In 1968 at the height, so to speak, of the Vietnam War, U.S. Air Force Major Chet Brown was fresh out of ideas and common sense. Tired, frustrated and on the wrong end of a microphone after a battle for the provincial capital of Ben Tre, he famously allowed that it had become necessary to destroy the town in order to save it. Such is the logic surrounding a spate of REIT equity offerings in the first half of 2009.

Undercapitalized and over-leveraged, many REITs had no choice but to enter into dilutive transactions in order to survive. But like Ben Tre, these 9 REITs have been flattened by massively dilutive equity offerings, and nobody can predict when they will be able to meaningfully grow their dividends again.

Maguire Properties (MPG), the office REIT that bought 24 office properties and 11 development sites from Blackstone (BX) for $2.88 billion at the height of the market, just got a market read on its Orange County holdings. According to the Wall Street Journal, Emmes Holdings in New York recently agreed to buy MGP's stake in a newly constructed office property in Irvine, Calif., for about $160 million, representing a 40% discount to its construction cost.

Maguire's heavy concentration in Orange County gives it exposure to the subprime debacle that probably rivals AIG, given that Orange County was subprime central HQ for many mortgage lenders. This exposure is resulting in an epic struggle to dig out from under the debt incurred in that 2007 purchase.

REIT earnings season got into full swing last week, but there's a lot more on investors' minds these days that last quarter's earnings. Transaction volume has continued to plunge, and CMBS loans placed in special servicing have continued to rise like a poodle in a jetpack.

This can mean only one thing, and in the words David Hamamoto, CEO of Northstar Realty Finance (NRF), it is that there is a growing backlog of motivated sellers who "will begin to transact later this year and who will establish market pricing as deals are completed." That people will need to sell is not in dispute, but exactly what "market pricing" will be is the $64,000 question.

Zillow reported that American homes lost about $1.4 trillion in value in the fourth quarter of 2008 alone. This value vacuum is directly connected to the dismal earnings now being reported by Apartment REITs. But first, one amazing factoid: this one quarter decline is more than all of 2007's losses combined. This was also the eighth consecutive quarter of declining home values, and obviously the worst quarter since the crisis began. The data is based on the company's median home-value estimates, or "Zestimates", for homes in 161 metro areas.

According to Zillow's estimates, U.S. homeowners lost a cumulative $3.3 trillion in home values during 2008. Since the housing market's peak in 2006, more than $6.1 trillion in "value" has evaporated.

The BBB-5 CMBX is above 3250. Do you know where your money is? These are record levels for the index, and they are seemingly indicative of even greater trouble in the CMBS market. If one were to use the stock price of many Mortgage REITs however, it would seem that the soaring Markit index is actually behind the times for a change:

I had some fun reading the text of the proposed treasury bill last weekend, which also happened to be the subject of some thick political theatre at the Senate Banking Committee hearings yesterday. As far as I can tell, the bill basically authorizes a $700 billion government-run Mortgage REIT that has yet to be named. Perhaps we can all agree that simply calling it "expensive" would be appropriate. Not only that, the draft of the enormous bill, which requires an increase in the federal debt ceiling just to accommodate its incredible cost, runs a mere three pages long. I've actually seen trade confirmations with more black ink than this bill. But when it comes to government spending, brevity is the soul of the ultimate form of OPM: your tax dollars! (OPM=Other People's Money.)

The still nameless bill gives the Secretary of the Treasury, who would be the new Master of the Universe upon its passage, very broad authority to buy, sell, trade, loan, finance, refinance and repurchase, all at the same time if he wants, any type of mortgage asset that was originated prior to September 17th, 2008. The broad mandate to "finance" and "trade" means that the bill could wind up funding the purchase of even more than $700 billion in assets. So, for the next two years, the treasury secretary will be running one of the largest, most influential proprietary trading desks in the world, since foreign banks are also expected to participate under the proposed rules.

While market participants work overtime to digest every detail of the government's takeover of Fannie Mae (FNM) and Freddie Mac (FRE), Globest.com is reporting that one aspect of the plan is a new program in which the U.S. Treasury, at the discretion of Hank Paulson, will purchase agency mortgage backed securities on the open market, in addition to the direct portfolio acquisitions that the agencies themselves make.

