The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?

Many people have asked me how SRS and REITs share prices can defy
gravity the way they have given the abysmal state of  commercial real
estate (CRE). Well my opinion is that the equity and the debt markets
have allowed agent and principal manipulation to the extent that it
materially distorts and interferes with the market pricing mechanism.
Put more simply, its
the result of widespread fraud and shenanigans – subprime 2.0, just
with bigger numbers! If you have a trust or a
company that owns a basket of X assets on a 50% leveraged basis, and
those assets have decreased 40% in value, one should expect a requisite
80% drop in the equity value of said trust or company. Granted, this is
an oversimplification, but the premise is solid. Instead, we have
companies whose portfolios have fallen over 40% and whose share prices
have increased over 100% from the market lows – heading into what is
unmistakeably a worse macro environment and outlook in terms of interest
rates, employment and economic activity.

This is a relatively long post, and purposely so, for its goal is to
illustrate why REIT prices are defying gravity and what it will take to
bring them back down to earth (a significant fall), as well as when. If
you are the impatient type, or feel you have read this material already,
you can jump straight to the bottom to access our freshly released
REIT short list scan finalists for paid subscribers.

Make no mistake about the state of CRE, it is in bad shape. For those
of you who react to graphs and spreadsheets, reference Reggie
Middleton
begin_of_the_skype_highlighting     end_of_the_skype_highlighting’s
CRE 2010
Overview 2009-12-15 02:39:04 2.72 Mb. Tuesday, December 15th, 2009.
Those of you who like pretty pictures, unmistakeably grounded in
reality, reference my visual tour of downtown Manhattan to Downtown
Brooklyn from last year – “Who

are ya gonna believe, the pundits or your lying eyes?” (for
pictures) and “Who

are you going to believe, the pundits or your lying eyes, part 2″
(for numbers and a very shaky video. It is not just the big city
urban areas either. Here is an anecdotal snapshot of CRE business parks
in Washington state, contributed by a BoomBustBlog reader:

I am a bear (small guy) and I’ve had my ass kicked by the powers
that be. I’m clawing back. I just wanted to ask you what you think of
SRS/DRV. Will they finally start to move soon??  I am not asking for
“investment advice” I am already in and holding. Love your stuff…..If
you find who the bank is that owns this stuff [below] can you let me
know ??

Details below, Reader in Seattle,
Wa.

The
Business park I work in is in
North Bothell Washington state. I attached a map with a black circled
area. ALL properties pictured are right in here, maybe a square mile?
The location is right off 405 in North Bothell at the Canyon Park exit. 
I’ve been there for a few years and seen some of these [have been]
empty for 2-3 years. The Former Icos building had been empty the entire
time but recently someone finally moved in there but I don’t see many
cars in the parking lot so they must be small. No pictures of that one.
The really large nice reddish brown building was vacated by Safeco
Insurance. They moved to a high-rise down town and their old building
has been empty ever since, maybe 2 years? Most of the other ones I am
not sure of the history of. Most of the small unit pics toward the end
are all semi recent failures in the last year or so. Here is as detailed
a rundown as I can give on the attached PDF file with all the pictures:

Pic 1
and 2 are the same building
that was vacated by DHL when they went under. It has been empty ever
since.  Pics 3-6 are all of the former Safeco/unkown empty as long as
I’ve been there,  9-10 are the same building, details unknown [but]
empty a long time,  11-15 are all the same building but it is a HUGE
long ass building maybe 100 yards long, possibly subdivided but ALL
empty on 23rd SE,  16 is an unknown empty property, it had a church in
it for a while but they’ve been gone for a year or so.  16, 17 and 18
are all in a row on the way into the park on 220th st SE,   16 had 2
guys at the door, I often see maintenance being done around the park but
that one IS empty,  18 and 19 are the same building,  20-25 are ALL
SEPERATE units that are empty and snake around the area between where it
says ISSI data and Radar Electric on the map,  26 is Radar Electric
supply, I think they ARE open, you can see cars through the shrubs, I
took this because the sign was out front, I think there are other units
IN the Radar building that are empty,  27 is just past Radar electric,
details unknown. Building, Pics 7-8 are the same building,

Oh,
also, even funnier, they started
another HUGE commercial project in the same development. When you come
in 16,17 and 18 are on your right but across the street is a HUGE open
field that they have all ready to go, they even did landscaping and put
up big signs with a picture of the “building to be”. But I guess all
that changed as they stopped the project.

