Current Deals – 7-22-09

• RV Park – $4mm
• Rehab Hospital – $3.5mm
• Warehouse portfolio – $50mm

At some point, the liquidity that exists in a lot of pockets around the world will sniff opportunity and move into the markets, both debt and equity. And there is liquidity galore. As listed by J.P.Morgan and Jason Trennert of Strategas, the pockets include: 

• There are $5.7 trillion in money market funds around the world. Of that amount, $3.5 trillion is in the U.S. alone, and that $3.5 trillion is equal to 25% of the total equity capitalization of stocks in the U.S. 
• Private-equity funds have about $500 billion to invest. 
• Emerging-economy central banks grew reserves by $1.4 trillion in the last year. Most of that is from oil revenue, and some or much of it will get transferred to sovereign wealth funds, which look worldwide for opportunities. 
• Global savings accounts (as opposed to money market funds) have grown from $21 trillion in 2003 to $35 trillion this year. 
• Net credit balances in NYSE cash and margin accounts are over $150 billion. The prior peak before this surge was $50 billion in 2001. These balances bottomed at a debit of $125 billion in 2000 during the internet bubble. 
• Corporate America holds a 10-year high in cash on their balance sheets.

It would be nice if AIG(AIG Quote – Cramer on AIG – Stock Picks) got past the crisis, and I vote for the Fed to extend a bridge loan. It would be nicer if there were behind-the-scenes moves to couple that with an equity investment by private-equity funds or some indications that there are buyers for some of AIG’s assets.

It would be helpful if Goldman Sachs(GS Quote – Cramer on GS – Stock Picks) and Morgan Stanley(MS Quote – Cramer on MS – Stock Picks) report uneventful quarterly earnings reports.

A joint venture between The Carlyle Group and GFI Capital Resources Group is looking to acquire distressed residential apartment buildings in the US.

The joint venture could acquire up to $1.2 billion of real estate with leverage, according to media reports. Washington, DC-based Carlyle declined to comment.

GFI executive vice president of acquisitions and dispositions, Michael Weiser, said the joint venture was looking to purchase around 30,000 apartments in the US, including New York.

The deal follows on the heels of other private equity real estate firms targeting US distress opportunities. Last month, Parmenter Realty Partners launched its fourth real estate fund, Parmenter Realty Fund IV, targeting $500 million in equity. The vehicle will invest in distressed and/or under-managed infill office properties in the Southeast and Southwest regions of the US. It could also consider multifamily investments where there is “extreme distress,” the firm said, such as the South Florida market.

A joint venture between Lubert-Adler Real Estate and The Related Group also picked up 500 condos in Florida last month, paying $100 million for the properties, which the pair said were acquired ‘at significant discounts.’

NEW YORK (Reuters) – Global financial markets were shaken to their core on Monday after U.S. investment bank Lehman Brothers filed for bankruptcy protection and rival Merrill Lynch agreed to be taken over.

As a deepening crisis took new, bigger victims, The U.S. Federal Reserve said for the first time it would accept stocks in exchange for cash loans and 10 of the world’s top banks agreed to establish a $70 billion emergency fund, with any one of them able to tap up to a third of that.

On a black Sunday for Wall Street, frantic attempts to find a rescuer for Lehman (LEH.N) failed, and troubled insurer American International Group (AIG.N) asked the Fed for a lifeline, according to news reports.

But Bank of America (BAC.N) agreed to buy Merrill Lynch (MER.N) in an all-stock deal worth $50 billion, seeking a bargain as the world’s largest retail brokerage sought refuge from fears it could be the next victim.

“It’s a return to pure capitalism, the survival of the fittest — the government can’t and won’t bail everybody out,” said Justin Urquhart Stewart, investment director at 7 Investment Management in London.

“Investors will now retreat to the trustworthy banks, though that’s not a phrase that trips off the tongue easily nowadays.”

Asian and European stock markets tumbled as the worries aboutLehman counterparty risk and further financial market turmoil sent investors scurrying for safe havens such as gold.

The FTSEurofirst 300 (.FTEU3) index of leading European shares fell 3.5 percent, led by falling bank stocks such as UBS (UBSN.VX), down 10 percent.

Shares in U.S. banks trading in Frankfurt tumbled, with Lehman (LHMH.F) down 80 percent and Morgan Stanley (MS.N), Citigroup (C.N) and others all in retreat. Frankfurt-listed shares in AIG (AIG.F) fell almost 30 percent.

Merrill’s shares offered a rare bright spot and its Frankfurt-based shares jumped 36 percent. Bank of America said it had agreed to buy Merrill in an all-share deal for the equivalent of $50 billion, or $29 a share, almost $12 a share above Friday’s closing price.

