Tag Archives: Commerical Real Estate

Fed Warns WeWork Business Model Is A Systemic Risk To The U.S. Economy

(ZeroHedge) In a stunning rebuke, echoing very closely our own concerns, Boston Fed President Eric Rosengren has – without naming-names – called out the WeWork business model as being a systemic risk to the US economy.

 

Two weeks ago we asked (rhetorically)…

Here is the problem as we laid it out:

While the collapse and/or bankruptcy of WeWork would hardly lead to a personal finance disaster – SoftBank’s Masayoshi Son is already Japan’s richest man and with a net worth of over $20 billion can easily stomach losing billions on WeWork (and Uber) – it would send shockwaves across US commercial real estate, as the company is already the single biggest tenant in New York City, as well as Chicago, Denver and central London.

In fact, with over $47 billion in lease liabilities, WeWork is already one of the world’s largest lessees, trailing only oil exploration giants Petrobras and Sinpec, an astonishing feat for the flexible office space provider “which was founded less than a decade ago, bleeds cash, and doesn’t plan to become profitable any time soon.”

As Bloomberg recently noted, “anyone weighing whether to buy shares in WeWork’s IPO cannot ignore the fact that the company will have to find $47 billion from somewhere in coming years to meet its contractual obligations – including about $10 billion in just the next five years. Right now, its own very negative cash flows won’t cut it.”

And now, it appears, Eric Rosengren has realized just how serious this leveraged debacle has become. In a speech delivered to New York University today – following his already hawkish tone from this morning by which he highlighted The Fed’s easy money policy has enabled record leverage – the Boston Fed head seems to have seen the light, fearing financial instability from WeWork and its ilk…

Mr. Rosengren noted the risks posed by commercial real estate, which have long been a concern of his, as a possible vector to amplify trouble.

Without naming any firms, Mr. Rosengren noted the particular concerns posed by co-working companies. He made this comment as the parent of office-sharing firm WeWork postponed its initial public offering amid investor doubts about its valuation and concerns about its corporate governance.

Office-sharing firms are particularly exposed to risks should the economy run into trouble, and could wound landlords in the process, Mr. Rosengren said.

“In a downturn the co-working company would be exposed to the loss of tenant income, which puts both them and the property owner at risk if they cannot make lease payments to the owner of the building,” he said.

“I am concerned that commercial real estate losses will be larger in the next downturn because of this growing feature of the real estate market, which could ultimately make runs and vacancies more likely due to this new leasing model,” Mr. Rosengren said.

“The fact that the shared office model relies on small-company tenants with short-term leases, combined with the potential lack of recourse for the property owner, is potentially problematic in a recession. This also raises the issue of whether bank loans to property owners in cities with major penetration by co-working models could experience a higher incidence of default and greater loss-given-defaults than we have seen historically.”

Of course, he is right. As we concluded more explicitly, in a bankruptcy, all those obligations would be frozen and squeezed among all the other pre-petition claims, which of course means that the commercial real estate market of cities where WeWork is especially active – like New York and London (and Rosengren’s Boston) – would suddenly find itself paralyzed, as a deflationary tsunami is unleashed among one of the strongest performing markets since the financial crisis.

***

Here Are The Billions Of Loans Exposed To A Potential WeWork Bankruptcy

Is WeWork A Fraud?

Lenders Raise Collateral Concerns Over WeWork CEO’s $500 Million Personal Credit Line

WeWork Bonds Are Crashing (Again)

Masayoshi Son Has Pledged 38% Of His SoftBank Stake For Loans From 19 Different Banks…

London Office Space Deals Falter Amid Fallout From WeWork’s Cancelled IPO

Furious WeWork Employees Blame CEO’s “Outsized Personality” For IPO’s Collapse

Blain: “WeWork Turned Out To Be Not A Unicorn But A Donkey With Toilet Roll Glued To Its Forehead

Softbank Shares Tumble As Investors Waver Over New Fund After WeWork Farce

Chinese Firms Dumped $1 Billion Of US Real Estate Last Quarter

After being one of the most steadfast buyers of American real estate for years, large Chinese firms continued dumping high-profile US real estate in the third quarter, the Wall Street Journal reports, selling more than $1 billion of property as Beijing forced insurers, conglomerates, and other big investors into debt-reduction programs.

