Archives for January 2014

Obamacare Packing Medical Offices Spurs Deal Surge

January 14, 2014 by mcarristo

Obamacare and an aging U.S. population are spurring purchases of medical office buildings, with investors sending prices to a record on bets that Americans’ demand for health services will increase.
Sales of properties leased by doctors and other health-care providers reached $6.67 billion in 2013, the second-highest total in 13 years of data-keeping by Real Capital Analytics Inc. Buyers including real estate investment trusts paid an average of $270 a square foot, up from $262 in 2012 and the most on record. The increase partly reflects deals for newer buildings with the latest technology, according to the research firm.
“It’s a really competitive space,” said Steve Sikes, manager of real assets at the Alaska Retirement Management Board, which is considering buying $150 million to $200 million of medical offices in what would be its first direct purchases of the properties. “Hopefully there’s enough of these out there for everyone.”
The buildings generate steady income from multiyear leases and offer higher investment returns than other types of commercial real estate. Buyers expect occupancies to climb along with the need for medical services as baby boomers age and more people get insurance under the Patient Protection and Affordable Care Act. More than 975,000 Americans signed up in December to buy plans under the law, which guarantees health coverage to all residents and penalizes those who aren’t insured.

Cash Flow

The properties include doctors’ offices, urgent-care clinics and diagnostic laboratories and imaging centers. Their stable cash flow makes the buildings particularly attractive to REITs, which are required under U.S. tax laws to pay out at least 90 percent of their income to shareholders, according to Dan Fasulo, managing director at New York-based Real Capital.
“You have built-in demand drivers vis a vis the demographic trends that fundamentally don’t exist in other real estate,” said Jeff Hanson, chairman and chief executive officer of Griffin-American Healthcare REIT II Inc.
The Irvine, California-based company, a nonlisted trust, purchased $816 million of medical offices in the two years through Jan. 2, making it the biggest buyer after publicly traded Ventas Inc., which acquired 72 such buildings in its April 2012 purchase of Cogdell Spencer Inc.
Investor interest in medical-office buildings is driving up values. Capitalization rates, a measure of returns that declines as purchase prices rise, reached a six-year low of 7.3 percent nationally in 2013, Real Capital data show. That’s still higher than the 6.4 percent average cap rate for general offices and 5.7 percent for apartments, according to the firm.

Hospital Landlords

More than 90 percent of about $1 trillion of health-care properties are still in the hands of hospitals and medical systems that may no longer want to be landlords, creating plenty of opportunities for institutional buyers, according to Hanson.
Among his company’s 2013 acquisitions were six buildings purchased from Middletown, New York-based Crystal Run Healthcare, a specialty physician practice group, for a combined $141 million. Crystal Run agreed to lease back the offices with 3 percent annual rent increases through 2033.
Griffin-American, owner of health-care real estate in 30 states and the U.K., buys stable, well-leased properties rather than buildings that need major renovations, Hanson said.
“We’re an income REIT,” he said. “Stability and growth of our dividend is paramount for our shareholders.”

High Occupancies

The company’s medical offices are 94 percent occupied and have a lease-renewal rate of almost 90 percent, according to Hanson. That compares with a nationwide 65 percent rate for industrial real estate and other types of offices, he said.
“You typically don’t lose health-care tenants,” he said.
That stability helps make medical offices appealing to the Alaska Retirement Board, which oversees about $25 billion of assets as manager of the state’s pension funds. The properties fit in with the system’s strategy of building a diverse real estate portfolio, which already includes corporate offices and apartments, Sikes said.
“The main appeal to us is the income component,” he said. Rising health-care demand “will improve the economics of providing those services and translate into a better real estate experience from a rent perspective and occupancy perspective.”
The shift to outpatient clinics instead of much-costlier hospitals for many health-care services also has boosted tenant demand for office space, said Todd Jensen, executive vice president and chief investment officer at New York-based American Realty Capital Healthcare Trust Inc.