Lehman said it filed for Chapter 11 bankruptcy protection and was attempting to sell assets, becoming Wall Street’s highest-profile bankruptcy since junk bond specialist Drexel Burnham Lambert succumbed in 1990. Lehman’s European arm appointed administrators, who said they would wind down the business in as orderly a manner as possible.

Lehman’s petition followed three days of talks between bank CEOs and regulators at the Fed’s fortress-likeManhattan building.

“This shows the U.S. government is saying ‘enough’ after saving other institutions and that they see Lehman as a private affair. I think today and tomorrow there will be a panic on the markets,” said Marie-Pierre Pillon, head of equity and credit research at Groupama Asset Management in Paris.

S&P500 share futures fell over 3 percent, signaling U.S. stocks will open sharply lower, and the dollar tumbled.

The euro jumped to as high as $1.4479, up 1.7 percent from Friday, while U.S. Treasury yields dropped to five-month lows on concern about the stability of the U.S. financial system and as investors increased bets the Fed will cut interest rates.

SHAKE-UP

The events signaled a transformation in Wall Street’s power structure with major banking groups like Bank of America and JPMorgan Chase (JPM.N) becoming more dominant.

With Lehman and Merrill out of the picture, three of the top five U.S. investment banks have effectively departed the scene inside six months. Bear Stearns was acquired in a fire sale by JPMorgan in March.

Britain’s Barclays (BARC.L) emerged as a front-runner to buy Lehman late on Sunday after Bank of America pulled back, but it was deterred by the U.S. government’s unwillingness to provide a financial backstop to potential losses.

Lehman collapsed under the weight of toxic assets, mainly related to real estate, that are now worth only a fraction of their original prices.

In its bankruptcy filing, Lehman said Citigroup, Bank of New York Mellon (BK.N), Japan’s Aozora Bank(8304.T) and Mizuho Financial Group (8411.T) were among its top unsecured creditors.

The cost of insuring banks against default jumped and one credit analyst said without the positive Merrill takeover news the market could have seen “one of the most brutal days on record.”

LINE IN SAND

Lehman employees streaming into its European headquarters in London’s Canary Wharf financial district were met by television cameras, a scrum of reporters and a beefed-up security team.

“I guess times are tough and we’ve got to face the music … Everyone is worried about their job, it’s inevitable,” said one banker entering the building, adding a company-wide meeting had been set for Monday morning.

Other employees said staff were clearing desks, packing personal belongings and saying farewells to colleagues.

“It’s just shockingly fast how it happened,” an employee for Merrill in Asia said. “It’s hard to believe there will be no more Merrill Lynch,” he said of his firm, known as The Thundering Herd.

The New York Times also reported that AIG, once the world’s largest insurer, had made an approach to theFederal Reserve seeking $40 billion in short-term financing.

Authorities sought to prop up market confidence with announcements late on Sunday. The Fed said it would accept equities as collateral for emergency loans, and laid out a series of steps to calm markets and brace for Lehman’s collapse.

In addition to broadening the collateral it will accept from investment banks for direct Fed loans, it said it would increase the amount of Treasury securities it auctions on a regular basis under one of its lending programs.

One of the catalysts for this weekend’s events was the stance of U.S. Treasury Secretary Henry Paulson, who opposed using government money to resolve the Lehman crisis after a week earlier bailing out mortgage lenders Freddie Mac (FRE.N) and Fannie Mae (FNM.N), wary of accusation of encouraging excessive risk-taking by bailing out the bank.

(Additional reporting by Steve Slater, Sitaraman Shankar, Brian Gorman, Jane Baird and Olesya Dmitracova in London; Editing by Jean Yoon and Andrew Callus)

Managing your risk is an essential component of all investing, and real estat is no exception.  In this section we will look at the diiferent elements of investment risk and explore how we can understand the external and internal factorsaffecting risk.

Real estate investing runs the gamut in terms of risk and investment success. The first rule of real estate investing, even before location, location, location, is be very careful with whom you are dealing. For some reason, real estate is fraught with unscrupulous characters, many of whom you’ll see on late night television commercials with their “no-money” down methods of becoming millionaires. Only a very small percent of these so-called real estate gurus are legit.

If you are seriously considering investing in real estate property, it means essentially that you will need:

• Investment capital, or a legitimate means of attaining some without putting yourself in debt.
• A good knowledge of the real estate market and the neighborhood in which you are looking to buy property.
• Good management, people and negotiating skills on late night television commercials with their “no-money” down methods of becoming millionaires. Only a very small percent of these so-called real estate gurus are legit. 

  If you are seriously considering investing in real estate property, it means essentially that you will need:

  • Investment capital, or a legitimate means of attaining some without putting yourself in debt.
  • A good knowledge of the real estate market and the neighborhood in which you are looking to buy property.
  • Good management, people and negotiating skills
  • The ability to do repair work or access to people who can do it for you.
  • The name and number of a property inspector or engineer.

