Thursday, April 30, 2009
Wednesday, April 29, 2009
MGM Mirage and Dubai World have reached an agreement with their lenders to continue to fund the construction of the massive CityCenter development in the heart of the Las Vegas Strip. A CityCenter implosion would have devastated the Las Vegas economy. If this transaction is a harbinger for real estate finance it is good for all of real estate. On the other hand, it could also be a case of "too big to fail."
I heard about accounting issues at Grubb related to NNN's TIC business last week, and now here it is in today's Wall Street Journal's Plots and Ploys column. There is the entire section:
Will Grubb Report?
Two big, commercial real-estate brokerage firms report earnings this week. Will a third?
Grubb & Ellis Co., saddled by a 2007 merger with asset manager NNN Realty Advisors, has delayed its earnings filings twice in recent months. Investors will find out by Thursday if a third delay is coming. (Jones Lang LaSalle Inc. and CB Richard Ellis Group Inc. report their results this week.)
The cause for the reporting delays are accounting errors related to how NNN booked revenues related to its or tenant-in-common, or TIC, products before the merger. (Emphasis mine.)
This will be another interesting 10-K to read.
Tuesday, April 28, 2009
Saturday, April 25, 2009
I am reading Dividend Capital Total Realty Trust, Inc.'s 2008 10-K. It is another dreary read. I've more to read, but its real estate securities are in trouble. In 2008 Total Realty Trust wrote down $192.7 million of its real estate securities (which Total Realty Trust classified as "other-than-temporary impairment charge" on the financial statements). The original face value of the securities was $246.50 million, meaning that 78% of the REIT's original investment was eliminated last year. Looked at another way this is approximately 12% of the amount that Total Realty Trust has outstanding in investor share capital (159 million shares at $10 per share, or $1.6 billion in outstanding investor capital (I made no adjustment made for any dividend reinvestment shares that would be priced somewhat lower than $10 and would raise the percentage that has been lost)). The real estate securities included CMBS and CRE-CDO (commercial real estate collateralized debt obligations). Total Realty Trust has another $106 million of real estate loans that includes mezzanine loans and B-notes (not sure what this means) that did not have any impairment charge in 2008.
Despite the write-off, Total Realty Trust is still selling shares to new investors at $10 per share. This is not unique to Total Realty Trust. Other non-traded REITs are selling shares at $10 per unit and have assets that have declined in value (pretty much any real estate asset bought before 2008). I have calculated some potential Net Asset Values for the Total Realty Trust. I am not sure whether I am am going to post them, but even using a low cap rate, the NAVs I calculated are much less than $10 per share.
Friday, April 24, 2009
What state has had the most bank failures since the credit crisis started in the summer of 2007? My first thought was that the states hit hardest by the housing downturn - California, Florida, or Nevada - would have the most failures. I did not guess the winner - Georgia. Eleven banks have failed in Georgia since the summer of 2007. Since the crisis started there have been fifty-three bank failures and California has had eight, Florida four and Nevada five. Not sure why Georgia has had so many failures.
Wednesday, April 22, 2009
I am reading the Behringer Harvard Multifamily REIT I 10-K, and it is an interesting read, to say the least. Before I get too far into this post, here is an excerpt from the Behringer Harvard website on the REIT's objectives:
Reading the above information you'd think that the REIT would acquire quality apartment complexes that generate enough cash flow to allow the REIT to pay distributions to investors. But the last sentence needs to be read carefully because it appears to be the key sentence: Development investments may include making an equity investment in the project or making a mezzanine construction loan with a right to acquire equity in the project.
Behringer Harvard Multifamily REIT I, Inc. is a real estate investment trust created to primarily acquire a portfolio of high-quality multifamily communities, including conventional multifamily assets, such as mid-rise, high-rise, and garden-style properties; age-restricted residences (typically requiring tenants to be 55 or older); and student housing.
Behringer Harvard Multifamily REIT I, Inc. is for investors seeking:
- Capital preservation
- Capital appreciation
- Current cash distributions
- Attractive total returns
- Portfolio diversification
- A mid-term holding period
- REIT Strategies–The REIT will focus on acquiring a blended portfolio consisting of core, stabilized, income-generating assets; assets for repositioning, renovation, or redevelopment to core status; and development assets for stabilization to core asset status. Development investments may include making an equity investment in the project or making a mezzanine construction loan with a right to acquire equity in the project.
Multifamily has made ten apartment investments and nine are developments. Here is how the 10-K describes the investments:
We have made ten separate investments in multifamily BHMP CO-JVs. Nine of the properites are in development projects and one is an operating property. As of December 31, 2008, the BHMP CO-JVs have made ten mezzanine loans related to the development projects and seven equity investments in Property Entities, with equity purchase options for all Property Entities.That is a lot of development, and a lot of projects that are not generating rental income. The properties are in Texas, Virginia, Colorado, Maryland, Nevada and Florida. The mezzanine loans look like they have options to convert to an equity position in the project entities. The mezzanine loans look like they are at interest rates of 9.5% to 10%, with maturities before the end of 2012. (These seem like low interest rates. A mezzanine loan could generate interest income of 10% to 20% or more, and involve points of an additional 2% to 4%. Maybe the REIT took a lower interest rate due to its equity option.)
