appurato che i lettori sono 4 e non solo uno
(temo sempre di sprecare spazio con i miei interessi di nicchia, spesso non inerenti il tema del forum...) un punto di vista diverso, quello di un REIT che gioca in difesa da un po' di tempo... se non altro per evidenziare che non tutti hanno visto il problema DOPO...
In last year’s Annual Report [2007], we said,
“We believe
that many companies (us included) have had a fairly
easy operating environment in recent years. Interest
rates have been historically low, which has allowed
businesses, consumers and investors to finance their
purchases of assets with higher levels of debt. This has
led to increased values in the stock market, bond
market, residential real estate, commercial real estate
and almost all other asset classes. At the same time,
we have seen historically low default rates on mortgages,
bonds, consumer loans, and virtually all other types of
credit. It has been our experience that all ‘good runs’
eventually end, asset values get a bit overdone and, at
some point, things slow down. We wouldn’t be surprised
if 2008 is a year that, at best, we all move towards a more
normal operating environment, and, at worst, we face more
challenging conditions throughout the economy.We believe
we are prepared for such an environment and should be able
to make progress in our operations in 2008.”
That’s an understatement! As a conservative
Company, we were becoming very concerned with what
we were observing in the financial markets and where
we thought the economy might be headed. Thinking
that there might be substantial excesses in the overall
market, we made a number of moves, over the past
couple of years, that are serving us extremely well
today. Let’s take a moment to review what we were
thinking and what we did about the economic
environment we thought might be coming.
Since our business is to provide capital to other
businesses by buying their real estate and leasing it back
to them, we are, in essence, a provider of credit. That
means our competition is often other sources of capital,
such as the debt markets, and we try to maintain an
awareness of what is going on in those markets. From
2003 to 2006, we noticed that less creditworthy
borrowers were being charged rates of interest very close
to the interest rates being charged to the best borrowers,
which was unusual. This encouraged the more risky
borrowers to add a significant amount of debt to their
operations.We observed this not only in the retail industry,
but also throughout the overall economy. There seemed
to be too much leverage (borrowed dollars) in almost all
areas of the economy. Additionally, living in San Diego,
we had a front row seat to view the incredible increases
in the prices of residential real estate. We observed that
a lot of the real estate being bought and sold in our
community was being financed by “nothing down,”
“interest-only,” “sub-prime,” “limited documentation,”
and “negative amortization” mortgages. As a result, we
came to believe that a housing market bubble was
building very quickly. However, we also knew, from
experience, that excesses in any market can last a long
time and our ability to time the end of the cycle is limited.
In late 2006, we also came to believe we might be
at the beginning of the end of the rapid rise in the
housing market. “Grant’s Interest Rate Advisor,” a great
publication to which I subscribe, noted that
the cost
for an institution to insure against a default in a
$100 million residential mortgage bond was only about
40 basis points (4/10 of 1%), or $400,000. In a matter
of a few weeks, the pricing for the insurance went to over
300+ basis points ($3 million), and by February it went
to over 1,000 basis points ($10 million), which meant
that one or more institutions in the market thought they
needed insurance on their residential mortgage bonds
and were willing to pay up for that insurance. “Grant’s”
very accurately interpreted these, and other events, as the
end of the housing bubble, and I thought their analysis
made sense. This also caused us to speculate that, if the
residential mortgage bond market collapsed, the
commercial mortgage bond market might not be far
behind, and then the REIT bond market might soon
follow. Eventually, the overall debt market could be
negatively impacted and so it occurred to us that capital
might become more difficult to obtain in the future.
