Archive for September 2012
And now for something completely different…..
All work and no play makes John a dull boy, I guess, so Tuesday evening, I enjoyed a great dinner at the Cosmos Club in DC with Amanda Smith to celebrate her new book, Newspaper Titan: The Infamous Life and Monumental Times of Cissy Patterson. For a bit more about Amanda and her book, click here or keep reading.
First, about Amanda — you may know her better as the biographer and granddaughter of Joe Kennedy (Hostage to Fortune: The Letters of Joseph P. Kennedy), who of course was the Ambassador to the Court of St. James under FDR in the 1930’s, and perhaps even better known as the Father of JFK, RFK, Teddy, and the like. Amanda’s mom is Jean Kennedy Smith, no slouch in her own right, who is the last surviving child of Joe and Rose Kennedy and was Ambassador to Ireland under President Clinton. Amanda holds her doctorate from Harvard.
Joe Kennedy, of course, was one of the great isolationists during the interwar years, and when Amanda was researching her granddad, she was drawn to the stories behind the other isolationists of the day. Cissy Patterson is one of the most interesting women — nay, most interesting people — of the middle years of the 20th Century. In 1946, Colliers magazine called her the most powerful woman in America, and perhaps the most hated. She was the granddaughter of Joseph Medill, one of the founders of the Republican Party (and the man who delivered the decisive Ohio delegation to Abraham Lincoln at the 1860 convention), and after an amazingly adventurous life, became publisher of the Washington Times Herald, taking it from the 5th rank among papers in the nation’s capital to number one in both circulation and influence during World War II.
Presenting a book about Cissy Patterson at the Cosmos Club was not without irony (and regular readers of this blog know how much I love irony). Cissy Patterson was an early supporter of FDR, but became a big critic of his administration over its foreign policy. The wonderful headquarters of the Cosmos Club, on Massachusetts Avenue, was the former home of FDR’s under-secretary of state, the famed Sumner Welles, who was one of the great architects of modern-day interventionist U.S. foreign policy and the designer of the United Nations.
Of course, attending a dinner to honor Amanda Smith and her new book wasn’t the ONLY reason I was in DC this week, but it’s the only one I can talk about right now. More on the other things later.
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REIT Research — Real Estate in Volatile Times
The National Association of Real Estate Investment Trusts (NAREIT) recently commissioned Morningstar to study the role of securitized real estate in the well-balanced portfolio, with a particular eye to the investor attitudes regarding risk, as well as the actual performance of markets. Both of these two concepts — risk and investor attitudes — are less well understood than researchers seem to think. In the first, market models assume a degree of normalcy in the distribution of market returns. However, empirical evidence seems to contradict this, and in fact market volatility is significantly greater (and of greater magnitude) than models would predict.
In the second case — investor attitudes — traditional models suggest that rational investors react to “up” markets in the same way as “down” markets. More recent behavioral models recognize the fallacy in this — rational investors relish “up” volatility, but loathe down markets.
The results of the research were published in an excellent new research piece from NAREIT titled “The Role of Real Estate in Weathering the Storm” (click on the title for a copy of the paper). Some high-points from the study:
- Since 1929, the S&P 500 has had 10 months with declines of 15.74% or more — which is eight more than would be predicted by a normal distribution.
- Recent studies by James Xiong of Ibbotson Research show that the log-normal distribution fails to account for this down-side volatility.
- From 2000 – 2009 (often called the “lost decade”), the cumulative return on large-cap stocks was negative 0.95%.
Morningstar then crafted portfolios under the “theoretical” model (normal distribution) versus a more realistic model of volatility, with alternative structures for risk-averse investors and more risk-tolerant investors. Investment returns were measured over the period 1990 – 2009, which notably included the recent market melt-down.
Under normal distribution assumptions, an optimum risk-averse portfolio would allocate about 6% to securitized real estate and theoretically enjoy a return of 7.6%. Under more realistic volatility assumptions, the risk-averse portfolio would allocate 14% to securitized real estate and would have returned 8.2%.
A more risk-tolerant investor would have allocated 18% to 20% in securitized real estate, and would have enjoyed a return of 9.7%, with volatility (standard deviation of portfolio returns) of 10%.
The most striking finding of the study was the consistent role played by securitized real estate in all four of the models (normal versus non-normal, risk-averse versus risk-tolerant) and particularly thru the market melt-down. While this may seem counter-intuitive, given the roller-coaster ride of REIT prices, investors need to realize that REIT shares paid relatively high dividends through this period, thus ameliorating the downward price movements. In short, the gains from real estate holdings pre-meltdown, coupled with the dividends, more than made up for the price bounce over the past few years. Further, REIT prices have rebounded better post-recession than have other S&P shares.
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Sustainability — Follow the Money
Sustainability seems to be the real estate buzz word du jour. A “google” of “sustainable real estate” brings me slightly over 56 million hits. Number two on the list is the Journal of Sustainable Real Estate, (a more-or-less joint presentation of the American Real Estate Society and CoStar) of which I’m apparently on the editorial committee. Go figure.
I don’t want to sound too cynical here, but as a “finance guy” in the real estate field, I tend to follow the money. A lot of what’s going on in real estate, particularly at the individual building-level, has a lot to do with sustainable energy (e.g. — LEED Certification, Energy Star) or sustainable architecture. There was a nice paper out of Clemson University by David Heuber and Elaine Worzala recently on sustainable golf course development (click here for a link) which begins with the irony that no one is building golf courses today. Scott Muldavin has a great book on underwriting and evaluation sustainable financing (reviewed here) which gets close to the heart of the matter.
However, Ben Johnson, writing for the current issue of Real Estate Forum, seems to have caught the scent, to use a hunting dog analogy. In his article, “When CalPERS Talks, People Listen”, he notes that this mega-pension fund n($228 billion) has about 8% of its total invested in real estate. (My own estimate is a bit higher and more current than that — see here for details.) The noteworthy thing, however, is that CalPERS just made a $100 million stake in Bentall Kennedy outt of Toronto. B-K is one of North America’s largest real estate investment advisors, resulting from the 2010 merger of the Canadian firm Bentall with Seattle’s own Kennedy Associates.
Two things make this all very interesting. First, B-K earned the top spot this year on the Global Real Estate Sustainability Benchmark Foundation’s ranking of fund managers in the Americas. This ranking, covering 340 of the world’s largest funds, measures social and environmental performance. (Given B-K’s Pacific Northwest and Canadian pedegrees, this doesn’t surprise me at all.)
Second — and this may be the biggie — as CalPERS goes, so goes the industry. The focus of Mr. Johnson’s article was to note that now every pension fund in the known universe will need to consider using an advisor like B-K. Johnson notes that this deal “gives the largest public institutional player in the US a deeper investment in understanding real estate as an asset class and a unique insider’s view of the industry’s dynamics.” More interestingly, I would posit, it puts a leader in sustainable real estate front-and-center in the view of the sorts of pension managers who, until now, have very little cross-pollination with the real estate industry. In short, as institutions look to find good real estate partners, sustainability will be a key element of consideration.
From a small northwestern observatory... 