Chinese investors dumped $1.05 billion worth of prime US real estate in the third quarter while purchasing only $231 million of property, according to data firm Real Capital Analytics. This marks the second consecutive quarter where investors were net sellers of US commercial real estate, and the first time investors sold more US property than they bought since the 2008 crash.

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In the last decade, Chinese investors plowed tens of billions of dollars into US real estate, with a concentration in major metro areas like New York, Los Angeles, San Francisco, and Chicago. The Journal notes that Chinese buyers “never represented more than a fraction of the buying power in any U.S. market,” however they made headlines for paying massive premiums. 

Now, the party has unexpectedly ended.

Rising corporate debt levels and concerns over currency stability has forced the Chinese government to tighten capital outflows and clamp down on overseas acquisitions. 

As ZeroHedge discussed last month, total Chinese Credit Creation unexpectedly collapsed, resulting in shock waves of weakness across the domestic and global economy. Amid speculation that Beijing is engineering a “slow landing” through a significant slowdown in credit issuance, investors – hungry for liquidity – are unloading US properties at a rapid clip. In global markets, this will likely create a deflationary chill and lead to a further slowdown in 2019.

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Trade tensions between Beijing and the Trump administration have not helped the situation, as more Chinese firms sold properties amid worries the trade war could deepen in the coming quarters, and potentially lead to more aggressive blow back at Chinese investors. 

“This has to do more with a change in how capital is permitted to behave rather than Chinese investors saying ‘I don’t like the U.S.’,” said Jim Costello, senior vice president at Real Capital Analytics.

“Ping An Insurance Group Co. of China and partners in August sold a 13-story Boston office building for $450 million, the largest sale by a Chinese investor during the third quarter, Real Capital Analytics said. Its U.S. partner Tishman Speyer said it was the one that drove the decision to sell the building.

China’s retreat showed signs of continuing in the fourth quarter. Dalian Wanda Group sold a glitzy development site in Beverly Hills, Calif., last month for more than $420 million. The Chinese conglomerate purchased the eight-acre parcel in 2014 for $420 million and had planned to develop luxury condominiums and a boutique hotel on the site, but feuds with a local union and contractors stalled progress.

Anbang recently engaged Bank of America Corp. to help it sell a portfolio of luxury hotels that it acquired two years ago for $5.5 billion, though the Waldorf isn’t part of that sale, according to a person familiar with the matter,” said the Journal.

“Anbang is reviewing the company’s U.S. real estate portfolio after seeing price recovering in local property market due to strong recovery of the U.S. economy,” said Shen Gang, a spokesman for Anbang.

Still, some strategists believe that Chinese selling may slow in the months ahead.

“I do not think it will be a tidal wave of sales,” said Jerome Sanzo, managing director and head of U.S. Real Estate Finance for Industrial & Commercial Bank of China. “Some of them are not able to move forward for various reasons and will take gains now while waiting for future changes.”

In a highly leveraged economy such as China’s, growth is a lagged result of changes in the supply of credit. And with credit creation waning in China, it is less of a mystery why local corporations are rushing to “liquify” as fast as possible: the Chinese credit squeeze is well underway. Prepare for a global slowdown in 2019, one which has already hit the US housing market hard.

Source: ZeroHedge

Private Equity Pours Money into Self-Storage Deals

by Robert Carr

Investors are crowding into self-storage as the sector continues to post the highest long-term returns of any commercial property type, according to a recent quarterly industry survey.

