Add SL Green to the list of REITs cutting dividends. SLG, the largest owner and manager of commercial properties in New York City, cut its quarterly common stock dividend by 50%, to save capital for debt payments and investments. SL Green cut the payout to 37.5 cents per share, down from 78.75 cents. At least they're paying cash, instead of some dodgy dividend payable in stock

Unlike other dividend cuts, this move may not be one borne of desperation, but of opportunity. According to REIS, the New York area tops the list of MSAs with the largest number of distressed commercial real estate, followed closely by Los Angeles. Increasing numbers of vultures are circling these and other areas hoping to invest at or near the bottom of what may be one of the worst down cycles in commercial real estate we've seen for a very long time. However, New York and Los Angeles have both had their share of ugly real estate busts, and they will eventually recover from this one just as they have in the past. Downturns are part of the real estate cycle, and wealth is always created (and lost) at the bottom of the cycle.

New York is SLG's front porch, so when CEO Marc Holliday said that the dividend cut "ensures that the company will have additional capital to take advantage of the highly attractive investment opportunities which we believe will materialize in our core market", I took notice. That sure sounds like a future bid on New York to me, and by extension CRE.

At the same time that SLG announced the dividend cut, three month USD LIBOR fell to its lowest since the immediate post-Lehman period and three-month euro and sterling LIBOR have fallen in every session since the beginning of October.

These trends are causing a few intrepid souls to open the purse strings on new investments. A private equity consortium including investment firms J.C. Flowers, Dune Capital Management and the hedge fund Paulson & Co. are expected to close the purchase of IndyMac (IDMCQ.PK), all of its 33 branches, its the reverse-mortgage unit and a $176.0 billion loan-servicing portfolio as early as tomorrow. The FDIC is pushing them along with looser rules on investments in banks by hedge funds, which are not regulated, as well as a desire to rid its books of the Indy Mac carcass by year-end.

Commercial real estate definitely has a few more shoes to drop before turning around, but rehabilitating firms like Indy Mac - and soon - will help cushion the blow. Clearly some investors see opportunity and J.C. Flowers, a firm run by the former head of Goldman Sachs's financial institutions group, knows its way around the banking sector. Richard Bove of Ladenburg Thalmann Co. agreed and said, "the decline in bank-stock prices has been excessive and ... many of these stocks represent excellent values."

While it's still too early in the cycle to jump into SL Green, the REIT market usually starts to recover about a year before actual operating fundamentals improve. But if you're short SLG, you're betting against New York and one of the savviest operators in that market, and I wouldn't want to be doing that for too much longer either.

Click here for a list of REITs Paying Dividends In Stock


Disclosures: None at the time of publication

Click here for an Office REIT list, including current yields.

office reits, reits, reit

What happened? Just when you though it was safe to venture out, the REIT sector got hammered again, with many shares down 10% or more on Monday. Much of the reason for that related to the latest round of dividend cuts, this time from the Hotel REIT sector. Ashford Hospitality Trust Inc. (AHT), a hotel operator, became the latest hotelier to suspend its dividend to preserve cash.

After the close of trading on Friday, Ashford said it was laying off employees, cutting benefits for those who remain, renegotiating vendor contracts and suspending its common stock dividend to preserve cash. Ashford shares dropped over 10 percent, to $1.12.

AHT is now is danger of being delisted, but the stock has never been for the faint of heart. The Company provided no information on the number of job cuts, and said it expects to distribute the absolute minimum dividend required to maintain its REIT status in 2009, but no more. Expect that REIT dividend to be paid in stock.

Like other Hotel REITS, Ashford sits squarely in the bullseye of reduced consumer and business spending, which leads inevitably to a decline in the value of its real estate. Ashford is just one of many REITs that have suspended or reduced dividends to preserve cash. Newcastle Investment Corp., a Mortgage REIT, even skipped its preferred stock dividend.

Earlier this month, DiamondRock Hospitality Co. (DRH) said it does not plan to issue another dividend until the end of 2009 to free up more liquidity for next year and help pay down about $70 million in debt.

Also, FelCor Lodging Trust Inc. (FCH) suspended its common dividend and Host Hotels & Resorts Inc. (HST) slashed its regular quarterly dividend by 75 percent to 5 cents.

FelCor shares took a 10% dive to $1.55, while Host Hotels' stock dropped to $6.73.

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Disclosures: None at the time of publication

Click here for a list of Hotel REITs, including current yields.

Scroll down for more news, information and analysis on REITs


hotel reits, reits, reit

REITWrecks: December 23, 2008

Both Bloomberg and the Wall Street Journal published stories on Monday warning of increasing trouble in the land of commercial real estate. It's going to be pretty bad, there's no doubt about it. But why is it bad and who is it really going to hurt? The Bloomberg headline claimed defaults could triple, but how much you care about that depends on where you sit in the food chain.

REIS, a consulting firm boasting a peripatetic chief economist with the best enunciation I have ever heard, evidently supplied data to Bloomberg showing that commercial loan defaults will rise dramatically if property-level net operating incomes ("NOI") drop by even 5%. That's a rosy forecast, given what's going on with the economy. For the time being however, let's assume they're correct because there is really no dispute that NOI will weaken in this environment.

All things being equal, when NOI drops, the value of the underlying property also drops. Let's say you own a property with $6 million in NOI. And let's also say the "market" capitalization rate for that property is 6%, which is about where cap rates were, broadly speaking, during the boom. That means you have a property worth $100 million ($6MM in NOI/.06). However, if your NOI drops 5% to $5.7MM, your property is now worth only $95 million ($5.7MM/.06).

Could this really be what persuaded a bunch of New York City real estate tycoons to beg for a meeting, hats in hand, with a Senator from Brooklyn? Unfortunately, it wasn't, because the above example assumes all else is equal, which is not the case. What if you threw in a few more wildcards, like the collapse of the CMBS market and rising cap rates? Then you'd have a story, and blessed be the prophets, it's all right here on REIT Wrecks!

