Except a mortgage broker. Many people ask me what I do, and its often difficult to answer them both concisely, and in layman's terms. Even those who know a thing or two about real estate, too often confuse my role with that of a mortgage broker.
A mortgage broker is a matchmaker of sorts, marrying borrower and lender together...at least until one of them wants a divorce. Sometimes the borrower cheats on the lender in the form of shopping for better rates to take out the existing lender through refinancing, and sometimes the lender cheats on the borrower by packaging their loan and selling it off to a third party.
The simple fact of the matter is that while they want to see a successful partnership, mortgage brokers don't work for the borrower, or the bank, but for themselves. Many consumers assume that a mortgage broker works for them for free, in the form of shopping for the best rates and terms, and then gets paid by the lender for providing them the ability to loan money. Funny. That's the equivalent of a commercial broker telling a buyer that they've scoured the market for better deals, and can't find one better than the deal they are listing for sale.
The truth is that if you, as a consumer, aren't paying the broker a fee directly, then the broker isn't working for you. Sometimes lenders will offer brokers a rate to push to their consumers, and the only way a broker makes money is by inflating this rate until the spread reaches a number representing a fee for which the broker is willing to work. The bigger problem however, is that in recent years, banks offered brokers more to push certain loan terms like adjustable rate mortgages. “The ways brokers were paid created a conflict of interest and really meant that the broker to a very large extent was financially rewarded by betraying the trust of the borrower,” said Representative Brad Miller, a Democrat from North Carolina who co-sponsored the legislation in the House of Representatives.
Real Estate Investment Bankers are different for a whole host of reasons. First and most obviously, is that we offer capital solutions spanning the entire capital stack, not just straight debt. This means we can provide access to secured and unsecured mezzanine, and preferred and joint venture equity in addition to debt. We also provide more ancillary services like access to high net worth individuals for credit enhancements, bridge debt, and hard money. It is our network and creativity in addition to our services that provide value to our clients.
Most importantly of course, is that while any intermediary technically has two clients, the seller and buyer, borrower and lender or what have you, investment banking counsel really only works for one of them, the borrower. Lenders are our client in the sense that they are a vital partner to our business. By working closely with them, we can better understand their needs, desires and constraints to doing business, which in turn helps make our job easier on behalf of the borrower, our true client. It is the borrower who retains us for our services. We earn our fee in that we are only paid thereafter for success. Lenders value investment banking counsel for the relationships we bring to them, not any services we provide them.
Borrowers on the other hand value us for an array of things. First and foremost is our access to capital. Banking is a relationship business, and in today's economy specifically, if you don't have a relationship, you've got nothing at all (deposits help a lot, though!). Second is our ability to structure a client's deal in a way that presents their case to potential lending sources in the most favorable light. This means that we increase the likelihood of funding since we understand how bankers want information presented to them. Third is our industry knowledge. By working with lenders frequently, we know what types of deals they want to see, which means we know the most likely candidates to be competitive for each specific deal. Fourth, we save the client time, and time is money. Many of our clients are successful real estate operators, but they didn't become successful by wasting their time on the phone with 100 capital partners, shopping for the best terms. Others are business owners, where real estate is not their forte. In either case, we act as a trusted advisor to our client. Furthermore, no lender would dare call a real estate investment banker's bluff if we told them we can do better.
So next time when you are speaking with your investment banking counsel, remember why they might be upset with you for insinuating they are "simply" a mortgage broker, and choose your words wisely.
For our Philly-centric readership, you will definitely want to check out The Philly 411, a new monthly contribution to GlobeSt.com, written by Llenrock Group's own Dave Jacobs. The feature discusses interesting commercial real estate related happenings in the greater metropolitan area, including news, rumors, and gossip.
Vornado Realty Trust VNO.N, owner of office and retail properties, said last Wednesday it now expects to raise net proceeds of $710 million from its equity offering, up from an earlier $617 million, as underwriters exercised their option to purchase additional shares.
The company, the most recent real estate investment trust to tap the equity markets for capital, said it intends to use the proceeds for general corporate purposes, including repaying debt and funding acquisitions.
Although the debt markets have been reluctant lately to make large loans to commercial real estate companies, equity investors have shown an appetite for new shares.
Property companies that have turned to the equity market for capital over the past month include Simon Property Group Inc SPG.N, AMB Property Corp (AMB.N), Kimco Realty Corp KIM.N and ProLogis PLD.N.