Reggie, 
I took a ride down to the
next business park south on 405 at 195th/Beardslee Blvd exit and found
20 more signs for “Available”. This park didn’t have quite as many
completely empty units for that ghost town feel but I guess each one was
1/2 full.”

Click here for a visual tour of what the reader was referring to: Green

Shoots 2010.

Now, from Washington State to the wildfire (used to be) market, Washington DC:

04:04

Commercial
Real Estate: The Next Hole in the Economy

So, back to the original question, “How the hell can the landlords
have rocketing share prices while their business disintegrates?”

Conflict of Interest Number 1: The Managers of CRE Investment Funds
Are Paid to Do Deals, Not Necessarily to Make Their Investors Money!

First of all, the big investment banks and private funds DO
NOT have their investors best interests in mind. They made money
regardless of the returns of the their investors due to the implicit
call option that most investors have naively granted them. Thus, these
agents cum principals actually did a flurry of multi-billion dollar
deals at the height of the market to reap the tasty, foamy, “assets
under management fee – froth” from the churn, and not necessarily
because they felt they could produce an investment profit. Because of
this height of the bubble, “dumb money” capital injection, you have had
prices bid up totally unnecessarily during the boom times of CRE by
hundreds of billions of dollars of (I don’t intend to sound
condescending, but the reality is) clueless and very naive
institutional, foreign and high net worth capital in search of fees for
the investment bank and private fund managers that ran them. Now those
artificially high prices just have that much farther to fall.

On April 15th, 2010 I penned “Wall
Street Real Estate Funds Lose Between 61% to 98% for Their Investors
as They Rake in Fees!” wherein I espoused much of my opinion on
market manipulation and the state of CRE. I will excerpt portions below
in an attempt to explain how REITs and the bankers that they deal with
get to add 2 plus 2 and receive a sum of 6, or worse yet have 4
subtracted from their 6 and get to sell 5!!! Straight up Squid Math!

Oh,
yeah! About them Fees!

Last year
I felt compelled to comment on
Wall Street private fund fees after getting into a debate with a Morgan
Stanley employee about the performance of the CRE funds. He had the
nerve to brag about the fact that MS made money despite the fact they
lost abuot 2/3rds of thier clients money. I though to myself, “Damn,
now that’s some bold, hubristic s@$t”. So, I decided to attempt to lay
it out for everybody in the blog, see ”Wall

Street is Back to Paying Big Bonuses. Are You Sharing in this New
Found Prosperity?“. I excerpted a large portion below. Remember,
the model used for this article was designed directly from the MSREF V
fund. That means the numbers are probably very accurate. Let’s look at
what you Morgan Stanely investors lost, and how you lost it:

The
example below illustrates the impact
of change in the value of real estate investments on the returns of
the various stakeholders – lenders, investors (LPs) and fund sponsor
(GP), for a real estate fund with an initial investment of $9 billion,
60% leverage and a life of 6 years. The model used to generate this
example is freely available for download to prospective Reggie
Middleton,
LLC clients and BoomBustBlog subscribers by clicking here: Real
estate fund illustration.
All are invited to run your own scenario analysis using your
individual circumstances and metrics.

To depict
a varying impact on the
potential returns via a change in value of property and operating cash
flows in each year, we have constructed three different scenarios.
Under our base case assumptions, to emulate the performance of real
estate fund floated during the real estate bubble phase,  the purchased
property records moderate appreciation in the early years, while the
middle years witness steep declines (similar to the current CRE price
corrections) with little recovery seen in the later years.  The
following table summarizes the assumptions under the base case.

Under the
base case assumptions, the
steep price declines not only wipes out the positive returns from the
operating cash flows but also shaves off a portion of invested capital
resulting in negative cumulated total returns earned for the real
estate fund over the life of six years. However, owing to 60% leverage,
the capital losses are magnified for the equity investors leading to
massive erosion of equity capital. However, it is noteworthy that the
returns vary substantially for LPs (contributing 90% of equity) and GP
(contributing 10% of equity). It can be observed that the money
collected in the form of management fees and acquisition fees more than
compensates for the lost capital of the GP, eventually emerging with a
net positive cash flow. On the other hand, steep declines in the value
of real estate investments strip the LPs (investors) of their capital.
The huge difference between the returns of GP and LPs and the factors
behind this disconnect reinforces the conflict of interest between the
fund managers and the investors in the fund.