Marc Boorstein, a principal with Chicago-based MJ Partners Self Storage Group, said in his full year and fourth quarter overview that the average 2014 investment return for self-storage REITs was 31.4 percent. The REITs are the major owners in a largely fragmented sector, as about 80 percent of self-storage properties are owned by small mom-and-pop-type firms. But according to Boorstein, private equity is starting to enter the sector.

Long-term returns for self-storage beat out all other commercial real estate sectors, Boorstein says. The five-year average return for self-storage is at 24.4 percent, the 10-year average is at 17.8 percent and the 15-year average is at 20.3 percent, beating out the closest sector, multifamily, by about 400 basis points for each category. These numbers, as well as a lack of new supply and unusually high demand, have led to increased competition for assets.

“There’s just a lot of transaction activity going on, for every $50 million portfolio there [are] 20 offers,” Boorstein says. “Average occupancy has increased to more than 91 percent, and new supply was at less than 100 new properties last year. That compares to about 3,665 new properties that opened in the peak year of 2005. Even if we have 300 to 500 new properties in 2015, as Extra Space Storage CEO Spencer Kirk predicts, that’s still not enough to even match the population growth.”

The recession created more renters, and the urban movement further increased self-storage customer base, Boorstein notes. Investors have flocked to the industry because of how quickly rents can be increased. A customer who pays $125 per month will tend not to move if the rent is increased incrementally, to $140 per month.

“That doesn’t sound like much each month, but multiply that by owning a thousand units and that’s a huge impact on revenue,” Boorstein says. New income generators such as self-storage insurance and improved digital advertising and management platforms have also boosted bottom lines, he adds.

The returns have attracted private equity firms new to the sector, such as the Carlyle Group partnering with self-storage operator William Warren Group last year, as well as increased activity from investors such as Prudential, Fortress, Morgan Stanley and Harrison Street. The four major REITs—Public Storage, Extra Space Storage, CubeSmart and Sovran Self Storage—are able to take down the large deals of more than $75 million, but there are aggressive bidding wars by private equity for the smaller portfolios, Boorstein says.

“If it’s a mid-sized deal, say between $20 million and $70 million, there’s four times as many private equity groups looking to purchase than there were two years ago,” he says. “There [are] groups bidding that have barely been in the market that long. Cap rates have plunged because of all this competition and partnering that’s going on.”

For example, Roseville, California-based Life Storage secured more than $120 million from TPG Real Estate and Jasper Ridge Partners late last year. “Not only is there strong continued support for self-storage, the industry remains very fragmented, which should provide opportunities for consolidation and attractive follow-on acquisitions,” said Avi Banyasz, partner and co-head of TPG, in a statement regarding the investment.

Michael Mele, senior director with Marcus & Millichap’s national self-storage group, says he agrees that private investment in the sector is “bigger than it has ever been.” He says while these investors can’t compete with the REITs in the large deals, there’s much more competition for the second-tier properties.

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“Mom-and-pop ownership of self-storage is declining because of the demand by private investment,” Mele says. “There’s also a continued consolidation of the industry, with a lot more private firms going after large portfolios with the help of the REITs, or using the REITs as third-party managers. You’re going to start seeing, in major and secondary markets, the same people owning many of the properties.”

Scott Humphreys, self-storage acquisitions director at Austin, Texas-based Virtus Real Estate Capital, says a new trend in the industry being employed by many of the REITs and larger regional players is purchasing sites in construction or shortly after they open. This eliminates some of the risk/liability associated with the development timeframe, and has also allowed the REITs to move forward with new site development without the added overhead and expense of keeping a full coterie of development resources in house. For example, Extra Space recently bought a portfolio of three self-storage properties in Austin from Endeavor Real Estate Group. All three properties were new, with two of the three having been opened less than a year at the time of sale.

“The difficult element to this type of purchase is the valuation gap, and determining how much to pay for yet-to-be leased space,” Humphreys says. “In core and growth markets, the risk is obviously not as great, and this allows you to rely on ‘merchant-build’ type development resources who know the local municipalities, and their nuances, well.”