This makes it easier for these big public REITs to acquire, especially to acquire assets of recently bankrupt General Growth Properties.
All of this news of REITs raising equity with public offerings raises an interesting question. Is this the wave of the immediate future? Are REITs better suited than private real estate companies to capitalize on opportunities in the short run, and thus are better poised for success in the long run?
While private real estate companies, much like REITs can be both narrowly focused by product type, as well as well diversified, both have been hit hard during the current economic downturn. There are several advantages each have over the other.
REITs have the clear advantage in the ability to raise capital. In this environment, the astute investor can see an undervalued stock rather easily, since many stocks are based on historical valuations, dividends, growth etc. Since REITs are relatively lower levered than private real estate funds, their purchasing power is higher during the current economic climate. On the flip side, many worried private investors who haven't seen strong returns from their current and previous investments in private funds may be more hesitant to commit capital in the next fund. As any private operator will tell you, fundraising is as tantamount to large scale success in the industry as finding the right deals to buy. REITs also pay dividends, and are very liquid, which means investors can and will see returns on their investments much more quickly. With funds, capital is promised back to investors within a certain time frame, which if necessary can be many years.
Yet, there are still some clear cut advantages for private companies. The first is return thresholds. Most private real estate funds promise returns in the mid to high teens, sometimes doubling or tripling the returns of many REITs. Private funds are also not subject to the scrutiny of regulators because ownership remains private. As an aside to this fact, private funds aren't focused on quarterly results, and do not have to meet analysts' projections in order to stave off a sell off of their stock, and thus, their capital base. Also, unlike with any public company, with many private funds, returns, to a certain extent are promised, and not subject to the fluctuations of the markets. That being said, if a private operator fails and goes bankrupt, how secure are those returns? An investor is taking a lot of faith that the operator knows what they are doing, and is more innovative than the next guy in being able to remain afloat during unforeseen circumstances, like the tumultuous market we know find ourselves in.
One thing does remain clear in this debate. Cash is king. And REITs have more of it.
What are your thoughts on who is better poised to take advantage of current market conditions?
Earlier in the week, we noted the meteoric rise to stardom for Meredith Whitney. She has rode that wave of predictions to her own firm. Yet despite her prowess as an analyst and despite her being a darling of the media, one has to wonder, as David Weidner has done in this Wall Street Journal piece from April 9th, if she is all we think she is. We won't go so far as to say she's a fraud or even a fluke, but the inherent nature of entrusting one individual with the title of "Wall Street Oracle," as Whitney has been dubbed, is nothing short of dangerous.
Weidner says, "But to put it bluntly, Ms. Whitney's call on Citi wasn't that great. It wasn't the first, nor was it the best. Citigroup was already in deep trouble. Citi held a conference call three days after Dick Bove, then at Punk Ziegel & Co., Mike Mayo, then at Deutsche Bank and Charles Peabody at Portales Partners all issued sell ratings on the stock. Ms. Whitney participated in this call and asked three questions of Gary Crittenden, then Citi's chief financial officer, none of which were regarding Citi's dividend or capital position."
Two weeks later, "The Call" was made.
And while Ms. Whitney did go on to make some correct prediction in 2008, and she has clearly demonstrated her intellect, she is no Oracle. The Call did not say Citigroup was stuffed with hundreds of billions of dollars in toxic assets. It did not say that multiple banks will fail unless the government intercedes. It didn't mention Bear Stearns (which she once expected to earn more than $11 a share in 2009), Lehman Brothers or American International Group Inc.
As Weidner correctly points out, "That Ms. Whitney has emerged as a prophet of the financial crisis, mainly on the basis of one call, is a reminder that we tread dangerous territory by crowning messiahs on Wall Street. The Whitney myth is especially relevant considering our current dire straits were in large part created by faith in the financial "masters of the universe" who were deemed too sophisticated – and too highly paid – to misjudge risk."
"How is this guy getting 15+% returns when the market has been tanking? Ahh, who cares, he's making me money!!" These were the same sentiments expressed by those who will be crying on the witness stand for Bernie Madoff's trial in June.
Nobody has all the answers. Not Meredith Whitney. Not even Nouriel Roubini. Nobody should have a messianic complex in this environment. So next time the media falls in love with someone else, remember the words of Chuck D. and Flavor Flav from Public Enemy..."Don't, don't, don't believe the hype."