  Unless you are able to find, evaluate and buy houses that are either in foreclosure or fixer-uppers, which can be turned around quickly, you will most likely serve as a landlord for the property while it increases in value. Be careful to whom you rent because your property must be well-maintained.

  Since legitimate real estate investing means having some money to make money, you need available capital. For this reason, many people go into real estate after coming into a sizable amount of money. For example, empty nesters who sell a large home for $500,000 and buy a smaller condo for $250,000 have money to purchase another property or two.

  Make sure to research your location. Go to local town board meetings, do research in libraries and go on the Internet to find out as much as possible not only about the location today, but about plans for the area over the coming years.

  And then there are REITs — Real Estate Investment Trusts. This is a way of investing in real estate for a lot less money and without having to worry about fixing a tenant’s leaking bathroom pipes in the middle of the night.

  REITS invest in various corporations involved in real estate, ranging from industrial parks to shopping centers to construction companies. They are listed on the NASDAQ and the stock exchange.

  Essentially REITS work in the same way as mutual funds, except they set up a diversified portfolio that deals only in real estate. They primarily pay the bulk of their earnings in investor dividends. Before investing in a REIT, consider:

  • The economic conditions where the key holdings are located
  • Past performance of the REIT and future projections
  • The manager of the REIT, who operates like a mutual fund manager
  • The overall state of the real estate market

  REITS, like stocks, bonds and mutual funds, have high and low periods. Like other income-producing vehicles, they can be strong investments over time and pay dividends. They are fairly liquid and are a much safer way of investing in real estate than buying property.

Real Estate Weekly, June 8th 2005.

With more investors–whether institutional or individual–seeking alternative forms of investment, commercial real estate has proven to be an increasingly attractive option.

Commercial real estate offers opportunities along the risk spectrum that investors can tailor to specific return objectives and risk tolerance levels. Investors can further fine-tune their goals with respect to current returns, capital appreciation and preservation of capital.

Commercial real estate investment opportunities range from the lowest yielding, lowest risk core investments to the highest yielding, highest risk opportunistic investments, with each different category offering a unique risk-reward mix that meets a variety of investor goals.

Core investments appeal to long term, passive institutional or individual investors seeking a secure return, largely generated from property cash flow.

Classic core investments include properties with long term net leases to strong credit tenants; first class or “trophy” office buildings in major urban markets, such as New York and Washington, D.C.; premier multi-tenant buildings with limited lease rollovers; and assets with a modest level of leverage (40 percent to 50 percent) relative to value. While overall returns or IRRs in the core category can range from 7 percent to 10 percent in the current market, it’s still offering an attractive premium relative to other asset classes, like stocks and bonds.

The core plus market is a variation on core investing, offering slightly higher returns of 9 percent to 11 percent overall due to slightly less current cash flow versus residual value, somewhat more releasing and/or tenant credit risk, or slightly higher leverage (50 percent to 60 percent).

Investments in the value added category offer institutional or individual investors opportunities for a balanced mix of current cash flow and future appreciation.

These properties may be located in recovering markets such as Atlanta and San Francisco, or secondary markets, like St. Louis, Cincinnati, and Minneapolis, and may offer some re-leasing risk when existing rents are at below-market levels.

Value added assets can potentially benefit from a change in marketing, operating or leasing strategy, as well as a new capital structure.

Moderate leverage (60 percent to 70 percent of value) can enhance yield while still allowing for healthy debt service coverage. Investing with experienced local operators that can closely manage the asset also mitigates risk associated with this type of investment. Overall value added returns are currently in the 11 percent to 15 percent IRR range.

This type of investment appeals to savvy investors who seek an enhanced return in exchange for a somewhat higher level of operating risk.

Opportunistic investments tend to be growth and development oriented, with high overall returns (IRRs in the high teens and above), with a significant portion of the equity return typically achieved upon sale or refinancing.

Opportunistic investments often involve assets or operating entities that offer “turn around” potential resulting from a new strategic direction, new or innovative product types, new development, or entry into unproven or international markets such as Korea, China, or Eastern Europe.

Players in this market sector tend to be large, sophisticated, and well-capitalized real estate opportunity funds, hedge funds, and others who have a high-risk tolerance and are comfortable with high levels of leverage.

Opportunistic investors can make significant bets on broad market trends and are often able to spread their investment risk across a pool of investments and use hedging techniques and derivatives to mitigate risk.

Investors who can clearly define their investment objectives can pursue highly individual investment strategies in the current real estate marketplace.

This variety of options, at all points in the investment risk spectrum, contributes to real estate’s continuing appeal as an asset class and the explosive growth in new investors and investment vehicles operating in the commercial markets nationally and internationally.

SUSAN L. STUPIN, MANAGING DIRECTOR, THE PRESCOTT GROUP, LLC

COPYRIGHT 2005 Hagedorn Publication
COPYRIGHT 2005 Gale Group