So what's going on with the CMBS market? The short answer is nothing, really, and that's a big part of the problem. During the boom years, CMBS grew to become a $225 billion source of capital to the commercial real estate market. Some were optimistically predicting that it would crash through $300 billion in annual issuance by 2008. What actually happened couldn't have been more different, but it did crash.


The CMBS market actually collapsed, and commercial real estate lending volumes continue to contract. In fact, those 2008 deals you see on the chart, all $12.1 billion of them, were largely the result of lenders desperately trying to unload the loans they made in 2007. One of the last of those deals, J.P. Morgan Chase Commercial Mortgage Securities Trust 2008-C2, closed in May of 2008 and 20% of its commercial real estate loans defaulted within just 6 months.

Clearly, huge demand for CMBS led to a 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%.



These poorly underwritten loans are still out there and in a few of short years, many of them will start to mature. Unfortunately, no lender will touch them now because they are practically radioactive. At the same time that a huge source of capital has disappeared from the market, borrowing costs have soared, making whatever capital there is out there relatively expensive. You can enlarge the chart a bit by clicking on it. Nevertheless, the lines going up and to the right tell the story: money is more much more expensive.


This is happening at the same time that cap rates, which were compressed down around that 6% mark, are now correcting. Cap rates averaged 8.3% between 1986 and 2008, but they fell below 6% in the first quarter of 2007.




This is a toxic mix for those New York City real estate tycoons, and the reason they made the trip to see Chuck Schumer from Brooklyn is simple: they are all about to lose a TON of money.

If NOI decreases by 5%, that's a few less dinners at the Palace Hotel. However, if that happens at the same time that cap rates revert to historic averages and borrowing standards suddenly tighten, they can forget about dinner at the Palace because they'll all be sleeping outside on the sidewalk.

Here is that $6 million in NOI at a 6% cap rate during the boom years. Everything looks great, and we've got our $100 million:


Ok, but what happens now that things have changed? If you still want your 15.6% Levered IRR (and that's a big if), what would that deal look like today? Cap rates are definitely headed north, most likely back to their 8.3% average, and loan to values are definitely headed south, probably close to 50% for office and retail (Pro Logis recently did project level industrial debt at 50% LTV).

Adjusting for the new reality, that $100 million deal is $36 million in the hole. If NOI drops by 5%, the problem gets a whole lot worse. This is the wall against which many equity investors and developers have backed themselves into, particularly those with near-term debt maturities.


While REIS was emphasizing NOI growth, or lack thereof, in the Bloomberg story, the canary in the coal mine for the Wall Street Journal was Foresight Analytics warning about near-term debt maturities. The Journal's story emphasised 2009 maturities that could have trouble getting refinanced. However, while there will definitely be demand for refinancing next year, it will start to get really interesting in 2010. About $180 billion in 2005-2007 CMBS loans will start to mature then, and a little more than half of those are variable rate deals. These are the Alt-A's of the commercial world, and they were underwritten for a completely different solar system.

The good news is that if you're a lender in the above example with a well-underwritten 70% LTV loan, things aren't looking nearly so bad. You're only down about 10%, and you get the asset to play with, while the developer/owner is completely wiped out. This could lead to the ultimate irony for all those that have been burned on Mortgage REITs: those loan defaults aren't looking so bad after all!



Disclosures: None at the time of publication
apartment reits, commercial real estate, commercial real estate debt, commercial real estate mortgages,reits
commercial real estate loans

The good news is that the end is near, and I'm not talking about the rapture. Mercifully (unmercifully?), Moody's said Friday that commercial real estate is going to get a whole lot worse before it gets better, but that it WILL get better. Unfortunately, that won't be until 2010, at the earliest.

For now, Moody's says that the deepening recession and the reduced availability of financing have heightened the risks for the US commercial real estate sector no kidding. The ratings agency cites the retail sector as most exposed to very tight-fisted U.S. consumers, but the gloomy picture they paint is the product of a very broad, thick brush: they say virtually no asset class will escape unscathed.

The hotel sector is clearly in the middle of the storm, as is retail, but demand for office space is also declining in many markets and industrial properties have been adversely affected by slowing trade and retail sales. Even multifamily (apartment) properties face trouble. It's true that everybody needs a place to live, but Moody's says there will be fewer "everybodys".

Reduced household formation, a fancy euphemism used to describe the impacts of children moving back in with parents, other parents moving in with their kids, friends sleeping in closets, and in some cases, dogs and cats relinquishing the kennel to their masters, all combined with growing unemployment and the increasing supply of rentals in the "shadow market" of foreclosed homes, will create stress even at this level in Maslow's hierarchy. For a little more dark humor on this topic, check out Public Storage: Sold on Craigs List!

Loan defaults will increase as well, but they've been at historical lows for so long this was inevitable. Moody's expects the aggregate default rate on CMBS loans (0.75% as of November 2008) to revert to its long-term historical average of 1.5% to 2.0% in 2009, and most likely to surpass this level before the market begins to form a bottom in 2010 and 2011. They also expect commercial property values, which have declined about 10% from the peak reached in October 2007, to decline an additional 10 to 20% over the next 18 to 24 months.

Other than that, I'm assuming they would also like to wish everybody a happy and prosperous holiday season.

Click here for the full Moody's press release on commercial real estate.



Disclosures: None at the time of publication
apartment reits, commercial real estate, reits, mortgage reits, reit

Moody's went more negative on commercial real estate yesterday, and as a result they went even more negative on below-investment grade CMBS. I have written about the bullseye that is on Anthracite's (AHR) controlling class chest before, and while AHR is well-managed and still enjoys tangible, substantive support from parent Blackrock, if you're new to the stock you should read more about Anthracite here before betting the ranch.