Update: The FBI Is Looking Into American Realty Capital Properties

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About: American Realty Capital Properties Inc (ARCP)  by Albert Alfonso

Summary:

  • According to a Reuters report, the FBI has opened a criminal probe of American Realty Capital Properties.
  • This follows the disclosure of accounting errors by the company.
  • This investigation is in addition to a SEC inquiry.

American Realty Capital Properties (NASDAQ:ARCP) just cannot catch a break. Reuters reported that the Federal Bureau of Investigation has opened a criminal investigation into ARCP, according to their sources. The FBI is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, according to the Reuters report.

This news comes just days after the company announced a series of accounting errors which had been intentionally not corrected and thus concealed from the public. The amount of money involved, roughly $9.24 million GAAP and $13.60 million AFFO, was relatively small. However, these accounting errors resulted in the resignation of two senior executives, chief financial officer, Brian Block, and chief accounting officer, Lisa McAlister.

Shares of ARCP were trading for as low as $7.85 each on Wednesday, before recovering to $10 per share after CEO David Kay held fairly well received conference call explaining what happened. In the call, Mr. Kay stressed that ARCP’s key metrics were sound. He reaffirmed that the dividend policy will not change, noting that the operating metrics were not impacted and that the NAV is unchanged at $13.25. Nevertheless, the stock continued to fall, closing the week at below $9 per share. In total, ARCP’s stock has fallen 30% since news of the accounting errors first arose, wiping out $4 billion in market value.

Conclusion:

This is quite the shocking development. Not only is the FBI looking into ARCP, but also the Securities and Exchange Commission, which announced its own investigation of the accounting errors late last week. Furthermore, the company was placed on CreditWatch with negative implications by S&P, which risks putting the credit rating into junk territory.

As I noted in my earlier article, accounting issues equal an automatic sell in my book. I sold most of my ARCP holdings on Wednesday, though I still kept some shares, opting instead to sell calls on the remaining position. I now lament that choice as I fear the stock can fall further. An FBI criminal probe is no small matter and represents a clear material risk. What an absolute disaster.

Update: American Realty Capital Properties: The Turmoil Is Only Getting Worse

by Achilles Research

Summary

  • ARCP sent shock waves through the analyst community last week after the REIT said its financials should no longer be relied upon and said goodbye to the CFO and CAO.
  • ARCP is now also attracting heat from the FBI.
  • In addition, RCS Capital Corporation cancels Cole Capital transaction.

Investors in American Realty Capital Properties (NASDAQ:ARCP) need to demonstrate that they have nerves of steel at the moment. After the company reported that it overstated its AFFO last week, and that its Chief Financial Officer and Chief Accounting Officer departed as a result of the accounting scandal, more bad news are seeing the light of day.

First of all, as various news outlets reported, the Federal Bureau of Investigation is putting up some additional heat on ARCP. As Reuters reported:

(Reuters) – U.S. authorities have opened a criminal probe of American Realty Capital Properties in the wake of the real estate investment trust’s disclosure that it had uncovered accounting errors, two sources familiar with the matter said on Friday.

The Federal Bureau of Investigation is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, the sources said. Further details of the probe could not be learned.

The involvement of the New York U.S. Attorney’s office is particularly bad news as Preet Bharara takes a tough stance with companies that break the law or push its limits too far. While the criminal probe certainly is bad news and comes in addition to the involvement of the SEC, something else caused massive irritation among ARCP shareholders today: The Cole Capital deal with RCS Capital Corporation (NYSE: RCAP) is in real danger.

According to ARCP’s latest (and angry) press release:

In the middle of the night, we received a letter from RCS Capital Corporation purporting to terminate the equity purchase agreement, dated September 30, 2014, between RCS and an affiliate of ARCP. As we informed RCS orally and in writing over the weekend, RCS has no right and there is absolutely no basis for RCS to terminate the agreement. Therefore, RCS’s attempt to terminate the agreement constitutes a breach of the agreement. In addition, we believe that RCS’s unilateral public announcement is a violation of its agreement with ARCP. The independent members of the ARCP Board of Directors and ARCP management are evaluating all alternatives under the agreement and with respect to the Cole Capital® business, generally. ARCP management and the independent members of the ARCP Board of Directors are committed to doing what is in the best interests of ARCP stockholders and its business, including Cole Capital.