Holdings Double

The nonlisted REIT’s medical office holdings almost doubled in the first nine months of 2013, according to a regulatory filing. As of Sept. 30, it invested $1.07 billion in the properties, up from $571 million at the end of 2012. More acquisitions are likely after a planned share listing this year, according to Jensen.
“Once you’re a publicly traded company, the Street wants to see you grow,” said Jensen, whose firm is managed by AR Capital LLC, the biggest fundraiser in the nontraded REIT business.
American Realty Capital Healthcare has $371.5 million of health-care property under contract, which will put its assets at $2 billion when the deals are completed, the company said today in a statement. Of that total, 44 percent will be medical office buildings.
Investors in public health-care REITs sold shares of the companies last year on concerns that rising interest rates would hurt the landlords’ ability to make money. Bloomberg’s index of 11 health-care trusts fell 11 percent, making them the worst-performing industry group in 2013. The broader REIT index slipped 1.4 percent.

More Vulnerable

Health-care landlords are more vulnerable to increases in borrowing costs because their buildings’ long-duration leases, which may range from three to more than 15 years, limit opportunities to raise rents. Income grows faster for owners of other property types that typically have shorter leasing periods and higher tenant turnover, according to Craig Guttenplan, a REIT analyst at CreditSights Inc. in London.
In times of strong economic growth, such as the years leading up to the 2008 financial crisis, health-care real estate wasn’t as popular as offices and retail properties, he said.
“It was not a sexy sector to invest in,” Guttenplan said. “As you see the economic recovery broaden and improve, you see some of the more stable property types get left behind.”
The large pool of properties to buy gives medical office investors ample opportunities to generate more income, according to Hanson of Griffin-American. A limited amount of construction should help landlords retain tenants and keep building occupancies high, he said.
Almost 15 million square feet (1.4 million square meters) of medical offices were completed in the past two years, compared with 41 million square feet in 2008 and 2009, according to Marcus & Millichap Real Estate Investment Services.
“You’ve got predictability and durability of income streams in medical office that you just don’t see in other real estate,” Hanson said. “You’ve got far lower risk in this sector.”
By: Brian Louis (Bloomberg Personal Finance)
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Latest Data on Retail Sales

January 14, 2014 by mcarristo

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest data on retail sales.

Retail sales squeaked out a small gain in December, rising by only 0.2 percent from the prior month. Cold weather and more precipitation this past December compared to historical norms may have contributed to the sluggish sales. From one year ago, sales were up 4 percent.
The national retail vacancy rate will not move down if sales rise at this slow pace. Rent growth, hence, will be difficult. NAR projects a retail vacancy rate of 10.1 percent in 2014, with retail space rents rising by only 2 percent.
Recent softness in home sales is causing sales at furniture shops to decelerate. A similar slowdown is occurring at building and garden equipment stores.
Employment at retail stores meanwhile has been increasing quite nicely, with a net gain of 381,000 in the past 12 months. But that growth is in jeopardy if retail sales do not accelerate higher.
Because consumer spending comprises two-third of the economy, consumer spending growth (supported by job and income growth) is needed to further propel the economy.
Spending at jewelry stores, interestingly, is rising at a double-digit pace. The record high stock market is likely causing the high net worth households to visit Tiffany’s on 5th Avenue, which then subsequently forces other high income people to spend conspicuously in order to keep up with the Jones. Though present, the show-off consumption is not that bad in the U.S. given many years of being a high income country. Pretty much everyone has a high-definition TV and a smartphone.
Conspicuous spending is most visible today in Moscow. The newly rich need to show they are no longer pretending to get paid (and pretending to work) as occurred in former communist times. Though subway stations in Moscow contain artistic beauty, as if visiting a museum, the newly-rich refuses to take underground transport and are adamant to show off their latest German-made car even through they endure possibly the worst traffic jams in the world. Pedestrians beware: it is common for drivers to view the wide sidewalks as another lane.