Anthracite certainly wasn't singled out; Moody's put $109 billion of CRE CDOs on review. But Moody's did say yet again that CRE CDO deals with collateral concentrations in below-investment-grade CMBS certificates will likely be among the first transactions to be affected by credit issues that are getting worse by the day, and that the additional leverage inherent in those deals creates the potential for higher losses. This is Anthracite's bread and butter, so any further deterioration in commercial real estate fundamentals will almost certainly translate into a reduced dividend

Not surprisingly, Moody's also repeated that 2006 through 2008 vintages of CMBS, both fixed and floating rate, will experience even more stress than earlier vintages. These were the go-go years of inflated appraisals, rosy pro-formas that assumed the good times would roll forever and investors who were indifferent to risk. Unfortunately, Anthracite was also ramping up its controlling class purchases at the same time. But why not? They were also issuing CDOs as fast as they could, and they needed a place to stash all that cash.

Specifically, Moody's put the following Anthracite deals on watch:

Anthracite 2005-HY2 Ltd. Commercial Mortgage-Related Securities, Series 2005-HY2
Anthracite CDO I Ltd.
Anthracite CDO II Ltd.
Anthracite CDO III Collateralized Debt Obligations
Anthracite CRE CDO 2006-HY3, Ltd.

Moody's expects to complete their review by February of 2009, but there's no need to wait that long for the results of their analysis: these deals will be downgraded.

Nevermind the fact that 2006-2008 CMBS deals were done with-pie-in-the sky underwriting, even rational, well-underwritten loans will come under stress in this rapidly weakening economy. Any borrower unlucky enough to face loan maturities in 2009 will have a very interesting year. Sitting at the bottom of this heap is Anthracite, and its optimistic/adventurous shareholders need to believe the Company can live up to its name and survive under the pressure.

Click here for a Mortgage REIT list, including current yields


Disclosure: None at the time of publication

mortgage reits, reit,reit

Boy did I make a mistake, and it was with real money. When Wes Edens stopped bothering to show up for Newcastle's earnings calls, I should have realized what was going on. Sure he had purchased a bunch of NCT stock earlier in 2007, but with whose money? He had taken Fortress public just a few months earlier and reaped a huge windfall. So what's a few million dropped along the ramparts of one of his embattled castles? He made his indifference public today with the announcement that NCT would not only skip the common dividend in Q4, but they would also stiff their preferred holders too.

It was only a few months ago that I thought NCT would pay a special dividend in Q4. In the second quarter, NCT reported operating earnings (Non-GAAP) which were twice the dividend, a big jump in cash, to $170 million, and $88 million in debt reduction, $57 of which was recourse. And they had effectively covered the entire annual dividend with just six months of operating earnings. What happened after that must have been a real disaster.

It appears as though NCT was forced to sell big chunks of the portfolio at a significant loss in the process of getting to this very precarious point. There is really no other explanation for deciding to stiff your preferred investors - it is tantamount to a default. Unfortunately, they gave no update on their cash position, which in and of itself, given the situation, is not reassuring.

As of July 31st, however, they had $170 million in cash and had already covered the dividend. By the time Ken Riis held the Q3 earnings call, unrestricted cash had dwindled to about $100 million, which was not great, but still not terrible, and it was certainly enough to fund the preferreds. However, by "electing" not to pay a preferred dividend, which is hardly an election, one can only assume that Q4 was a disastrous three months of losses driven by margin calls, and it looks like NCT is now in some serious, serious trouble.

Updating yields on the Mortgage REIT list keeps getting easier and easier. There are now more zeros than a room full of turnips.


Disclosures: None at the time of publication

mortgage reits, reit,reit

With the capital markets offering financing in spasmodic fits of miserly insufficience, almost no capital intensive industry can escape the effects of this money mess. Few businesses are more exposed to the financial firestorm more than Mortgage REITS, which make money with old fashioned spread lending. They borrow at 5%, lend the proceeds out at 7% and pocket the difference, assuming their miscreant borrowers manage to pony up each month. But now that these REITs are unable to borrow and basically out of cash, how are they going to make it through next quarter, never mind survive?

JER Investor's Trust (JER) offered a glimpse of the future yesterday. To my knowledge, they are the first REIT to fulfill the IRS minimum dividend requirement with stock (see "REIT Definition" for more on this) since the credit crisis began.

No, that is not a typo - JER paid their dividend with stock, not cash, and they were not wasting any time. The IRS issued Revenue Procedure 2008-68 just last week on this issue, and it provides temporary guidance to cash strapped REITs considering this cash preservation tactic (as well as an indication of the number of inquiries they have been fielding on the topic).

REITs have always had the ability to issue stock dividends in lieu of cash, but Rev. Proc. 2008-68 clarifies the amount of stock a REIT can distribute and obviates the need to seek "Private Letter" rulings from Uncle Sam. By issuing Rev. Proc 2008-68, the IRS has provided a clear safe harbor for those REITs that are considering this IOU tactic to recapitalize their balance sheets. With the new guidance, REITs now have a green light from the IRS to pay out up to 90% of their dividends in MORE stock! Yikes. You mean I have to take even more of that stuff??

There are special rules which apply to DRIP distributions of stock, and the oxymoronic requirement that investors who are short the stock presumably will now need to buy it in order to meet the dividend owed to their counterparty.

There are other cash preservation strategies available to cash strapped REITs, but with this Rev. Proc., there are none more appealing than issuing even more useless scrip. These strategies include decreasing the amount of dividend distributions (yep, next...) or deferring the timing of dividend payments. There is also the dreaded "cashless consent", but it is of no practical use to a public REIT as it requires unanimous shareholder approval. (Shareholders must include the amount of the cashless consent "dividend" in their taxable income.)

JER's election to pay dividends in the form of stock is currently the only viable way to raise capital. And whether they like it or not, JER is now effectively selling common stock each quarter to shareholders who are undoubtedly choking to death on what they already have.

This is also an indication of JER's level of pessimism for 2009. Underscoring that gloom, Credit Suisse is expected to take a hatchet to its commercial mortgage staff this month Happy Holidays! leaving only a skeleton crew in New York. Those expected to be departing soon are all of its originators (loan officers), both at Credit Suisse and at their CMBS loan origination subsidiary, Column Financial. This means that Credit Suisse has basically written off CMBS as a viable business in 2009. Morgan Stanley has also made deep cuts in its real estate group.

