Thursday, July 30, 2009

KBR Has Strong Second Quarter

KBR Inc. on Thursday reported a nearly 40 percent increase in second-quarter net income.
The Houston-based engineering and construction company (NYSE: KBR) reported net income for the three months ended June 30, 2009, of $67 million, or 42 cents a share, on revenue of $3.1 billion, compared with net income of $48 million, or 28 cents a share, on revenue of $2.66 billion in the same quarter last year.

Analysts polled by Thomson Reuters expected KBR to have earnings of 41 cents a share.
The company also said in a statement that it had a backlog worth $12.3 billion as of June 30, and a strong balance sheet with cash and equivalents equal to $1.1 billion.
“I am pleased with the strong revenue and operating income growth over the same period last year, which contributed to KBR’s solid earnings in the second quarter of 2009,” said Bill Utt, chairman, president, and chief executive officer of KBR.

Wednesday, July 29, 2009


New home construction rose in June, driven by a strong surge in construction starts on single-family homes, which were up nearly 15 percent from May's level, according to new figures released on July 17th, by the Census Bureau.

The increases in both building permits and construction starts surprised economists, who had predicted little or no change. Overall, building permits issued in June were up 8.7 percent from May, to a seasonally adjusted annual rate of 563,000. New permits for single-family homes were up nearly 6 percent in June, to an annual rate of 430,000. The survey covers building permits and housing starts for both single-family homes and multiunit buildings.

Overall new housing starts were up 3.6 percent in June, to a seasonally adjusted rate of 582,000 units. The big jump in single-family starts was dampened in the overall figures by a sharp drop in construction starts of multiunit buildings, which dropped by nearly 30 percent following a 60 percent increase in May. The big swing is likely the result of the survey's large margin of sampling error; the Census Bureau cautions that it may take 3-4 months for underlying trends to become reliably established.

By that measure, both new housing permits and housing starts have shown general increases since March after a series of sharp declines throughout the previous year. Both building permits and housing starts in June were at approximately half of their June 2008 levels.

- Don McGraw

Friday, July 17, 2009

Housing starts surge

By Ben Rooney, staff writer

NEW YORK ( -- Initial construction of U.S. homes and applications for building permits both surged in June, according to government figures released Friday.

Housing starts rose to a seasonally adjusted annual rate of 582,000, up 3.6% from a revised 562,000 in May, according to the Commerce Department.

Economists were expecting housing starts to increase to an annual rate of 524,000 units, according to a consensus estimate gathered by

Single-family housing starts were especially strong, up 14.4% on a month-over-month basis. It was the biggest surge in that measure, considered the core of the housing market, since December 2004.

Friday's report suggests that the battered housing market is gradually stabilizing, according to Mike Larson, real estate and interest rate analyst at Weiss Research.

"The new home industry has done a good job of reducing supply," Larson wrote in a research report. "But the existing home market is still vastly oversupplied, and we continue to be inundated with an influx of distressed and foreclosed properties."

Applications for building permits, an indicator of future construction activity, rose 8.7% to a seasonally adjusted annual rate of 563,000 in June. It was the highest number of applications since December and more than the 530,000 annual rate that economists had forecast.

June marks the second month that starts have increased after the annual rate of new homes breaking ground fell to an all-time low of 454,000 units in April.

New home construction activity was strongest in the Midwest, where starts were up by 33.3% versus the previous month. In the Northeast, starts jumped 28.6% in June.

But the West and the South both saw declines in the number of new homes breaking ground last month. Starts were down 14.8% in the West and 1.4% in the South.

Monday, July 6, 2009

Mid-Year Data for Private Equity Activity in 2009

PitchBook, a private equity-focused research firm, has published its report on private equity as of the second quarter of 2009. The findings show that private equity investors continue to wait before deploying their $400 billion in available capital.

