Thursday, July 26, 2007

Creative Destruction in REIT-land

In a savings-glutted(*) world, 10% compounds nicely, even with actual inflation (ex hedonic adjustments and official smoke & mirrors that limit the State's indexed liabilities) being what it is(*. And its amazing what a difference two months make, for it seems like just yesterday bidders were falling over each other in order to disassemble Sam Zell's EOP at cap rates that were pedestrian even to optimistic pedestrians, and the Tourettic Cramer was wondering why J. Bruce Flatt (of Brookfield Props) was not a household name like Warren Buffett.

Since February, the growth-darlings of REITville (AVB, SLG, BXP, VNO, KIM, BPO with Feb P/Est FFO of approx 20X) have been savaged, and in typical Wall St. fashion, the mauling has made formerly bullish analysts much less enthusiastic. Goldman got supremely whipsawed calling mid-June a buying opp, with an about-face in early July to "Ooops, I meant Sell them to oblivion". Which they have.

Old saws like "location, location, location" aside, and irrespective of what the Jones's have making (til the end of Q1) on their leveraged CDO and CLO portfolios marked to market by the guy who gets his bonus based upon his mark, 10% is in fact a fair and reasonable return to a rentier for the rights conferred by ownership of real and good assets, lowly leveraged, and professionally managed, and protected by the powers of the state and the rule of law. A prolific gold deposit in Bolivia or DR-Congo might have more upside, but it also has more downside. Complete downside, in fact.

Back to topic. Price destruction is, as it should, creating value in US REITs. Maybe there will be more destruction. Maybe we are on the cusp of an engulfing revulsion that will finally turn Tice, Faber and DKW's Edwards into bulls. By way of example, irrespective and contrary to low price momentum, low relative growth rates, low earnings momentum, poor analyst expectations - all the things newly-minted MBAs are taught to avoid - CLI, HRP, HPT, AHT, LXP and CDR, are ALL offering P/Est FFOs of 10x or less. These are all owners of real property (be they hotels, shopping centers, suburban officesm, what have you) with good existing tenants, fine management , attractive yields, and even more attractive valuations. It's as if the huge liquidity and monetary growth of 2004, 2005, 2006 and 2007 , and their resultant impact upon asset values never happened. Yes there is probably more volatility and perhaps some more downside ahead. Yes they've been more attractively valued before. BUT liquidity remains out there, even if held by official authorities, and that liquidity will move into equity from cash or debt at the right price. And as a betting man, I would wager that US authorities do NOT turn the screws tighter amidst a downturn, irrespective of how desperately US ficsal balance requires tax increases.

Mortgage REITs (CT, RAS, NRF, NCT, RWT, AHR, NLY, TMA etc. etc.) - which have vastly different size and leverage too are screaming ... errrr... something. As are their investors, though I, even with my mis-spent youth, cannot repeat the words here without whincing. Yet I cannot help but wonder whether the more moderately levered of this group do not offer meaningful opps, somewhere, perhaps close to here. Yes, one cannot say for certain what pieces of toxic waste populate their portfolios. And I cannot honestly say I can fathom the impact of price discovery upon their portfolio. But with the flight to quality and yields going one way, should quality tenant, diversified net-lease yields (like those of LXP) really be moving in the other? Yes, the market probably knows something about RAS that we will find out only later. But in the meantime, it is worth doing some work to find out those that didn't shoot the moon, and will survive the shakeout, when we hear the definitive "THUD!" of those that DID "shoot the moon".


Macro Man said...

I am a p.a. shareholder in NLY and have been since the days when it yielded 18% and was Billy Fleck's only publicly acknowledged long. (I have traded in and out since those heady days.)

It proprietor, Mr. Farrell, claims that it has been defensively positioned and short all of the subprime dross. One of my only forays into watching Cramer being Cramer was an interview he conducted with Farrell a few months ago, wherein he (Mr. F) claimed that NLY would clean up in the event of a subprime meltdown.

looks like August 2 will be put up or shut up time for NLY (interesting to note, though, that it was up a percent today, albeit still 15% lower than the heady heights of April)

"Cassandra" said...

Jim Grant is also a big admirer of Annaly. But a mortgage fund cannot escape the objective mark-to-market reality of widening spreads upon a leveraged portfolio. In the absence of short credit bets, it diminishes NAV in geared fashion. Full stop. Unless you;re an insurance company whose byzantine accounting is understood ONLY by small green men, and hedge funds who've managed to write into their prospectuses: "Mark-to-Model".

In my next life, I will insure that all my contractual engagemenmts specify "mark-to-model". This way I can go away at weekends without worrying about what the vicissitudes of the market does to my self-esteem, and of course my investors will love the steadiness of the 1.5% per month I manufacture on their behalf. At least the Errrr the early investors. And ummm at least the ones who are fortunate enough to redeem before the BANG! leaving the numbskulls holding the modeled bag.

And as experts we can cross-validate each others models: I'll validate yours if you validate mine! (the auditors will never catch THAT one.....)

Macro Man said...

I like the way you're thinking....I think JGB yields are actually 3%, don't you?

"Cassandra" said...

Ohhh yess!!! But mine says 2.95%

But I'll let you in on a secret to success: Do not tell anyone yet. Bleed the MTM-to-model drift out at one-and-a-half-percent -a-month (unless you need it to cover something that has combusted elsewhere in your portfolio. "Smooooth" is the mantra. And save the biggest for December (provided THAT is your FY end when the imaginary and the fantasized becomes the real.

Oh yeah. One more thing. When they're paid, make sure you create a bulletproof deeply nested ownership structure that begins in Cypress, passes through Malta, traiing through at least two DIFFERENT cantons of Switzerland, before definitively residing in a Lichtensteinian trust.

THAT way, when you're investors eventually come at you with an axe, Macrokids will have enjoyed a good twenty-years of P-A-R-T-A-Y ! before (if ever) London accountants penetrate it.

"Cassandra" said...

i meant, of course, Asil Nadir's home....Cyrpus

Macro Man said...

I reckon you need a stopover in Dublin as well. Maybe publish a slim volume of financial verse and claim residency as an arist (and thus absolve oneself of any obligation to the tax man.)

"Cassandra" said...

Here's one to Start (sung to to the tune of Bob Marley's "Redemption Song"

Investors, yes, they rob i;
Redeemed I for the t-bill chips,
Minutes after they told i,
i sold into a bottomless pit.
But my head was made strong
By whats already in my accounts,.
And I pour more into them
even as the losses mount...
Won't you help to sing
These songs of fees gone -
I've more than you'll ever have :
Redemption songs;
Redemption songs.

Emancipate yourself from mark-to-market
None but ourselves can free our lines,
Have no fear of toxic CDOs,
cause none of them can stop the whines .
How long shall they steal our profits,
By marking us to the market
Some say it just be prudent
No!, We've got to mark-up de book.
These songs of fees gone -
I've more than you'll ever have, despite
Redemption songs;
Redemption songs.
these songs of fees gone...