Under the
base case assumptions, the
cumulated return of the fund and LPs is -6.75% and -55.86, respectively
while the GP manages a positive return of 17.64%. Under a relatively
optimistic case where some mild recovery is assumed in the later years
(3% annual increase in year 5 and year 6), LP still loses a over a
quarter of its capital invested while GP earns a phenomenal return.
Under a relatively adverse case with 10% annual decline in year 5 and
year 6, the LP loses most of its capital while GP still manages to
breakeven by recovering most of the capital losses from the management
and acquisition fees..

Anybody
who is wondering who these
investors are who are getting shafted should look no further than
grandma and her pension fund or your local endowment funds…

Despite the carnage that I-bank clients have grown to know and love,
they still buy those self destructive I-banking products – and buy these
products they still do… Sadomasochism is to I-banking real estate funds and products as
Masochism is to RE Private Fund Clients… In its simplest
format, sadists desire to inflict suffering and masochists want to
receive suffering.

Flogging
demonstration at Folsom Street
Fair 2004.

In the post, “Doesn’t

Morgan Stanley Read My Blog?”, I lamented on the fact that I made
very clear in 2007 that anyone who bought the Sam Zell/Blackstone flips
were guaranteed to lose money. It was literally etched in stone. It
was a miracle that Blackstone didn’t lose their shirt attempting to
flip large office building parks like overpriced single family homes at
the top of a bubble (and they almost did). Well, guess who bought those
“Peak CRE” buildings on behalf of their clients as they raked in the
fees? You guessed it. None other than Morgan Stanley on behalf of their
fund clients. This particular purchase was a 100% equity loss – just
as I clearly and resolutely warned it would be back in 2007 when they
made the purchase. See “Will the commercial real estate market fall? Of course
it will” 09 December 2007. So, how could I have
seen this coming and the wizards at MS could not have? Well, as smart as
I would like to declare myself to be, it is easily argued that MS did
see it coming and didn’t care, for they made money on the deals anyway
(more on that in a minute). For the time being though, the entire
fund apparently lost about 61% of the shareholder’s money. See this
WSJ article: Morgan Stanley Property Fund Faces $5.4 Billion Loss.

Not to be outdone by those “lesser” brands on Wall Street. Goldman
Sachs lost nearly 100% of their clients money in a similar CRE fund.
Reference this FT article: Goldman real estate fund down to $30m (they
lost $1.76 billion,
yes, that’s a very big percentage loss).

These funds did very well during the boom, but when the obvious bust
came (and I blogged about it in full detail, so no one could say they
didn’t see it coming), these funds crashed. Professional asset managers
should know better. They are simply delivering leveraged market beta,
not alpha. Investors are paying a fortune in fees to ride the mortgaged
ups and downs of the real estate market.

Here’s another tidbit of information. Some of the banks that
sponsored these investment funds also helped arrange the financing of
the buildings that the funds bought. Without discussing the wide
implications of this potential and actual conflict of interest, it
remains to be said that if the building goes underwater, the lenders
(which were often the banks) were underwater on the deals as well. The
banks were underwater obviously need to get out from under these
securities. What’s the easiest way to do that? Upgrade the sector and
sell them to suckers, that’s how…

As stated Reggie Middleton begin_of_the_skype_highlighting     end_of_the_skype_highlighting vs
Goldman Sachs, part 1, For

Those Who Chose Not To Heed My Warning About Buying Products From
Name Brand Wall Street Banks, and “Blog

vs. Broker, whom do you trust!”, Goldman’s peddling of products
often spells doom for the consumer (client) and bonus for the producer
(Goldman). Goldman is now underwriting CMBS under a broad fund our $19
billion bonus pool “buy”
recommendation in the CRE REIT space  reference Reggie

Middleton
Personally Contragulates Goldman, but Questions How Much More Can Be
Pulled Off .Now, after all of the evidence that I have presented
against the CRE space, who do you think would be better for clients net
worth, Reggie’s BoomBustBlog or Goldman?