As a follow up to our video on Tuesday, perhaps this is what the New CitiBank ads will look like...
From the increasing popularity caused by correct assessment and prediction after correct assessment and prediction, Meredith Whitney resigned from Oppenheimer on February 19, 2009, just three weeks after the clip above, to establish her own firm, Meredith Whitney Advisory Group LLC. In one of her most recent interviews with Steve Forbes on April 5th, she was asked if we are currently out of the water. To read the entire transcript, click here.
Below, we have excerpted some of our favorite thoughts....enjoy!
STEVE FORBES: Back in the summer of 2008 when a lot of people thought we were out of the woods on the financial crisis, you said no, the worst was to come. First of all, why did you think there was such devastation in the banking sector that was unprecedented? And are we finally climbing out of the thing?
Meredith Whitney: What worried me last summer, summer of 2008 was what happened to IndyMac in the summer, in July, when you had a run on the banks. And what I knew at the time, was that there would be runs on other banks, and those that were heavily weighted towards commercial deposits.
So, at the time, it was a guarantee of $100,000 or below. And so, the commercial deposits, that which you pay your payroll through, there was your 30-plus percent of the banking system, 35% of the banking system, uninsured. And so, if you look at what was, who had the most exposure to the commercial deposits, obviously, those were the first to flight.
So, what you saw then was an effective on the bank of Washington Mutual, and an effective on the bank at Wachovia, and NatCity and some others. And so, what we didn't see was, all of those deals were done inside of the third quarter. So, what you didn't see was what happened to their deposits inside of the third quarter. So, July was part of the third quarter.
And by September, Wachovia and Washington Mutual were part of another entity. We never saw how bad things were. But I saw that on the come. I also knew that it was clear that the banks were carrying bad math assumptions. So, one key variable in evaluating your mortgage, what your mortgage portfolio is worth is, No. 1, what employment is.
But No. 2, where you think home prices are going to go. And as an example, Wachovia, which was, I put a sell rating on Wachovia in July. And the stock was $9 or something. It was a pretty wild call. But I knew that they were expecting home prices to decline by 21%; 60% of their exposures were in California. Case-Schiller is now down 30% in the top 10 MSAs. So, it was clear that they would have to play catch-up. And it is also clear that the banks still have to play catch-up. The banks, all the big banks anyway, carry their mortgage books with an assumption that home prices would decline peak-to-trough 30%, 31%.
Well, we're already there. So, what you'll see in first-quarter results is a catch-up to what now the future of market is doing, viewing the peak-to-trough home prices to be 37%. So, you're constantly having to reevaluate your reserves against loans. That puts earnings pressure on companies.
And it creates an environment where it's almost impossible to regenerate your own capital, to grow your own capital. So, you've got to have your hands out for other people's capital. And it's been sovereign wealth fund's capital. It's been U.S. investor's capital. It's been our taxpayer's dollars as capital. And I don't see that ending anytime soon.
SF: Now, in January and February, it seemed, at least to an outsider, that even regardless of what the books said, the banks seemed to be doing very well on a cash-operating basis, the rollover alone. You were paying fees. You are paying fees. You were paying 10,000 points above LIBOR. Do we have a disconnect here? Where on a cash basis, the banks are doing well; where in a statutory, regulatory basis, they're still not out of the woods?
MW: On an accrual basis, that's where you get into problem areas. Because your loan is only as good as it pays you back. And so, the loans are paying back less. As I said, one of the two main assumptions that goes into valuing any of your loans, accrual-based loans, is home price appreciation, but also unemployment.
A lot of the banks were carrying seven-and-a-half to eight percent unemployment. We're already over 8%. So, there are going to be big true-ups this quarter. Some parts of the business are OK. And what's interesting, for a Goldman Sachs, 70% of the capital markets competition has gone away, or dramatically pulled in their horns.
So, it's a smaller pie. But you're getting more of a market. And the government actually is churning a lot of fees for Wall Street. So, there's trading activity there. I don't know how sustainable it is because bank revenues, cash-based revenues on the non-accrual-based loans, should correlate to some multiple of the GDP and global GDP. And as we know, the global GDP is coming down.
It should be clear from this transcript, the numerous TV appearances, and publicized predictions proven correct, that Meredith Whitney knows her stuff. Stay tuned for Friday, however, when we take Ms. Whitney off her pedestal as David Weidner of the Wall Street Journal helps us rip her a new one...we ain't Fox News, but we ARE fair and balanced.
