Archive for November 2017
Tax Reform and Senior Housing
We follow some REITs at Greenfield, and in general REITs are having a lackluster year. REITs in general have outpaced the S&P 500 this year (though some have done very well), the goal is for a REIT to outperform its underlying net asset value, or NAV for short. NAV is the theoretical amount of cash the REIT would have if it liquidated its holdings at current market value. If the REIT management is doing well, or if the sector is expected to grow, then the REIT price should be higher, and should grow faster than NAV in anticipation of those future earnings.
Unfortunately, this has not been the case, particularly in some sectors. For that reason, health care REITs have backed off acquisitions a bit, since new acquisitions would be dilute current values. In their stead, non-REIT players (private equity, for example) are snatching up senior housing under the SWAG analysis that “hey, people are getting older, so senior housing is good.” Yeah…. Andrew Carle, a senior housing analyst quoted in a November 13 National Real Estate Online article by John Egan, notes that these new players may not be giving “proper consideration to market-specific dynamics.” That’s a nice way of saying they’re not doing their homework. This is not to say that senior REITs aren’t a good idea, but like every good idea, picking thru the produce rack for the best fruit is a must, particularly when you’re investing other people’s money. By the way, private equity accounted for 47% of senior housing deals in the first half of 2017, compared with about 10% done by public entities.
One of the “known unknowns” (to borrow from Donald Rumsfeld) is what will happen in Congress to taxes. One might think that lowering taxes is generally good for real estate, but that’s not always the case. Consider the Reagan tax cuts in the mid-1980’s. Market anticipated one thing, and the final bill had something else. In the end, much of the mistaken anticipation (for example, failure to grandfather certain deductible items) was one of the straws on the camel’s back that led to the S&L melt-down, FIRREA, the need for Fannie/Freddie oversight, etc. That said, just like the early 1980s, there’s a lot of private money chasing real estate deals. Let’s hope it all gets invested properly. Nothing beats good due diligence, analysis, and careful selection.
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The FED — “Everything Old is New Again”
Even though we’re both South Carolinians, I didn’t meet former FED Chair Ben Bernanke until 2004, when we were introduced at the American Economic Association’s annual FED luncheon in San Diego. He was, at the time, a member of the FED Board of Governors, a seat he would soon resign to become the Chair of President W’s Council of Economic Advisors, and shortly thereafter the FED Chair, succeeding the long-serving Alan Greenspan.
So now, somewhat in contrast, we have Jerome Powell nominated to be the new FED Chair. Like Bernanke, Powell will come to the job having served as a FED Governor. He also served in government, as Treasury Undersecretary, but spent most of his career in the private sector, most recently, intriguingly, at the Global Environment Fund, focused on specialty finance and opportunistic investments. After several years of Yellen and Bernanke, we tend to forget that many prior FED chairs came with significant private sector experience. Greenspan spent nearly his entire career on Wall Street, interrupted by a stint as President Ford’s Council of Economic Advisors Chair. Paul Volker before him had two long stints at Chase Bank, interrupted by a brief period in the Kennedy Administration as an Undersecretary of the Treasury. William Martin worked as a stockbroker at A.G. Edwards, Thomas McCabe was the CEO of Scott Paper, and William Miller was CEO of Textron.
Powell will be the 9th FED Chair since WW II, and most intriguingly, one without a degree in economics or finance. Yellen, Bernanke, Greenspan, and Burns all had doctorates, so we tend to think that’s de rigueur. Actually, it would appear that holding a Ph.D. in economics isn’t a prerequisite at all, and in fact of all of the FED Chairs in history, only those 4 held doctorates. McCabe, the first FED Chair after WW II, held an BA in economics. Martin, who succeeded him, studied Latin, originally considering a career as a Presbyterian minister. (Originally appointed by Truman in 1951, Martin served as FED Chair under 5 presidents, leaving office in 1970.) Miller, who served under Carter, was also a lawyer (and before that a Coast Guard officer) before joining Textron. The great Marriner Eccles, who served as Chair for 14 years under Roosevelt and Truman, had an undergrad degree and came out of his family’s business in Utah. (Intriguingly, this FED Chair who helped define Roosevelt’s New Deal was a registered republican. Go figure…)
So, why the history lesson? In part, to reflect on the fact that Powell may be one of the most mainstream appointments this White House has made. While FED chairs tend to have an agenda, the job tends to be somewhat more reactive than proactive. Consider the storm that Bernanke waded into, or the aftermath which Yellen has had to manage. Powell’s job will be to stay the course, which has been quite good the past few years. One tends to feel a bit sorry for him, recognizing that his will probably be an unenviably tough term of office.
(Footnote — Many will disagree with my comment about doctorates, and argue that Paul Volker had one. He did not. Volker held an MA in political economy from Harvard, and went on to do advanced graduate work in the subject at the London School but without the award of a degree, not that it appears to have held him back…)
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Housing…. overheated again?
“Home price increases appear to be unstoppable,” — a quote from David M. Blitzer, Chairman of the Index Committee at S&P Down Jones Indices, as quoted in a Tuesday article by Christopher Rugaber of the Associated Press, and featured on usatoday.com. Am I the only one who felt cold chills reading that?
C’mon, David, exactly how did that turn out last time? Prices, by the way, are headed up because money is still relatively cheap, demand is incessant, and supply is constrained. S&P, which is in business, among other things, of promoting their Case Shiller index, notes that buyers are in bidding wars. That index, released Tuesday, showed that house prices are up 6.1% from a year ago — well above inflation — and in 45% of the cities tracked, the house price increase has surged from a month earlier. In short, not only is the car speeding, it’s accelerating.
However, sales volume has fallen 1.5% from a year ago. That may not sound like much, but in a market that was already not at equilibrium, that’s economically significant. Plus, the number of homes for sale was down 6.4% from a year ago, to the lowest level since the NAR started tracking these statistics. Ever. In history.
Sigh….
From a small northwestern observatory... 