As excerpted from “No
One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times…“

And in
Bloomberg: Goldman

Sachs Hands Clients Losses as Seven of Nine `Top’ Trade Ideas Flop
Now there’s a big surprise! Listen, everybody makes mistakes, and no
one is perfect (except for Goldman’s prop desk, but we’ll get to that
point shortly). I will never criticize anyone for having a bad month,
quarter or year. The thing is this is not about Goldman having a bad
month, day or year, it is about their taking advantage of their clients.
Excerpts from the afore-linked article:

May 19
(Bloomberg) — Goldman
Sachs Group Inc. racked up trading profits for itself every day last
quarter. Clients who followed the firm’s investment advice fared far
worse.

Seven
of the investment bank’s nine
“recommended top trades for 2010” have been money losers for investors
who adopted the New York-based firm’s advice, according to data compiled
by Bloomberg from a Goldman Sachs research note sent yesterday.
Clients who used the tips lost 14 percent buying the Polish zloty
versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong
and 9.8 percent trading the British pound against the New Zealand
dollar.

…“This
says that Goldman’s guys are
only human,” said Axel

Merk, who oversees $500 million as president and chief investment
officer of Merk Investments LLC in Palo Alto, California. “No one is
always right. There are a lot of cross currents in this market.”

This my
dear friend, is what we in the
industry refer to in technical parlance as BULLSHIT!!!!
Goldman literally had a perfect trading quarter recently, with not
one day losing money. Yes, the guys at Goldman are only human, but they
are front running humans!

Let’s take a look at another big bonus
development exercise, marketing push they
made into residential MBS a few years ago…

Apathy and the need to masochistally follow name brand investors is
what enables this malarchy, and is what has allowed CRE prices to be
artificially elevated this high for this long. Believe you me, reality
will reassert itself and will do so in quite the destructive fashion.
Again, For

Those Who Chose Not To Heed My Warning About Buying Products From
Name Brand Wall Street Banks,

and “Blog

vs. Broker, whom do you trust!”

Believe it or not, very few institutional investors are interested in
seeing the mechanics of how they have been bilked to fund Wall Street
bonuses. I have been very generous with the CRE analysis on
BoomBustBlog, but there have been relatively few takers for custom
analysis. For those institutional investors who actually care
about making money, or at least not losing 91% of it, I
suggest you go through the public version of the model designed to
create the analysis above. You can download it here: Real estate fund
illustration & Interactive
model 2009-12-23 12:54:21 174.50 Kb.
For those with even more interest, you should download our 2010 CRE
outlook: CRE 2010
Overview 2009-12-16 07:52:36 2.85 Mb
and our CRE consulting capabilities statement:
CRE Consulting Capabilities 2009-12-17 14:17:01 655.48 Kb. I
must say, any client of mine would have been very hard pressed to lose
91% of their money in a Goldman or Morgan Stanley fund.

Well, the Wall Street Marketing Machine AKA “sell side research” is
at it again.  Just as I turn bearish on CRE for the second time (see Re:
Commerical Real Estate and REITs
– It’s About That Time, again…), check out the “pump and
dump job” from Merrill: Here’s a
Big Company Bailout by the
Taxpayer That Even the Taxpayer’s Missed!

It is
my opinion that the CRE
equities are back into bubble mode. Despite the fact that CRE is still
in the crapper, with rising defaults, rising cap rates and falling
rents and values; the equities of those companies (even the troubled
ones) that invest in that very same troubled CRE are skyrocketing. Yes,
even in the face of awful macro conditions. Why? Because many of them
were able to (in cahoots with the very same banks that lost you all of
that money) slough off their bad and underwater debts to unsuspecting
equity investors. As a result, the bank issued buy ratings across the
board. Of course, as soon as the analysts that issued those ratings
left the banks, they nasty truth comes out.

The need to conserve cash, as explained above, stems
directly and primarily from imprudently participating in bubble binging,
and from a tertiary perspective, the dwindling refinancing market – of
which would not be such a big deal if companies didn’t overpay for,
and overleverage properties in the first place. The solution? Team up
with the Wall Street banks that gave you the imprudent loans that most
should have known couldn’t be paid back in an effort to shift the
losses to the retail investor. This is a win -win situation for the
banks that made the loans as well as for the REITs that took the loans.
Here is the playbook (for illustrative purposes only, of course):

Step
#1: Pump the stock
– Reference the upgrades, and notice they happen to occur right before
a secondary offering – From ZeroHedge: Merrill
Lynch In Full REIT Upgrade Mode – The Sequel.
Notice that the upgrades are made despite the fact that the CRE market
is in total shambles with no near to medium term improvement in sight.