This entire week, Llenrock Blog is dedicating its posts to one of the most talked about banking analysts in recent memory...Meredith Whitney. She has been called the "Oracle of Wall Street" for her correct assertion 18 months ago that Citibank was in trouble. Since then, fanfare and accolades by her peers and the press have sent her to the very top of her business. Today we will take a look at what made her so popular. On Wednesday, we will take a look at a recent interview with Steve Forbes, to see what she predicts for the future. And on Friday, we will take a look at one of her detractors, and why it is so dangerous to place our collective faith in one person....one very interesting person.
If I only knew then what I know now. How many times have you uttered that phrase in your life? Well if you are stock analyst Meredith Whitney, probably not too much. For those of you not in the know, Meredith Whitney has become a polarizing figure in the world of banking. The media loves her. Bankers? Not so much. You see, last summer, when everybody was optimistic and hopeful that the economic downturn had seen its worst days, it was Meredith Whitney who predicted that the worst was yet to come. And she's done it repeatedly in the face of naysayers with astounding success.
First, some background. Whitney graduated with honors from Brown University. In 1993 she joined Oppenheimer & Co. as a research associate covering the Oil & Gas Industry. In 1995, she joined the company's Specialty Finance Group. Later, in 1998, she left the company, eventually becoming the Head of Financial Institution Research at Wachovia. Whitney returned to Oppenheimer in 2004, where she covered banks and brokers.
She made headlines 18 months ago, when she wrote a particularly pessimistic, but accurate report on Citigroup, on Oct. 31, 2007, which got her attention from many Wall Street analysts, and news media. She has since followed this report with similar reports and predictions, which have tended to leave the companies involved with lower stock prices as the market has taken her opinion seriously. One of her claims is that goodwill is built in to a lot of companies share prices, and that as the market moves into dark times, this goodwill will dissipate.
How good was The Call? If an investor sold Citi the next day, they would have saved themselves a 92.8% loss through last week.
Her extremely bearish view on banks landed her on the cover of the August 18, 2008 issue of Fortune Magazine. Even before the problems in September that befell Merrill Lynch and Lehman Brothers, she is quoted as saying, "It feels like I'm at the epicenter of the biggest financial crisis in history."
Recently in Institutional Investor Online, Ernst & Young contributed a research report listing the top ten business risks for commercial real estate. In a suspenseful twist, we will provide them in descending order, a la David Letterman, and provide our thoughts and commentary thereafter. Without further ado, they are (drum roll please):
10. Volatile Energy Costs (O)
9. Economic Vulnerability and Regulatory Risks in Developing Markets (F)
8. Green Revolution, Sustainability & Climate Change (D)
7. Pricing Uncertainty (F)
6. Inability to Find and Exploit Global and Non-Traditional Opportunities (D)
5. Changing Demographics (O)
4. Global War for Talent (O)
3. Impact of Aging or Inadequate Infrastructure (D)
2. Global Economic and Market Fluctuations (F)
1. Continued Uncertainty and Impact of the Credit Crunch (F)
If we assign these concerns into one of the following three categories: Finance, Development, and Operations, as indicated with (O, D or F), we find that while the top ten issues are somewhat diverse in nature, the top two remain financial concerns.
The issues we chose to tag "Operational," while important, we do not feel are vital to the health of the commercial real estate market. Changing demographics are sure to affect particular markets, especially in the southwest, but will take a while to reach corridors like the northeast. The Global War for Talent is an issue of the future, as anybody who is actually hiring in this market essentially has the pick of the litter from the copious amount of unemployed, likely overqualified candidates. When this does become an issue at some point in the future, it will likely mean the unemployment rate will dwindle from double digits back into the 5-6% comfort zone of a few years ago.
Energy costs are a necessary evil of the business. Lease type will dictate whether landlord or tenant will be paying for the rise in energy costs, and the government is attempting to implement a wide range of programs aimed at stemming energy costs from crippling the economy. These programs will take a long time to bear fruit, but they are being addressed.
