Quote of the Day
"I expect REITs will continue to fall, as the playbook is usually to go from stupid over-valuation to stupid under-valuation." - Financial blogger Toro, who no longer considers REITs overvalued.
Commercial Real Estate and Real Estate Investment Trusts (REITs)
FBI Building Contract Canceled "Michigan: Unexpected costs and tighter credit have forced the federal government to cancel a $100 million contract it awarded for construction of a new Detroit FBI headquarters... It's not known how long the project will be delayed, but it's clear the FBI's planned occupancy date of April 2009 will be pushed back... The delay appears to be partly related to the credit crunch that began with widespread foreclosures in the housing market but is reportedly also affecting the availability and pricing of loans in the commercial sector."
Investcorp Acquires Prestigious New York Building In Midtown Manhattan "Investcorp, the alternative asset manager, today announced the completion of the $1.4 billion acquisition of the 280 Park Avenue building, located in Midtown Manhattan in New York City... Investcorp’s acquisition was made in partnership with Broadway Partners. The property was acquired from Istithmar, the Dubai-based investment holding company. 280 Park Avenue comprises approximately 1.2 million-sf of rentable office space in the heart of Manhattan."
The Long Case for Redwood Trust "Redwood underwrites pools of mortgages down to the individual-loan level. When lenders are fearful, and prices are attractive, they invest aggressively... They haven't had any major problems [in the credit markets]... At the end of September, they had $300 million in cash out of $1 billion in equity, and they've since raised just over $120M from... new stock... Their plan is to [buy] assets... that will provide strong cash flows for several years... To take advantage of [distressed asset sales] they're raising an “opportunity fund” of $250-500M... The hedge fund-like fees from this venture will accrue directly to Redwood shareholders."
Investing Markets: U-S-A! U-S-A! "After seven years of impressive gains, real-estate funds ranked as last year's hardest-hit fund category, tumbling 15%... [Now] consider the Vanguard REIT Index. "You can't get too excited about REITs for outsized returns," says Chris Cordaro, chief investment officer at RegentAtlantic Capital in Chatham, N.J. "What you're really hoping is that they'll help with diversification."
Commercial REITs - Valuation Gap Closing "REITs are no longer ridiculously expensive... The capitalization-weighted FFO for 114 REITs in the Russell 3000 that account for 96% of the REIT weighting in the index is currently 9.0x. FFO for the S&P 500 excluding financials is also 9.0x. REITs should trade at a lower valuation than stocks. However, given that REIT FFO has fallen from 14x last year to 9x today whereas stocks have traded at about 9x FFO during that time, one can no longer conclude that REIT valuations are insane. Also... the dividend yield has risen. At one time yielding around 4%, the cap-weighted yield of the aforementioned 114 REITs is 6.3%, approaching the historical average... I have substantially reduced my REIT short."
Vultures Wait For Commercial Property Repricing "Real Estate Research firm Real Capital Analytics: In Chicago, office building sale prices fell 17% in the fall compared with the spring. Last month, only two properties sold for a total of $91 million, compared with a year earlier when 16 properties sold for $2.3 billion. Nationwide, the dollar volume of sales is off about 55%... Christopher Carroll, managing director of financial services firm Cohen Financial LP: For commercial real estate, "the cracks are just starting to show as landlords call us for new mezzanine loans to refinance an existing mezzanine piece or raise cash (to hire brokers) to retenant buildings." Mezzanine loans are usually higher-cost and shorter-term than mortgage loans."
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