Greer Advisors, LLC

 Innovators in Real Estate Analytics
 
   Wall Street & Commercial Real Estate

The purpose of the "Wall Street & Commercial Real Estate" newsletter is to provide Yield Rates and other key information from Wall Street (i.e. REIT dividend yield, CMBS yield, and CMBx returns) on a periodic basis with the "freshest" information from the "street." Though Ackerson and Ellwood brought sophisticated formulas to build up capitalization rates, the usefulness of such formulas diminished during periods with "less than ideal" sales activity; therefore, Greer Advisors brings you various REIT Dividend Yield (aka Capitalization Rates) and the "Greer CMBS/CMBx Build-Up Yield Rate" TM. Prior methods to build up capitalization rates were inherently flawed because of their reliance upon debt assumptions that did not reflect the debt market of today. For example:

       Do you use the "start rate", fully-indexed (index+margin) or "underwriting" interest rate?
       What if points were paid to drive down the interest rate?
       How do you account for credit-constrained markets?
       What if many buyers can't get financing?
       How do you account for interest rate swaps?
       How do you account for credit default swaps or LOCs to "credit enhance" the debt?
       How do you account for CMBx derivatives where anyone can be on either side of a tranche?

Many of these issues did not exist when some of the old methods were created. The bottom line is that the real estate industry needed new tools to add to the arsenal; hence, this newsletter was created to serve the commercial real estate community. Within the REIT world, the Dividend Yield is the closest approximation to a capitalization rate. The yield is "post debt service", which means it is a leveraged yield. Though leverage and debt costs vary widely, most bond covenants prevent leverage above 40-60% of total assets. Lastly, many investors emphasize the importance of FFO (Funds from Operations), which is Dividend Yield with Depreciation added back. Other investors emphasize the importance of AFFO (Adjusted Funds From Operation), which is Dividend Yield plus the difference between Depreciation and Maintenance Costs. Nevertheless, Dividend Yield could be thought of as a "leveraged" capitalization rate. The spreads between various credit-rated tranches in the CMBx world is one of the best indicators of risk. It demonstrates the market's current appetite for risk. As an example, in early 2007, Mr. Greer was charting the spreads on the various tranches. The AAA vs. BBB- yields were about 65 bps apart, near 20-25 bps over swaps for the AAA, and around 85-90 bps for BBB-. By the end of the year, numerous CMBS issues were unable to sell some of the lower-rated bonds. The spreads were near 2,000 bps, or 20 percent apart on yield. While spreads in corporate bonds are interesting, Real Estate is not considered as safe as corporate bonds; hence, they are not good predictors for real estate. Additionally, the REIT and CMBS markets tend to be very good indicators of where commercial real estate is going. If bond issue is consistently increasing, real estate values tend to increase. In terms of interest rate and Fed Rate hikes or drops, there is a lag effect in terms of their impact on capitalization and yield rates, typically six months to two years, depending upon the size and frequency of changes in the Fed Fund target rate.

If your focus is debt, in addition to the yields noted in the Greer CMBS/CMBx Build Up Yield Rate TM other notable resource include Keefe Bruyette & Woods www.KBW.com, Debt Connnection www.DebtConnection.com, Debt Trader www.DebtTrader.com, and various Fed programs. The St. Louis Fed https://Research.StLouisFed.org is a tremendous wealth of other data.

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