Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Friday, April 8, 2005: Economics
is called the dismal science. An economist is someone who didn't have the personality
to become an accountant. God invented economists to make weather forecasters and
astrologers look good. Economists are incredibly good, I'm told, at predicting
the past. Several people have also said, ""If you laid every economist
end to end, it would not be a bad thing." There are also three types
of economists: Those who can count, and those who can't. For those of you who
don't know (or care), my first degree was in Economics.
All this is by
way of introduction to how wrong economists are. Be wary when you hear what
they predict. According to them,
1. The rise in oil should have put our economy into recession. It hasn't.
2. The dollar's drop should have cut our imports. It hasn't.
3. By now, Greenspan's short-term rate hiking should have lifted long-term mortgage
rates. He hasn't. This week long-term mortgage rates dropped to below 6%.
4. The housing boom should be bust, or busting. It hasn't and isn't.
5. Inflation should be skyrocketing. That may be the only thing the economists
are getting close on. And that portends further short-term interest rates rises
by Mr. Greenspan. Inflation is now the factor which could trigger items
1-4, and ultimately a recession. This weekend see for yourself. Go shopping.
Check out prices at your local supermarket. Try to remember what they were three
months ago. I've written about higher prices at my local Whole Foods. A reader,
Merryfield L. Peters, writes,
"We don't have a Whole Foods Store in our area, but I hope that will
change. On Monday I went to our local Sam's Club and was shocked by some hefty
price increases. Paper plates were up about 25% A 2-lb package of pecan halves
increased in price from $8.95 to over $11. This was repeated over and over as
I went through the Club. Add that to the increased gasoline price and a shopping
trip isn't much fun anymore.
P.S. The Sam's
Club (a Wal-Mart company) in our area is rarely busy while Costco is always
crowded. While I was at Sam's I overheard two employees talking about current
employees being either laid off and/or reduced to part time status."
Week predicts the real estate boom will end shortly. But go tell
that to the market, where prices continue to escalate. Try this: Last Friday
a company called Tishman Speyer bought Manhattans MetLife Building for
$1.72 billion -- more than $660 per square foot. That now stands
as the loftiest price ever paid for a single Manhattan skyscraper. Lost in all
the hoopla is the downright puny cap rate, estimated at slightly less than
4% by one Manhattan real estate source with close knowledge of the deal.
Such a low cap rate could make squeezing profits from the former Pan Am Building
a serious challenge.
A sub-4% cap rate
is considered extremely low for a healthy, leased-up property in Manhattan.
It also represents a huge premium over the 7.1% average cap rate
that Real Capital Analytics estimates for similar trophy properties that sold
in the first quarter, according to National Real Estate Investor Magazine
-- see chart below.
Speyer] must really believe that they can boost rents in the building
and fast in order to pay that price, says Dan Fasulo, an associate
at Manhattan-based Real Capital Analytics.
Easier said than
done. Average asking rents in midtown Manhattan were $47.13 per sq. ft.
at the close of the first quarter, according to Cushman & Wakefield. A midtown
Manhattan leasing broker says that average asking rents in the MetLife Building
are around $55 per sq. ft. CoStar Group data shows the building to be
100% occupied, with 5.2% of the space subleased. Lease expirations in the building
are staggered over the next 14 years.
The rich valuation
of the Tishman Speyer deal does have a certain sense of deja vu. New York real
estate execs were stunned in 1980 when the ailing Pan American World Airways
sold its headquarters to MetLife for an unheard of $400 million, or $177 per
sq. ft. That yielded just 3.4%. Whats more, the buildings
cash-on-cash return (meaning cash flow after debt service divided by equity
investment) was only 2.4%. But in last weeks sale, MetLife scored
a $1.32 billion profit on its investment and that averages out to $52.8
million worth of appreciation per year since 1980, or about a 13% annual return.
cap rates by quarter:
Q1 2002: 9.2%
Q1 2003: 8.5%
Q1 2004: 7.6%
Q1 2005: 7.1%
Source: Real Capital Analytics
real estate syndications are doing fine: I
am in five properties with one careful syndicator. On four of them, I'm getting
a cash dividend of between 8% and 9%. The fifth one's dividend is on hold as
we're using it to spruce up the building in anticipation of a sale. We paid
$82 million in 2003. We're about to sell it for between $100 million
and $110 million -- giving us syndicators an IRR on sale of between 20%
The deal today is to buy buildings, fix the management, improve the building,
up the rents and sell it. We had originally projected a sale price of $95 million
in 2008. We were early.
see more opportunities in real estate than in the stock market. But as I"ve
written before. You got to be careful and you have to follow my friend Francis
Greenburger's philosophy "Buy it right. It's the only chance you'll
get." To that aphorism, you should add, "If you've done
everything you can to improve it, sell it. No one went broke taking a profit,
nor being in cash."