Thus, preserving cash is really the only prudent strategy for JER, and it probably is the only practical way out of this mess for other capital-starved REITs. The net effect of the IRS guidance is that is now easier than ever for REITs to issue stock in lieu of cash, and 2009 will definitely be the year of the stock dividend. If you were counting on that cash to pay your rent, you had better look elsewhere. Click here for an updated list of REIT dividends paid in stock.



Disclosures: None at the time of publication
apartment reits, reit, reits, mortgage reits, JER Investors Trust

Mortgage REIT CBRE Realty Finance has been fatally stung by its aggressive commercial real estate loan origination activities, which began at the worst possible time: 2005. CRTYZ.OB hardly has a nice ring to it, but on November 7th, the New York Stock Exchange permanently de-listed CBF (CBRE Realty Finance) due to its inability to satisfy the NYSE's minimum share price and market cap. It now trades rather ignominiously on the pink sheets, but probably not for long.

If you're an investor, don't feel too badly. Arbor Realty Trust (ABR), which is now in a heap of trouble for its purchase of Extended Stay Hotels in a joint venture with the Lightstone Group, bid $8/share for CBF last fall in a nasty battle for control of the stuggling Mortgage REIT. CBF fought Arbor's bid off, but the new CRTYZ.OB closed yesterday at 18 cents a share.

Shortly after that $0.18 close yesterday, the Company made its misery official and complete by announcing that it had suspended its quarterly cash dividend in order to "maintain the Company's financial flexibility". The Company will definitely need the cash. Fortunately, most remaining investors gave up at the end of the third quarter when CBRE Realty Finance reported that it was just barely meeting the over collateralization tests on its two CDOs (See "What is a CDO").

From the Company's September 30, 2008 10Q:

Our most restrictive covenants on our CDOs had an asset over collateralization ratio of 1.16x and 1.13x for CDO I and CDO II, respectively, compared to minimum requirements of 1.12x and 1.10x.

If CBF/CRTYZ.OB fails these "O/C" tests, the cash flow from these CDOs will be diverted to the more senior tranches in these deals. These CDOs will then be in technical default, and in this environment it's really only a matter of time before senior bond holders foreclose on the remaining collateral and wipe out CBF's equity. Scroll down for links to more news, research and analysis on REIT Dividends.



Disclosure: None, thank goodness.

mortgage reits, reit

Believe it or not, there was some good news for the beleaguered Mortgage REIT sector last month. Fitch said that commercial real estate CDO loan delinquencies actually fell in November. Translation: commercial real estate loans backing the CDOs that many Mortgage REITs issued by the bucketful were actually performing better, on average, than they had in October. Whether this reflects a reduction in the number of CDO loans that are likely to completely blow up (Alesco, Crystal River, Deerfield, Taberna, etc.) or improving fundamentals remains to be seen, since much of the improvement was simply the result of loan extensions.

As far as the data, Fitch reported that the delinquency rate for commercial real estate collateralized debt obligations, or CDOs, fell to 2.8% last month. This was down from 3.13% in October and it marked the first decline since July. However, there were 45 new loan extensions in November, up from 35 in October. Fitch said expects an average of 40 extensions each month going forward. This is about 3.5% of the $23.8 billion in commercial real estate loans backing the 35 CDOs that Fitch rates.

Anecdotally, Northstar Realty Finance's third quarter earnings release supports this data. NRF reported an increasing number of loan extensions, all of which had been successfully refinanced, as well as a doubling of the loans on its watch list. This was the first time any signs of real trouble had surfaced at Northstar. Unfortunately, it also looks like Northstar's triple net lease portfolio may get WAMbushed by JP Morgan later this month.

Apparently, the FDIC's agreement with JPMorgan Chase allows Chase to pick and choose which WAMU real estate it will keep. Chase will then turn over the rejects to the FDIC. But here’s the kicker: the FDIC, as receiver, can then simply terminate the leases of those rejected properties, all contractual obligations void. Done.

Typically, in a bankruptcy case involving real estate leases, the landlord's remedies are the greater of one year’s rent, or 15 percent of the rent on the remaining lease term (not to exceed three years). In normal times, this is meant to give landlords at least some breathing room while they line up new tenants. But these are obviously not normal times.

The New York Times reported today that Los Angeles is just behind New York in the number of properties that are or are likely to become distressed. Unfortunately, NRF's WAMU leases happen to be located in the Los Angeles area. According to a Real Capital Analytics analysis cited in the story, the Los Angeles had an inventory of about $11 billion of potentially troubled properties, followed by Las Vegas ($6.6 billion) and southern Florida ($4.2 billion). So, if WAMU/FDIC do reject the leases, these NRF assets may lie fallow for longer than usual, with none of the "normal" bankruptcy relief available to Northstar.

Both Fitch and Real Capital Analytics separately said they believe the sectors most likely to be affected are the retail, apartment and hotel sectors. So, in addition to sticking to those commercial Mortgage REITs that avoided the hysteria at the height of the bubble (an almost impossible task), you can add another criterion to your list: diversity by geography and property type. Even "24 hour" superstar cities like New York and Los Angeles are unlikely to completely escape the ferocity of this downturn.

As always, it comes down to careful underwriting - not all commercial real estate loans will go sour. As I pointed out in Commercial Mortgage REITs: Reason to Believe?, the news is not universally bad. But Mortgage REITs that have asset concentrations in either of those two cities may get a bit more than they originally bargained for.

Click here for a Mortgage REIT list, including current yields

Disclosure: long NRF at the time of publication

mortgage reits, reit
commercial real estate loans

Storage REITs were the best performing REIT sector in 2008, which isn't saying much. Apparently, some people thought storage would be a recession-proof investment last year, but those people weren't counting on a recession like this one. With the economy completely upside down, never mind in a recession, storage will likely be one the first expenditures that tapped-out consumers cut from their budgets in 2009. Indeed, rather than paying to store unwanted household items, most people are already choosing to hock them on Ebay and Craigslist instead.

