From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for the ‘Finance’ Category

Tax Reform and Senior Housing

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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.

 

Written by johnkilpatrick

November 15, 2017 at 8:15 am

The FED — “Everything Old is New Again”

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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…)

 

Housing…. overheated again?

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“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….

 

Written by johnkilpatrick

November 2, 2017 at 9:02 am

Retail?

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The massive, annual orgy of shopping is just around the corner, and I’ll admit I’m worried.  Let me share a bit of a story.  I live in a pretty tony suburb of Seattle.  I dare say I’m surrounded by conspicuous consumption.  The Range Rover density in my corner of the world is embarassing.  That said, the glass bowl on the Kilpatrick family’s upright mixer broke (first world problems, right?), so we ordered another one.  Turns out, the quickest  quickest way to get a replacement was to have it delivered directly to a nearby big-box (which shall remain nameless) so I wandered in to pick it up yesterday.

It wasn’t just the dearth of customers that disturbed me, but the dearth of sales staff. the shelves were reasonably well stocked (albeit, nothing holiday-esque yet) but the cashier stands were empty — all checkouts were directed to the customer service desk (I’m not kidding).   I’ve frequented this store regularly, and while I don’t have a grasp of the seasonality of their business, my guess is that the shopping count was about half of what I had seen in there before.

Let me repeat that.  About half.

Most economists have been looking for a pull-back (that’s a kind word for “recession”) sometime next year or the year after.  The current leadership in Washington fails to note that increasing stock prices do not bely the onset of a recession.  Indeed, Mike Patton had a great study of recessions and the stock market (measured by the DJIA) published in Forbes back in 2012 (click here for a copy).  He studied 14 economic pull-backs dating from 1928 thru the most recent one.  Intriguingly, in most cases, the market hit record highs immediately prior to the onset of each recession.  In fact, in a couple of the recessions (particularly the one in 1945), the market continued to rise even during the economic trough.  During the most recent kerfluffle, the market was behaving quite nicely, albeit with a bear trend, until the full onset of the recession.

I think there’s more to be learned about recessions down on Main Street than there is up on Wall Street.  Right now, Main Street in my admittedly prosperous corner of the world is not as healthy as it was a year ago.

Written by johnkilpatrick

October 13, 2017 at 3:52 pm

Posted in Economy, Finance

Not a good sign….

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The International Monetary Fund (IMF) tracks gross domestic product (GDP) both globally and by nation.  Their metrics are generally quite good.  They’ve downgraded the 2017 expectation to 2.1% from a prior forecast of 2.3%, in no small part to the abysmal 1.4% the U.S. turned in during the 1st quarter.  They’re currently projecting 2.1% for next year as well. This is a far cry from the 4% annual rate the Prez promised on the campaign trail, and the 3% he promised after taking office.

Admittedly, a president can’t be judged on the economics of his first year.  That said, a principal driver of the lousy 2018 forecast is the amazing lack of understanding this administration (and Congress, for that matter) has about the power of fiscal policy to drive the economy.  This lack of understanding can trace its roots to the early Reagan days and the GOP’s enamor with Milton Friedman.  The Chicago economists (and this is a wild oversimplification) preached monetary theory, holding that the entire economy was driven by the money supply, which could be improved with tax cuts.  This was in contrast to the Keynesians (and again, a wild oversimplification) who held that targeted fiscal policy was the order of the day.  Since the Kennedys were Keynesians (or at least Harvard graduates), then they had to be the enemy of all that was good.

Of course, many of us have been forecasting a recession for 2018 or so.  Why?  From a simple cyclical perspective, we’re long overdue.  My own thinking was that the Congress would enact a tighter budget which would be felt in the short-term, but that tax cuts wouldn’t be felt (if at all) until father out.  As it turns out, I was an optimist.  The budget cuts are draconian, and the tax cuts proposed will do nothing to add to consumption or investment.  (The former is patently obvious.  Give Bill Gates an extra million a year in tax cuts, and he’s not going to eat better or buy nicer clothes.  As for the investment side, money is already essentially free — overnight LIBOR is actually negative — and yet cash lays around on the sidelines looking for a new merger to fund.)

I’m presently not an optimist.  Neither are the economists at the IMF.  For a great synopsis of their report, read Rishi Iyengar’s report on CNN Money.

Written by johnkilpatrick

July 24, 2017 at 5:28 pm

WordPress v. Facebook

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Loyal readers will note that I’m frequently on Facebook and less frequently here.  You may have also noted (or not….) the very different tone of my two sets of writings.  My pure FB posts are generally either my (fairly strident) political views or mental meanderings about family, travel, restaurants, and bars.  In other words, normal stuff.  My blog posts lean to business, finance, and the economy, with a bent toward real estate.  By construct, the “voice” on this blog is different than the “voice” on FB.

