Philip Blumberg Blog

U.S. REITs Make Significant Gains

According to a report from the National Association of Real Estate Investment Trusts, REITs have gained over 5 percent through February.  "With a long-term recovery in real estate valuations ahead, there are good prospects for total returns for REITs," says Michael Hudgins, VP and global REIT strategist at JP Morgan Asset Management.

Ron Kuykendall of NAREIT suggests that the answer may lie in the fact that "investors aren't buying today's fundamentals as much as what they think tomorrow's will be."  He further belives that publicly raised funds are now being used to acquire properties from private side owners who were not able to tap into public equity markets are a contributing factor to this heightened rebound.

Dr. Sam Chandan of Real Capital Analytics concurs:  "The best-positioned REITs are facing the same general set of challenges in managing lower occupancy and rents as the rest of the marketplace.  But these REITs have also been very successful in raising capital in the public markets over the last few quarters."

For more news and information visit Blumberg Capital Partners.

MBA Report Shows 3Q Commercial Performance Falls in Weakened Economy

According to the Mortgage Bankers Association's (MBA) Q3 2009 Commercial/Multifamily Mortgage Delinquency Rates report delinquency rates continued to increase for most commercial mortgage investor groups. "Commercial and multifamily mortgages continued to feel stress in the face of the weakened economy," said Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research. "The deterioration in commercial and multifamily loan performance is generally in line with what is being seen in other parts of the economy, with loans backed by commercial properties continuing to perform far better than construction and development loans."

Based on the unpaid principal balance of loans (UPB), delinquency rates for each group at the end of the third quarter were as follows:

• CMBS: 4.06 percent (30+ days delinquent or in REO);
• Life company portfolios: 0.23 percent (60+days delinquent);
• Fannie Mae: 0.62 percent (60 or more days delinquent)
• Freddie Mac: 0.11 percent (90 or more days delinquent);
• Banks and thrifts: 3.43 percent (90 or more days delinquent or in non-accrual).

"The market is going to take a hit on the CMBS side, and the mutual funds and insurance companies are going to have some good opportunities in 2010," said Carla Gazzola, executive vice president with Santa Ana, CA-based RiverRock Real Estate Group in a CoStar article. "Not everyone will like the price, but properties are going to start trading. The pipeline of money that's available is stunning."

For more news and information visit Blumberg Capital Partners.

Sale of Half of Grand Central Square in NYC

SL Green Realty Corp., a REIT focused on Manhattan office properties, has entered into a sale-purchase agreement to sell 49.5% interest in 485 Lexington Avenue to a joint venture partnership comprised of Herzliya, Israel-based Optibase Ltd. and Gilmore USA LLC. The JV, Mazal 485 LLC, will take ownership of nearly half of Green 485 JV LLC, the entity designated as owner of 485 Lexington (also known as Grand Central Square), in exchange for providing SL Green with approximately $20.8 million, as well as a loan of $20 million according to a Commercial Property Executive article.

The transaction results in an implied asset valuation of approximately $504.2 million, or $547 per square foot, and includes $450 million of existing debt, which will remain outstanding. The implied cap rate of this transaction is 6.25%. SL Green CEO Marc Holliday commented, "This is a first, but significant step towards the sale of interests in 485 Lexington Avenue. If ultimately approved, the transaction would demonstrate that the Midtown Manhattan office market continues to stand as one of the world's top locations and that investor interest is once again on the rise."

SL Green originally acquired the 921,000 square foot office tower in 2004, and immediately embarked upon a $90 million capital repositioning program which included window replacements, installing a new lobby, replacing retail storefronts, and upgrading corridors and elevators. The property is currently 96.8% occupied with tenants including Citigroup and The Traveler's Indemnity Corporation which, together, occupy half the space.

For more news and information, visit Blumberg Capital Partners.

REIT Secures 16-Property Portfolio in $162M Cash Deal

Grubb & Ellis Healthcare REIT (to be renamed Healthcare Trust of America) has purchased a 16 building portfolio from Greenville Hospital System (GHS) in a $162M cash deal, or approximately $189 per square foot. All 16 properties are within the Greenville, South Carolina metropolitan area and total over 855,000 square feet of medical office and related space. Greenville Hospital System will continue to occupy approximately 83% of the portfolio under a long-term lease arrangement. The deal is expected to close by September 15.

"We are proud to enter into a strategic partnership with GHS," said Scott D. Peters, chief executive officer and president of the REIT. "This major transaction is part of a strategic long term relationship. It provides us with high quality performing assets, and in addition provides us with the opportunity to develop and/or acquire additional medical buildings as Greenville expands its first class health system."

"GHS has a significant market share, it has 70 percent of its market, so it's a dominant provider and that will allow us to go forward with new real estate developments in the future," Mark D. Engstrom, executive vice president for acquisitions, told CPN. "We'll be in a position to help them deliver those new developments as they need them."

For more news and information, visit Blumberg Capital Partners.