By: Lawrence Yun (Economists’ Outlook)

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Showrooming Left in the Dust as Shoppers Go Online

January 13, 2014 by mcarristo

Mission accomplished—or at least, on the right track.
According to a new study, efforts to eliminate showrooming from shoppers’ behavior paid off in 2013, as a significantly smaller dollar amount was spent by shoppers who visited a store to test or try on a product, only to go online and purchase it, usually for a cheaper price.
(Read more: Retailers want to make ‘showrooming’ a no show)
The IBM study released Monday at the National Retail Federation convention found that showrooming, an issue that has particularly plagued brick-and-mortar retailers in recent years, is no longer a top threat to physical stores. The study included data from more than 30,000 global consumers.

Tim Boyle | Bloomberg | Getty Images

A customer looks at a laptop at a Best Buy Co. store in Northbrook, Illinois, on Monday, Dec. 23, 2013.

Although the number of shoppers who showroomed last year ticked slightly higher—to 8 percent from 6 percent in 2012—the spending attributed to the practice was drastically lower. While nearly 50 percent of online purchases in 2012 came as a result of the practice, that number fell to 30 percent in 2013.
“It’s really an interesting point here, where people are just more comfortable to go direct to online versus having to go to a store first,” said Jill Puleri, IBM Retail Consulting leader.
(Read more: Without rebirth, malls face extinction: Developer)
Brick-and-mortar stores made a proactive effort to eliminate showrooming during the holidays by attempting to make their in-store experiences more unique, improving customer service and offering product giveaways to attract shoppers. But more importantly, Puleri said, traditional retailers did a better job of integrating their online and in-store offerings, with more stores showing the same prices and products across both platforms—two of shoppers’ top demands.
One example of this was Best Buy, which tried to combat showrooming by embracing it. Ahead of the season, executives from the electronics chain said that it would be competitive on price with discounter Wal-Mart and online shopping meccaAmazon, in an effort to regain market share. To underline the fact that it offered the latest technologies at the lowest price, the retailer used the tagline of your “Ultimate Holiday Showroom” as a “fun way to embrace showrooming,” said Amy von Walter, senior director of communications at Best Buy.
(Read more: Game on for a retooled Best Buy this holiday)
“Thanks to our Low Price Guarantee [price match], customers can shop with us with confidence that they received a great deal,” von Walter said.

Although Best Buy is in its quiet period before releasing holiday sales results on Thursday, analysts have been bullish on the company’s strategy to recapture market share, though it may come at the expense of margins.
As seen in a slew of same-store sales announcements last week—when more than 10 retailers lowered their earnings forecasts for either the fourth quarter or the year—brick-and-mortar stores needed all the help they could get this holiday. Intense competition, the lack of a must-have item and low traffic caused many retailers to slash prices in an effort to ring up sales, most times at the expense of margins, they said.
New information from Bankrate, released Monday, showed that 1 in 4 shoppers spent less than they expected during the holidays, while only 14 percent spent more than they expected.
What’s more, according to analytics firm ShopperTrak, retail traffic fell nearly 15 percent this holiday season.
But the news isn’t all bad.
(Read more: Why a 15% drop in holiday traffic didn’t matter)
Despite dwindling traffic, ShopperTrak reported that in-store retail sales rose 2.7 percent this holiday, slightly higher than its predicted 2.4 percent increase. Founder Bill Martin attributed the difference to shoppers going online to research products and then visiting stores with a purpose, knowing ahead of time what they are going to buy.
This is particularly true thanks to the explosion in mobile shopping, an area that saw sales rise more than 46 percent in the fourth quarter, according to IBM data. As a result, retailers are starting to get their act together, optimizing their mobile sites and integrating location features to connect with shoppers closer to when they make their purchases, Puleri said.
Martin echoed the importance of delivering an easy shopping experience at the physical store and online.
“Retailers who deliver a seamless customer experience both in the store and across all channels will emerge ahead of the rest,” Martin said.

Play Video

Holiday retail blues

Discussing holiday retail numbers and consumer uncertainty, with Steve Odland, Committee of Economic Development president & CEO.