As of last Thursday though, the storage sector had dropped only 14.59 percent over the last year, compared to an index of equity REITs, which was down 49.16 percent in 2008 (according to the National Association of Real Estate Investment Trusts). In comparison, Industrial REITs were down 81.11 percent, Hotel & Leisure REITs were down 66.57 percent, and Retail REITs were down 66.34 percent. This has been the second consecutive year of losses for the wrecked REITs. In 2007, they fell almost 16 percent.

The reason for sector's better performance, comparatively, is that there just aren't many publicly-traded storage REITs, and the largest of those, Public Storage Inc., (PSA) has virtually no debt. Obviously, that is very attractive in this environment, and PSA's share price has been relatively stable as a result. Public Storage, which is a fully integrated, self-administered and self-managed real estate investment trust, is also well-run. The Company operates storage facilities in 38 states and seven European nations. The company currently has interests in 2,017 storage facilities, with 127 million rentable square feet of space in the US.

In Q3, the Company beat earnings estimates by 9 cents, reporting EPS of $1.37. Funds From Operations for the quarter was $1.09, which was somewhat lighter than expected but more than ample for dividend coverage. Accordingly, the Company declared a special dividend of $0.60 per common share, on top of the regular common dividend of $0.55 per common share. The dividends are payable on December 30, 2008 to shareholders of record as of December 15, 2008.

However, while analysts and investors were lauding PSA's almost debt-free virtues, and the Company's Board of Trustees were busy authorizing special dividends, longtime Chairman B. Wayne Hughes and two children (who serve as company directors) couldn't even wait for the record date to sell off significant chunks of their holdings.

Together, the three of them sold over 5.4 million Public Storage shares on the open market for proceeds of about $342 million. The trades were executed at prices between $55.67 and $72.65 per share. The trio started selling on Nov. 12, just after their blackout period ended, and continued selling through Dec. 8, only seven short days before the December 15th record date. How come they didn't wait just a few days more to collect that juicy payout?

The self storage business is often cited as a possible beneficiary of the housing bust, but I just don't see it, and evidently Hughes and his sons don't either. Why on earth would you want to spend $150 a month to store your spare dining room furniture after you've lost your house and all of your savings?

As of December 8th, Hughes still owned just over one million shares directly, but his overall holdings are down significantly from the previous quarter. I would have loved to be his broker; the commissions on those trades will surely make for a nice holiday season. If it were possible, it would have been much cheaper for Hughes and his sons to sell it all on Craigslist, just like all of their customers.

Click here for a full list of Storage REITs, including current dividend yields.

Disclosures: None at the time of this writing.

storage reits, reit
Public Storage

And you thought you had it bad with a Mortgage REITs. Retail REIT Macerich (MAC) found itself in the eye of the storm after closing a sale/leasback on 41 of 149 Mervyns stores in late 2007 and early 2008. Mervyns was already struggling, so it was not a huge surprise when the California-based chain declared bankruptcy on July 29th, with intentions to reorganize.

Unfortunately, the retail environment became so difficult that Mervyns announced on October 17th that it would liquidate instead. This sent MAC's shares into a tail spin, forcing Macerich CEO Arthur M. Coppola (among many others, I'm sure) to sell 90% of his Macerich holdings the rest was safe with Bernie to satisfy margin calls.

Tony Grossi, senior EVP and COO of Macerich, said that they had been pursuing other retailers for the Mervyn's sites ever since acquiring them. Indeed, as an owner/lessor in a sale leaseback deal, one of the exit/monetization strategies is to take control of "well-positioned retail real estate" and either sell or re-lease it to more credit-worthy tenants. See Retail Woes to Ripple Through CMBS for additional backgound on that.

With Macerich's announcement Friday that it has lined up quality tenants for 22 of the 41 Macerich-owned Mervyns sites, that strategy seems to be working at the moment (notwithstanding the CEO's empty wallet).

The 22 Mervyns sites will be filled by retailers Forever 21 and Kohl's. Forever 21 will be taking 12 of the spaces because they are dyslexic and Kohl's will be taking 10. Of the 22 locations that were leased, eight are within centers owned by Macerich.

MAC also anounced that it secured a $250 million loan on Washington Square, its 1.5-million-square-foot Portland, Oregon shopping center. The loan is for seven years at 6%. That is hardly usury, and Macerich also managed to pull $63 million in cash out of the deal.

Industrial REIT Pro Logis also recently announced $210 million in secured financings, and Apartment REIT UDR announced a $400 million credit facility from Fannie Mae. These are the latest in a series of REIT financings this year totaling over $1 billion, proving that there is one real estate axiom that could truly stand the test of time: location, location, location.

Click here for a full Retail REIT list, including current yields. Check out Retail Traffic Magazine's blog "Traffic Court" for the latest information on the world of retail real estate

Scroll down for more links to news, research and analysis.



retail reits, reit

Two weeks ago, I wrote that a very good buyside analyst I know was selectively buying all the Apartment REITs he could get his hands on. He told me this after closing out his iStar short, which he took from $20 to $8, so I was pretty interested in what he had to say. In essence, he said that Apartment REIT fundamentals have definitely weakened, but the market is discounting them too much, and in the longer term (2-3 years), there will be no better place to be. Here's why, along with two of my friend's top picks, and some helpful data from Green Street Advisors to assist you in your research.

First, the bad news. Vacancy rates are climbing in many markets and rent growth has slowed as the economy weakens. Job growth drives apartment demand, and we all know what's happened to job growth. Fewer jobs causes renters to double up with roommates, or move in with parents, friends or relatives, and that puts pressure on occupancies. In addition, the "shadow" rental market is increasing as foreclosed homes and failed condominium conversion projects are being added back into rental housing stock. This latter problem of failed condo projects is particularly acute in Florida. Reasonable people can dispute the true effect of the so-called "shadow" market on apartments, but it's true that the combination of increased supply and slower demand will reduce prices (rents).

