Real Estate Avoids ?Catastrophe? as Yields Drop: Credit...

Real Estate Avoids ?Catastrophe? as Yields Drop: Credit Markets

Dec. 15 (Bloomberg) -- Investor confidence in U.S. commercial property is the highest since the 2007 market peak, a sentiment reflected in bonds of real estate companies that own everything from New York skyscrapers to California strip malls.
Yields on debt issued by real estate investment trusts average 210 basis points more than Treasuries, the least since Nov. 12, 2007, according to Bank of America Merrill Lynch index data. The debt has returned 13.2 percent this year, trumping a 8 percent gain by investment-grade bonds.
The debt of companies that own offices, shopping centers, apartments and warehouses has rallied as a dearth of new development spurs demand ?little by little,? according to billionaire investor Sam Zell, chairman of Chicago-based apartment owner Equity Residential. The Moody?s/REAL Commercial Property Price Index has been little changed since October 2009 after plunging 45 percent in two years.
?If there is no new supply, then the catastrophe that everybody was expecting isn?t going to happen,? Zell, 69, said in a telephone interview. ?Commercial real estate is not suffering and is in fact getting better,? said Zell, the founder of Equity Office Properties Trust, the biggest U.S. office owner before Blackstone LP bought it in a record-breaking leveraged buyout in 2007.
REITs have issued $17.7 billion of bonds this year, the most since 2006, Bloomberg data show. The sales helped refinance existing debt and bolster balance sheets as rents and occupancies stabilize, debt-research firm CreditSights Inc. said in a report last month.
Nothing Built
?Real estate is all about supply and demand,? said Zell. ?We haven?t built anything in this country since July ?07. We?re not building anything right now.?
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt was unchanged at 171 basis points, or 1.71 percentage points, according to Bank of America Merrill Lynch?s Global Broad Market Corporate Index. Yields averaged 4.021 percent, the highest since June 22.
The cost of protecting corporate bonds from default in the U.S. fell for a 10th straight trading day, the longest streak of declines since 2006.
Securities of Wal-Mart Stores Inc. sold in October plunged to the lowest since they were issued as debt offerings tumbled to the least in almost three weeks. Leveraged loan prices rose to the highest in almost a month, while junk bond spreads matched the lowest point this year.
Hedge Against Losses
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.6 basis points to a mid- price of 85.8 basis points as of 6:54 p.m. in New York, the lowest since Nov. 5, according to index administrator Markit Group Ltd.
The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has dropped from 99.4 at the end of November. The gauge fell for 10 straight trading days in the period ended Oct. 26, 2006, Markit data show. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Federal Reserve Chairman Ben S. Bernanke said yesterday the central bank is keeping its plan to buy $600 billion of Treasuries through June to stimulate the economy and reduce unemployment.
?Don?t fight the Fed,? said James Parascandola, head of credit derivative trading at MF Global Holdings Ltd. in New York. ?Stocks go up, credit spreads go tighter, that?s the environment.?
Most Traded Bonds
Bonds from New York-based Citigroup Inc. were the most actively traded U.S. corporate securities by dealers, with 125 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Wal-Mart?s $1.75 billion of 3.25 percent securities due in October 2020 fell 1.3 cents to 92.6 cents on the dollar, Trace data show. The notes from the Bentonville, Arkansas-based company yield 70 basis points more than similar-maturity Treasuries, according to Trace. The debt was issued at 99.619 cents on the dollar, with a spread of 78 basis points more than the benchmark, according to data compiled by Bloomberg.
Companies led by CNO Financial Group Inc. sold $747 million of debt in the U.S., the lowest volume of sales since Nov. 26, when issuance halted after the Thanksgiving holiday, according to data compiled by Bloomberg.
CNO Sells Bonds
CNO, the insurer previously known as Conseco Inc., sold $275 million of 9 percent notes due in January 2018 to yield 626 basis points more than similar-maturity Treasuries, Bloomberg data show.
?We didn?t see much issuance today and there was really no reason to come to market,? said Guy LeBas, chief fixed income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. ?There?s no incentive to step into the kind of volatility that a Fed statement can invite.?
The Barclays Capital Global Aggregate Index of bonds has lost 0.28 percent this month, trimming this year?s gain to 3.9 percent.