The Development (D) issues are of greater immediate importance in our opinion. However, most are questions of project feasibility as they pertain to financing. If green buildings are not cost effective for landlords or tenants, you simply won't see very many being built, or converted. Likewise, while aging infrastructure is a serious problem, developers will examine the cost basis of various opportunities before building or renovating. Until construction costs drop replacement costs closer to price per square foot figures being paid for existing product, new ground up developments will be fewer and farther between, especially if market demand is sluggish. Which leads us to the last (D) on the list...finding new global and non-traditional opportunities. This issue is probably the most abstract on this list, and so it will take time to figure out exactly what the issues are. More than likely, it was included on this list as a result of so many of the other issues being, well, issues. People fear the unknown.
This of course leaves us with Financial (F) concerns. Pricing uncertainty, regulatory risk, market fluctuations and the credit crisis blow the rest of the aforementioned issues out of the water, in our humble opinion, in terms of what people SHOULD be worried about. Frankly, these four issues would be 1-4 on our list. Of course, unlike David Letterman's Top Ten Lists, which are supposed to make you laugh, ours, like E&Y's, would be more likely to make you cry....
If you haven't been watching C-SPAN over the last several months, here is an example of some of the meetings on Capitol Hill. Its pretty intense, but somebody needs to say it.
Recent reports issued by Deutsche Bank, DBRS and Fitch Ratings find that commercial real estate fundamentals have dramatically weakened across most major property segments and markets, with some starting to reach the depressed levels of the last major recession in the early 1990s. Richard Parkus, head of CMBS Research at Deutsche Bank, projected in his firm's commercial real estate outlook last month that property prices are expected to decline 35% to 45% (or more) overall during this recession. If of course that happens, much of the $700 billion dollars worth of commercial real estate coming due between 2009-2011 will be extremely difficult to refinance, making default rates spike even further.
CMBS collateral performance are currently deteriorating at a historically fast pace and Parkus predicted the total delinquency rate could likely to exceed 3.5% by year-end. That is one of the highest estimates that have been projected by CMBS analysts. Worse still, Parkus added, it could go as high as 6% by 2010. By far the greatest risk facing CMBS loans right now is maturity default/extension risk, not term default risk, Parkus of Deutsch Bank said.
A large percentage of CMBS loans made in 2005-2008 may not qualify for refinancing without substantial equity injections due to much tighter underwriting standards, massive price declines and declining cash flow.
All of this, of course has led to increased pressure on the Obama administration to include commercial real estate on the list of vital industries that need help.
Longer-term debt is critical to saving the commercial real-estate business, which faces a record amount of debt coming due in the next three years. Industry observers are expecting the delinquency rate to double by the end of this year and go higher next year. Problems could be magnified if the credit drought continues and owners of even healthy properties are unable to refinance. This has sparked a lobbying effort to include CMBS in the TALF program.
Currently, TALF makes low-cost loans available to investors who buy securities backing everything from credit cards to auto loans. The first TALF-eligible deals, involving securitized car loans and credit-card cash flows, began in March, but investor response to the program has been anemic. Investors applied for just $1.71 billion in loans on Tuesday in the second round of TALF, according to the central bank. That follows applications for $4.71 billion last month.
Obama administration officials have been promising for weeks that the TALF would be expanded to include commercial real estate. But details have been sketchy and have been a subject of debate between policy makers and the private sector.
The big problem with expanding TALF to commercial real estate is the nature in which both entities naturally function. The government typically doesn't like to make loans, similar to those they are currently making under the TALF program, longer than a year or so. They do this because they like to control liquidity. However, they have already gone to three year loans, outside of their comfort zone, for existing TALF eligible loans. The CMBS loans, on the other hand, are typically five years or longer.
Industry executives hope that the TALF effort will resurrect the CMBS market. In 2007, about $230 billion of securities were sold. That number dropped to zero by last summer. The dearth of financing has frozen sales and sent values plummeting, setting the stage for another wave of defaults that could cripple some banks and other lenders.
Commercial-property debt is expected to be one of the most attractive TALF-eligible assets, because it is collateralized by office buildings, malls, warehouses and other income-producing real estate. It is perceived as less risky than consumer credit such as credit-card debt and car loans.
Anticipating that TALF will be modified, a number of investment firms, including BlackRock Inc., Prudential Financial Inc. and ING Groep NV unit ING Clarion Partners LLC, are positioning themselves to use the TALF program to buy high-quality commercial mortgage-backed securities, or CMBS. Some of them aim to raise billions of dollars for that purpose.
Let's hope, for all of our sake, that these guys are right, and that the government makes good on their promise. It's likely our livelihoods depend on it.