In light of all the emphasis on online sales this holiday, Puleri emphasized that while digital sales growth is huge—comScore reported earlier in the month that desktop spending rose 10 percent this holiday—about three quarters of retail sales are still completed in store.
“There won’t be a day when you and I don’t walk into a mall,” she said.
Among the survey’s other findings:

The percentage of consumers willing to share their location with retailers via GPS nearly doubled over 2012, to 36 percent.
The five most important things to shoppers making purchases both in-store and online, in order, are:
Price consistency across shopping channels,
The ability to ship out-of-stock items directly to their home,
The option to track the status of an order,
Consistent product assortment across channels, and
The ability to return online purchases to the store.

By: Krystina Gustafson (CNBC)

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Are Commercial Mortgages the Next Big Thing for Hedge Funds?

January 12, 2014 by mcarristo

Gleaming office towers, corporate office parks and big box retail stores could be the next big thing for Wall Street traders.
Some of the smart money certainly thinks so. Hedge funds focused on buying and selling securities backed by assets like home loans and credit card payments—known as structured credit or asset backed funds—are increasingly betting on commercial mortgages.
A small but growing group of money managers believe that they can earn returns between 10 percent and 20 percent annually by trading commercial mortgage backed securities, which are essentially office and retail loans bundled by bankers like the $3.5 billion one JPMorgan Chase and Deutsche Bank just did for Hilton Worldwide.
Those profit expectations are lower than what many hedge funds made betting on residential mortgages after the financial crisis, but the returns are still healthy compared to other types of bonds, like Treasury or high-yield corporate credit which usually yield single-digit percentage returns.

Commercial property prices

Year	National All-Property	Major Markets	Non-Major Markets
2008	-19%	-17%	-20%
2009	-27%	-25%	-28%
2010	11%	17%	6%
2011	12%	14%	9%
2012	8%	9%	7%
2013 YTD	10%	9%	11%
Since peak (Dec. ’07)	-12%	-1%	-20%

