecast repayments. Unfortunately, this means that RSO's IRR-driven borrowers have been unable to execute their exit strategies with either (1) asset sales or (2) refinancings. In contrast, Northstar's earnings pressure came simply from the fact that they were sitting on a big pile of uninvested cash. Like RSO however, Northstar management believes that "best investment opportunities we have seen in years will occur later this year."

I also loved the juicy RSO conference call. The CRE portfolio manager spent the bulk of his time detailing events around one defaulted mezzanine loan with an underwritten debt coverage ratio of 1.18% and a coupon of treasuries plus 765 yikes! but management curiously spent almost no time explaining why they had increased general reserves on the rest of the portfolio, which includes those other "bank" loans at LIBOR plus 675 yikes again!

The "inside" story:

The best part of the call was the characterization of the mezzanine borrower as "disengaged" and the collateral as a case of "good property gone bad" malls gone wild! with "sudden vacancy issues". Truthfully, and in all fairness to RSO, these particular malls may have been good properties when they first opened. But that was back in 1969, a few years after sputnik.

Now, almost four decades hence, both were Brady-Bunch era relics having a difficult time competing with the brand new "lifestyle" shopping centers that had just opened down the street. Suddenly, treasuries plus 7.65 is looking cheap! quick, where do I sign? These new shopping destinations siphoned off tenants from the old fallout shelters malls securing the RSO loans, including the anchors, which led to the "sudden" vacancy issues they referred to in the conference call. Going in, everybody knew about the lifestyle centers....but that was then and we all know about then now.

As for the disengaged borrower, this is a guy who started out twenty years ago with a couple of brownstones in Brooklyn, I jest not, and by 2005 he had grown his company into one of the largest privately held owners of real estate in the country by using you guessed it! OPM. That led to his nearly $8 billion purchase of the "limited service hotel chain" from Blackstone AT THE PEAK!, and the now "distressed" multi-billion dollar loan related to it.

The Usual: Delay of Game

How disengaged was he? Well, first of all it wasn't his money, so the term implies he was really engaged in the first place. That aside, he was pretty disengaged. At the end of March, he had been saying for weeks that he was close to reaching a deal on $31 million in defaulted unsecured corporate bonds related to the hotel deal (he defaulted on March 15).

Then, he said it was really just a matter of a simple family vacation. "My luck -- the guy who is in charge of it [the workout], he called me and said, 'Look this is not very important to us and I'm on spring break with my kids. And let's just finish it when we get back.' "

This is the same guy who was negotiating a work out stuff job with RSO. S&P was not fooled, amazingly enough, and placed the senior bonds (CMBS) secured by the malls on negative watch at the same time (March). In response, the borrower offhandedly said that the mall loans "likely will be worked out".

According to the RSO conference call, the senior lenders took a "significant hit" to principle when they finally foreclosed on the malls. This was no surprise, and it flicked RSO's junior mezz loan into the bin as a result. Given that the senior underwriting probably anticipated debt service coverage of at least 1.30% (and look what happened!), how unreal do you think RSO's pro forma junior 1.18% was??

It's just another reminder not to eagerly swallow every morsel offered up by management Let's face it: the collateral here is older than the CEO. Everybody is struggling to get it right, but in this environment getting it right is just about impossible. If RSO's borrowers are currently unable to sell or refinance, it means that those deals are not working as planned either, and that could lead to even more reserves and charge-offs down the road.

MANAGEMENT AND PROTECTION: The Snail Darter Recovery Team recommends that there should be at least five separate viable populations to eliminate the threat of extinction.

Disclosure: At the time of this writing, long NRF, none for RSO or SFI

“When Citi is cheaper than Colombia, which is on the verge of a war, it wakes you up,” Andrew Phillips, managing director and co-head of U.S. fixed income at BlackRock (BLK), in the March 2008 edition of Pensions & Investments, referring to the historically wide spreads on Citi's (C) corporate debt.

Or to put it another way, when Liberty Plaza is on the verge of becoming cheaper than Plaza de Bolivar, maybe it really is time time to throw in the towel on U.S. commercial real estate:

Let's take the donkeys and head to Bogota, shall we?

Throwing in the towel is exactly what Lehman Brothers ass whooping! (LEH) may be doing. The New York Post reported on Friday that Lehman is exploring the sale of about $30 billion of commercial mortgage loans, including CMBS. Insiders say Friday's NY Post report was the result of an intentional leak designed to test the market's reaction to Lehman's capitulation potential deal.

However, given that the CMBX was climbing relentlessly throughout July, would it be naive to suggest but we planned the leak! that they still can't figure out their hedges and simply got squeezed by a pack of ravenously short hyenas?

Hoocoodanode?

In what could be one of the biggest strategic blunders since the French built the Maginot Line ein, zwie,...drie!! Lehman decided to partner with Tishman Speyer Properties in early 2007 to buy Archstone-Smith, an apartment REIT. They paid $22 billion, which is the largest deal for apartment-buildings ever. The $22 billion price tag reportedly produced a "3 cap" on current income, which means that it essentially had an unlevered yield of 3%. Assuming that this makes sense for even a moment, it doesn't when you consider that the majority of the deal was financed with debt (leverage) at an average cost that far exceeded the 3% unleveraged yield, it's really not that hard to figure out what happens next.