That’s right. Since the FBI now has its fingers in the pie, and the SEC, management at RCS Capital has informed ARCP that it is terminating the deal. Whatever side you are one, you’ve got to admit: American Realty Capital Properties is just falling apart.

The once mighty real estate investment trust has lost a staggering 36% of its market capitalization since shares closed at $12.38 on October 28, 2014, which is a tough pill to swallow for those investors who pledged allegiance to American Realty Capital Properties, despite the turbulence that erupted a week ago.

Technical picture
Shares of American Realty Capital Properties are trading extremely weakly today in light of the new information, and I continue to see further downside potential for this REIT in the near term.

It seems as if all the forces of the universe are conspiring to bring American Realty Capital Properties down to its knees, and an investment in this REIT is not recommendable at the moment.

Source: StockCharts.com

Bottom Line:
The American Realty Capital Properties’ story has gotten significantly worse today: In addition to two of the most important executives abruptly leaving the company amid an accounting scandal, the SEC and the FBI are investigating the company, lawyers are very likely going to hit ARCP with litigation, and the latest transaction is in the process of collapsing.

Bulls must either have nerves of steel or clinging to hope. In any case, ARCP’s prospects have gotten much worse today, and I continue to expect further downside potential driven by litigation concerns, potential fines and extremely negative investor sentiment.

American Realty Capital Comes Clean, And I Feel Dirty

by Adam Aloisi

Summary:

  • American Realty Capital’s restatement has created rampant volatility in a stock already under the gun.
  • Why I decided to sell half of my position in the company.
  • Important portfolio takeaways for investors of all kinds.

This is one of the tougher articles I’ve written for Seeking Alpha. Asset allocation and portfolio strategy for income investors has been my focal point of writing over the past three years. I’ve always been of the opinion that talking about how to fish trumps simply giving someone fish to chew on.

Still, I mention equity-income stocks all the time in articles, but it’s rare that I write focus articles. On October third, I wrote, “American Realty Capital Properties: 30% Total Return Next Year“. Less than a month later, I find that post in an inverse position, with American Realty Capital (NASDAQ:ARCP) having dropped around 30% in market value.

First, I will tell readers that I sold a bit more than half of my position as a result of ARCP’s restatement, and still retain shares. However, it is now one of my smallest income portfolio positions and one that I have lost a majority of my conviction in. ARCP, in my mind, has transitioned from being a higher-risk investment into now becoming day-trader fodder, and at least for the near term, highly speculative. I would have been all over this thing during my trading days, but having become more conservative today with less portfolio churn, it has little room in my portfolio.

I considered all options here. I thought about increasing my position, extinguishing it altogether, selling put options at attractive premiums, or potentially doing nothing. Being so supportive of this story over the past year, I was mostly disappointed that I had to put any thought into the matter at all. For a variety of reasons, I came to the conclusion that halving the position — taking a loss, which I needed to do anyway for taxes — was a prudent near-term choice. I will revisit the decision in a month, and could conceivably buy back those shares once wash sale rules have passed.

Though selling during a period of fear and volatility is not typically in my playbook, following this restatement, I have lost confidence in this story. If you follow me, you know that I certainly identified the elevated risk that ARCP brought to real estate investors. Over the past six months, here are some comments that I made in regard to ARCP in several articles:

If you invest in ARCP today, you should expect the unexpected.

Given all the deals and potential for a misstep, there is heightened risk in owning ARCP.

But with the baggage it continues to drag along with it…..it may not necessarily be appropriate for more conservative investors

I do not consider the stock a table pounding buy.

I even compared Nick Schorsch to Monty Hall from “Let’s Make A Deal,” following the Red Lobster purchase and flip-flop on the strip mall IPO-then-sale.

