Wednesday, July 18, 2012
Cap Rates Lower Than Advertised
REIT.com interviewed Paul Curbo, portfolio manger for INVESCO, about market conditions for commercial real estate. The article (and video) include a number of insights into the various sectors of investment real estate. What caught my eye was the discussion of cap rates and the examples he cited: apartments changing hands at 5% cap rates, and 4% in California. While the fundamentals are entirely different today than they were then, this pricing is reminiscent of the frothy markets 2006 and 2007. Curbo's observation that a development pipeline will provide immediate value add is true as long as pent up demand for units continues. At the rate that units are being built and mothballed construction is being restarted, that backlog will not exist for long.
Tuesday, July 17, 2012
Another Note Program Halts Interest Payments
Investment News has a story about Thompson National Properties (TNP) suspending payment of interest on a program that raised capital in 2008 and 2009, just as TNP was getting started. The program, TNP 12 Percent Notes Program LLC, was intended to provide working capital for TNP. The only assets of the program were loans to TNP and affiliates. TNP provided no credit enhancements or guarantees. If I remember correctly, investors are members of the LLC, and the LLC made the loans. Of course, an affiliate of TNP is the Managing Member of the LLC.
I don;t believe that investors have any immediate recourse, other than to remove the Managing Member, and install one that will act in their interests. That would take a lot of time and money, and if TNP's forecasts are accurate, interest payments would be flowing again.
On the other hand, Tony Thompson has faced a lot of adverse conditions, has worked hard to resolve them for the benefit of investors, and has made a lot of money for investors and himself along the way.
The comments on the article are very interesting. They reflect just how polarizing an figure Tony Thompson is. Tony has just as many fans as he does detractors.
I don;t believe that investors have any immediate recourse, other than to remove the Managing Member, and install one that will act in their interests. That would take a lot of time and money, and if TNP's forecasts are accurate, interest payments would be flowing again.
On the other hand, Tony Thompson has faced a lot of adverse conditions, has worked hard to resolve them for the benefit of investors, and has made a lot of money for investors and himself along the way.
The comments on the article are very interesting. They reflect just how polarizing an figure Tony Thompson is. Tony has just as many fans as he does detractors.
Monday, July 16, 2012
Now The Fed Is Getting In On The Action
I have mentioned before about the proposal to insulate money market funds from runs that would have an adverse impact on markets. The proposal would have money market funds either 1) have a cushion provided by the management firm, or 2) allow the NAV to float. Next, the Financial Stability Oversight Board stepped in to say that is the SEC didn't adopt the proposal, it would require the commission to enforce it..
Now, the Federal Reserve has stated its intention of using its bank regulatory powers to accomplish the same objective. According to Investment News, the Fed is considering reclassifying the funds provided by money market funds to a riskier category. this would make money funds a less attractive option for funding, possibly limiting the investment available to the money market funds. Of course, all would be well if the money funds would drop their opposition to the SEC proposals. Wink,wink, nudge, nudge, knowwhatImean?
Last time I said it's going to happen. Now it's time for money fund companies to figure out how they will comply. As a money fund with a floating NAV is not much of a money fund, I expect more than a few funds to announce that they will have the 3% (or so) equity buffer. Expect any fee waivers that these funds enjoyed to be dropped, and fees to increase once interest rates increase sufficiently to cover them.
Now, the Federal Reserve has stated its intention of using its bank regulatory powers to accomplish the same objective. According to Investment News, the Fed is considering reclassifying the funds provided by money market funds to a riskier category. this would make money funds a less attractive option for funding, possibly limiting the investment available to the money market funds. Of course, all would be well if the money funds would drop their opposition to the SEC proposals. Wink,wink, nudge, nudge, knowwhatImean?
Last time I said it's going to happen. Now it's time for money fund companies to figure out how they will comply. As a money fund with a floating NAV is not much of a money fund, I expect more than a few funds to announce that they will have the 3% (or so) equity buffer. Expect any fee waivers that these funds enjoyed to be dropped, and fees to increase once interest rates increase sufficiently to cover them.
Friday, July 13, 2012
Wells Foregoes Fee on REIT II
On June 29, The Rational Realist reported that Wells REIT II had announced that it will not pay to internalize its advisor. This is a big deal, as the internalization fee was the big payday for a syndicator, and it wasn't subject to such uncontrollable factors as performance. Wells Real Estate Funds is forgoing probably between $150 and $200 million.
This is not an altruistic move. Leo Wells is a very charitable man. However, he is very quick to tell you that Wells Real Estate is not a non-profit organization.
Nor is this an indication of some newfound backbone by the Board of Wells REIT II. REIT boards are filled from a good ole boy network, and Leo Wells is the definition of a good ole boy.
Forgoing the internalization fee is the second move that the wells organization is taking to address an issue tat is much bigger to Leo Wells: slumping sales. at its core, Wells Real Estate Funds is a sales organization, not an investment organization, not a real estate organization. Every decision is made through a lens pointed at sales trends. Wells Timberland's capital raise was an enormous disappointment. The raise for its Mid-Horizon Value-Added fund has been lackluster. Core Office REIT was on a run rate of about $1 million per day raising just $225 million through December 31, 2011 and $282 million through March 31, 2012. In May, Wells made wholesale changes in its senior sales personnel. Now, Wells II has reduced its fees.
What has not happened is the renunciation of internalization fees for the Core Office REIT. I guess Wells is hoping that the market will pick up the implication that no more internalization fees will be charged. Their market prospects would improve much more significantly if the Core Office REIT would just adopt that position.