This is all occurring against the backdrop of increasing capitalization rates, which is a yield/valuation metric in commercial real estate. "Cap" rates are just like bond yields, as they move up, par value goes down. Consequently, as investors demand higher cap rates in many markets, asset values are declining. Many Apartment REITs have relatively low levels of debt, but for those operators with higher leverage, declining asset values is not good and no different than any other high leverage scenario - everything must to go right for that strategy to be rewarding. If things don't go right, more highly levered players could be forced to sell assets in order to reduce leverage.

In terms of good news however, most apartment owners are not nearly as highly levered as operators in other REIT sectors, so they are not suffering from the same high profile debt issues in the retail, industrial and hotel businesses.

In addition, apartment assets continue to perform very well relative to other commercial real estate, and low multifamily loan delinquencies reflect that. Underscoring this thesis was a report out from the Mortgage Bankers Association this week showing that the 30-plus-day delinquency delinquency rate for multifamily assets held in commercial mortgage-backed securities (CMBS) was still below 1%. Delinquencies did tick up, although only slightly (by 0.10 percentage points to 0.63 percent).

The 60-plus-day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.05 percentage points to 0.16 percent. The 60-plus-day delinquency rate on multifamily loans held or insured by Freddie Mac fell 0.02 percentage points to 0.01 percent.

Multifamily loans held by insurance companies were performing even better. Of the 35,135 commercial/multifamily loans in life company portfolios, only 36 loans were 60plus days delinquent at the end of the quarter. These loans represented an aggregate unpaid principal balance of less than $144 million.

“Commercial/multifamily mortgages have not seen the same kind of deterioration in performance witnessed among other real estate loans, and at the end of the third quarter, delinquency rates for every investor group remained at the lower end of their historical ranges,” said Jamie Woodwell, MBA's vice president of commercial real estate research.

Fortunately, despite the meltdown in the capital markets and the takeover by the federal government (and perhaps even because of it), Fannie Mae and Freddie Mac are still providing plentiful debt financing for the apartment industry, and they are doing it in such a way as to move final maturities out into years where there will be less pressure from other CRE maturities/refinancings. If you can show (prove) 1.25x debt coverage at no more than 80% loan to value, Fannie Mae will happily write you a loan. Many large portfolio acquisitions are being financed by Fannie Mae as well, including the nearly $1 billion UDR, Inc (UDR) portfolio sale to DRA Advisors.

The case for multifamily is simple. For many years in the earlier part of this decade, the easy credit environment increased the homeownership rate at the expense of rental housing. Now the easy credit years are over, and those folks who could once qualify for a single family mortgage simply by having a pulse will no longer be able to do so. Moreover, the economy will not be in the tank forever, and job growth will eventually return. These dynamics are causing some industry observers, including the National Multi Housing Council, to go so far as to predict a shortage of rental housing as early as 2011.

I wrote about those dynamics extensively in this article on Apartment REITs. That article includes historical graphs of homeownership rates and vacancy rates, and recommends two Apartment REITs: Avalon Bay (AVB) and Essex Property Trust (ESS). That's convenient, because those are the very two REITs that my buyside friend is loading up on, and he's doing it with real money.

Avalon Bay Communities is a real estate investment trust which primarily focuses on developing high-quality, multi-family apartment communities for higher-income clients in high barrier-to-entry regions of the U.S. As of September 30, 2008, the company owned or held ownership interests in 177 apartment communities, with 50,034 apartment homes in 10 states. They have a great development pipeline in several strong markets and will be well-positioned for the eventual rebound.

Essex Property Trust is a fully integrated real estate investment trust that acquires, develops, redevelops, and manages multifamily apartment communities located in supply-constrained markets, primarily in strong markets along the West Coast. Today, Essex’s portfolio has grown to 133 apartment communities, comprised of 26,790 units, with 1,658 units in active development. The portfolio is currently concentrated in Southern California, the San Francisco Bay Area and the Seattle metropolitan area.

These two also happen to be carrying low levels of debt, so they are relatively safe from the turmoil in the capital markets. The three apartment REITs with the most leverage on their books are Denver-based AIMCO (AIV), Birmingham, Ala.-based Colonial Property Trust (CLP) and Richmond Heights, Ohio-based Associated Estates Realty Corp. (AEC). These would be best to avoid for the time being.

Green Street Advisors, a Newport Bach, Calif.-based consulting and research firm, produced some terrific data which illustrate the effect of a hypothetical 150 basis point increase in cap rates on the leverage ratios of several Apartment REITs. Nobody knows how high cap rates will rise, so 150 basis points may or may not be the right number, but it does help indentify those higher-risk Apartment REITs, particularly in this environment of toxic near-term debt maturities.

Under this 150 bp scenario, AIMCO's liquidity leverage pushed up to 76 percent; its solvency leverage moved to 81 percent. For Colonial, the numbers would edge up to 78 percent and 82 percent, respectively; for Associated, they rise to 77 percent and 83 percent, respectively. "That gets dangerous because you can't lever properties at about 70 percent to 80 percent," said Andrew J. McCulloch, an analyst at Green Street.

