REITBull

One Trillion Dollar Commercial Real Estate Time Bomb Now Ticking

Thanks John.

I am not an accountant but my understanding is that they do have to mark to market their development pipeline and any land held for sale. Also, if a REIT provided a loan to another company, this would be marked to market as well.

You are right that dividend cuts have effected the value of IYR. My belief is that any new investors to IYR will have low expectations in regards to dividends and will price in further dilution in the underlying stocks. IYR used to attract dividend oriented investors, but with the creation of SRS and URE, IYR seems to have become more attractive to shorter term investors due to its volatility. I wish I knew where it would be at the end of 2009. My best guess is that it will stay within a range of $30-$40. My plan is to hold for 3-5yrs. I don't see a lot of downside potential as IYR has been rebalanced with some of the better capitalized REITs.

I really do not know enough about the stress test to be able to predict its impact on REITs. GGP ran into trouble due to maturity defaults. I do not know all the details on this bankruptcy. But it is my understanding that the bondholders pushed GGP into BK, not the secured lenders. The portfolio lenders may be more open to extensions than securitized lenders (due to the constraints of REMIC).

In light of what happened to GGP, many of these REITs are paying down their revolving lines of credit through these equity offerings. If a REIT cannot refinance a loan before the maturity date, they can tap the revolving line of credit to avoid maturity default. Some of these lines of credit are upwards of $1 billion. Certainly not an ideal position, but it gives them some flexibility and time to sell or hold until financing conditions improve. GGP did not have this option.

Sorry for writing a book here. I agree their is some short term pain that still lies ahead. I'm trying to get ahead of the crowd by looking out 3-5 yrs from now.

One Trillion Dollar Commercial Real Estate Time Bomb Now Ticking

"So when do the REIT's reflect true appraised value rather than the dream values REIT managers have been relying on Mr. "REITbull"? Will this be part of the stress test? How will they continue paying those high promised dividends? Will they pay if with additional stock sales to new investors in a Ponzi scheme?"

john,
This statement seems to imply that REIT assets are valued on the books using market value accounting. The truth is that most equity REITs use historical cost accounting to value their hard assets. My apologies if I have misinterpreted this part of your statement. These equity offerings are a legitimate means of raising capital. An investor who buys stock knows that dilution part of the risk of ownership. The premise of REIT offerings being a Ponzi scheme is based on an assumption that the accuser knows more than the investors purchasing the equity. You know what they say about assuming.

One Trillion Dollar Commercial Real Estate Time Bomb Now Ticking

Many of these conclusions in Tyler's piece are correct today. However, it is impossible to tell what the LTV's and DSCR's will be in the coming years. Any analysis being done after a sharp move in value needs to be taken with a grain of salt. A year ago all I was reading about was oil going to $200 and how we would never see it fall below $100 again. CMBS will return in some form once the decline in values of CRE create enough speculative interest. This should happen shortly after a period of price discovery from distressed sales. This will not be a silver bullet but pension funds, life insurance companies and foreign investors will be looking to invest in hard assets again once the dust settles. Consumers will not maintain the current savings rate (budgets are like diets, noone sticks to them). I am not smart enough to pinpoint the catalyst that will revive CRE, but I am confident in the real estate cycle playing out over the long term.

Disclosure: I'm long REITs