Wednesday, August 26, 2009

The Debts of the Spenders: From REITs With Love - A Closer Look at CMBX

Commercial real estate bears continue to get beaten badly. There was a time when I was a CRE bear (earlier this spring/last fall) but that era passed upon realizing the extent of the government's commitment to TALF and POMO (permanent open market operations) purchases in the CMBS market. Even though cash flow modeling and other means of fundamental analysis continue to paint a poor picture, the CMBX index has managed to gather steam while maintaining support levels. Last week's extension of the TALF program into 2010 was the final nail in the coffin for CRE bears.
Keep in mind that commercial real estate was priced for armaggedon earlier this year. Is there a reason to be suspicious of the rally? Yes! But is it possible to fight the unlimited firepower of the Federal Reserve in its quantitative easing? NO!
Bailout Ben has done his job of holding the fort long enough for the cavalry to arrive - in this case, sideline money (an eclectic mix of hedgies, mutual funds, and private wealth) that has watched the March - August equity rally in disbelief. Faced w/the prospect of inflation, fund managers are feeling the pressure to invest their funds somewhere. . . .anywhere. And it seems to be working.

NEW YORK, Aug 25 (Reuters) - Bonds of U.S. real estateinvestment trusts have rallied as thawing credit markets easedconcerns over the sector's liquidity and short-term refinancingneeds, though the continuing need to refinance maturing debtmay spark renewed weakness. REIT bonds have rallied as the companies shored up liquidity with equity and debt sales, and extended maturities on revolving credit lines.
Spreads on REIT bonds have narrowed to 392 basis points, from more than 500 basis points in July, according to Bank of America Merrill Lynch data. The spreads had widened to over
1000 basis points in April. "REIT credit spreads have continued to tighten as near and
intermediate refinancing risk has subsided largely due to much improved access to capital in the form of a thawing unsecured market, higher equity values, and the potential for CMBS
issuance via TALF," CreditSights analysts Craig Guttenplan and Rob Haines said in a report on Tuesday. REITs are expected to benefit from the government's Term Asset-Backed Securities Loan Facility (TALF), which aims to jump-start the moribund commercial mortgage-backed securities (CMBS) market.
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