These three REITs (among others), are all working to reduce leverage, but that primarily means selling assets into weak markets, and/or extending available lines of credit, cutting dividends, moving maturities back, and, if stock prices rebound, possibly secondary stock offerings (which are obviously dilutive). The full article can be found on Multifamily Executive Online

	Leverage ratios (Now)		Leverage ratios if cap rates rise by 150 basis points
Company	Liquidity Leverage*	Solvency Leverage**	Liquidity Leverage*	Solvency Leverage*
AIMCO	64%	69%	76%	81%
American Campus Communities	56%	56%	68%	68%
Associated Estates	66%	71%	77%	83%
AvalonBay Communities	34%	34%	42%	43%
BRE Properties	56%	59%	45%	48%
Camden Property Trust	55%	55%	67%	67%
Colonial Properties Trust	66%	69%	78%	82%
Education Realty Trust	59%	60%	71%	72%
Equity Residential	50%	50%	61%	61%
Essex Property Trust	47%	51%	38%	42%
HOME Properties	60%	58%	71%	70%
Mid America Apartment Communities	53%	58%	63%	68%
Post Properties	56%	59%	46%	49%
UDR	55%	54%	67%	66%
Source: Green Street Advisors
* Liquidity Leverage ratio = book value of debt divided by estimated asset value
** Solvency Leverage ratio = marked-to-market value of liabilities plus preferreds divided by asset value

Unless Fannie Mae and Freddie Mac stop lending on apartments, which is unlikely, Apartment REITs should be able to avoid any real trouble with high leverage. But for the time being, it's probably wise to pursue a policy of absence of doubt, even with apartments.

Click here for a full Apartment REIT list, including current dividend yields.


Disclosures: None at the time of this writing.

apartment reits, reit
Avalon Bay, Essex Properties Trust

Money Management Letter reported last week that The New Jersey Division of Investment has authorized a $1 billion allocation to commercial real estate that will be deployed over the course of next year. The move roughly doubles New Jersey's current 5% allocation, said Kathy Jassem, portfolio manager. A significant portion of the allocation will be channeled to commercial real estate debt, including CMBS.

Blackrock, one of the world's largest bond fund managers, has also backed up the truck on CMBS. The value in CMBS is an intriguing story, and you should check out Deal Junkie if you want to know more about the fundamentals in commercial real estate.

“We didn’t know where real estate values were headed but we could clearly see there was value in the debt,” Jassem said. Meanwhile, spreads on AAA-rated commercial mortgage-backed securities are at record levels, and the CMBX continues to forecast a grim future of enormous bread lines and rattling tin cups.

So what gives? Why is the State of New Jersey and others stepping in where so many fear to tread? The reason is that the fundamentals are just not as bad as the CMBX and AAA CMBS imply.

Actual delinquencies remain low, and while I have written previously about the number of interest-only CMBS loans coming due in the next several years, it's also true that the overall number of loans coming due in the next couple of years will also be somewhat low. This is giving many investors reason to believe.

According to JP Morgan, of the more than $600 billion of outstanding CMBS fixed-rate debt, only $16 billion is scheduled to mature in 2008 and $19 billion in 2009 (for a total of $35 billion). Scheduled maturities of fixed-rate CMBS debt reach peaks of $98 billion in 2015, $128 billion in 2016 and $127 billion in 2017. 65% to 85% of those loans are interest-only for the entire or partial term. As for the near future, 80% of the loans maturing in 2008 and 2009 have been amortizing over the full term, significantly bettering the odds that these loans can be refinanced.

Unfortunately, however, there is also some bad news: Wachovia has identified $30 billion of large-loan floating-rate deals that mature before May 2009, the majority of which were originated in 2006 and 2007. These were the go-go years and high profile defaults in several 2007-vintage loans were what caused much of the recent spread contagion. Wachovia also says that 95% of those loans have extension options, although it remains to be seen whether borrowers will be able meet the terms necessary to extend them (minumum LTV, DSCR, etc).

As far as defaults go, the delinquency rate on CMBS still remains low (for now). Fitch's loan delinquency index was only 0.45% at the end of September. This is only slightly above the historic low of .27% (set in January of 2008). Currently, only 488 loans, totaling $2.5 billion in unpaid principal, are delinquent. This is small potatoes compared to the $562 billion in Fitch's rated portfolio (which consists of over 40,000 individual loans).

Fitch also reported an additional 246 nondelinquent loans that are in special servicing due to imminent default or other nonmonetary reasons, and while not all of them will become delinquent, if they did the delinquency rate would double to .90%. This would still be only slightly above the historical average of .78% to .79%.

As I've written about ad-nauseum already, 2005-2007 loans will certainly bring challenges. Not only did originations in those years dramatically exceed the volume of previous years, but underwriting standards across the commercial real estate industry eased just as property valuations peaked and loans were increasingly written with interest-only provisions as noted above.

Historically, CMBS deals see defaults peak in years 3-8, with most of those coming about year 7. Everyone already knows this as tail risk, and it is accounted for in loss severity models. Now however, there is a disturbing trend of 2005-2007 loans being transferred to special servicing just one or two years after securitization. Goldman Sachs has projected that losses on commercial mortgages originated in 2007 could reach 11%. In fact, according to Larry Kay, director of structured finance ratings at Standard & Poor’s, 2005, 2006, 2007 vintage years comprised about 45% of all delinquencies.

However, when viewed against issuance, the rate of delinquency from recent vintages is not so alarming because they represent just a fraction of the tremendous volume generated during those years. Earlier this year, loans 60 days or more delinquent amounted to just 0.25% of 2005 volume, 0.12% in the 2006 vintage and 0.05% for 2007, according to Fitch.

"Issuance volume is a very important factor when determining which vintages may have credit issues," said Susan Merrick, managing director at Fitch. "Certain recent vintages may have delinquent loans, but when compared to the large volume of issuance in these years, the proportion is very small."

Where does Fitch see the most delinquencies? Loans originated in 1998 had the largest amount of delinquencies at $257.6 million, or 16.7% of all delinquent CMBS loans. That equates to a 1.43% delinquency rate for the 1998 vintage, the most of any year. The next highest delinquency rates compared with the outstanding balances in each vintage year were 2001 at 0.81%, 1997 at 0.74%, 2000 at 0.56%, and 2004, 0.49%.

That CMBS delinquencies will rise is not in dispute, only because they have been at historical lows for so long. But most of the troubles do appear to be confined to the 2005-2007 vintages, and even if the current overall default rate doubled, it would still be in line with historial averages. That is allowing some rather savvy investors to see through the hysteria and pick through the bargain bin. Some beaten up REITs are even getting into the act by repurchasing their own CDO debt.

