Asif Suria

What REALLY Caused the Mortgage Crisis - And What to Do Now

Thanks for your response Mr. Shaefer and for recommending my article to everyone on this thread.

While I agree with you that keeping a roof over their head is the primary concern for most people, young renters have the option of moving back in with their parents or splitting an apartment with other renters instead of renting by themselves. This is something Avalon's management mentioned in their last conference call. I am long the apartment REITs and will most likely add to my positions but wanted to play devil's advocate to get your thoughts about them.

Regarding liquidity and the ability to cover debt coming due, this sector of REITs has been fortunate enough to be able to borrow from GSEs like Fannie and Freddie to not only lower their interest rates but to cover any debt that is coming due in 2009 or 2010. I have some additional information about debt maturity of these on my website, which was not reproduced in the SA article.

www.sinletter.com/spec...

What REALLY Caused the Mortgage Crisis - And What to Do Now

A nice summary of what occurred and I am with you about the apartment REITs and wrote an article about them (specifically AvalonBay) a few months ago,

seekingalpha.com/artic...

What are your thoughts about the effect of unemployment on these apartment REITs, especially the more leveraged ones like AIMCO and Equity Residential.

Avalon Bay: A Look at Apartment REITs

Urbane, before I dug deeper into the apartment REITs I held the same opinion as you did that getting capital at reasonable rates is going to be very difficult for the REITs. Interestingly REITs like AvalonBay and Equity Residential have been able to raise capital at reasonable rates from Government Sponsored Enterprises (GSEs) like Fannie Mae and Avalon actually lowered the interest it owed on its portfolio from 6.5% in 2007 to 6% by the end of 2008 by retiring higher interest debt.

Quoting Avalon's CFO Tom Sargeant from the fourth quarter conference call,

"We're anxious to return to the unsecured market and I think that you'd have to have the spread differential somewhere within 100 basis points before we'd take a serious look at it. I mean, with the GSE debt and this 10-year debt in the 6.25% range compared to an unsecured offering that could be done maybe around 9% today, we're still a pretty fair piece away from where it would need to align for us to do unsecured debt."

Avalon Bay: A Look at Apartment REITs

@Thomas, I think what some of those people are not factoring in is the amount of debt these REITs have been able to raise at low rates from GSEs like Fannie Mae. Equity Residential borrowed nearly $1 billion in late 2008, most likely to retire the higher interest $863 million debt that is maturing in 2009. Check out the valuation and numbers section of my report for additional information,

www.sinletter.com/spec...

@Chris B. That is a good point and there is little doubt that the assets on the balance sheets of most REITs have fallen in value. However I believe that the 70 to 90% decline in apartment REIT prices already reflects this reality. Moreover consider the fact that many properties in the portfolios of these REITs have existed for a decade or two and hence I am more worried about the effect on occupancy from unemployment than from new investors coming in as competitors. AvalonBay has been active in both disposing existing properties and building new ones, with 8 new communities slated to come online in 2009.

@ED. Thank you.