Subprime- Real Estate Guru Ken Heebner speaks.
bloomberg.com
Heebner Says Subprime-Loan Defaults Will Hurt Economy (Update3)
By Danielle Kost
Feb. 28 (Bloomberg) -- Kenneth Heebner, the manager of the top-performing real estate mutual fund over the past 10 years, said the economic damage from high-risk mortgage defaults is going to get worse.
``We have a trillion dollars of subprime mortgages and we're going to have huge defaults,'' Heebner, 66, said in a telephone interview today from his office in Boston.
``If you're looking at the housing market, it's not the darkest before dawn, it's the darkest before pitch black,'' Heebner said.
Heebner, cofounder of Capital Growth Management LP, has been selling shares of real estate investment trusts that buy apartments because they are no longer cheap. At year-end his CGM Realty Fund had 35 percent of its assets in REITs. He's made a ``significant reduction,'' though he wouldn't be more specific.
The $1.5 billion Realty fund returned an average of 20 percent over the past 10 years, the most of any real estate fund, according to data compiled by Chicago-based Morningstar Inc. The fund advanced 29 percent last year, almost double the gain in the Standard & Poor's 500 Index. It trailed the 36 percent rise in the Bloomberg U.S. Real Estate Index.
Heebner is known for making concentrated investments in a few industries. He owned homebuilders in 2001 to 2005, record years for home sales. He bet against technology and telephone stocks in 2000, correctly timing their collapse.
He's changed course again.
Moving On
``For 10 years, I've been a flat-out bull on REITs in general,'' said Heebner, whose 17-year-old firm oversees more than $6 billion. ``I think they've reached a fair valuation.''
REITs are selling at 20 times the cash they're generating per share, Heebner said. Private-equity firms eager to buy real estate have driven prices up. On Feb. 9, Blackstone Group acquired Equity Office Properties Trust for $39 billion in what was then the biggest-ever leveraged buyout.
``I don't see them as being economic buyers,'' Heebner said about buyout firms. ``They're creating transactions that will line their pockets.''
Investors are concerned rising subprime mortgage delinquencies and defaults will hurt the U.S. economy. It was a factor in the selloff yesterday in which the Dow Jones Industrial Average lost 3.3 percent, the most in four years. The Dow rebounded 1.3 percent today.
No Recession
Heebner said the surge in bad subprime mortgages will hurt the economy as it puts a drag on the housing market, but he doesn't expect a recession. Federal Reserve Chairman Ben S. Bernanke said the same today in testimony to the House Budge Committee in Washington.
Still, the secondary market for subprime loans could ``shut down'' as U.S. mortgage companies including Freddie Mac stop buying them.
``I have anecdotal information that these people are having trouble selling this paper,'' Heebner said.
Subprime mortgages are made to people with limited credit records or high debts. Delinquencies and defaults are the highest in at least seven years, according to a Feb. 22 report by Barclays Capital. At least 20 subprime lenders in the U.S. have closed, scaled back or been sold in the past five months.
Expect Volatility
Investors in Heebner's funds get a manager who doesn't restrict himself to a category and whose returns can fluctuate, said Morningstar analyst Federico Cepeda.
``The fund is one of the most volatile offerings in the real estate category,'' he said.
The Realty fund's Sharpe ratio is 1.63, compared with 1.38 for the average real estate fund, according to Morningstar. A higher Sharpe ratio means better risk-adjusted returns. Morningstar rates the fund five stars, its highest designation.
Heebner began his career in 1965 as an economic forecaster with consultants A&H Kroeger in New York after receiving a master's degree in business administration from Harvard Business School. He later managed money at Scudder, Stevens & Clark Inc., now part of Deutsche Bank AG, and Loomis Sayles & Co.
His $2.3 billion CGM Focus Fund, started in September 1997, returned 15 percent over the past five years, ranking third among funds that invest in growth and value companies. The fund trailed the S&P 500 last year.
``If you're going to be following the fund every day, you're not going to be able to stomach the wide price swings,'' Cepeda said.
While Heebner's view on apartment REITs may have soured, he's more optimistic about the prospects of those investing offices, especially SL Green Realty Corp., New York's biggest office landlord. Shares of the company, the Realty fund's biggest position at the end of December, have jumped 68 percent in the past year. Its earnings rose 41 percent in the fourth- quarter amid rising rents.
``The Manhattan office market is the most powerful in the country,'' said Heebner. He also favors office REITs that operate in San Francisco, Los Angeles and Boston. ``There's room for rents to move up a lot.''
To contact the reporter on this story: Danielle Kost in Boston at dkost1@bloomberg.net .
Last Updated: February 28, 2007 20:02 EST |
