Wednesday, April 22, 2009

Bookkeeping: Restarting Some Commercial REIT Short Exposure

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It has been feast or famine for us in commercial real estate the past 10 weeks; we made some fantastic gains in February and took some egregious losses in late March and early April. Much of the chatter on the internets is HAL9000s across America (quant funds) took some massive hits in a very crowded (short) trade. This is an incredibly troubled sector but when too many people are at the party, the fundamentals don't matter for a while and some epic squeezes can happen.

I've decided to once again try my hand in some REITs - we have had a 5 basket short portfolio. 2 of those names are now at resistance (SL Green (SLG) and ProLogis (PLD) while the other 3 we hold in very small stakes are still above a key area (so the moving average is acting as support). So I am going to begin building these 2 names, and then the general index (which is the ETF IYR) with a 3% stake specific to that.

Any reader who has been around for a while knows my case against commercial real estate - we've done literally hundred+ posts. An amazing story in the Wall Street Journal about Atlanta... pretty much explains the horror that is (still) coming across this nation in CRE. Again, I ask you to drive around your neighborhoods and start taking a look very closely - you should be seeing a lot of "for lease" on office buildings and retail strips... this doesn't solve itself in months as the bulls would have you believe. Remember, we ALREADY have 6x more retail space per capita than any country on Earth. And we're still building...

WSJ: In Atlanta, Irrational Building Experience
  • A one-mile stretch of Atlanta's upscale Buckhead neighborhood shows why commercial real estate is emerging as an obstacle to pulling the U.S. economy out of recession. Separate developers in Buckhead are building four speculative office buildings at the same time with virtually no leasing activity. The 35 recent condominium projects will help give Atlanta a 40-year supply at the current sales pace.
  • The glut threatens to worsen the clobbering that many U.S. banks already are getting from nonperforming loans made to owners and developers of office buildings, shopping centers, condos and other commercial real estate.
  • At Bank of America Corp., first-quarter results announced Monday included a surge in the percentage of commercial real-estate loans that are nonperforming to 7.5% of the Charlotte, N.C., bank's total portfolio of such loans. In Buckhead, Bank of America financed two of the four speculative office buildings just steps away from each other, despite little evidence there was demand for more than one of them. (this is what your tax dollars are bailing out... great deals like this)
  • It also provided a loan for the Streets of Buckhead luxury retail development, now struggling as some retail tenants flee and go bankrupt. There already are two other luxury malls there. (2 luxury malls are never enough - more, more, more)
  • The slump in the commercial real-estate sector could be a drag on the economic recovery. While some of the Atlanta projects already are defaulting on loans, others won't start running into financial problems for months or years, with a crescendo of loan maturities starting in 2010.
  • "This is about as bad as it's been in modern times, and we haven't even seen most of the commercial damage yet," said Tom Bell, chief executive of Cousins Properties Inc., the Atlanta developer of one of the four towers. (thankfully his trade group is successfully lobbying the Federal Reserve to put your tax dollars at risk for his decisions. I'm sure it will work out in the end Mr. Bell - for you anyhow) He, like his three competitors, is bullish about his own project over the long term. (and why not? the tax payer is here to help him) [Apr 17: Surprise Surprise - Federal Reserve Succumbing to Commercial Real Estate Lobbying]
  • ... (for the next tower) Bank of America provided the $116 million construction loan.
  • ... (for the next tower) Bank of America again provided the financing: $108 million for the office portion of the mixed-use project, which also includes condominiums. (again, this is where your tax dollars are going - thanks BAC)
So we have 4 (count em!) spectacular buildings created in the craze. Tons of new square footage added to Atlanta in one neighborhood. What do we have to show for all 4?
  • The Cousins building is the only one of the four to find a tenant: a 50,000-square-foot lease with Firethorn Holdings LLC, a mobile-banking company.
So let's review - 4 buildings, 3 completely empty. 1 has... 1 tenant. However, green shoots have been sighted on the premises therefore you know what to do ---> Buy commercial real estate stocks!
  • Prospects that the Buckhead buildings will fill quickly are dim. Buckhead relies on financial-services companies as its best tenants. Those jobs are disappearing. What tenants they do attract are likely to poach from existing landlords, hurting the overall market.
While I'm still very net positive on the market in terms of positioning I am uneasy having such little short exposure. If we break north of S&P 875 I'll change my tune but until then I want to have more than 8%ish short exposure. I'm thinking we are in a quite large range between upper S&P 700s and lower S&P 900s for quite a few weeks to come as we battle between strands of economic data that say "good times" versus "not so good times" - but the whipsaws day to day continue to be relentless. It would be nice to start putting in a series of days of +/- 0.5% on the indexes so individual stocks stop moving all in concert. For now still positive in a general fashion north of S&P 840 but I am seeing a lot of tired charts where we no longer are reaching highs reached in the past two weeks... this has to be corrected soon by breaking over those levels, or there is a risk of correction.

Today's hot sector are retail and restaurants as (yawn) the consumer is back. With Capital One Financials (COF) earnings out of the way (another huge short squeeze) I've added back some short exposure there along with Macy's (M) and Bed Bath & Beyond (BBBY). And while we outlined earlier today all the really important reports from yesterday that touch on the economy, tonight all that will matter is the Apple (AAPL) earnings economy. As always they will beat, underpromise (lowball) next quarter, and then beat it again in 90 days. We know that - all we don't know is how the market reacts to the same old script.

p.s. is it me or is there a strange dichotomy watching gun stocks break out while we talk of green shoots and recovery? Hmmm...

Short IYR, SLG, PLD, COF, M, BBBY in fund; no personal position as of yet

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