Here’s where life gets interesting.  I had the honor last week to speak to a small audience at a luncheon at Seattle’s historic Rainier Club about the economy.  It’s quite impossible now-a-days to separate “economy” from “politics”, much as I might like to.  Calvin Coolidge, I believe, said that the “business of America is business”, and the current government in D.C. has adopted that mantra.  Sadly, the current government in D.C. appears to know quite little about mainstream business.  they know a bit about a few things, and almost nothing about most things.  That said, they’ve sold a bill-of-goods to many mainstream business folks.  I saw a truck heading into Seattle today with InfoWars and “Arrest Hillary” bumper stickers.  The driver was a bearded young man who appeared to be a hard working fellow.  He’s been sold on the notion that the government in D.C. is on his side now, and they’re going to make everything a lot better.  I’m waiting to see that.  I haven’t seen anything yet out of D.C. that suggests this government is representing anyone other than Russian bankers and the Koch brothers.

At my Rainier Club talk, a questioner — clearly a Trump supporter — commented that the benefit of the new administration was that they were dismantling onerous regulations which affect small business.  I reminded the questioner that I’m Chair of the Board of a business headquartered in Seattle, and that nearly all of our regulations are imposed by the City of Seattle and the State of Washington.  I further reminded him that these regulations make Seattle the sort of place where creative people wanted to live, and since my bread and butter is hiring creative people, I’m happy to put up with these regulations in order to hire creative folks.  I noted that Amazon, Starbucks, Nordstrom, Weyerhaeuser, Expeditors International, Expedia, Alaska Air, Microsoft, Boeing, Costco, the Russell Group, Symetra, F5 Networks, Paccar (who make Peterbilt and Kenworth trucks) and a host of other global companies were also willing to put up with these Washington State regulations in order to be able to tap into the brain trust that wants to live here.  Intriguingly, the most “regulated” cities and states in the nation tend to be homes to the most forward-thinking and growing businesses.  Indeed, New York and California have over 20% of the Fortune 500 headquarters, and the states which are generally the least regulated have no Fortune 500 or even Fortune 1000 companies (Montana, Maine, South Dakota, Wyoming, West Virginia, New Mexico, and Alaska).  You go figure….

Kroger…. sigh….

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I truly like Kroger.  I do the largest portion of my “commodity” shopping there.  Friends and colleagues know of my constant battle with my weight, and sadly enough, Kroger (or their pacific northwest brand, Fred Meyer) is partly to blame.

That said, I’m very concerned with Kroger (and Fred Meyer) as brands, and by extension as users of big boxes of real estate and anchors of shopping centers.  Kroger’s stock hit a one-year high of $37.86 last July, and is today 40% lower at 22.82.  Admittedly, about 7 points of that loss came on the heels of Amazon’s announced acquisition of Whole Foods.  However, another 7 or 8 points came from slow drift over the last 11 months.  For the record, during the past 12 months, the S&P 500 (not the most aggressive benchmark, for sure) rose from 2000 to 2433 (today, 1pm EDT), for a gain of just under 22%.  Hence, Kroger has underperformed the S&P by 62%.  Ahem…. To put this in more meaningful terms, Kroger has lost about $14 Billion in shareholder wealth in 11 months.

So this morning, I took time out of my nasty, busy schedule to listen to Kroger’s CEO, Rodney McMullen, interviewed on CNBC.  I was underwhelmed, to say the least.  He basically wanted to defend their current modus operandi, and bragged about their cheese department (which, I will admit, is quite good).  Arguably, when one loses $14 Billion in shareholder wealth in 11 months, perhaps one should have a “Plan B” to discuss on CNBC.

From a real estate perspective, Kroger and its other brands (e.g. — Fred Meyer) run 2,778 grocery stores in the U.S.  At about 50,000 square feet each, that’s roughly 140 million square feet of real estate (not counting 786 convenience stores, 37 food processing facilities, 1,360 supermarket fuel centers, and such and so forth).  Further, most of these stores are anchors for community shopping centers.  Lose the grocery anchor, and the entire shopping center becomes a dust bowl pretty quickly.

A long time ago, In Search of Excellence established that businesses “in the middle” of a market are doomed to failure.  You can make money at the top of the market (Whole Foods) or at the bottom (WalMart Super Centers) but not in the middle.  Profit margins in grocery have always been razor thin.  I can think of a dozen business scenarios that make sense for Amazon and Whole Foods, not the least is the fact that Whole Foods, geographically, is well positioned to serve as distribution centers for the sort of “top of the market” customers who would order groceries from Amazon.  I would love to see where Kroger thinks its market lies, but I’m going to guess that everyone in the grocery biz who is not chasing the top of the market will be in a race for the bottom of the market.

Written by johnkilpatrick

June 27, 2017 at 9:27 am