The industry appears to be rethinking the leveraged buyout and focusing on middle-market private equity deals, financed with mostly equity and little borrowing. PitchBook CEO, John Gabbert says of the report, “PitchBook’s analysis shows that the private equity industry is currently shifting gears in a return to its roots. More attention is being paid to middle-market deals using a healthier amount of equity where private equity’s operational and financial expertise can make a big difference. ”

Total Amount Invested in PE Deal Type ($M)

Key Findings from the 2009 Mid-Year Report

The first half of 2009 was the slowest six-month investment period since 2002 with only 407 completed investments, and just 174 of those were completed in the second quarter. However, another 44 deals, totaling $6.5 billion were announced during the quarter but have yet to close.

In response to the current credit markets private equity investors have been using less leverage and targeting smaller operational improvement and distressed company investments. These lower and middle-market companies now account for 70% of all investments. PE firms are also strengthening their current portfolio companies through add-on acquisitions, which accounted for 43% of all buyouts in the first half of 2009.

In Q2 2009 only the Business Products & Services and Information Technology industries were able to maintain their investment levels from the first quarter, with 54 and 29 deals respectively.

The BankUnited Financial acquisition was the largest of the quarter and accounted for over 25% of the total invested capital for the quarter.

The decrease in private equity investment is not due to a lack of available capital, which remains at an all time high of $400 billion. PE investors continue to raise capital and currently have enough dry powder to more than support the combined deal activity of 2004, 2005 and 2006 with the use of moderate leverage.

So half-way through 2009 private equity is still in a slump and investors are holding onto about $400 billion in capital.

Wednesday, July 1, 2009

Hedge Fund Returns Up, Redemptions Down

Tuesday, June 30, 2009

BOSTON (Reuters)—Hedge funds are living up to their high-flying reputation again with strong returns in the last three months, but many investors burned by last year's losses are clamoring for reforms before committing new money.

Final June quarter data will not be released until next week, but Merrill Lynch analysts who track returns in the $1.3 trillion industry wrote on Monday [June 29] that hedge funds will likely post their best quarterly performance since early 2000.

The rebound became visible in April when the average hedge fund returned 2.7%. It gained strength in May with a 4.4% rise, Merrill Lynch analysts wrote. For the second quarter, they estimate a gain of 6% or more.

That would mark a dramatic recovery from 2008 when the average hedge fund lost 19% and some celebrated funds, including Citadel Investment Group LLC, run by Kenneth Griffin, the 41-year-old Chicago billionaire, were down as much as 50% at the height of the financial crisis.

This year's stock rally, sparked by hopes that the worst of the global economic downturn is over, has helped boost many funds' returns.

Tudor BVI Global Fund, run by Paul Tudor Jones of Tudor Investment Corp., gained 12.4% through the end of May, while Lee Ainslie's Maverick Fund gained 8.8% through the end of May, their investors said.

"I believe there's been a very big change of mood and it has come at least three months earlier than I was expecting," said Christopher Fawcett, chief executive of hedge fund firm Fauchier Partners in London.

Last year, pension funds, endowments and wealthy individuals reacted to hedge funds' heavy losses and high fees by demanding a record $152 billion back in the last three months of 2008, research firm Hedge Fund Research said. This year, the pace of redemptions has slowed. In the first quarter, investors pulled $103 billion, according to HFR.

In May, hedge funds saw inflows of $3.4 billion, their first inflows since May last year, researchers at TrimTabs found.

"Redemptions have really dried up," said Mark Kary, chief executive of hedge fund firm Polar Capital in London, noting that his firm also saw small net inflows in the second quarter.

While inflows are still small, industry researchers said they played a critical role by letting hedge funds stop selling market positions to raise cash needed to let investors out.

"The inflows kept hedge funds from being a drain on the markets," TrimTabs President Conrad Gann said.

Pension funds and other investors have said they plan to commit more money to hedge funds in the second half of 2009, but they are also ready to attach conditions about how their money will be invested and a right to get it back fast.

"Transparency, liquidity, good fee terms, no gates, no side pockets. That is what the institutional community will be pressing hedge funds for," said Eric Goodbar, hedge fund strategist at Mellon Capital Management, a unit of Bank of New York Mellon Corp. "Hedge funds that are essentially large lockup structures will be viewed with caution."