"There are a number of missing blanks that Treasury has to fill in with this plan," said Dave Baird, national director for multifamily for Sperry Van Ness, "but I think it is clear that this will add additional and much needed liquidity to the capital markets." There is some speculation that a stepped-up Treasury presence in the capital markets could even provide an indirect positive boost to the CMBS market.

A few days ago, I was talking with a friend who until very recenty had been in charge of capital markets at a privately-held "hard money" lender.  Hard money is a rough and tumble world of last resort, where borrowers who are out of both time and luck go for quick cash, priced at prime plus ten and three points on closing. 

My friend left the firm because he refused to participate in a quiet, back-room shell game designed to conceal the true health of the firm's loan book from their accountants and lenders.  The scheme basically involved trading bad loans back and forth with competitors, then disguising the trades as repayments and refinancings. All they did was replace one piece of illiquid, rotting swamp sludge with another, but it made the companies and their portfolios look much healthier than they actually were.

"It's surprising that you'd have a New York City multifamily [default] happening so quickly," said Manus Clancy, senior managing director at Trepp Research.

Surprising, that is, unless the mortgage payment is more than double the monthly net income. Impossible you say? Not really, this was the beginning of 2007, and almost anything was possible. "Our job is to create loans for securitization," said an official from Wachovia Corp. (WB) a few years earlier. "We're trying to manufacture the product that the investor base wants." And so they did.

The collapse of the housing bubble is likely to eliminate most, if not all, of the gains that families had made in accumulating wealth over the last two decades, according to a new study from the Center for Economic Policy & Research in Washington, DC.

In the report, entitled The Impact of the Housing Crash on Family Wealth [pdf file], the authors project that the sharpest falloffs are projected to occur for the youngest families.

Is IStar the Canary in the Coal Mine, or is this Just Fremont Coming Home to Roost?

IStar (SFI) saw the need to issue interim estimated earnings estimates for the second quarter on Friday, and it wasn't encouraging. As a result of loan losses and impairments uncovered during the Company's quarterly risk review process, IStar said it now expects net income per share to be in the range of $0.05 - $0.15, and that it will book an adjusted earnings loss of between $1.45 and $1.55 per share when its second quarter results are announced at the end of the month. There was no update on guidance for the full year. In the first quarter, IStar reported adjusted earnings of .87/share, which was down from .93/share for the first quarter of 2007.

According to indications in the CMBS and CMBX markets, and recent reports by all three of the major ratings agencies, there are increasing signs that the commercial real estate debt markets are stabilizing. As we reported in earlier posts, the CMBX and CMBS cash markets were completely divorced from commercial RE fundamentals. Back then, seemingly a hundred years ago, there was no need for a ticket to Vegas: if you were an investor in this sector, all the adrenaline your heart desired could be had sitting right in front of your computer.

Indeed, when nobody was looking and the kids were safely tucked in bed, you could have picked up RAIT Financial Trust (RAS) at $6.75, Northstar Realty Finance (NRF) at $8 and Anthracite Capital (AHR) and $6.50. But as everybody knows, it was no time for the faint of heart, and I lost a lot of donuts employing this price/value thesis on the likes of iStar Financial (SFI) and Newcastle Investment (NCT).

This may be no country for old men, but it's definitely no market for little boys either.

The headlines on February's mortgage delinquency numbers were either negligible or incredibly alarming, depending on who reported them and the comparisons they were using. The biggest surprise in all the data was the increase in multifamily delinquencies, which is traditionally the safer and less volatile of the four real estate "food groups". Here is a look behind some of the data.

In September 2007, hedge fund manager Andrew Lahde of eponymous Lahde Capital, which had previously earned huge returns by heavily shorting the ABX, launched a new fund to short commercial real estate via the CMBX. The ABX was becoming too expensive to short, and tying up all that capital reaching for the final 10% of the trade wasn't worth it.At the time, he predicted a "100% likelihood" of a US recession that would cause commercial property to also tumble and that his "commercial fund [would] act as a hedge for all of the carnage still to come".

