Monthly Archives: August 2009

The sorry state of REITs in America

For a no-nonsense explanation about the problems faced by real estate investment trusts from across the pond, look no further than ContrarianProfits. Unless, of course, this sort of writing scares you off.

If you carefully consider the combined statistics on commercial mortgage debt, equity, and future rental cash flows, you come to the conclusion that the value of many REITs is permanently impaired. Even if a core group of higher-quality REITs escapes bankruptcy, their equity will still be impaired because lenders will only refinance properties on very tight terms: strict covenants, high interest rates, and requirements of hefty equity infusions into upside-down properties. This is a transfer of wealth from REIT shareholders to creditors. This wealth transfer is occurring through many channels, but the most important one relates to claims on future rental cash flow, which will be bleak regardless of who owns it:

  1. Creditors will take a higher share of those rental cash flows via higher interest rates
  2. Of the cash flows that trickle down to shareholders, they will be divided up among more and more REIT shares as we see more and more dilutive secondary offerings

This unprecedented collapse in commercial real estate fundamentals means that for the next few years, you can throw out the analyses that rely on “cap rates” to value REITs. Distressed sellers and vulture buyers will make up the bulk of commercial real estate transactions for at least the next few years. Equity looking to invest will be scarce, so it will demand very low prices and high potential returns to invest.

Between now and 2013, $1.6 trillion in commercial real estate debt will mature. Bankers know this, so they’re going to keep conditions very tight for any refinancing that they grant. Plus, a hefty chunk of this debt is held by commercial mortgage-backed securities (CMBS), in which the lenders cannot sit across the table and renegotiate with stressed borrowers…

Not fun reading, unless, of course, you’re a glutton for punishing distressed owners.


Forbes praises Poland’s recession-proof economy

You don’t get unadulterated praise for whole countries these days, but Forbes is running an encouraging piece about Poland. The spur for this were the recently released economic numbers which showed the country grew 1.1 % in the second quarter of the year, after a 1.9% showing in the first quarter.

That’s not great by pre-recession standards. But it puts Poland, which didn’t binge on debt during the credit boom, well ahead of other countries that joined the European Union along with it in 2004.

To say nothing of the rest of Europe…

ECM announces 6-month figures for 2009

They’re not terribly pretty, but at least they’re out there: ECM has released its first half results for 2009.

The highlights (or low lights…)

-Net rental and related income increased by 56.5 % to EUR 7.2 million (H1 2008 restated: EUR 4.6 million )

-NAV decreased by 19% Y-t-D to EUR 112 million (12/31/2008: EUR 139 million); undiluted NAV per share stood at EUR 16.36 (12/31/2008: EUR 20.28)

-Net operating loss before net financing results of EUR -8.1 million (H1 2008: EUR -3.9 million loss)

-Reported net loss of EUR 18.56 million (H1 2008: EUR 19.9 million loss)

-Total assets decreased by 23% to EUR 518.9 million (12/31/2008: EUR 677.9 million)

-Total equity decreased by 21.5% to EUR 74.8 million (12/31/2008: EUR 95.3 million)

The link.

Confirmed CEDEM speakers…

In case you haven’t been getting our updates, here’s a list of speakers we’ve confirmed for CEDEM CEE 2009, which takes place at the Prague Marriott on Sept. 23 – 24. If it’s too small to read, click on the list (or here) and you’ll go to a more readable version.


US investors giving Europe a miss

The Wall Street Journals notices that US investors have fled Europe’s real estate. Seems fair to say that so has just about everyone else, but it’s an interesting read nonetheless.

In the first half of this year, U.S. investors spent €407 million ($581.7 million) on commercial-property assets in Europe, down 98% from the peak of U.S. involvement in the first half of 2007, when Americans invested €20.7 billion in European property, according to a report by property-services group CB Richard Ellis.

Of course, it also notes that back in 2007, US investors made up 16% of all transactions, 9.1% in 2008 and just 1.6% over the first half of 2009. Ok – fair point. All of this on the back of CB Richard Ellis numbers, by the way.


US hotel sector’s unexplained strength

Shares in US  hotel REITs have been rising recently, writes the Wall Street Journal, despite some of the worst revenues people can remember.

The stocks of hotel companies that are structured as real-estate investment trusts were up 11% during the past three weeks and 34% since the beginning of the year, according to the National Association of Real Estate Investment Trusts. Such gains far outpace the 6% year-to-date gain for all REITs and the 12% rise by the Standard & Poor’s 500-stock index.

Host Hotels & Resorts Inc., a REIT that owns 113 hotel properties, recently lowered its 2009 earnings outlook, but its stock is up 26% since late July. Marriott International Inc., which manages and franchises more than 3,200 hotels world-wide, in July reported dour second-quarter earnings and said revenue per room in North America would likely decline 20% to 23% during the third quarter. Yet its stock has risen 13% since then and closed at $24.69 Friday.

So what’s going on? Optimists say hotel share rise first in any recovery, and point to hotel groups who are doing the mature thing and disposing of debt-laden assets. Pessimists, meanwhile, warn that fools rush in. Chris Woronka is not an optimist.

“You have some investors that weren’t invested…at all. And then these stocks moved and they had to play,” said Chris Woronka, an analyst at Deutsche Bank. “This isn’t a basis for a sustainable rally, and that puts the stocks in this sector on shaky ground.”

Weak residential sales in Bucharest

Colliers has supposedly released a report in which it records just 515 new flats being sold in the first half of 2009. That’s an 83% decline compared to 2008, for those who are counting. If those kind of numbers seem weak (and they do), then how about the fact that the same report says that 6,700 new units will be completed by the end of the year? Can’t help thinking something’s gotten lost in translation…