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Brad Case

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  • Should Banks Hold More Capital? It Worked Out Great for REITs [View article]
    Very thoughtful observation, thannagan. Generally speaking, of course, the banks that were unable to survive have tended to be much less diversified, geographically and by product line.

    However, it's going a bit far to pronounce the UK study "silly"--it's not silly at all. And the idea that "there's no evidence that banks require anywhere near 50% equity to survive even the worst recession" is of course wrong, since the UK study provides exactly such evidence.
    Feb 6 04:22 PM | 1 Like Like |Link to Comment
  • Should Banks Hold More Capital? It Worked Out Great for REITs [View article]
    Thanks, Westcoaster. Actually, I think the idea of moving to substantially higher bank capital deserves real, careful consideration. Companies that use way too much leverage, such as private equity real estate funds (among others), want debt to be freely available and cheap, partly because if they use enough debt then they can report high "value added" or "opportunistic" returns without having added any value or located any opportunities, but rather by depending on the leverage to jack up poor asset-level returns. This analysis doesn't mean that capital won't be available, just that more of it will be equity capital rather than debt capital. Equity capital means that you have to earn your returns.

    And, of course, the main purpose of raising capital standards would be to eliminate many of the banking crises that so regularly plunge the whole economy into recession. Yeah, more bank lending would help move us out of this Great Recession--but after all, LESS bank lending would have helped keep us out of it in the first place.
    Feb 6 02:59 PM | 1 Like Like |Link to Comment
  • ING: Global REIT Returns Estimated at 8%-12% for 2011 [View article]
    aussiereader5,
    ING Investment Management didn't cover Australian REITs in their global market outlook because this report came from their Australia office. I haven't found their projection for total returns on Australian REIT investments, but in another report (www.ingim.com.au/ingim...) they predict earnings growth averaging 4.8% for Australian REITs, which is higher than Canada but lower than the UK.

    Note that their global outlook predicts total returns in three ranges: 5%-10% in Japan, Singapore, and Continental Europe; 8%-12% in the U.K., Canada, and the U.S.; and 15%-20% in Hong Kong/China. Based on their earnings growth forecast, my guess is that they might put Australia in the same category with the U.K., Canada, and the U.S.
    Feb 6 08:06 AM | 1 Like Like |Link to Comment
  • Commercial Real Estate: Good Fundamentals, Increased Default Rates - Why the Disconnect? [View article]
    K Smith,

    Thank you for what is mostly a thoughtful comment. Do not, however, accuse me of playing fast and loose with the facts or of misleading people.

    My article was about the direction in which real estate operating fundamentals seem to be headed, which is positive: things are getting better. That's very different from saying that things are good. Of course vacancy rates are extraordinarily high: we seem barely to be past the very worst, and they're not going to improve quickly--but they do seem to be improving.

    When you're in the first stages of a recovery, things still look very bad. If you wait until things look good, you're near the end of the recovery, and very possibly near the end of the upturn. Tactical investing is all about correctly perceiving changes in the economy earlier than other investors do. What you seem to be suggesting is waiting until things are already great for everybody, which implies buying at the top of the market.

    I've written before (seekingalpha.com/artic...) that the market is "bifurcated" or even "trifurcated" in the sense that operating fundamentals and property values maintained better strength and have already been improving for some time among the higher-quality assets, while they're relatively much weaker and, I expect, will probably even continued to decline among the lower-quality assets. You're clearly looking at some properties in the lower-quality segment of the market. It is common for a crisis to cause a "flight to quality" and this is a good example.

    The high default rates that I expect will persist for some time will generally be concentrated among the lower-quality segment of the market; in contrast, the spike in property values that I cited was measured by the Transaction Based Index (TBI), which focuses on a generally higher-quality segment of the market.

    How on earth can someone accuse me of "creating the impression that all is rainbows and lollipops" from an article the first two paragraphs of which are all about record-high default rates?

    --Brad
    Feb 6 07:47 AM | 1 Like Like |Link to Comment
  • ING: Global REIT Returns Estimated at 8%-12% for 2011 [View article]
    That sounds right--although I'm learning from you, so thanks!
    Feb 5 12:37 PM | 1 Like Like |Link to Comment
  • ING: Global REIT Returns Estimated at 8%-12% for 2011 [View article]
    Hmm, not sure, but again it's basically the same as long-term capital gains. The idea of locating your low-income, high-appreciation investments in your taxable accounts and your high-income, low-appreciation investments in your tax-advantaged accounts (assuming you have both, and can't keep everything in tax-advantaged accounts) is that the taxes that you'll ultimately pay on your long-term capital gains will be deferred anyway until you sell them, whereas the taxes on ordinary income can't be deferred except by holding them in IRAs and the like. So I think the answer is that you don't lose the return-of-capital advantage, you just defer it, which makes it worth less. (But I'm certainly not a tax expert!)
    Feb 5 11:16 AM | 1 Like Like |Link to Comment
  • ING: Global REIT Returns Estimated at 8%-12% for 2011 [View article]
    tweedn,
    K1 forms are for partnerships (LPs and MLPs), not for ETFs, publicly traded stocks, or REIT mutual funds. Investing in a publicly traded REIT or a REIT ETF (such as VNQ) is just like investing in any other publicly traded stock, and you won't have a K1. (Some REITs that are not publicly traded may be organized as LPs and may involve a K1, but if you're investing in publicly traded REITs, REIT ETFs, and REIT mutual funds, that won't apply to you.)
    The dividend from a publicly traded REIT has three parts: ordinary income, long-term capital gain, and return of capital. Return of capital reduces your basis, so it has essentially the same tax treatment as long-term capital gain. So your wife is correct that there is return of capital, but in the case of publicly traded REITs that's just a matter of how the 1099-DIV is allocated--it's just the same as with any other ETF or mutual fund, and still doesn't involve a K1.
    --Brad
    Feb 5 09:35 AM | 1 Like Like |Link to Comment
  • ETF Focus: iShares Developed Europe REIT ETF Ideal for Diversification [View article]
    You flatter me, Ho'opono. Personally, I would be very surprised to see any effect whatsoever on volume!
    Feb 4 03:27 PM | 1 Like Like |Link to Comment
  • Commercial Real Estate: Good Fundamentals, Increased Default Rates - Why the Disconnect? [View article]
    Thanks, Jim, I totally agree with you. Just to clarify my article, 5-10 years is generally the maturity, but (as you say) the amortization is generally 25-30, which is why there's a big balloon payment at maturity.
    Feb 3 12:28 PM | 1 Like Like |Link to Comment
  • Is the Commercial Real Estate Downturn Over? [View article]
    Norm,
    In general, the interpretation of P/E ratios is the same with REITs as with non-REIT stocks. The problem, though, is that to use the P/E ratio properly you need an estimate of "permanent" earnings. In a stable, normal market, projected earnings over the next four quarters (leading earnings)--or earnings over the most recent four quarters (trailing earnings)--is a good representation of permanent earnings, so comparing leading or trailing P/E ratios is valid. But in a rapidly changing market, four-quarter leading or trailing earnings won't reflect permanent earnings very well, so P/E ratios can't be compared usefully.

