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Neuberger Berman Real Estate Se Message Board

  • chrisanja chrisanja Jan 18, 2008 5:18 PM Flag

    What will NRO do now?

    Are they asking shareholder for ideas?

    Could they close up shop and distribute all proceeds - sounds like they are not thrilled about continuing the business.

    Obviously not a lot of posters here.

    What can / will happen?

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      Easy monetary policy should be an immediate boon to REITs now that they can refinance at much lower rates, thereby increasing FFO. I hope management takes advantage of the opportunities to swap high Price/Book REITs with low Price/Book REITs with strong balance sheets/FFO. The ability to refinance and raise cheap capital to buy properties for pennies on the dollar is much better now.

      Whereas residential real estate was probably selling at a 100% premium in 2006 adjusted for inflation, commercial real estate premiums were probably closer to 15% - 20% based on REIT buyout data from the first half of 2007.

      http://www.speculativebubble.com/images/homevalues1.gif

      Commercial REITs were much smarter about price, leverage, and cash flows than residential real estate investors who ignored the economics of the deal (negative cash flow) in pursuit of lofty capital gains. Assuming an average 6.3% annual residential real estate appreciation rate (supported by true inflation since 1968) over the last two years, residential real estate discounts should be about 37.4% in 2008 ((50% discount to fair value - (average appreciation rate X number of years since peak in 2006)). With the average REIT down over 40% from their peaks, it appears the market threw the baby out with the bath water when it applied justified residential real estate discounts to commercial REITs that were not nearly as overvalued. If the Fed is able to re-inflate the housing market, it seems more likely to only be successful with commercial real estate (now undervalued) this time around since residential real estate still needs to come down from ridiculous heights (median income needs to double from 2006 levels to justify peak residential real estate prices).

      Who would you rather rent to: a company with the ability to raise capital in the financial markets or individuals who often get laid off by companies working to protect their financial positions during hard times?

    • Easy monetary policy should be an immediate boon to REITs now that they can refinance at much lower rates, thereby increasing FFO. I hope management takes advantage of the opportunities to swap high Price/Book REITs with low Price/Book REITs with strong balance sheets/FFO. The ability to refinance and raise cheap capital to buy properties for pennies on the dollar is much better now.

      Whereas residential real estate was probably selling at a 100% premium in 2006 adjusted for inflation, commercial real estate premiums were probably closer to 15% - 20% based on REIT buyout data from the first half of 2007.

      http://www.speculativebubble.com/images/...

      Commercial REITs were much smarter about price, leverage, and cash flows than residential real estate investors who ignored the economics of the deal (negative cash flow) in pursuit of lofty capital gains. Assuming an average 6.3% annual residential real estate appreciation rate (supported by true inflation since 1968) over the last two years, residential real estate discounts should be about 37.4% in 2008 ((50% discount to fair value - (average appreciation rate X number of years since peak in 2006)). With the average REIT down over 40% from their peaks, it appears the market threw the baby out with the bath water when it applied justified residential real estate discounts to commercial REITs that were not nearly as overvalued. If the Fed is able to re-inflate the housing market, it seems more likely to only be successful with commercial real estate (now undervalued) this time around since residential real estate still needs to come down from ridiculous heights (median income needs to double from 2006 levels to justify peak residential real estate prices).

      Who would you rather rent to: a company with the ability to raise capital in the financial markets or individuals who often get laid off by companies working to protect their financial positions during hard times?

    • That makes sense especially for someone like me who is looking at the long term picture. Thanks

    • Divide the money up and buy a different CEF each week (or each 2 weeks or each month).

      Domestic REITs
      NRO - Pays out gains along the way
      JRS - Retained their year end gain (could be good for fund value)
      RPF - Paid good year end gains last 2 years + I like Cohen and Steers
      SRQ - Has had slightly better performance than the others (at least from where I bought it)

      Mix of Domsteic and International REITs
      IGR - Usually pays a extra gains dividend in both Sept and Dec!
      RWF - I like Cohen and Steers
      AWP - Hasn't used it's leverage yet, does dividend rotation/capture, fund manager bought a lot of shares in dec

      There are lots of others, but those are the ones I'm most familiar with. For example, I bought a small amount of IIA this morning.

      In the long term, buying a mix and not buying all at once will probably be better than trying to buy only the one with the highest yeild at the exact bottom.

    • Thanks cn for giving us some intelligent info.

    • Definatly all true about credit issues potentially effecting REITs as well as the CEFs. But the effects on REITs could also have a few other subtle aspects.

      Going from worst to best.

      - Worst case would be the Centro case. Can't re-finance debt when it comes due and forced to sell properties into a down market. Could be devistating - I think Centro lost 76% of it's value in one day because something like this happened.