All the REIT's investments appear to be with an affiliated entities. One development is in Florida and two are around Las Vegas.
This is a complex deal. The affiliated transactions, European money partner and third party developers add to its complexity. It is going to take me several posts to wade through it all, but I wanted to get the analysis started.
A couple of final points. I am not sure where the cash flow is coming from and whether all the mezzanine debt is paying current income (v. deferred interest). I would not be surprised if some of the loans reserve interest payments for a certain period. The REIT is developing properties in a tough environment, especially in markets like South Florida and Las Vegas. There are legacy issues, too, as most of the REIT's projects were started (and budgeted) before 2008. This is an area for investigation as the values may have changed.
The REIT is not coming close to covering its dividend. It was 6.5% and only covered 58% by FFO according to the 10-k, but for some reason the dividend was raised to 7.0%.
More posts will be coming over the next few days.
Thursday, April 16, 2009
General Growth Properties filed for Chapter 11 due to the weight of $27 billion of debt. It is the largest property bankruptcy ever. General Growth has been struggling for nearly a year to refinance its debt. It is the second largest mall owner in the US with over 200 properties in 44 states. A fire sale of General Growth's mall assets is not expected.
MGM Mirage's fate took another twist today as Carl Ichan and Oaktree Capital Management, owners of hundreds of millions dollars of MGM Mirage debt, have told MGM Mirage that it should file for bankruptcy. Here is an updated article with more detail than the first link. According to the article, Kirk Kerkorian, 53% owner of MGM Mirage valued at $900 million, would have his equity wiped out in any bankruptcy filing. Kerkorian's stake in MGM Mirage was valued at $14.9 million at the end of 2007. The battle is still forming and the objectives of Ichan and Oaktree, who are not working together, are not clear. There is more at stake here than the huge egos of Kerkorian and Ichan. The $8.6 billion City Center development, which is the root of MGM Mirage's financial problems, is important to Las Vegas and other casinos. It is a huge project along the Strip. If this project were to go dark, Las Vegas' recession will get worse and last longer.
Sunday, April 12, 2009
MGM Mirage's City Center looks like its original partner is throwing it a life line. Here is an article from the Wall Street Journal. Let's see if the two can work out a deal. It is me or does the picture of Kirk Kerkorian make him look like a Seuss character, maybe The Grinch or the guy from Green Eggs and Ham. "Say, I like green money from Dubai, I really, really like green money from Dubai."
Thursday, April 09, 2009
I went back to re-read and post about this article. I saw that the article is dated April, 1, and almost thought it was an April Fools story. But it is not. The story is amazing, and I can't get it out of my head. A partnership between two outfits called Normandy Real Estate Partners and Five Mile Capital Partners acquired the John Hancock Tower in Boston for $20 million. The partnership acquired the senior portion of $700 million in mezzanine debt for $20 million and and agreed to take over the exisitng first mortgage of $640.5 million.
The property was acquired in 2006 by private equity firm Broadway Partners for $1.3 billion. (Why is it called private "equity" when Broadway used $640.5 million of a first mortgage and $700 million of mezzanine debt and no apparent equity.) When Broadway could not make the mezzanine payments, Normandy and Five Mile foreclosed and were handed the keys while assuming the exisitng first mortgage. So, the way I read this article, Normandy and Five Mile acquired a building that sold for $1.3 billion two years ago for $20 million. I want to be a buyer of mezzanine debt. (If figure that if the Hancock Tower has lost 30% of its 2006 value, Normandy and Five Mile still have $250 million in net equity in the property, acquired for $20 million.)
Monday, April 06, 2009
MGM Mirage is attempting to sell two of its non-Las Vegas casinos to raise cash. One is in Detroit and the other is in the south along the Mississippi River. It does not appear that Australian gambling magnate James Packer and Los Angeles-based Colony Capital are going to invest in MGM, at least at this time. I find this story fascinating because of the size of MGM's City Center development.
Sunday, April 05, 2009
IMH Secured Loan Fund, LLC filed its 10-K last week and it's not pretty. I have not read the entire document, but anyone that bought or sold shares in this company should invest the time to wade through the 10-K. There are many points in the 10-K that concern me and that I could reference, but I don't want to take important information out of context. I will, however, note that IMH posted a non-cash charge of $323.2 million in 2008 to reflect the fair value of its portfolio. This amount was nearly half the company's loan assets. There are 'going concern' disclosures for the company and its manager. Previous company filings, but not the 10-K as far as I have read, had the follow motto prominently displayed:
Rule 1: Don’t lose the money.
Rule 2: Don’t lose the money.
Rule 3: Don’t forget Rule 1 and Rule 2.