Public housing companies are the new way to buy distress

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Despite falling property values ​​during the coronavirus pandemic, it has been difficult for buyers to find properties for sale as most landlords are holding out. This has prompted some to rush to acquire shares in public real estate companies and bonds.

A handful of large investment firms, including Blackstone Group Inc.,

Starwood Capital Group and Oaktree Capital Management bought property-backed securities, according to public filings or people familiar with the matter.

These companies are betting the public markets are too pessimistic about the impact of the pandemic on homeowners. Some of these purchases have already produced handsome returns as markets rally from their spring lows.

Ronald Dickerman, president of real estate investment firm Madison International Realty LLC, said his company purchased tens of millions of dollars worth of shares in real estate investment trusts in March and April. At the time, shares of some large REITs were down more than 50% for the year, amid widespread fears that the pandemic could lead to lower property values ​​and missed rent payments.

Mack-Cali Realty shares Corp.

a New Jersey-based office and apartment owner where Madison was already an investor, fell below $14 in early April, but Mr Dickerman calculated that the company’s real estate, minus debt, was worth almost double.

“So we backed up the truck and bought all the stocks we could find at $14,” he said. Mack-Cali’s stock price is up about 18% from its May low. Mr Dickerman said he planned to hold on to the shares, betting on a further rise. Madison also bought shares of Capital & Counties Properties PLC and other public real estate companies.

“These are opportunities that simply don’t exist in private markets,” Dickerman said.

Investors turn to securities in part because real estate for sale is not readily available. The number of commercial real estate transactions in the Americas fell 33% in the first 150 days of the year, compared to the same period a year earlier, according to Real Capital Analytics.

Real estate markets move slowly and many homeowners would rather wait and see if prices recover than sell at a loss. Banks allow borrowers to defer mortgage payments, reducing pressure on homeowners to sell. While most observers expect an increase in mortgage defaults and distressed home sales, they expect that to take time.

Blackstone and Starwood Capital bought shares in Extended Stay America Inc.,

an extended-stay hotel operator in the spring, according to people familiar with the matter.

“We are already seeing exploitable opportunities emerging from dislocation, initially in structured credit and liquid markets,” Blackstone Chairman Jonathan Gray said in an April earnings call. The company has purchased more than $2 billion in real estate stocks since the pandemic began, according to a person familiar with the matter.

SL Green Realty Corp.

meanwhile, has sold more than $900 million in real estate and debt holdings since April and is using the money to buy his own shares, which he considers undervalued.

“These are opportunities that simply don’t exist in private markets.”


— Ronald Dickerman, Managing Director, Madison International Realty

Investing in public real estate carries its own risks. Stock and bond prices tend to swing more strongly than private real estate values, and poor economic data or an increase in missed rent payments could send markets lower again, as these stocks tend to move in tandem with larger markets.

Earlier this year, some mortgage REITs were forced to sell their commercial mortgage-backed securities holdings after a rapid drop in prices prompted margin calls from their lenders.

It turned into an opportunity for others. April 2, TPG RE Finance Trust Inc.

sold $572 million of mortgage bonds, a type of mortgage bond. The buyer, according to people familiar with the matter, was Oaktree Capital Management. About a week later, the Federal Reserve announced that it would begin buying a broader range of commercial mortgage bonds, including bonds not guaranteed by Fannie Mae or Freddie Mac..

This helped the market rebound.

New York-based real estate investment firm Somera Road Inc. has purchased about $60 million in commercial real estate debt since March and CMBS accounted for 40% of that number, according to Ian Ross, the company’s chief executive.

Many of these purchases were made in late March, when mortgage REITs and other leveraged lenders were under pressure to sell and prices were low. The market rebound led to “phenomenal” returns, Mr Ross said. But he worries that some CMBS prices have risen too much and that other investors are underestimating the scale of the crisis facing the commercial real estate sector.

“We’re going to see a lot of defaults, both on the tenant side and on the borrower side,” he said.

Write to Konrad Putzier at [email protected]

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