REITBull

The Great REIT Unravelling Begins? Simon Property Group Defaults on Loan

Just for the record (Source: SeekingAlpha SPG transcript):

"We have a 25% carried interest in that property behind significant preference for what I will call the true economic owner; there are two other partners in that deal. We have no invested capital in that project. We were working toward a refinance kind of as the property manager of that asset.....we are actually trying to work with the true economic owner and the lender to figure out how to come up with an acceptable alternative to extend the maturity date and give us the time to figure out how to fill the space....Both the true economic owner and the lender have expressed an interest in us maintaining our role in that, even though we don’t get any cash flow and the management fee is de minimus in terms of what we’re doing. So, we are actually trying to be an honest happy broker to figure out how to make and give both of those lender and the borrower the ability to maintain the status quo for a better environment down the road. So, that is the source."
-David Simon

The Great REIT Unravelling Begins? Simon Property Group Defaults on Loan

This headline is very misleading and irresponsible, in my opinion. The Source at Westbury is a joint venture in which Simon Property Group only has a 25.5% ownership interest for operating rights. Keep in mind that this a company that has $774 million in cash and equivalents as of the end of 2008.

Source: SPG 10K

Looking for the REIT Bargain

Thanks H.J.

Looking for the REIT Bargain

Thanks for the feedback H.J.

My reason for being more bearish on Residential REITs is that as the price to own comes more in line with renting, these Rez REITs may loose many of their longer term renters as owning becomes more attractive. These renters can be replaced by those who are not in a position to buy, but at lower rents than the exiting tenants. These apartments will also have to compete with single family homes being rented out, adding additional pressure to rental income.

I believe much of the carnage in the residential markets was caused by the high number of residential loans that were securitized. Most commercial mortgages were kept as portfolio loans allowing greater flexibility for modifications and extensions.

I agree that rising vacancy rates will push down the value of CRE. The more important question to me is, which will recover sooner? Rez or Commercial? It is going to take some time to burn through the excess supply of residential real estate (option arms are still resetting and people are still walking away from underwater homes). On the other hand, I am not confident that the consumer will continue to maintain the current savings rate. Many consumers are not very disciplined when it comes to savings over the long term. As they begin to spend money at the malls, this will lift the industrial REIT's, Retail REIT's and eventually the office REIT's as more jobs are added back. Once this happens the jobs picture will look better and people will feel comfortable purchasing homes again (which will reduce supply and improve pricing power for Rez REITs). That's just my take and I don't assume that my opinion is any better than the next guy's.

I still agree with many of your analyses as you are taking a technical approach and you have demonstrated that in all likelihood many REITs may have been oversold. Thanks

Looking for the REIT Bargain

H.J.,

I have become a fan of your articles due to the fact that you seem to do a very in-depth analysis and support your opinions with data. I'm going to take a look at the DEI 10K myself. If you are taking requests, I would love to see an analysis on commercial versus residential real estate from a macro standpoint and why you feel that residential will recover sooner. I'm not trying to challenge your opinions, I just like to question my own (I am more bullish on CRE then Residential).

Thanks

Colonial Properties Trust: Value in the Real Estate Apocalypse

Don't get me wrong, I do think there is money to be made in Residential REITs and the market has probably oversold them. However, excess residential supply and low barriers to entry in these markets could put pressure on Residential REITs for some time. In regards to CRE, I believe people will begin spending money at the malls before they start to purchase homes again and therefore reducing residential supply.

Again, these views are just from a macro standpoint and I do not mean to come across as being bearish on CLP. Many of these residential REITs probably have been oversold.

On Mar 12 07:36 AM H.J. Huneycutt wrote:

> My problem with commercial REITs is the market is too unpredictable
> for a lot of them. With a residential REIT, you know their occupancy
> rate will stay within a certain range. Commercial REITs could get
> hammered very hard if one tenant is having financial difficulties
> and I think the retail environment is going to be dismal for the
> next few years. Plus, some of the commercial REITs I'm looking at
> haven't even taken much in the way of write-downs, which seems unrealistic
> to me given how far real estate values have fallen.

Colonial Properties Trust: Value in the Real Estate Apocalypse

Hi H.J.,

It looks like you have done a lot of research on this. I admit that I know very little about CLP. I'm a little nervous about residential REIT's right now though. My main concern is around supply and demand fundamentals and I would be worried that it might take longer than expected to overcome these headwinds (not specific to CLP but Residential REIT's in general). I actually believe commercial REIT's (retail, industrial) will recover sooner. Anyway, you provide a very good analysis to support your opinion. Thanks