Step
#2: Dump the stock:
Again from ZeroHedge: Bank Of
America Merrill Lynch Gets
Paid To Pay Itself Back In Developers Diversified.

Today,
Developers
Diversified Realty
announced it was issuing $300 million in senior notes, with
lead underwriter “BofA Merrill Lynch”…

… The
final deal terms were $300 million of 9.625% notes due March 2016,
priced at 99.42% to yield 9.75%. The syndicate, primarily BofA ML will
pocket $5 million in underwriting fees (oddly, less than the customary
3% for a HY offering – are companies starting to demand more bang for
their buck?).

And the
ever crucial Use of Proceeds? Why paying back Bank of America’s 2010
maturing credit facility, as if there was ever any surprise. More
specifically:

We
intend to use the net proceeds
of this offering to repay debt, including, without limitation, one or
more of:

•·Borrowings

under our $1.25 billion unsecured revolving credit facility maturing
June 29, 2010 (with a one-year extension at our option subject to the
satisfaction or waiver of customary closing conditions); as of June 30,
2009, total borrowings under our $1.25 billion unsecured revolving
credit facility aggregated $1,169.5 million with a weighted average
interest rate of 1.5%;

•· Borrowings
under
our $75 million unsecured revolving credit facility maturing June 29,
2010 (with a one-year extension at our option subject to the
satisfaction or waiver of customary closing conditions); as of June 30,
2009, there were no amounts outstanding under our $75 million unsecured
revolving credit facility;

•· A
portion of our
4.625% Senior Notes due August 1, 2010; as of June 30, 2009, there was
approximately $260.8 million aggregate principal amount of our 4.625%
Senior Notes due August 1, 2010 outstanding; and

A
portion of our
5.000% Senior Notes due May 3, 2010; as of June 30, 2009, there was
approximately $193.6 million aggregate principal amount of our 5.000%
Senior Notes due May 3, 2010 outstanding.

Not a bad
deal: the company refinances BofA’s 2010 bank facility, which has a
1.5% interest rate with a 2016 term piece of paper, paying 9.625%. Any
way you look at it, it goes to show the “solid fundamentals” behind the
sector, where the cost of extending a maturity is 6 times the current
interest rate!

This excerpt was taken from the ZeroHedge posted linked above. What I
think they missed was that the yield on the secondary was much less
relevant than it appeared, since DDR was probably going to pay it in
stock (that’s right, that funny stock split cum dividend thing).

Step #3: Shift the tax liabilities upon those who you dumped
the stock on… The last step in
this new REIT game, after dumping the unpayable debt converted into
follow-on offering stock is to push the fake dividends and shift
the tax liabilities of said fake dividends from the entity that
generated the liability on to the investor. Normally, if the cash is
not paid out, the REIT would have to pay the taxes on it. Now the REIT
can keep the cash, dilute the stock by offering the pump and dump
secondary,  then pass the tax liability off to the guys that were
suckered into buying the stuff, most likely by sell side brokers and
analysts – as was exemplified by the BofA Merrill Lynch excerpts above.
If you feel as if I (actually, Zerohedge since they broke the
story) am being a little hard on the Merrill guys, check out what their
ex-REIT analyst head had to say as soon as he left the company – More
from Zerohedge: Some
Totally Unexpected REIT Lack Of
Love From Merrill Lynch -

“From a financing standpoint things are far worse;
from a fundamental standpoint things are certainly getting worse.“.

As a
matter of fact, this alleged
“bait and switch” behavior was called out by ZeroHedge in an open
letter to the SEC: Open
Letter To The SEC Regarding Wall
Street’s REIT Bait-And-Switch:

Zero Hedge is well
aware that our regulatory friends at the SEC and FINRA enjoy going
through our articles in search of the “next big scam.” We are always
happy to make their lives a little easier and not only connect the dots
but give them everything they need on a silver platter so that even a
green securities lawyer, 4 hours fresh out of law school, would be able
to comprehend and litigate.

A few weeks ago I caught on a troubling trend whereby Merrill
Lynch/Bank of America embarked on an epic quest to underwrite equity
follow on offerings for a vast majority of the lowest quality REITs
including Kimco,
ProLogis,
Duke
Realty and
others. I say lowest quality, because Merrill’s own analysts had a Sell
rating on these names as recently as March 31 (for Kimco) and January 6
(for ProLogis). How the global economy has really changed for the
better of REITs since then is still a mystery to me. But I digress.

