Glad to see more investors are starting to see the light with respect to CMBS. My estimated loss for the commercial REIT sector comes in at 22%. After a 40% decline in the major commercial REIT indices last month, I would say that we have more than discounted the likely fallout in this particular sector. Every other sector outside of commercial real estate has to catch up.
Residential real estate, on the other hand, is way overvalued given the massive total inventory available and the greatly diminished buying pool of qualified borrowers. Don’t be fooled. According to the Census Bureau, there were 17.3 million vacant homes in the US in Q2 2007. How big do you think this number is today after the accelerating rate of foreclosures that we have been experiencing since last year? We keep hearing about the record number of vacant homes for sale while ignoring the record number of vacant units not for sale YET. Once we get through the current inventory for sale, there are plenty of units waiting to replace what is sold. On top of that, homebuilders are still constructing over 1 million units annually!
Homebuilders can probably stop all construction of residential housing units for the next 5 years and we would still have some inventory left for sale. The excesses of the biggest RESIDENTIAL housing boom in American history will not be worked out by next year as many would like you to believe. Government intervention that impairs the cash flows of RMBS (rate freeze, foreclosure moratorium, bankruptcy judge ordered reductions in mortgage balances, etc.) will damage liquidity for future homebuyers, making the problem even worse. After 2.25% in Fed rate cuts, the 30-year mortgage is about where it was when the credit crunch began six months ago!
Significant home price reductions are the only thing that will quickly restore affordability to the residential housing sector. Home prices should not exceed 3X local median incomes in any area. The longer we resist the prices necessary to bring demand in balance with supply, the longer the recovery will take. If we are lucky, residential housing will fully recover by 2014.
I would like to see a little more diversification among NRO’s CMBS REITs. Perhaps swapping some our current positions to add AHR and JRT would be helpful. Given the current high volatility of this sector, no one CMBS REIT should be able to move the fund’s NAV by more than .5% in a single day. Six to eight solid names with strong cash flows, solid balance sheets, and a relatively low Price/AFFO should suffice.
You don’t see many funds out there with a strong commercial mortgage finance position, giving NRO an edge when this sector explodes to the upside and competing funds rush in to gain exposure. Of course, by then it will be too late and NRO will be way ahead of the pack with capital gains and much better dividend yields ;)
NRO NAV closed Thursday up 2.73% to $9.04 while the S&P500 gained only .70%. Add NRO dividends plus potential year-end capital gains to the mix and it should seem obvious who will likely win this race by the end of the year.
Hopefully, NRO management took advantage of some opportunities to accumulate some AHR or other CMBS REITs on the pullback after an extraordinary pop the day before. The CMBS sector looks like it is heading for a major advance soon IMO. Perhaps some signs of improvement in the real estate market in general will spark the rally since the volume of adjustable rate mortgage resets that are fueling foreclosures will begin dropping significantly at the end of this month (drop by 50% in September and 70% in December). I would say September is a good month to also start seeing the economic impact of the 2% Fed Funds rate. The combination of these two events could justify another 25% to 35% rally from the recent lows like what happened from March to May. Sitting on a 20%+ dividend while waiting for this to happen sure makes it easy to be patient ;)
The price of NRO will always converge with value (NAV) in the long-run. The only time I’m interested in NRO’s price is when I’m purchasing shares at a discount - the bigger the better.
Today is the last day to qualify for a July dividend on a NAV that is currently over $9 per share based on the current 2.5% increase in the FTSE NAREIT-EQUITY Index. Given the more favorable share price yield, that sounds like good news to me ;)
There is CMBS asset accumulation going on since the spreads on the AAA, AA, and A securities have been trending downward over the last few days. Additionally, the FTSE NAREIT Mortgage REIT Index (REM) has recently showed superior relative strength by rising more and falling less than the FTSE NAREIT-EQUITY Index. Time to get them while they are attractively priced since you know a more tightly regulated investment banking industry is going to focus a lot of attention on this asset class. As opposed to RMBS, CMBS has credible ratings, low default rates, and mouth-watering spreads on attractive assets that can deliver more reliable cash flows.
NRO NAV up a whopping 9.04% to $9.65!!! I noticed from the latest NRO report that Steven Brown increased CMBS exposure, adding a solid REIT (NRF) to the lineup. Also noticed some AHR preferred shares. Hope the AHR common was added since April 30th. Glad he had the courage to maintain his commitment to value while others were too scared to buy anything that isn’t hitting a 52-week high (Cramer types). NRO’s CMBS holdings definitely delivered today in boosting the NAV while providing the fund with excellent risk-adjusted cash flows and yield spreads. As I said before, NRO management rocks!!!
With respect to SFI going ex-div Friday, it just means its time for NRO to cash a fat CMBS dividend check again ;)