Interestingly enough, Jassem (the State of New Jersey portfolio manager) was originally interested in allocating 1% to REITs but the recent market volatility kept her at bay. "We’re willing to miss out on the first 10% of the upside," she said, explaining that the fund will wait until she can clearly see the REIT bottom in the rear view mirror.

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


Disclosures: None at the time of publication

mortgage reits, reit

"Any idiot can face a crisis. It's this day-to-day living that wears you out."

- Anton Chekov

Our national psyche has been more thoroughly revealed over the past year or so, and it has been interesting to learn more about us. Before 2007, I was only vaguely aware of the term "schadenfreude", and I certainly didn't know how to spell it. I simply had no reason to use it, nor did I spend time with anybody who did. I still don't. But that is becoming harder and harder as more and more fingers are being pointed more furiously in various directions, and few people are willing to dig into their own pockets for a solution.

The comments on posts of mine that benefit from a wider audience (those posts that appear in Seeking Alpha email alerts, for example), have betrayed a broad streak of national schadenfreude in relation to this huge mess. The failure of the first "bailout" plan was due in part to many people in this country whose sense of justice was betrayed by a "bailout". It had nothing to do with a deep concern over creeping socialism, which seemed more relevant to me, but a simple need to see others struggle too.

I really don't believe for a second that schadenfreude is part our nation's fundamental character, but I do believe there were many, many people struggling for years through the "boom" times, and they bitterly resent the flippers, rehabbers, bankers and hedge fund managers who continue to drive their leased Range Rovers to Starbucks. And I believe there were many others who weren't struggling but lived relatively simple lives and still resent it.

The question I wonder about now is how much schadenfreude is enough, and I hope the answer will soon be that this much is enough. The title of this blog was meant to be funny, not real. I was never prophetic enough, sadly, to foresee the carnage that would occur in the REIT sector, particularly on Monday when some Apartment REITs were down 20% for no fundamental reason in just one day, after being cut in half or more over the past six months. For those that have engaged in a bit of schadenfreude, shouldn't this be pain enough for the conservative, income-oriented investors that bought into these REITs thinking they were safe?

Mortgage REITs were also eviscerated. Some of these enterprises deserved to be put away and forgotten even before the credit crunch, but not all of them. I went looking for a list of Mortgage REITs the other day so I could see, in one place, just how bad it had gotten for these investors. Things have changed so much that most lists where full of bad links to bankrupt companies with newly non-existent websites. Error. Page Not Found.

So I made my own list and posted it here so you can see for yourself how bad it is. Check out those yields! Of course, many are completely illusory, but the availability of credit made them sustainable at one point, and that money was "real" for as long as investors were willing to keep believing in the ready availability of credit.

But nobody believes in the ready availability of credit now, and many poorly underwritten loans will start to come due in this environment. The volume of maturing loans will start to pick up beginning in 2010. Nobody really knows what 2010 will be like, except that it will be a very different world than 2005, and the market is clearly not liking what it sees. According to Green Street Advisors, a research firm, the majority of those 2010-2012 maturities - over 80% - are 2005 thru 2007 vintage loans, with the majority being 2005-2007 variable rate deals. The variable rate deals will obviously be the most problematic.

2005-2007 were not good years for underwriting. According to Moody's, the gap between the Moodys Loan to Value ("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 (and investors) would give you more money than your property was worth?

Which brings me to the title of this post. Of course, I was quite pleased with myself over this one, but clever or not, it cuts to the chase: where on earth are we going to find the money to foregive all this recklessness? Is there really any room for schadenfreude? Borrowers want to be bailed out. Investors want their loans repaid. Shareholders are counting on their dividends not to be cut. And everybody wants a tax cut. The whole country is involved, but nobody's responsible. Change? I hope we can.

It's turning into a real problem, and a December 2nd story in the New York Times pretty much sums up our little national dilemma: Fund Investors Sue Countrywide Over Loan Modifications. The plaintiff, Greenwich Financial Services (talk about Range Rovers...), said it and other investors stood to lose money if Countrywide, now part of Bank of America, modified bad home loans under a settlement that it reached with 11 state attorneys general in October. As The New York Times noted, this is the first case of its kind, and it signals that more aggressive government efforts to "bail out" individual borrowers could face stiff resistance from private investors.

This is not some theoretical legal case, and it is more and more likely to affect CMBS as well as RMBS if a solution is not found before long. As an investor in, say, Anththracite Capital, are you going to be upset if the special servicer modifies a bucket full of CMBS loans to save a bunch of shopping mall owners, but your investment in AHR gets wiped out in the process?

Or, if you've just raised a bunch of money for your distressed debt fund, are you going to plow all that money into AAA CMBS yielding 15% even though there is a chance that the government will force you to take a loss on some of it? If so, is that really a 15% yield, or something else? If not, how do you quantify it? What are the rules, and who is going to pay??

Unfortunately, the economy is now in absolutely terrible shape, so it almost doesn't matter anymore. The national economic malaise is now so broad and so deep that it will touch almost everyone. Since the start of the recession last December, the economy has shed 1.9 million jobs, and the number of unemployed people has increased by 2.7 million — to 10.3 million now out of work. But this figure does not include the legions of unemployed people who have simply stopped looking for work; that number jumped by 637,000 last month, according to the Labor Department. A half-million (533,000) American jobs disappeared last month alone, the worst mass layoffs in more than three decades, and economists fear the nation's economy is spiraling downward into what could be the hardest hard times since the Great Depression.

"The economy is in a free fall," said Richard Yamarone of Argus Research. "It is as if someone flicked off the switch on hiring."

Ron Paul is a bit of a kook, but he's right that one of the few ways out of this mess is through inflating the currency. If so, it'll be more counterfeit money, and the result will not be good:



All of this is really, really bad news, and it leaves very little room for any self-indulgent schadenfreude. As most everyone knew even then, we and our government had been living beyond our means for years. But now the music has stopped. Like it or not, we're all in this together, and few of us will escape our share of the bill.