Ever been to a fair, carnival, or amusement park? Well assuming you have, you certainly know the weird but lovable shucksters that work there, trying to taunt you with the promise of a 13 foot stuffed gorilla with fast talk while your kid's pleas and cries begin to burn a hole in your pocket. These folk operate all of the little games that seem all too winnable, that is until you actually try them (do those rings even fit around the bottles? are those milk bottles glued to the surface?). The bottom line is that these carnival operators, or carnie's, as I like to refer to them as, will do just about anything to get you to spend money at their booth.
This concept seems all to familiar to retail landlords of regional malls, power and lifestyle centers. The only thing worse than a rainy day to a carnie is a dark store to a landlord. And landlords aren't being all that shy about it either. A recent article in the New York Times showed that a burgeoning trend to fill up the mounting oceans of vacant space is, well, water.
In more than 12 malls across the country, the Flowrider, an indoor wave pool, is filling up once vacant blocks of space emptied by retailers gone bust.
“Landlords are scared,” said Suzanne E. Mulvee, a real estate strategist with Property & Portfolio Research. “Part of the reason they’re scared is dark space doesn’t pay.”
This phenomenon has begun to grow roots ever since big ticket tenants like Circuit City and Linens N Things filed for bankruptcy. Landlords began scrambling for replacements tenants. Downscale chains that landlords once kept out of shopping centers are suddenly being shown the welcome mat. Temporary stores are popping up. Once-small retailers are being invited to take over big spaces, while the strongest national chains are seizing the moment to move into new cities at low rents. And vast mall spaces formerly occupied by department stores may soon be carved up or turned into community colleges and dance studios.
The Flowrider might ordinarily be a great co-tenant of a swimwear store, a surf shop, or a Chuck E. Cheese. Yet, its making waves (brutal, I know) in regional malls of all shapes and sizes. And it makes perfect sense too.
When the nation’s stores March sales results came out last week, the numbers were down yet again — especially for department stores and mall chains, which have been the weakest performers for months.
John Hancock was famous for his distinctively large signature on the declaration of independence. Psychologists suggest that this is an common mark of someone who is egotistical, cocky, or insecure. As is often the case with insecure people, they often do something to cover up their insecurities by trying to distract the public with something else (if you drive a Ferrari or Lamborghini, I'm looking in your direction). So what was John Hancock so embarrassed about? Well he may not have been clairvoyant, but if he was, he might have been embarrassed by the dearth of activity that the "signature" skyscraper his name bears in Boston, generated at auction recently. 
Even more embarrassing? The price owner Broadway Partners begrudgingly had to sell the trophy asset for. And you thought the neon lights were bright on Broadway? Turns out the neon lights are dimming, and Broadway may have been better off with the stereotypical Porsche or Viagra.
What Broadway Partners couldn't overcompensate for, however, was the credit crisis, and the disaster overleveraging an acquisition in a declining market would bare. Led by founder and chief executive officer Scott Lawson, the New York based firm was a prolific buyer of real estate assets in the US in the boom years of 2005 to 2007. Having raised just $799 million in two funds, in 2006 Broadway "reviewed 436 transactions with a combined asking price of $75.2 billion," according to fund documents of the Pennsylvania Public Schools Employees' Retirement System.
The John Hancock Tower was part of those deals, after being acquired from Boston-based Beacon Capital Partners as part of a $3.3 billion, 10-building portfolio. The Tower was reportedly sold to Broadway for $1.3 billion.
Like many active buyers during the boom years, debt was key to Broadway's strategy. As the PSERS' document stated, "Broadway continuously monitors the capital markets in order to take advantage of refinancing opportunities and to position the property for the optimal exit strategy."
Something tells us this isn't an anomaly. There are too many large real estate operators I know who like to talk opportunity, but in actuality are too busy trying to asset manage thier existing portfolios to truly be focused on vulture acquisition opportunities. Not only that, but even funds that are capitalized well aren't the same as they used to be. The preferred returns they promise investors are ones which they would like to maintain. Without the leverage they were able to get several years ago, especially on bigger sized transactions, buying the same way is almost impossible. Buying with lower leverage cramps down those returns. And lets not forget most opportunity-based funds are investing based on pro-forma returns, not in place current cash flow. Pro-forma today is almost the equivalent of throwing darts at a dartboard. Sure, you can plug in assumptions into your ARGUS model all you like, but assigning probabilities to those assumptions, which make or break the IRR's a model spits out, is anything but easy.
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