That deal was soon underwater, as was the first-loss junior debt that Lehman underwrote to help finance it (and can no longer sell at par). Now, people outside the firm if you're not inside, you're outside! say Archstone is quietly shopping every single property outside of those located in New York the new Buenos Aires and San Francisco.

"We're not going to move curious absence of more precise verb noted [commercial real-estate assets] at fire-sale prices," said former Lehman Brothers Holdings Inc.'s finance chief, Erin Callan, during a conference earlier this year, adding, "We're going to move them curious absence of more precise verb noted yet again at prices that make sense to us." an attempt to revive central planning??

Remind me, what was that old joke about Wall Street beginning at a river and ending in a graveyard?

Disclosure: Despair

FAS 159: More Red Flags Than a Military Base in China, or Just a Little Frost on the Windshield?

Stifel Nicholas analyst David Fick downgraded Northstar from hold to sell on Friday. Maintaining coverage at a hold is hardly table-pounding, so downgrading to sell what ev's, dude seems like a minor administrative point, especially in this market. The stock was trading ex-dividend on Friday anyway, so it was difficult to know whether the downgrade had any real effect on the price.

I have only seen excerpts of the report *because I am child-like and not to be trusted* but the main point of the report appeared to be a debunking of FAS 159's applicability to the calculation of NRF's book value. Because NRF does not apply any FAS 159 gains to taxable earnings, the only real issue here is NRF's true duh! we OWN this pos! book value. Using FAS 159, NRF calculates its book value at just over $12 per share, Fick writes that it is even less, about $5 per share, and Mr. Market simply says "Do I have to??"

The applicability of FAS 159 is definitely a case by case play. For some background on how it works, see "Muddled Mortgage REIT Book Values Create Opportunity". The argument against applying FAS 159 accounting to REITs is pretty simple. In theory, many people believe that distressed beached, sunburnt, shriveled whales Mortgage REITs will never, ever have enough cash to buy back their own debt. Furthermore, people argue, even if they did manage to come up with the cash they would have to account for the discount as an immediate taxable gain (i.e., the gain on the debt repurchase must be distributed as dividends). This presents cash-flow issues, as the required dividend would most likely exceed actual cash earnings.

But neither can FAS 159 be dismissed completely out of hand. It just doesn't make sense to penalize REITs for an amount that exceeds (in the case of a CDO) their net economic investment in a specific transaction. Moreover, FAS 159 is not just accounting theory, as evidenced by Grammercy Capital's (GKK) partial buyback of it's own CDO debt last quarter (check out "The New Mortgage REIT Magic" in The Mortgage REIT Journal for great detail on the accounting behind that deal). The GKK deal proved that FAS 159 can actually be converted to economic reality, and that even distressed beached, sunburnt, shriveled whales REITs can find a way around the frozen capital markets.

The key to GKK's deal is that they were able to shelter the gains on the debt repurchase with normal, every day depreciation losses in the portfolio of recently acquired American Financial Realty Trust. Were it not for those depreciation losses, and the fees paid to the bankers who printed the AFR trade the buyback could most likely never have been done.

A quick aside: the value of depreciation losses in relation to buying back your own highly discounted debt potentially creates a fascinating conflict: To what extent, if any, should REITS overpay for physical assets, and thus "step up" the depreciable basis of those assets, so that they can shelter even more taxable gains on repurchasing their own dodgy debt??

In NRF's case, it's a double edged sword: their CDOs are performing well so it's doubtful that FAS 159 is correcting any great accounting wrongs on NRF CDO equity valuations vis a vis the correspoding debt. It would also be difficult for NRF to take adavantage of any opportunity offered by FAS 159. They do have their net lease portfolio (which generates depreciation losses), but these are already matched against income in that portfolio, so that portfolio would not be of much use when it comes to offseting gains on the repurchase of debt. Opportunistic distressed portfolio acquisitions could incrementally create additional shelter for them, but that's unlikely to be of any great significance.

For now, I think Fick is in a dying business right to question the value of FAS 159 to NRF. For long-term investors though, this shouldn't be disappointing as the fundamental question has always been this:

how good are the assets and can management generate earnings growth?

The answer to the first question is that they are clearly very good, while the answer to the second question is a weak maybe. In this environment, NRF just can't raise accretive capital easily, but they do have some very inexpensive retained earnings/debt repayments to deploy which should help. I'm long very here, but money is fuel in this sector and right now most Mortgage REITS are simply out of gas.

But none of this FAS 159 stuff is incredibly insightful how much is Stifel paying that guy, anyway and if your investment thesis is to buy high-quality, 100% match-funded assets and ride it all out (see "High Yield Mortgage REITs, the Perfect Storm?"), that thesis is still intact with NRF. Indeed, the stock is still trading above the lows sir, your card has been declined seen in November '07 and January '08. So for now, I think it's still safe to ignore all the noise and quietly bank the 18% yield. REITwrecks is on your toes!

Disclosure: Long NRF at the time of this writing