By Svea Herbst-Bayliss and Laurence Fletcher

Tuesday, June 23, 2009

U.S. Investor Rose Eyes Rebound, One House at a Time

NEW YORK (Reuters)—Bruce Rose, founder of hedge fund Carrington Capital Management LLC, and a pioneer in the roller-coaster market for mortgage credit, is set for the next phase of the housing crisis: recovery.

Carrington is planning several new funds, at least one of which will step into local real estate markets expected to recover first, Mr. Rose said in a rare media interview at his office in Greenwich, Conn.

Another fund has already seen success with properties in Texas and Colorado, he said during the interview last week.

Mr. Rose is also rejecting lower estimated prices for his portfolio of homes that has grown through foreclosures, noting that fire sales by banks are exaggerating the market downturn. He is selling his properties one by one, and making much more money than rivals in the same position.

"We began to sense a bottoming of the market with the new [U.S.] administration, and began to focus on areas that we believe will recover early," he said.

The U.S. housing market is entering its third year of downturn that has triggered huge losses as homes are foreclosed and investors shun mortgages. The recession is adding to the fallout, and home prices are still sliding despite White House efforts to save 9 million homeowners with cheaper mortgages.

The pronouncement is a rare insight from Mr. Rose, 51, who left a life as aircraft mechanic and charter flight operator in 1980 to enter finance and sell ultra-safe mortgage bonds issued by Ginnie Mae, the agency that pools government-backed loans. In 1990, Mr. Rose helped engineer the first bona fide sale of mortgage credit risk at brokerage Paine Webber. Later at Salomon Brothers, he financed the early subprime lenders.

Since starting Carrington in 2003, Mr. Rose packaged $23 billion in subprime mortgages. Many of the bonds included loans originated by now-bankrupt New Century Financial, whose unit for collecting and distributing payments Mr. Rose later acquired.

Carrington kept between 6% and 12% of the riskiest parts of the securitizations, and forged unique contracts that let it direct any foreclosure and liquidations of the underlying loans.

Securitizations are now under fire from Congress, blamed for triggering the crisis by raising the money that encouraged lenders to loosen underwritings to boost volume. Their failings are a key focus of planned U.S. regulatory reforms, which Mr. Rose favors, to realign lender and investor interests.

Among the proposals, lenders are to take at least a 5% stake in what they sell, to ensure "skin-in-the-game."

"That's what we do—skin-in-the-game—and I think that's what makes us different from any other mortgage investor out there," he said.

To protect that skin, Mr. Rose is counting on his servicer, which like others, has taken the spotlight in the housing slump since its decisions can limit or increase losses to investors.

Carrington Mortgage Services has stubbornly held on to foreclosed homes through the crisis, insisting that bulk sales were hurting bonds supported by the properties. This strategy has ignited criticism from bondholders who claim Carrington is delaying sales of bank-owned properties and modifying loans recklessly to get delinquent homeowners up-to-date.

This, critics say, prolongs payments to Mr. Rose's sub-investment grade securities at the expense of the senior investors who might be made whole sooner if a home is sold. Mr. Rose says Carrington is looking out for all bondholders, as required by bond pooling and servicing agreements.

The strategy is "as long as possible, to keep the borrower in the house, and keep cash flowing to maximize the proceeds of the trust. That's always been our focus," Mr. Rose said.

When a home must be sold, Carrington does it house-by-house to get top dollar, he said.

Carrington found that as home price indexes fell, the more its selling prices outperformed the broker price opinions (BPOs) which are used by home value appraisers.

The retail market is about 15% higher than where banks are dumping hordes of unwanted inventory, which is driving home price indexes lower, he said.

Last week Carrington closed a sale in Littleton, Colo., at $277,100, 13% above two BPOs obtained in April. A home in Freeport, Texas, sold June 11 for $180,250, higher than two March BPOs of $169,432 and $130,900.

In harder-hit Florida, Carrington sold a Cape Coral house for $116,000 compared with BPOs in the mid-$90,000 range.

"We try to be the best sale on the block, not the first sale on the block," Mr. Rose said.