This is not an altruistic move. Leo Wells is a very charitable man. However, he is very quick to tell you that Wells Real Estate is not a non-profit organization.
Nor is this an indication of some newfound backbone by the Board of Wells REIT II. REIT boards are filled from a good ole boy network, and Leo Wells is the definition of a good ole boy.
Forgoing the internalization fee is the second move that the wells organization is taking to address an issue tat is much bigger to Leo Wells: slumping sales. at its core, Wells Real Estate Funds is a sales organization, not an investment organization, not a real estate organization. Every decision is made through a lens pointed at sales trends. Wells Timberland's capital raise was an enormous disappointment. The raise for its Mid-Horizon Value-Added fund has been lackluster. Core Office REIT was on a run rate of about $1 million per day raising just $225 million through December 31, 2011 and $282 million through March 31, 2012. In May, Wells made wholesale changes in its senior sales personnel. Now, Wells II has reduced its fees.
What has not happened is the renunciation of internalization fees for the Core Office REIT. I guess Wells is hoping that the market will pick up the implication that no more internalization fees will be charged. Their market prospects would improve much more significantly if the Core Office REIT would just adopt that position.
Monday, June 25, 2012
Some Whispers To Improve The Optics
Forbes has a list of 89 business cliches. Just what we need: all of them gathered together in one place where they can multiply.
Friday, June 22, 2012
Exchange Traded Product Ripe For a Premium?
JPMorgan's Alerian MLP Index ETN (AMJ) has issued its maximum shares, according to a story in Investment News. As noted in the story, this turns the notes into a closed-end fund. Now, advisors can expect the note to trade at a premium to NAV, reflecting a very generous yield. However, that premium could just as easily and quickly disappear when oil and gas related properties fall out of favor. Or, JPMorgan could just register additional units which would eliminate the premium in one fell swoop, as happened with Credit Suisse VelocityShares Daily 2X VIX Short-Term ETN (TVIX). An opportunistic advisor would be looking for an alternative to AMJ and establishing a reasonable premium for exit.
Thursday, June 21, 2012
Absolute Return, Alpha or Something Else?
The Quest For Absolute Returns: Winning The Loser's Game, from the June 2012 edition of the Hedge Fund Journal (requires registration for a trial subscription), is the latest attempt to differentiate between Absolute Return and Alpha and how each is generated. He recounts the Charles Ellis' reference to tennis matches in describing the differences. Just as the highest levels of tennis is a Winner's Game (i.e. the winner being determined by the player who wins the most points), Alpha is generated by the managers who establish the most winning positions. In contrast, Absolute Return is a Loser's Game, determined by the player making the fewest errors (losing positions). The author describes the Absolute Return Manager as one who avoids cognitive errors and minimizes behavioral biases in his trading.
There are a lot of funds intending to generate Alpha calling themselves Absolute Return funds. As this article notes, one very good way to distinguish them is to determine whether they make money by identifying winning trades, or avoiding losing trades. Absolute Return funds put themselves in a position to avoid losing trades.
I have long maintained that Absolute Return strategies are not investment strategies in the traditional sense. Absolute Return strategies are not compensated for exposures to risk factors that we normally associate with investment performance: inflation, credit, equity, economic growth, interest rates. m Indeed much of the trading that these funds do is designed specifically avoid these market related risks. Instead, Absolute Return funds get compensated for performing a service for the market. Some, such as the arbitrage strategies, provide liquidity to the market, driving price discovery between and across markets. This is a dealer function, similar to the dealer described in the article. The goal of these strategies is to be (nearly) net neutral to market forces, while awaiting the markets to reprice the positions to equilibrium.
The other group of strategies provides insurance to the markets. The carry trade (borrowing short to lend long) is an example. Others include the Macro strategies, the commodities funds, the short sellers, and the options traders. They put on trades, often highly complex, to isolate a single element of risk for which they believe that they are compensated very handsomely.
Most of the strategies that I consider Absolute Return can not be executed in a mutual fund format, due to restrictions on concentration, short-selling, turnover, and a host of other techniques and vehicles. The funds out there claiming the distinction are alpha generators. They may be good at it, but calling a tail a leg does not make it one.
There are a lot of funds intending to generate Alpha calling themselves Absolute Return funds. As this article notes, one very good way to distinguish them is to determine whether they make money by identifying winning trades, or avoiding losing trades. Absolute Return funds put themselves in a position to avoid losing trades.
I have long maintained that Absolute Return strategies are not investment strategies in the traditional sense. Absolute Return strategies are not compensated for exposures to risk factors that we normally associate with investment performance: inflation, credit, equity, economic growth, interest rates. m Indeed much of the trading that these funds do is designed specifically avoid these market related risks. Instead, Absolute Return funds get compensated for performing a service for the market. Some, such as the arbitrage strategies, provide liquidity to the market, driving price discovery between and across markets. This is a dealer function, similar to the dealer described in the article. The goal of these strategies is to be (nearly) net neutral to market forces, while awaiting the markets to reprice the positions to equilibrium.
The other group of strategies provides insurance to the markets. The carry trade (borrowing short to lend long) is an example. Others include the Macro strategies, the commodities funds, the short sellers, and the options traders. They put on trades, often highly complex, to isolate a single element of risk for which they believe that they are compensated very handsomely.
Most of the strategies that I consider Absolute Return can not be executed in a mutual fund format, due to restrictions on concentration, short-selling, turnover, and a host of other techniques and vehicles. The funds out there claiming the distinction are alpha generators. They may be good at it, but calling a tail a leg does not make it one.
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