      - Credit is more expensive or harder to get. Even if the REIT isn't forced to sell buildings, they might not be able to expand and take advantage of growth opertunities. Also any debt they have might cost more, putting pressure on FFO.

      .... now getting a little more positive ....

      - It didn't seem to me like the commercial side was over built the same way the residential side was. To what ever extent it's hard to get money, it will be even harder to build in the future. Less new building on the commercial side could put upward pressure on rents.

      - Public REITs are in a better position than private REITs or private realestate investment, and this could be a big oppertunity. First the private side tends to have much more leverage, so they are much more likely to run into the negative points above and be forced to sell into a down market. Second the public side has more potential sources for raising capital. The public companys can sell more stock, issue preferreds as well as borrowing. The private side only has borrowing. With less leverage and more potential sources of capital, the public companys may be able to take advantage of oppertunities as the private side is forced to sell on the cheap.

      As a side comment, when investing directly in individual REITs, debt to equity is a good thing to screen for, this can help keep you out of the more leveraged ones. I would hope the management of the CEFs is looking at that metric these days too.

    • Just a couple of things to keep in mind when investing in CEFs.

      First, remember that their payout can include dividends, capital gains, and the return of your own invested capital. Many declare special dividends at year end to meet their payout obligations, and the actual source of the funds isn't clearly characterized by management until well into the next calendar year. In other words, don't think too narrowly about dividend cuts when assessing investment potential.

      Second, tight credit can affect not only leveraged CEFs themselves, but also the REITs (in this case) in which they invest. Those REITs may not have exposure to subprime mortgages, but many have to borrow money themselves for operating purposes. When credit gets tight, it pinches them even if they have nothing to do with residential mortgages. That, in turn, can depress their results, driving down the NAVs in the CEFs. Hopefully, Ben and his posse are/will address the credit issue quickly to avoid disruption to the commercial side of the economy.

      Thanks for the intelligent posts. So far, this isn't a typical Yahoo board!

    • Thanks For All The Good Information and insight CN21713. Great points to ponder. Lots of great insight here.

    • Looks like I didn't quite finish the thought about why I generaly consider it possible they could cut the dividend.

      Since NRI now assumes capital gains as a part of the regular payout, if those gains aren't there for a period of time because of market conditions then I would expect them to have to cut the dividend. Eventhough most REIT CEFs amazingly had good capital gains to return in 07, it certainly seems to me like a real possibility they could have less or none for some period of time because of the way the market is.

    • "Where do you think the bottom is on NRO and why?"

      I have no idea because price is goverend by people's perception as much as it is by facts. It's hard enough to predict facts.

      My approach is 1 part contrarian, and 1 part dolar cost average. In the sense that I'm part contrarian, to what ever degree I see people panic about things that I can't connect to the underlying value of a stock, it makes me want to buy more of that stock. But, I'm also 1 part dollar cost average in that if people are panicing today for some irrational reason, they can always panic more tomorrow. So, never commit all your money at one time.


      "Do you forsee anything in the next year that would indicate that NRO will lower its dividend?"

      No specifics. But, yes I have a general reason for thinking this could happen.

      A lot of these funds pay a large capital gain at the end of the year. The activist investor got NRI (and I'm assuming NRO too) to increase their regular dividend in anticipation of this so that the gain gets paid out along the way instead of all at once at the end of the year.

      So, what happens in a year where REITs don't go up?

      It looks to me like the funds that pay a gain at the end of the year would have less or no gain to pay. But NRI, which pays the gain out along the way would have to cut it's regular payout.

      So far it seems I've been wrong. Dead wrong on this. I was expecting no year end gains at the end of 2007, but all the CEFs I owned payed as much or more year end gains as they did at the end of 2006. At first I couldn't make sense of this at all, but in the end I concluded that eventhough the market went down in 07, they probably bought a lot of their stuff way way earlier and so even if they sold it in 07, they generated a gain. And some of the funds may have sold some of their longer holdings to take advantage of repositioning opertunities that came along as the price of different things went down. This could have generated some considerable capital gains even though the market in general, the NAV and the PPS were all down.

      Maybe management will be sharp enough to always make enough good trades to cover the gain. I don't know. In my mind I think of the fundimental basis here as being someone pays rent to a REIT and the REIT pays NRI and NRI pays me. That's all I really expect. If the REIT can make some more by buying and selling buildings or NRI can make some more by buying and selling REITs, I consider that "extra".

      "What about performance, i was under the impression that they posted a loss in 2007? Any ideas why this occurred?"

      REITs were down in 07. And for the most part, they were down by more than what they pay out in dividends. So the total return was negative.

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