Mr. Rose is now eyeing East Coast and West Coast property that should perform better as markets turn. He said he expects rust-belt states and those dependent on the struggling auto industry will lag.

"As [distressed opportunities] diminish, we'll start with the origination strategy again," he said.

By Al Yoon

Wednesday, June 17, 2009

The LTV, IRR, DSCR And ROI: Ensuring Accurate Numbers

The majority of real estate investment and development decisions are numbers driven, but it
is important to realize that not all parties are concerned with the same numbers. Therefore, each party in a given real estate transaction would benefit from a greater understanding of the matrices that are important to the others involved.

For example, when an investor is talking to a lender about a transaction, it may not make sense to discuss internal rate of return (IRR) or equity multiples, but it would be very important to bring up the maximum allowable loan-to-value (LTV) ratio. Or, when a developer is trying to raise equity, the investors may not care much about debt service coverage ratios (DSCRs), but they may be very concerned with the cash-on-cash return, for example.

Consequently, it is important to understand each of these matrices and how they are derived. For many of the more complex calculations, participants may find it easier to use Excel or some other spreadsheet software to calculate these numbers. Please refer to the corresponding figures to learn how to input these formulas into the spreadsheets or otherwise perform the calculations. Equity for real estate investments can come from a number of different sources.

Many small investors and developers raise equity from friends and family or from high-net-worth individuals that they may know. Larger real estate companies may have their own dedicated capital, or they may be partnered with opportunity funds or other institutional investors. Regardless of the source, calculating the performance of each invest-ment is essential, and the three most common matrices used are IRR, cash-on-cash return and equity multiple. Using these matrices enables investors to evaluate the expected performance of each investment and compare it to other possible investments.

The IRR is usually the first number that most institutional equity groups ask for when they are presented with a new real estate investment. For a given investment, the IRR is the discount
rate that makes the net present value of all cashflows equal to zero. When calculating an IRR, you must remember to discount negative cashflows in future years back to time zero at a safe rate. Doing so is necessary because the calculation built into the IRR function in most software will assume that these cashflows are discounted at the IRR. Obviously, this assumption causes investors to set aside insufficient cash to fund these future shortfalls.

It is possible to use the modified modified IRR (MIRR) function on many spreadsheets, but then you must also decide upon a reinvestment rate for future positive cashflows. At the
current time, most institutional real estate investors are still using IRR over MIRR and are typically interested in both un-levered and levered IRRs. The un-levered IRR for a project is
calculated using the cashflows before debt service. Although most investors prefer to use some level of leverage when purchasing properties, the un- levered IRR is still very useful.

Remember that when you leverage an investment, you are adding additional risk. Therefore, an un-levered IRR is closer to a risk-adjusted return than a levered IRR. The levered IRR is calculated using cashflows after loan proceeds and debt service. This figure is usually the number that investors are most concerned with, as it is a good indication of the actual return that they will receive on their investment. Each institution’s criteria for investing are different: Core investors may be happy with levered IRRs in the mid-teens, while value-add and opportunistic investors often look for mid-high twenties or better.

While the IRR displays an investment’s performance over the investment’s entire holding period, many investors are interested in that performance at a given point in time. This performance can be measured as a return on investment (ROI) or cash- on-cash return.

The ROI for a given investment can be measured by subtracting the cost of the investment from the gain from the investment and then dividing the difference by the cost of the investment.

The cash-on-cash return is calculated in a similar way, but it uses cashflows after loan proceeds and debt service. The cash-on-cash return is important to investors who are seeking
current income. Equity investors also want to know how many dollars they are going to receive over the entire holding period for each dollar that they invest. This is often referred to as the equity multiple or holding period return. It is typical for investors to get a minimum
of two times their initial investment back out over time.

From a recent article in:

Commercial Mortgage Insight
August 2008 issue
By Joseph R. CaCCiapaglia

Tuesday, June 9, 2009

CalPERS To Boost Private Equity Target

June 9, 2009

Aiming to buy low, the nation’s largest public pension fund is poised to increase its private equity investments by about 40%.