I received emails about DDR’s predicament (Diversified
Development Realty Email
of Interest), which makes sense, because Goldman Sachs is
pushing CMBS secured by this company’s malls (,span>Reggie
Middleton
Personally Contragulates Goldman, but Questions How Much More Can Be
Pulled Off), which of course had a AAA tranche (see more on
this Goldman phenomena below). What a coincidence! If you think that is
a coincidence, just as pressure starts to turn up on in the CRE space
with a bad macro outlook and an even worse fundamental outlook, Goldman
upgrades the entire sector and issues a buy on Taubman (see my take. The Taubman
Properties Research is Now
Available). Anyone want to bet that Goldman won’t help
these REITs trade bad debt for more bad debt or bad equities??? The
following table summarizes the valuation of each property through
NOI-based and CFAT-based approaches. Individual property valuations
will be discussed in detail separately, and released to professional
subscribers. Click to enlarge…

The two deep underwater properties – The Piers Shops at Caesars and
Regency Square were written down to the fair value by recording
impairment charge in 3Q09. While the former is being handed over to the
lenders for auction proceedings, the latter still remains with the
Company and the Company continues to service its debt obligations. 
Additionally, there are 5 more properties with LTV of more than 80%,
making them highly susceptible to reach the negative equity territory in
case of further declines in rentals or increase in cap rates.

Do you think they will have the gall, nerve, ability
to push AAA financing for
Macerich (A
Granular Look Into a $6 Billion
REIT: Is This the Next GGP?)?

Below is an excerpt of the full analysis that I am including in the updated
Macerich forensic analysis. This sampling illustrates the
damage done to equity upon the bursting of an credit binging bubble. Click

any chart to enlarge (you may need to click the graphic again with
your mouse to enlarge further).

Notice the loan to value ratios of the properties acquired between
2002 and 2007. What you see is the result of the CMBS bubble, with LTVs
as high as 158%. At least 17 of the properties listed above with LTV’s
above 100% should (and probably will, in due time) be totally written
off, for they have significant negative equity. We are talking about
wiping out properties with an acquisition cost of nearly $3
BILLION, and we are just getting started for this ia very
small sampling of the property analysis. There are dozens of additional
properties with LTVs considerably above the high watermark for
feasible refinancing, thus implying significant equity infusions needed
to rollover debt and/or highly punitive refinancing rates. Now, if you
recall my congratulatory post on Goldman Sachs (please
see Reggie Middleton
Personally Contragulates Goldman, but Questions How Much More Can Be
Pulled Off), the WSJ reported that the market will now
willingingly refinance mall portfolio properties 50% LTV, considerably
down from the 70% LTV level that was seen in the heyday of this Asset
Securitization Crisis. Even if we were to assume that we are
still in the midst of the credit bubble and REITs can still refi at
70LTV (both assumptions patently wrong), rents, net operating income
and cap rates have moved so far to the adverse direction that MAC STILL
would not be able to rollover the debt in roughly 37 properties (31%
of the portfolio) whose LTVs are above the 70% mark – and that’s
assuming the
credit bubble returns and banks go all out on risk and CMBS trading.
Rather wishful thinking, I believe we can all agree.

… As stated above, Goldman is now underwriting CMBS under a broad fund
our $19 billion bonus pool
“buy” recommendation in the CRE REIT space. Let’s take a look at
another big bonus
development exercise, marketing push they made into MBS a few
years ago…

Anyone wishing to discuss my CRE outlook further can easily reach me
via this link.

---

Select (free)  Commercial Real Estate Opinion and Analysis from the
recent BoomBustBlog archives. A must read for those with interest in
this space.

• The
  REIT Fundamental Performance vs Share Price Performance Heat Map is
  Available for Download Monday, January 11th, 2010
• Commercial

  Real Estate is Pretty Much Doing What We Expected It To Do, Returning
  to Reality

  Wednesday, May 19th, 2010
• Commercial
  Delinquencies Rise Again, Data Goes Ignored Monday, April 12th,
  2010
• The
  Taubman Properties Q4-2009 Earnings Opinion: The CRE Trend Continues
  as Expected Thursday, February 11th, 2010
• Deflation,
  Inflation or Stagflation – You Be the Judge! Tuesday, January
  12th, 2010
• Thoughts
  on Ackman’s GGP analysis and trade Tuesday, December 29th, 2009
• Wall

  Street is Back to Paying Big Bonuses. Are You Sharing in this New
  Found Prosperity?

