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CBRE Clarion Global Real Estate Message Board

  • jbc54_99 jbc54_99 Feb 14, 2008 6:08 PM Flag

    Just Remember IGR Is Juiced Up By Leverage

    I have nothing against IGR's use of leverage but new investors should be aware of the risk of using borrowed money to spice up returns.

    Using their June 30/07 semi annual report as an example, IGR reported Total assets of $3.352 Bil, Total Liabilites (including auction rate preferred securities worth $910 mill) of $1.116 Bill.

    Keep in mind that auction rate preferred securites are periodically reset at auction and bought as temporary short term investments by banks and institutional investors. If they don't want the risk or if they demand a higher rate, then IGR will be forced to cough up extra premium.

    It also appears that in the current market environment that an auction could also conceivably fail altogether. This afternoon it was reported on Bloomberg News that Merrill was pulling back support and reducing purchase of auction rate securities.

    They join a lengthening list of institutions list of institutions such as Goldman Sachs, UBS, and Citigroup who are pulling back from this $300 Bill auction rate market.

    On Wed Feb 13/08 , $20 Bill worth of auctions didn't attract enough buyers and this resulted in a 80% failure rate.

    Just remeber that there is no free lunch. The yield on IGR is high for a reason and that is due solely to the borrowed money they use. It is certainly not the case that you are so smart and others are so dumb!

    There is real credit risk happening and you will be directly involved in that scenario if you own IGR. Thats all I'm saying...Know the risk you are dealing with before you decide to invest.

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    • It sounds like you don't know what it means for the auction to have "failed".

      It actually means they hit a maximum cap on the interest that will be paid to the preferred holders.

      So the funny thing is that what you are warning us about actually prevents the bad consequence you state. A faild auction would exactly mean that IGR won't be "forced to cough up extra premium".

      Smart very smart actually. The AMPs cap at a certain interest rate and the auctions fail. Meanwhile IGR can go invest funds a whatever the higher rates of the current market are.

      From what I have been reading, the auctions were already close to the maximum cap, so them hitting the maximum cap isn't really any big news about a big jump up in interest rates. However it is big news that the interest rate won't be going up from here for these funds.

      Not only that, but most funds will usually hedge some portion (if not all) of the interest rate exposure on their leverage. They may vary the amount of this hedging based on the direction they see interest rates as going. So, to the extent they are hedged, increases in the interest rate of the levrage wouldn't effect the fund anyway.

      Now for those who hold the auction rate preferreds, the picture doesn't seem nearly as good. Not only is ther rate capped now, but the market is locked up. They can't sell the security at an auction if the only rate a bidder would be willing to pay is higher than the maximum cap rate. So, the holder might have to write down the book value and with the market locked up it might not be clear what the correct value is.

      Also, for a fund that didn't have these things already issued, if they were trying to issue them today, they would probably have to put a higher maximum cap or find some other way of funding their levrage.

      As far as I can see, neither of these down sides would effect IGR common stock holders.

      Of course the general point about being careful of leveradge always applies.

      But, the specifics of this situation look to me like if they cause any of the closed end funds to get hammered in price, then it's buying oppertunity.

      A couple of other funds have already come out with information on this:

    • There is one other thing to consider. The management company from IGR is a subsidiary of the ING - bank. I would assume them to be a preferred partner when it comes to financing the leverage. Now ING pays something like a 4.5% yield on customers for whom ING is an ideal piggy bank to keep an emergency stash or park money for downpayments or just save without the strings attached to CDs. Now at a leverage of about 1:3 and assuming no transaction costs and no profit for ING it would cost IGR about 13.5 on there cash margin - giving them a 4x leverage - that is a pretty good interest rate - damn it.

    • Why should the fund manager be forced to pay "auction rate"
      for preferred securities? Smart fund managers are combing
      over the preferred arena for some depressed gems.

      For example, GRT preferred 'G' is now selling at a 20%
      discount and yielding over 10%. Historically, Glimcher has
      reissued its debt when called, and the call date is later
      on this year.

      So, from my myopic greedy perspective, it seems to me
      that a savvy fund manager or investor would load up
      on these preferreds knowing the past history of GRT,
      receive a 10% plus yield, AND if the preferreds are called
      in, get a 20% capital gain over purchase price for a short
      holding period.

      Then again, the preferreds may not be called. However, it
      is my bet that they will. Management will be under a lot
      of pressure in the coming months to straighten out and
      fly right.


    • So are you saying that IGR is maintaining their monthly payout by borrowing the money at low, variable rates?

      • 2 Replies to warnbeeb
      • I never said that IGR was borrowing to pay dividends. I simply noted that for every $3 of assets, IGR has borrowed $1. In turn that means that for every $2 of common equity, IGR has raised an additional $1 through borrowing. Their June 30/07 semi-annual report notes that IGR had $2.2bil equity + $1.1bil borrowing = $3.3bil of assets. Since 1/3 of everything they own was bought with borrowed money, the effective yield is higher than it would be otherwise.

        In a scenario where IGR could not borrow at all, they would be forced to sell off one third of their portfolio to pay off their borrowings. That of course would drastically reduce their payout.

        In a more likely scenario, if IGR were faced with paying a much higher rate on their borrowings, then that too would reduce their more money would go toward payment of interest.

        The key to leveraging is to make sure that the interest paid on the borrowings is less than the additional investment income earned because of the borrowing.

      • Absolutely not! They are not borrowing money to pay dividends. The Funds From Operations more than covers the dividend and in fact they have historically paid distributions each year other than the dividend. Don't worry about IGR. With interest rates continuing to come down and everything the Fed is doing as well as what Congress has done with the rebate and what they will continue to do to boost the economy, by this time next year we will be sailing again. Buy more shares and reinvest the dividends and look at your investment in 3 or 4 years. You will be happy!!!!!!

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