Commercial Real Estate Finance

Archive for the ‘REITs’ Category

Can you trade real estate just like this guy trades securities? Of course, but let’s face it. Investing effectively in actual real estate is tough. A few reasons why are that real estate tends to be illiquid, and is usually rather expensive (at least in comparison to other financial instruments). There are a few ways to maintain exposure to the real estate sector without having to buy physical real estate. One way is to invest in a real estate investment trust (REIT), an example of a publicly traded REIT is Hersha Hospitality Trust (NYSE: HT). REIT’s invest their capital in real estate, and you can invest your money in the REIT by buying stock. By law REITs are required to return at least 90% of their operating profit to shareholders. Because of this the REIT will pay dividends.  Personally, I love investments that pay some sort of interest or dividend because it makes the investment feel more tangible. Another popular benefit is that you can reinvest your dividend. Essentially you were just able to purchase more stock for “free.” I put “free” in quotation marks because nothing in life is ever free, and also because the stock price may have depreciated and your initial investment may have lost money.

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Since March 9th, what has performed better: Gold or the Dow Jones REIT Index?

For all you commercial real estate folks out there, it may come as a surprise to learn the answer is the REIT Index.   If you have a look at this chart, you’ll see.  REITs returned over 90% and GLD returned under 10%.  How does that compare with the commercial real estate you’re familiar with? Read the rest of this entry »

The New York Times recently published an article highlighting a developing trend in investment banking–the deferral of underwriting fees until an offering has proven to perform.  In several REIT IPOs this year, investment banks representing the REITs have agreed to defer a portion of their fees until the REIT achieves a pre-specified hurdle rate of return for investors.  In theory, the deferral of fees aligns the underwriter’s interests more closely with the investor’s.  Underwriters will naturally be more conservative in their underwriting if they know their payout is directly tied to the performance of the offering they are bringing to market.

The NY Times article points out that aligning the underwriting investment bank’s interests more closely with shareholders’ provides for a fairer IPO process.  In my opinion, however, the practice of deferring fees pending the performance of the offering is not about to catch on with other securities.  Instead, the deferral of fees is just a way of bringing mortgage REITs to market in a difficult economic environment.  After all,  Wall Street investment banks have always found clever ways of getting deals done in the sourest of times under the guise of streamlining their operations for the benefit of investors.

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Jerry Sweeney, head of Philly-based REIT Brandywine Property Trust talks about how his REIT is up 284% with former Philly wing-nut, Jim Cramer.

In this video, Mike Graziano, managing director at Goldman, Sachs, discusses the market response to REIT equity offerings and looks at what the future may hold for this trend.

The Week of May 22-29

- The 177-Store anchor Blue Denim chain filed for bankruptcy.

- HUD took action against 120 FHA -approved lenders earlier this week.

- Grubb & Ellis reported Wider Quarterly, and Yearly Losses.

- A new report came out detailing that Manhattan Sales have reached a 25 year low.

- FHA announced it is allowing first time home buyers to sue the much ballyhooed tax credit towards their down payment.

- Fitch Ratings has downgraded First Industrial.

- Giant real estate player Tischman Speyer has announced they will sell some California assets to pay down debt.

- News broke on Tuesday that two more banks have failed.

- Sequoia Equities announced the acquisition of a $75M multifamily luxury apartment complex in Orange County, CA.

- S&K Menswear will be closing all remaining stores in bankruptcy

- A Westin hotel developer accused a local councilman of extortion.

- Sunstone sold a 274-room Marriott.

- Paramount Realty bought a prime retail center.

- Freddie Mac could help out the commercial backed securities market with
K-Certificates.

- LandAmerica sold 6 of its subsidiaries last weekend.

You would think that a real estate investment bank, by definition, would be right in the mix for any mergers and acquisitions deals involving the more than 130 Real Estate Investment Trusts that exist today. Sorry to disappoint, but that’s not really what we do. That being said, there has been more and more speculation, A. D. Pruitt of the Wall Street Journal Online being one of the loudest and most recent, that REITs will go the M&A route.

One of the biggest and most obvious reasons for this is that many REITs are struggling right now, saddled with too much debt from frothy acquisition plays they made during the boom years of 2004-2007. Better positioned REITs, in an ironic twist, may be well suited to acquire the struggling REITs because they are lower levered and can take on some of the debt burden that would come with acquiring such a massive entity.
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Vornado Realty Trust VNO.N, owner of office and retail properties, said last Wednesday it now expects to raise net proceeds of $710 million from its equity offering, up from an earlier $617 million, as underwriters exercised their option to purchase additional shares.

The company, the most recent real estate investment trust to tap the equity markets for capital, said it intends to use the proceeds for general corporate purposes, including repaying debt and funding acquisitions.

Although the debt markets have been reluctant lately to make large loans to commercial real estate companies, equity investors have shown an appetite for new shares.

Property companies that have turned to the equity market for capital over the past month include Simon Property Group Inc SPG.N, AMB Property Corp (AMB.N), Kimco Realty Corp KIM.N and ProLogis PLD.N.

This makes it easier for these big public REITs to acquire, especially to acquire assets of recently bankrupt General Growth Properties.

All of this news of REITs raising equity with public offerings raises an interesting question. Is this the wave of the immediate future? Are REITs better suited than private real estate companies to capitalize on opportunities in the short run, and thus are better poised for success in the long run?

While private real estate companies, much like REITs can be both narrowly focused by product type, as well as well diversified, both have been hit hard during the current economic downturn. There are several advantages each have over the other.

REITs have the clear advantage in the ability to raise capital. In this environment, the astute investor can see an undervalued stock rather easily, since many stocks are based on historical valuations, dividends, growth etc. Since REITs are relatively lower levered than private real estate funds, their purchasing power is higher during the current economic climate. On the flip side, many worried private investors who haven’t seen strong returns from their current and previous investments in private funds may be more hesitant to commit capital in the next fund. As any private operator will tell you, fundraising is as tantamount to large scale success in the industry as finding the right deals to buy. REITs also pay dividends, and are very liquid, which means investors can and will see returns on their investments much more quickly. With funds, capital is promised back to investors within a certain time frame, which if necessary can be many years.

Yet, there are still some clear cut advantages for private companies. The first is return thresholds. Most private real estate funds promise returns in the mid to high teens, sometimes doubling or tripling the returns of many REITs. Private funds are also not subject to the scrutiny of regulators because ownership remains private. As an aside to this fact, private funds aren’t focused on quarterly results, and do not have to meet analysts’ projections in order to stave off a sell off of their stock, and thus, their capital base. Also, unlike with any public company, with many private funds, returns, to a certain extent are promised, and not subject to the fluctuations of the markets. That being said, if a private operator fails and goes bankrupt, how secure are those returns? An investor is taking a lot of faith that the operator knows what they are doing, and is more innovative than the next guy in being able to remain afloat during unforeseen circumstances, like the tumultuous market we know find ourselves in.

One thing does remain clear in this debate. Cash is king. And REITs have more of it.

What are your thoughts on who is better poised to take advantage of current market conditions?