Thoughts on Starwood's $500M IPO

Barry Sternlicht is starting a mortgage REIT in a time when credit is badly needed to restore market liquidity.
Financing mortgages was the original purpose of the REIT structure in the 1970's, until they got in trouble with a wave of too much lending with poorly underwritten loans and lax lending policies.

Sound familiar?
..... it should, as that's what happened again in the late 1980's when relaxed Savings & Loan regulation and policies promoted large scale over building leading to the worst commercial real estate market downturn until.......today, once again fueled by too much debt made possible by another "new" idea in capital flows to real estate: securitized debt in the form of RMBS/CMBS.

This new innovation in the debt markets, which provided high leverage at low rates, without recourse or risk to the borrowers, required other non-securitized loan providers, such as commercial banks, to be competitive and keep up or drop out, further rapidly expanding credit.
In fact over the last 5 years over $2 trillion in commercial real estate loans were made.
This fueled record and unsustainable pricing.

As the reaction to the overly abundant credit, initially in the sub-prime residential market, spread to other sectors, in the form of credit market contraction, a price/value decline was set off.
This drop in values further exacerbated the credit contraction, quickly becoming a hard credit freeze.

Lack of credit has also dried up capital for the purchase market, currently with transaction volumes at their lowest level in decades.
With the credit freeze comes the lowest level of new loan originations and a looming crisis in the debt markets for acquisition or refinance.
And an opportunity to selectively and prudently introduce new lending.

Historically, its almost always increased capital flows that induce the major crisis in real estate, not recessions.

And the re-establishment of prudent, patient capital flows that cures it.

When capital flows to real estate dramatically increase its often debt, abundant cheap debt, that starts the cycle.
With yields, or more accurately projected yields, "rising" as the positive effects of leverage are felt - equity starts to pour in.

A predictable cycle, that stops only when the effects of over-levered inflated investments are felt.

Those effects are usually in the form of too much capital fueling over building with eventually insufficient demand to keep up (eg the residential markets today),
or as we are now experiencing in commercial real estate, over levered, over priced acquisitions requiring debt and rental structures that are unsustainable.

Because real estate is a lagging re-actor (due primarily to the long time lag in development and the lease renewal lag in commercial assets) the supply/demand reaction is delayed, and the imbalance becomes dramatic.

So does the crash - typical of real estate.

These cyclical problems and solutions are very similar across time.
So in this environment we should again expect applications of old ideas or new twists on old structures.

Barry Sternlicht is a very bright and experienced innovator to real estate structures and I'd give respect to his mortgage REIT direction as one means of restoring capital flows to real estate.

Blumberg Capital Partners in the News

Blumberg Capital Partners was recently featured in a CoStar Group article titled "REIT Outlook '09: Survival of the Fittest (And Most Liquid)". An excerpt:

An analysis of real estate values, leasing and vacancy trends by Coral Gables, FL-based investment fund manager Blumberg Capital Partners shows that maturing debt obligations will come under even more stress in 2009, with leasing rates poised to drop an additional 20% to levels not seen since 2002, and with office vacancies potentially rising to 25% by the end of the year. The nation's office market could take until 2011 to stabilize, the analysis shows.

The New York City and Los Angeles markets are expected to be among the hardest hit, with Washington, D.C., and Northern Virginia likely to fare better, according to the Blumberg analysis.

"Some cities are holding up in terms of occupancy levels, including places like Houston, which has been relatively resilient due to the energy markets," said Blumberg. "However, most of the major hubs of commerce nationally are reporting alarming increases in available office space, which should lead to severely falling leasing rates in cities like New York, Chicago, Los Angeles and Phoenix."

To read the full article, click here.

Five X Securities Enters Market with $1B REIT Fund Planned

A former executive at NFP Securities has created a new real estate securities firm, Five X Securities, with the intention of distributing commercial real estate opportunities to high-net worth individuals. The firm’s plans include the launch of a $1 billion, non-traded REIT, as well as the launch of a $250 million private equity fund that, when levered, would have at least a $500 million purchase power, David Young, principal and CEO of the company, tells GlobeSt.com.

"We fully intend to identify investment opportunities and craft institutional quality deals of the type previously unavailable to individuals," Mr. Young said. "These deals will feature low fees and an alignment of interest between the sponsor and the investor. And, it is our intent to distribute to high net worth individuals. At the same time, we will recruit top-flight institutional quality sponsors to augment our planned growth curve."

Five X has signed a multifamily company real estate investment and operating company, Oakton-based Mission Residential LLC, as its first client. Mission Residential owns and manages 30 apartment communities in Atlanta, Dallas, Nashville, and Charlotte, Raleigh and Greensboro, N.C.. Five X also hopes to ferret out opportunities in other real estate sectors, including industrial and office. Before his tenure at Austin, Texas-based NFP Securities, Young spent eight years in New York City, first as president at New York Life Insurance Co. and then as CEO of NY Life Securities and Eagle Strategies. The University of Chicago-trained lawyer also taught insurance law at the Cardozo Law School and New York Law School.

For more real estate news and information, visit Blumberg Capital Partners.