Moody’s/RCA CPPI

Angelo, Gordon & Co., Cerberus Capital Management and Claros Fund Management have earned double-digit returns on their CMBS investments this year. Other firms, such as Pine River Capital Management, CQS and Ellington Management Group have all seen gains in their credit focused funds as they increased bets on the sector over 2013.
“We see a great opportunity set for CMBS as valuations and issuances have come back in a meaningful way. It’s a good-sized opportunity,” said Leo Huang, a portfolio manager at Ellington who specializes in CMBS.
(Read more: Hedge funds hope for more mortgage juice)
Lots for traders to love
Investors like CMBS for several reasons.
First, prices are all over the place: Old securities with the highest rating, AAA, have recovered from their post-financial crisis lows in 2008 and 2009.
But lower-rated securities—A and BBB- for example—are still near their nadir after falling steeply in 2007 and 2008. About two thirds of the approximately $810 billion U.S. CMBS market is rated AAA, according to JPMorgan and Bloomberg data. The riskier tranches of CMBS are also volatile, which sometimes scares off more conservative institutional investors.
Second, new securities are finally being packaged and sold again, creating new places to bet. CMBS issuance is about $90 billion this year—nearly double 2012—but still well off from the record high of $288 billion in 2007, according to Dealogic. But some hedge funds believe the credit quality in new CMBS is deteriorating given low interest rates, creating the opportunity to short certain deals.
Third, the commercial market’s recovery hasn’t been as even as the housing market. American jobs have been slow to come back, for example, and certain domestic real estate markets are still in trouble. In Europe, the economic and employment situation is even worse, creating greater opportunities to find under-valued properties.
And many of the underlying mortgages in CMBS are set to come due in the next three years, meaning many will have to refinance. That will be more difficult if interest rates rise and would create more price volatility and dispersion—just what traders love.
“We love the opportunity—we think there’s value in plain sight,” said Warren Ashenmil, who recently founded CMBS-focused hedge fund firm Jerica Capital.
Ashenmil, who previously was a portfolio manager at Tricadia Capital, plans to begin trading for his new hedge fund in the first quarter and believes he can generate returns of about 15 percent net of fees for investors.
(Read more: How DC mess could curb commercial real estate)
Another new entrant is Stephen Feinberg’s Cerberus.
The firm has traded CMBS since April 2008 and earned double-digit gains every year besides 2008, including 28.7 percent gross in 2013 through October, according to investor materials obtained by CNBC.com. Given those returns and investor demand, Cerberus launched a dedicated vehicle, the Cerberus CMBS Opportunities Fund, on Oct. 7. Led by Scott Stelzer, it had $66.4 million in assets at the end of October.
Cerberus declined to comment through a spokesman.
Other firms that increased their exposure to CMBS have performed well overall.
Ellington roughly doubled its exposure over the year to as much as 10 percent of the strategy currently, according to Huang. The Ellington Credit Opportunities Fund, which trades CMBS among other types of debt, is up 14.46 percent net of fees this year through October, according to a report by HSBC’s Alternative Investment Group.
Huang said he targets returns of between 6 percent and 17 percent gross return, depending on the risk of the CMBS tranche. “CMBS offers good relative yield,” he said.
Philip Weingord’s Seer Capital Management is up 10.48 percent through November with about 26 percent of its portfolio in CMBS as of October. It was 24 percent in January, according to a person familiar with the fund. A spokeswoman for Seer declined to comment.
CMBS has been about 14 percent of the book at Chris Hentemann’s $833 million 400 Capital all year. The 400 Capital Credit Opportunities Fund is up 12.64 percent net of fees through October, according to an investor update. A spokesman for 400 did not respond to a request for comment.
Others believe the greatest value is in Europe, where CMBS prices are even lower than in the US.
“European CMBS is attractive both relative to the U.S. and other asset classes in general,” said Jason Walker, portfolio manager for the $2.4 billion CQS ABS Fund. “Fundamentals in the sectors are turning. It’s an attractive outlook as the underlying real estate environment improves in Europe, especially in the U.K. and Germany.”
CQS increased its European CMBS exposure from about 15 percent earlier in the year to roughly 25 percent now. Walker believes the investments can earn between “high single-digit” and “mid-teen” returns. The ABS fund is up 9.32 percent this year through November, according to performance information obtained by CNBC.com.

Build it and they will come?
Despite that excitement, it’s not clear if investors will come.
Hedge fund data tracker eVestment projects funds that run CMBS strategies won’t raise much money in 2014.
The firm said that the mortgage funds it tracks had net outflows of $12.1 billion over the first three quarters of 2013. And search activity in the eVestment database for MBS strategies has remained neutral over that past 12 months, which is “a significant indication of flat asset-flow activity heading into 2014,” a spokesman for the firm said.
(Read more: The new mortgage landscape: What you need to know)
“It seems like a good opportunity without too much risk, but it’s not like I’m jumping up and down about it,” said one fund of hedge funds manager who invests with many mortgage-focused funds and asked not to be named.

Hedge funds & mortgage-backed securities

CNBC’s Lawrence Delevingne weighs in on hedge funds and mortgage-backed securities.

Part of the reason is the potential returns are good—but not great. Manus Clancy, a senior managing director at CMBS information company Trepp, said “B” rated slices of the securities—some of the riskier ones—are now yielding around 15 percent, but that assumes no losses on the underlying real estate.
One to point out the risks of CMBS recently was Paul Singer of Elliott Management, which has some exposure to the market.
“The rise in rates shows no signs yet of dampening commercial real estate prices or transaction activity, but we suspect that will change if interest rates move up materially from current levels,” Singer explained in a recent letter to investors.
Regardless, few doubt that there’s some opportunity—even if the returns targets aren’t electrifying.
“We expect many will continue to look at distressed commercial opportunities, especially those being created by large retailers with vast real estate assets like JC Penney and Sears, to name just a couple,” said Brian Shapiro, CEO of Simplify, a New York-based advisory and data firm that tracks hedge funds. “The outlook is moderately positive.”
By: Lawrence Delevingne (CNBC)

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