A Home Built for a Billionaire
You've heard of spec homes? How about a spec home
designed to sell to a billionaire? This is for real. Updown
Court, as it's called, is 25 miles outside London. It's 103 rooms, 60,000
square feet, 11 acres, 22 bedrooms, a two-lane bowling lane, a squash court,
a 50-seat theater, stables for five horses, a tennis court and a price tag of
This mosaic found on the floor of the study in the master suite is one of the
house's most extravagant design details. Made of 24-carat gold, it cost $475,000
It also has five swimming pools, an eight-limousine garage and a walk-in safe
and windowless "panic suite," fitted with a mini-kitchen and steel
The target owner, according to developer Leslie Allen-Vercoe, is a super-rich
international buyer looking for a second, third, or fourth home in London. "The
house has been designed for a specific market, which is the billionaire market,
as opposed to the millionaire market," he told Business Week. The
Rolls Royce is not included.
The scandals never cease: When we sold our
company in 1997, we told the truth. We actually embellished all the bad things,
and made a sales point out of the bad things. "We couldn't expand internationally.
That is bad. But you can. That is good."
But we didn't
lie or cheat or mess around faking up documents. As a result, I can still sleep
at night. Several years ago, I wrote here that it would be a minimum of five
years for all corporate scandals to emerge. And there would be plenty of them.
Today another one. From the New York Times:
"Documents for a transaction that is at the center of a wide-ranging insurance
investigation were doctored two months after the deal was struck, executives
with direct knowledge of the transaction said this week.
The 2000 deal,
between American International Group and General Re, a unit of Berkshire Hathaway,
served to spruce up A.I.G.'s financial reports, ultimately bolstering its stock
price. Regulators, and now the companies, say the way that the deal was accounted
for was improper. Why the documents were altered by midlevel General Re employees
is not entirely clear, but one regulator said it was done in a way that allowed
A.I.G. to account for the transaction in a favorable way.
the paperwork had been altered drew the attention of lawyers for the Berkshire
unit this year, when they were examining possibly questionable insurance transactions
at General Re. The lawyers brought the transactions to the attention of law
enforcement authorities, prompting a fresh round of subpoenas at A.I.G. in February
that led to the downfall of Maurice R. Greenberg, who had been A.I.G.'s chief
executive for nearly four decades."
is just great. The Internet is the best place
for buying lightbulbs of all sorts. I like Bulbs.com
for four reasons:
1. They have pictures of all their bulbs. It's easy to find what you need.
2. They sell brand-name (expensive) bulbs and "value-brand" (cheap)
bulbs. Other than a huge savings in price, I've never found any performance
3. They remember what you bought. This saves you figuring out the dumb names
of what you need.
4. They're easy to deal with. Their site works well.
I bought some bulbs from them yesterday for $2.38 a piece. I checked locally.
One hardware company was selling the identical bulb for $7.57. Another was selling
it for $4.99.
The moral of this story is simple: Check the price on the Internet, first.
world's prettiest watch: I want to own this
watch. But it's $10,000, discounted on the Internet, no less. I can't find a
$20 fake, yet. And I'm not paying $10,000 for a watch that keeps worse time
than my $20 Timex.
Irish gas station
Tiger Woods drives his new Mercedes into an Irish gas station.
An attendant greets
him in typical Irish manner,
unaware who the
golf pro is... "Top o' the mornin to ya".
As Tiger gets
out of the car, two tees fall out of his pocket.
are those things, laddie?" asks the attendant.
called tees," replies Tiger.
would ya be usin 'em for, now?" inquires the Irishman.
for resting my balls on when I drive," replies Tiger.
Mary an' Joseph!" exclaims the Irish attendant, "Those fellas at Mercedes
think of everything."
season is upon us
The Internal Revenue Service sent an auditor to a synagogue.
As the auditor
reviews all the paperwork, he turns to the Rabbi and says, "I noticed that
you buy a lot of candles."
do," responded the Rabbi.
what do you do with the candle drippings?" He asked.
question," noted the rabbi. "We actually save them up and when we
have enough, we send them back to the candle maker and every now and then, they
send us a free box of candles."
replied the auditor somewhat disappointed that his unusual question actually
had a practical answer. "Rabbi, what about all these matzo purchases? What
do you do with all the crumbs from the matzo?"
replied the rabbi calmly. "We actually collect up all the crumbs from the
matzo and when we have enough, we send them in a box back to the manufacturer;
and every now and then they send us a box of matzo balls."
replied the auditor, thinking hard how he could fluster the rabbi.
he continued, "what do you do with all the foreskins from the circumcisions?"
too, we do not waste." The rabbi answered. What we do is save up all the
foreskins, and when we have enough we actually send them to the Internal Revenue
Revenue?" questioned the auditor in disbelief. "Ah, yes," replied
the Rabbi, "Internal Revenue. And about once a year, they send us a little
prick like you."
to ponder for the weekend
If a man opens his mouth to say something, and there
is no woman present to hear him, is he still wrong?
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
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