As the year wore on, however, my convictions rose, since the company did not materially change its guidance to investors, despite all the acquisition activity. I figured if there were a stumble, it would have been disclosed earlier this year as the various acquisitions had time to be absorbed into operations.

While there was much criticism over the Cole quasi-divestiture to RCS and lowered guidance, I remained resolute, thinking there wasn’t another buyer, and this at least got Cole out from under the ARCP umbrella.

Of course as we now know, some financial disclosures were not to be relied upon and guidance should have been changed. If there were not so much other controversy with regard to this company, I doubt the stock would have tanked as much as it has. When you have a managerial crisis of confidence already in place and make a restatement announcement, you create panic. If we take this on face value, it does not appear to be a huge restatement, but taken in totality, this is a monumental, perhaps insurmountable, credibility problem. It’s now all aboard for the ambulance-chasing lawyers.

At this point I have decided that it is in my best interest to rip the towel in half and throw it in. I see it as a hedge against further deterioration in this story that I would not necessarily rule out given the loose management style that I and every ARCP investor knew existed.

We’re not talking about some low level accounting bean counter or paper pusher that seems to have perpetrated this; we’re talking about CFO Brian Block, assumedly someone that David Kay and Nick Schorsch had drinks with regularly. So when Kay defended the culture at ARCP on the conference call by uttering, “We don’t have bad people, we had some bad judgment there,” forgive me if I now wonder if he really has a clue how good, sweet, and honest his executives and rank-and-file workers really are. Although the restatements appear isolated to this year’s AFFO, we’ll have to see if anything turns up in 2013. While I’d like to give this company the benefit of the doubt once again, I’m finding myself staring at a slippery slope of hope that another shoe will not drop.

Still, I did not jettison the entire position because these are emotional times, and the glass-is-half-full part of me says the market is overreacting. We are, keep in mind, still talking about a high-quality portfolio of real estate, not a biotech company whose sole drug was deemed inefficacious by the FDA. In the end, however, I had to make a decision for my own portfolio that I deemed appropriate. This was it.

Meanwhile, I would not criticize nor blame someone for selling out here and moving on to more stable pastures. Fellow REIT writer Brad Thomas apparently has. On the flip side, I could see the more adventurous or those with continued conviction buying in now or upping exposure. The “right” thing to do for many investors may be to simply hold through the volatility. As I opined in a past article on ARCP:

But with the considerable sentiment overhang and “show me” attitude of the market, it could take some time and a strong stomach to see it through.

The sentiment “overhang” has basically become something much worse. And at this point I wouldn’t even want to predict how much time it could take for a rebound. Your stomach constitution will need to be stronger than I first suspected.

Portfolio Takeaways

I’ve had more than one reader tell me that the various risks I identified made them conclude that ARCP was not a stock they should own. And given what has happened here, at least for the near-term, that was obviously a prudent decision. We must all come to personal conclusions as to how much risk we are willing to take to attain income and capital growth goals.

For investors of all types, the most important thing to take away from this near-term “disaster” is that diversification and limiting position size is critical. If ARCP amounted to a couple of percent, or less, of a portfolio, the stock’s tank may not be all that impacting. If it was a more concentrated portion of the overall pie, it becomes a more painful near-term event and makes various portfolio maneuver decisions more challenging to come to.

In the end, portfolio management is a personal endeavor that amounts to an inexact science. Whether you think what I’ve done with my ARCP position is right or not is not really all important. The more important thing is whether you are comfortable with the personal portfolio decisions you make or not, why you make them, and whether they are right for your situation.

I’ve used the word “I” more than I normally would in an article. This one was indeed about me and owning up to putting wholesale trust in a management team that apparently I shouldn’t have. And it was a about a decision I really didn’t want to make as a result. Unfortunately, we have to take the bad with the good in the investment world, brush ourselves off, move on, and continue to make personal decisions that are right for our portfolios.