His thesis relies heavily on exploiting the leverage often used to finance real estate. Using an analogy he says is from Peter Schiff, he explains that one should picture the commercial real estate market as a beach ball, with an arm holding the ball. If the arm is taken away, that ball will fall to the ground. He says many foolishly believe that somehow if you take cheap financing (the arm) away, the ball will remain afloat.

In the hierarchy of half-truths, hoodwinks and practical jokes, there are lies, damn lies and then there are statistics. Somewhere within this hierarchy must also be NAR press releases.

According to the NAR, which just released its new home sales statistics for February, the supply of new homes in the U.S. dropped 3 percent at the end of last month to just over 4 million homes. This translates into an approximately 9.6-month inventory of new homes, compared to about 10.2 months at the end of January. In addition, the NAR says the national median existing-home price for all housing types was $195,900 in February, down almost 10 percent from 12 months ago.

Back in 2005, executives at Camden Property Trust (CPT), a REIT specializing in large apartment complexes, were worried. Why had they been unable to maintain their average occupancies at historical levels? They fanned out across the country to talk with CPT property managers, who complained of having to turn down the credit of applicants for $700 a month apartments when home lenders across the street were providing the same questionable applicants with mortgages worth $350,000.

The CPT executives were suspicious about the mortgage credit checks, but they were unable to confirm their hunch. Numerous observers had been monitoring the record growth in the U.S. homeownership rate, including the Boston Globe which published a 2005 article entitled The Dark Side of Subprime Loans.

The world, once awash with levered up Greenspan dollars chasing assets of almost any kind, is now drowning in debt. In response, the Fed dramatically announced another cut in its discount rate late on a Sunday afternoon, just minutes after rapidly orchestrating and ultimately approving the sale of Bear Stearns (BSC) to J.P. Morgan Chase (JPM) for just $2 a share. Working in concert, the Fed and the Treasury Department accomplished these two unusual feats while most traders and bankers were cowering under cover of Friday’s closing bell.

In bailing out Bear Stearns, the Fed invoked parts of a rarely used law that allows it to lend directly to non-bank financial companies. Underscoring the seriousness of such a move, using the provisions under that law the required a nod from at least five of the seven Fed Governors before the bailout could be implemented: the purposeful goal being a solution firmly in place before markets opened in Asia later on Sunday evening.

As the British comedian Douglas Adams once wryly noted, “Nothing travels faster than light, with the possible exception of bad news, which follows its own rules”. Indeed, the bad news careening through the financial services industry has now permeated every corner of the market, forcing even the once impermeable Bear Stearns (BSC) into a government-sponsored survival suit.

The well-publicized crisis in the mortgage market has by now forced write downs and write offs of anything that is mortgage related, never mind the near bankruptcy of Bear Stearns. Even once sacrosanct “agency mortgage securities”, those mortgages guaranteed by quasi-governmental Fannie Mae (FNM) and Freddie Mac (FRE), are trading at a discount.

Investing in Mortgage REITs is not for the faint of heart these days. Write-downs are easier to come by than cheap commissions, and huge losses are more common than ice cubes in a fresh cocktail. And while you may need a cocktail if you own any of these stocks, calculating GAAP book value for these REITs will definitely cause any sober accountant to reach for the liquor cabinet.

Nevertheless, it pays to understand the confusion, as there are tremendous opportunities being created by the maelstrom in Mortgage REITs. Some of the confusion is being aided and abetted by the by the Financial Accounting Standards Board, the folks who create our beloved Generally Accepted Accounting Principles [GAAP]. They recently developed FAS 159 to help reduce this confusion, and it is being implemented as of this quarter by many REITs.

Historians say that if we are unable to learn from the past, we are condemned to repeat it. Economists, who study the dismal science, may simply believe that we are condemned. While I hold those who study these two influential and important social science disciplines in great respect, I like to embrace a more sanguine view.

Consequently, when I heard bond guru Bill Gross of PIMCO briefly mention a so-called “Operation Twist” last week, I was intrigued. The original Operation Twist was developed by the U.S. Treasury in 1961 in order to lower long term borrowing rates, in an effort to encourage investment and grow the economy, while simultaneously raising short-term rates to reduce pressure on the dollar. Essentially, it was an effort to purposely invert the yield curve. Thus the ''twist'' in Operation Twist. Part of the operation involved direct intervention in the market for residential mortgages.