  Tuesday, December 29th, 2009
• Doesn’t
  Morgan Stanley Read My Blog? Thursday, December 17th, 2009
• It
  Doesn’t Take a Genius to Figure Out How This Will End Thursday,
  December 31st, 2009
• Bad
  CRE, Rotten Home Loans, and the End of US Banking Prominence?
  Thursday, November 12th, 2009

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The
Latest BoomBustBlog CRE
Short Candidate Search Results

We performed a fresh short scan of the US REITs arrived at a shortlist of 8 comps based on the following selection process –

•    We retrieved initial list of 77 REITs in US with market cap of more than 200 million and share price of more than $15.
•    We excluded 37 comps with increase over their 52 week lows at less than $10.
•    We selected comps which were meeting either of following criteria –
o    High leverage - Net Debt to Gross real estate investment more than 50% and net debt to EBITDA more than 7.5x
o    Over-valuation - P/FFO in 2010 and 2011 more than 15x or EV/EBITDA in 2010 and 2011 more than 15x
Out of the selected comps, excluded 1 comp with negative net debt. Total comps selected in the step were 26.
•    We selected top 16 comps with high leverage as well as those that are over-valued

We have shortlisted 8 REITs – 3 with high financial risk and 5 comps with relatively moderate financial risk but look overvalued. The comps are placed in order of preference for short candidates. The comps with high financial risk are highlighted in green and the overvalued comps are highlighted in orange (Professional and Instutional Subscribers only).

Non-subscribers can click here to subscribe and/or upgrade.

Commercial Real Estate Short Scan Review &
Analysis – Retail (788.85 kB 2010-06-30 15:20:30)

Commercial Real Estate Short Scan Review &
Analysis – Pro (805.54 kB 2010-06-30 15:22:01)

Commercial Real Estate Short Scan Review &
Analysis – Institutional (805.54 kB 2010-06-30
15:23:15)

Comments

[doubleot]

On the CMBS/CRE front - Trepp came out with their June delinquency numbers.  Numbers were better than expected (although still not great).  It's here for anyone interested.

http://www.trepp.com/m/Press_release/displayFile.cgi?input=treppwire201007%2Epdf

[rmsnickers]

Good article Reggie, thx for the info.  Especially interesting b/c I live off of 228th right between the canyon park exit and the 195th/Beardslee exit on the Bothell, WA map.  Interesting side note, Vertafore just moved into a newly construced 3 story building right off of the 195th street exit.  The building is pretty big and I saw they were just bought out:

http://seattle.bizjournals.com/seattle/stories/2010/06/07/daily32.html

ATT wireless is amongst the buildings nearby; I think they dropped one of their big buildings and left the remaining staff in the one right next to it off monte villa parkway.

[twotraps]

So this would lead us to expect a 'Great Re-Pricing' of CRE crapola and perhaps the mkt in general.  Yes the prices may be lower, so they will seem like 'deals' at lower prices...but will it represent value.  Been waiting for a bigger washout, a more deliberate move lower in everything that might finally shake off anyone hanging on to losses and bring out the sideline cash vulturing around.  You can only legislate so much of a recovery...the rest needs to happen on its own where capital moves swiftly, in a brutal and efficient manner.  Uncomfortable for a period but healthier longer term.

[traderjoe]

Banks can't afford to repossess/take the marks, the FDIC is broke and can't bear the losses either, the equity owners can't or won't put in more equity but don't want to lose control if possible = extend and pretend. 

If I hear one more CNBS pump and dumper recommend REIT's for their dividend... 

[banksterhater]

Many tenants are NOT PAYING RENT or pay what they can afford, full-leased buildings are NOT paying anything, just like residential! Mike Shedlock I think or Michael Panzer had postings on it.(blogs)

[Invisible Hand]

Great article as always.  I really need to subscribe and start using your excellent analysis to trade.

Thanks

[zack]

Invisible hand, contact me at [e-mail]  i have a question for you.

[Florida Joe]

Quote of the day:

"Yes, the guys at Goldman are only human, but they are front running humans!"

IMO Translation: GS is crooked.

[Marvin_M]

Reggie is one of the hardest working and staightest shooting dudes anywhere.  I marvel at the quality and quantity of his work.