In the loan market, the Standard & Poor?s/LSTA US Leveraged Loan 100 Index rose for the sixth day, gaining 0.15 cent to 92.32 cents on the dollar, the highest since Nov. 15.
The index tracks the 100 largest dollar-denominated first- lien leveraged loans. Leveraged loans and junk bonds are rated below Baa3 at Moody?s Investors Service or less than BBB- at S&P.
High-Yield Debt
The extra yield investors demand to own high-yield debt declined 16 basis points to 542 basis points, matching the lowest level this year set in April 26, Bank of America Merrill Lynch index data show. Spreads on the debt have narrowed 80 basis points this month.
In emerging markets, relative yields shrank 12 basis points to 220 basis points, the lowest since Dec. 26, 2007, according to JPMorgan Chase & Co. index data. The gauge has dropped 52 basis points this month, reversing the 30 basis points gain in November.
REITs were pummeled in 2008 by the drop in property prices and a decline in occupancies and rents fueled by the worst recession since the Great Depression. The bonds lost 29 percent that year on average as spreads widened to 1,383 basis points in December 2008 after credit markets seized.
The price of REIT bonds above similarly rated debt has eliminated the incentive for investors to buy them, said Thierry Perrein, a senior analyst for Wells Fargo & Co. in Charlotte, North Carolina.
Rally Over
?The game is over,? said Perrein, who in October cut his recommendation on the debt to ?market perform? from an ?outperform? rating he assigned in May 2009.
?If you?re getting involved now, you kind of missed the rally,? he said.
REIT debt, which had gained for 10 consecutive months in the longest winning streak since 2001, declined 2.67 percent this month, index data show. That compares with a 2.34 percent loss on investment-grade debt and a gain of 0.92 percent in high-yield bonds.
The improvement belies predictions by investors including Inland Real Estate Group Inc. Vice Chairman Joe Cosenza that the commercial property market had further to fall.
?Double-Dip?
In an interview at Bloomberg LP?s Chicago office in July, Cosenza said a ?double-dip? in the commercial real estate market could have come as soon as September.
The turnaround is being driven in part by the relatively slim list of distressed properties coming up for sale and quicker-than-expected rebound in fundamentals such as rents and vacancy rates, according to Newport Beach, California-based Green Street Advisors, an independent real estate research firm.
HCP Inc., the biggest U.S. health-care REIT by market value, said late Dec. 13 it would pay $6.1 billion for 338 nursing homes from Carlyle Group?s HCR ManorCare Inc. in the largest REIT deal in three years.
The acquisition is ?a good example of public REITs buying from private-equity firms looking to monetize investments from a few years ago,? said Craig Guttenplan, a London-based analyst at CreditSights, which recommends buying REIT debt.
Boston Properties Inc., the U.S. office REIT led by Mortimer Zuckerman; and Toledo, Ohio-based Health Care REIT Inc. led $2.63 billion of bond sales for the industry in November, the most since March, Bloomberg data show.
Sales of bonds linked to commercial real estate loans are beginning to recover as well. About $10.6 billion of the debt has been issued this year, up from $3.4 billion in 2009, according to data compiled by Bloomberg. Issuance may reach $45 billion in 2011, according to a Nov. 24 report from JPMorgan.
CMBS Sales
Americold Realty Trust, the warehouse operator owned by Ron Burkle?s Yucaipa Cos., sold $600 million of bonds backed by commercial-mortgage debt, a person familiar with the transaction said Dec. 9. The offering was secured by refrigerated warehouses, compared with recent transactions that have been backed primarily by shopping malls and office buildings.
U.S. apartment vacancies dropped for the first time in almost three years in the third quarter, suggesting the trend of people moving in with family or friends might be abating, New York-based research firm Reis Inc. said.
Office vacancies in U.S. central business districts declined for a second consecutive time in the third quarter, reaching 14.7 percent compared with 14.8 percent in the previous three months, as tenants signed leases for additional space, according to broker Cushman & Wakefield Inc.
Office Rebound
The average rent per square foot of REITs operating in central business districts, including Boston Properties and Vornado Realty Trust, increased in the third-quarter, while declining for REITs focused on suburban area properties, like Highwoods Properties Inc. and Mack-Cali Realty Corp., according to CreditSights? Nov. 22 report.