The California Public Employees’ Retirement System is set to approve an increased target for corporate buyout and venture capital investments to 14%, up from 10%. Under the plan, private equity and venture capital investments could reach 19% of the fund’s total assets; currently, CalPERS invests 13% in the asset classes.

“This is a great time to make some good deals,” spokesman Clark McKinley told Reuters. “when markets are down, it’s a good time to buy.”

The boost to p.e. and VC comes at the expense of CalPERS’ equity portfolio, which includes hedge funds. The pension giant has no plans to change its hedge fund allocations, McKinley said, but losses by the hedge funds and other equity managers employed by CalPERS have effectively cut its exposure to them.

From FINalternatives June 9, 2009

Thursday, May 21, 2009

1031 Energy: Comparing Oil and Gas Property Ownership to Real Estate TIC Property Ownership

Comparing Oil and Gas to TICs and associated Taxes

Like Tenant-in-Common property (TIC), oil and gas properties (O&G) produce a monthly cash flow, require little management and have intrinsic value. However, unlike conventional TICs, they are diversified both by geography and product and generally do not require investors to sign personal guarantees. Most O&G replacement properties enjoy cash flow from a combination of oil and natural gas production. Because the O&G market is worldwide, or at least regional, they also generally minimize locale-specific economic trends and operator-specific business issues.

Additionally, purchase of O&G assets can provide investors with portfolio diversification, especially if an investor has a significant portion of his or her net worth in real estate. This diversification can be prudent because there is low correlation historically between O&G property value and commercial real estate property value.

While O&G production properties are not risk free, risk of investment is comparable to real estate TIC assets. The monthly production capacity in any given O&G property tends to average out to a known rate, and income fluctuation is mostly dependent on energy prices the higher the price of energy commodities, the greater the income.

Having O&G assets in your investment portfolio may help distribute or diversify risk away from factors that may devalue other kinds of assets. Individual real estate properties often carry local/regional risk because they are often strongly tied to local economic and development trends whereas ownership of geographically diverse energy-based investments offers a degree of insulation from local trends. O&G investments are instead often subject to production risks and O&G market risk. O&G assets also can serve as a hedge against rising energy prices. Other portions of your portfolio would tend to decrease as energy prices increase (certain stocks/certain real estate). Moreover, long-term performance history of O&G properties has shown only weak (or negative) correlation to Wall Street.

Although private placements are generally limited to investors who are not buying with a view to distribution, there can be a number of situations where an investor can need or desire liquidity. Generally, energy properties are more liquid than TICs. Partial or complete divestment can often be accomplished rapidly through a variety of existing and established methods, ranging from direct transfer/sale (usually 15-30 days), to online auctions (typically lasting 30 days), to traditional auctions through specialized auction houses (typically around 60 days) or divestment/brokerage firms (usually 45-60 days). The options in the liquidity spectrum for energy assets offer turn-around that can be as little as two weeks, and put your offerings into active, highly-competitive bidding environments to optimize the sale price of your properties.

Congressional Incentives Encourage Domestic Petroleum Development

Oil and Natural gas from domestic reserves helps to make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not "Loop Holes" -- they were placed in the Tax Code by Congress to make participation in oil and gas ventures one of the best tax advantaged investments.

Intangible Drilling Cost Tax Deduction

The intangible expenditures of drilling (labor, chemicals, mud, grease, etc.) are usually about (65 to 80%) of the cost of a well. These expenditures are considered "Intangible Drilling Cost (IDC)", which is 100% deductible during the first year. For example, a $100,000 investment would yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. (See Section 263 of the Tax Code.)

Tangible Drilling Cost Tax Deduction

The total amount of the investment allocated to the equipment “Tangible Drilling Costs (TDC)” is 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted as depreciation over a seven-year period. (See Section 263 of the Tax Code.)

Active vs. Passive Income

The Tax Reform Act of 1986 introduced into the Tax Code the concepts of "Passive" income and "Active" income. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a "Passive" Activity, therefore, deductions can be offset against income from active stock trades, business income, salaries, etc. (See Section 469(c)(3) of the Tax Code).