[RockyRacoon]

Home run, Reggie!  I sent this to a friend who is hiding out in Honduras -- big commercial real estate developer and manager.  Things are not looking good for him.  Of course, he blames Obama, by name, directly, for his woes.  Seems to me he is reaping that which he has sown.

[dot_bust]

Good article, Reggie. I've gotten slammed in SRS several times because of the CRE manipulation. That wasn't my finest trade.

[banksterhater]

SRS is a bitch to trade. You MUST have both IYR/SRS on your screen, and use 10 &20dma, watch for breakdown in IYR, but when stochastic is under 20, watch that macd & rsi, they will bring it back so fast you get creamed, I mean your profit in SRS is gone to loss in a heartbeat. I have better success w/ IWM-TWM, shorted using TWM late yesterday, but put sellstops in TWM on upside. Very tough, usually it's besy to wake at 5am and sell part in premarket, that's when idiots pay anything to get in TWM, but must be very fast.

[BoyChristmas]

Hey hey Reggie. Gotta do work for a good part of the day but you know I will be digging into this later. 

[Astute Investor]

Excellent article.  The analysis that demonstrates the asymmetric returns / risk of GP vs LPs unfortunately is endemic to nearly all classes of alternative investments (private equity, hedge funds, etc.).  It's great to be the GP of a marginally successful LBO firm, but not so rewarding for the LPs.  Despite these conflicts, sophisticated investors, like all shepple, continue to pile money into alternative assets.  "2 & 20" should be the reward for superior returns and not based on an asset class designation.

[Grand Supercycle]

EURUSD buying support detected for some time now, has returned again and the daily chart is now neutral to bullish.

http://stockmarket618.wordpress.com/about

[[e-mail]]

It's a "blind" quest for yield that holds it together.

[Rogerwilco]

Great article and analysis!

[Kreditanstalt]

It's much simpler than all that.

The large REITs, on which short ETFs are based, are universally institution-owned.  Usually/always 90%+.  The large funds, mutual funds, insurers, banks and investment entities holding these stocks never have any need to sell UNLESS they themselves are being hit with REDEMPTIONS and/or have cash-flow problems.

These two are beginning to happen, as alluded to in an earlier ZH story on mutual funds.  The economy is worsening and now business all round is in decline, too, so things can only get worse in this regard.

I have watched SPR, as the largest REIT, for a couple years now.  It rises on LOW volume, as small amounts of purchases are used to boost the price.  Much of the time it rises even in the absence of "good" news...after an 'upgrade' the stock also rises, albeit on low, low volume...

Manipulation is right!

The third factor that means things can only get worse in REIT-land is that institutional stockholders want them mainly as dividend plays.  If those dividends shrink any more, it's LIGHTS OUT.  And it is happening: SPR is down to 65c...soon more, as the underlying retail climate deteriorates.

Patience. It's coming.

[banksterhater]

Great analysis. Note IYR is holding the $47-47.50 area, but it's no support til 45 once that breaks. It went to $46 today. It pays a quarterly div(did in last 2 wks I think) so it fouls up the chart. Several REITs did offerings, so they can pay same dividend.

[Boilermaker]

Today is a great case-in-point.  IYR soaring even in the face of abhorrent jobs numbers and well beyond the broader market.

They very simply will not allow any shorting of SPG, VNO, BXP, et al irrespective of how ridiculous it becomes. 

Totally blantant.

[sonicdragon]

Very good analysis ! 

I'm buying SRS today !

[QQQBall]

Wait for a PB

[Boilermaker]

Go for DRV.  Keep a bottle of pepto next to you and an ice pack for your soon to be swollen fist.

[Boilermaker]

Slammin' Reggie...I watch IYR in disbelief daily and wonder why MSM can't / won't pick up on just how manipulated it is.  Even with high profile properties selling (or not selling) at huge losses, the IYR index moves up and even defies the broader markets, daily.

..." its the result of widespread fraud and shenanigans – subprime 2.0, just with bigger numbers! "  Winner, winner, chicken dinner.

You've certainly gone to great lengths to prove what was so obvious.  Thanks for validating that I'm not crazy!

[MarketTruth]

Excellent article! As a side note, even the only local FedEx distribution center closed up shop in this small to medium-sized population area so the next nearest is about 60 miles away. Of course that is a large building still sitting empty. Then there are the usual many other CRE properties for rent/sale of course. Yet when FedEx pulls out their only distribution center within a 60 mile radius...