    In the current market, REIT earnings are extraordinarily low because real estate operating fundamentals are at close to their worst point in a historically bad market. That means that both trailing and leading four-quarter earnings are much less than "permanent" earnings (meaning what earnings will be once the real estate market returns to normal). In contrast, among non-REIT corporations, trailing or leading four-quarter earnings are extraordinarily high because of aggressive cost-cutting, so they're much higher than "permanent" earnings (meaning what earnings will be once the companies start hiring, buying materials, and spending money on new plants and equipment).

    In short, the low current REIT earnings can't be sustained, and the high current non-REIT earnings can't be sustained. Investors are valuing both REIT and non-REIT stock prices according to permanent rather than current earnings, which is why the P/E ratios based on current earnings look out of whack.

    Hope that's helpful,
    --Brad
    Jan 27 10:35 PM | 1 Like Like |Link to Comment
  • Potential AMB Property/Prologis Merger Comes as Operating Fundamentals are Strengthening [View article]
    As of 12/31/2010, ProLogis had a market cap of $8,216.5 million and AMB was at $5,330.9 million, which put their combined market cap at $13,547 million. The largest publicly traded REITs were: Simon Property Group ($29,140), Public Storage ($17,259), Vornado ($15,159), General Growth ($14,825), Equity Residential ($14,644), Boston Properties ($12,063), Host Hotels ($11,900), and HCP ($11,896).
    Jan 27 08:54 PM | 1 Like Like |Link to Comment
  • New REIT ETF: Stocks Correlation Only 74% Now [View article]
    Point well taken, mitchb! Actually, I was thinking in particular about unsecured debt (meaning corporate bonds, as well as lines of credit) rather than secured debt (commercial mortgages). Still, my understanding is that REIT mortgages weren't as likely as non-REIT mortgages to have been originated in the CMBS channel--and there was clearly more capital market discipline in the non-CMBS channel than in the CMBS channel--but I don't have data about that.
    Jan 27 04:15 PM | 1 Like Like |Link to Comment
  • Is the Commercial Real Estate Downturn Over? [View article]
    Txwoodworker,
    I don't make any use of property appraisals done by or for REITs. When I look at REIT total return, it's strictly stock market returns: stock price appreciation plus dividends actually paid. As you point out, appraised values may suffer from appraisal contamination--regardless of whether they're being intentionally skewed or whether they're simply mistaken. But when I compare the investment returns of publicly traded REITs with any other investment, there's no issue of appraisal contamination affecting the reported REIT returns.
    Thanks for the comment.
    --Brad
    Jan 27 12:20 PM | 1 Like Like |Link to Comment
  • New REIT ETF: Stocks Correlation Only 74% Now [View article]
    mitchb,
    I know that report from Green Street, and I think it's very good. Some people have argued that REITs shouldn't really use any leverage, because REIT debt is not subsidized by the Federal government the way it is subsidized for non-REIT corporations. On the other hand, the use of debt provides an opportunity for capital market discipline, by which I mean that if REITs hold debt then their investment and operating performance is being monitored by debt investors (and potential debt investors), which I believe results in better execution by REITs. There's independent academic support for that idea.
    --Brad
    Jan 27 12:07 PM | 1 Like Like |Link to Comment
  • Is the Commercial Real Estate Downturn Over? [View article]
    Actually, farside, I'm not bearish--yes, there's still a chance of a double-dip, but I don't expect it. The most significant danger, in my mind, is that people use the wrong signals of how the commercial real estate market is progressing. Appraisal-based indexes such as the NCREIF Property Index are poor signals, even if sometimes the signals they give are the correct ones. (As they say, even a broken clock is correct twice each day!) And strong real estate fundamentals don't mean that private real estate investment managers won't default on their mortgages or become distressed sellers, while defaults and distressed sales don't mean that other real estate investors (including, though not limited to, publicly traded REITs) aren't making money hand over fist.
    Jan 27 07:19 AM | 1 Like Like |Link to Comment
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