Small Producers Tax Exemption

The 1990 Tax Act provided some special tax advantages for small companies and individuals. This tax incentive, known as the "Percentage Depletion Allowance", is specifically intended to encourage participation in oil and gas drilling. This tax benefit is not available to large oil companies, retail petroleum marketers, or refiners that process more than 50,000 barrels per day. It is also not available for entities owning more than 1,000 barrels of oil (or 6,000,000 cubic feet of gas) average daily production. The "Small Producers Exemption" allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free.

Lease Costs
Lease costs (purchase of leases, minerals, etc.), sales expenses, legal expenses, administrative accounting, and Lease Operating Costs (LOC) are also 100% tax deductible through cost depletion.

Alternative Minimum Tax
Prior to the 1992 Tax Act, working interest participants in oil and gas ventures were subject to the normal Alternative Minimum Tax to the extent that this tax exceeded their regular tax. This Tax Act specifically exempted Intangible Drilling Cost as a Tax Preference Item. "Alternative Minimum Taxable Income" generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. "Tax preference items" are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage and the wells thereon.

Tax Bill Gives Incentive to Marginal Wells

The US Senate and House of Representative have passed a tax incentive bill to help small oil and gas producers. This bill provides a tax credit of up to $9 per well per day for marginal wells. A typical marginal well pumps 15 barrels of crude or 90 thousand cubic feet of gas per day. There are 650,000 “marginal” or “stripper” oil and gas wells in the USA. Marginal wells provide as much as 25 percent of the nations’ crude supply (on par with Saudi Arabia ) and about 10 percent of gas stocks. In 2002 alone, 17000 oil and gas wells were permanently plugged with cement (13,600 oil wells and 3,900 gas wells). This tax bill will act as a safety net to save many of these wells, thereby reducing our reliance on the Middle East.

From Houston Chronicle, October 12, 2004

Wednesday, May 6, 2009

Private REO and Distressed Asset Real Estate Funds See Increased Opportunity

According RealtyTrac® (, the leading online marketplace for foreclosure properties, First Quarter foreclosure filings were reported on 803,489 properties, a 9 percent increase from the previous quarter and an increase of nearly 24 percent from Q1 2008. This means that one in every 159 households filled a foreclosure during the quarter. Foreclosure filings were reported on 341,180 properties in March, a 17 percent increase from the previous month and a 46 percent increase from March 2008. The March and Q1 2009 totals were the highest monthly and quarterly totals since RealtyTrac began issuing its report in January 2005 despite a decrease in bank repossessions (REOs), which were down 13 percent from the fourth quarter of 2008 and 3 percent from February totals.

“In the month of March we saw a record level of foreclosure activity — the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record. Since much of this activity was in new foreclosure actions, it suggests that many lenders and servicers were holding off on executing foreclosures due to industry moratoria and legislative delays,” said James J. Saccacio, chief executive officer of RealtyTrac. “It’s also likely that the drop in REO activity can be attributed to these processing delays, rather than to any of the foreclosure prevention programs currently in place. It’s very likely that we’ll see the number of REOs increase again now that most of the moratoria have been lifted.

“On a positive note, it appears that demand is up in some of the harder-hit areas, particularly on bank-owned REO properties that first time homebuyers and investors see as bargains,” Saccacio continued. “But it’s unlikely that this increased demand will be enough to offset the growing number of foreclosures in the pipeline, accelerated by rising unemployment rates.”

What does all of this mean? In a word, opportunity. These number represent an increasing opportunity for not only first time home buyers, but real estate investors. The unique market condition which exist today in the housing market has created opportunities for groups with capital, established bank relationships and market expertise to acquire bulk portfolios at discounts of 30% to 50% off current market value. These conditions are likely to continue for the next couple years, until there is a substantial decline in both mortgage delinquencies and the supply of bank-owned home inventory.

Savvy real estate investors are participating in the arbitrage available in the REO marketplace by joining Funds who are buying homes in bulk and reselling them to traditional buyers. Many investors in these Funds are realizing returns of 20% or more. As unemployment numbers and foreclosure numbers rise, these opportunities should continue for some time to come.