An investor might be forgiven for assuming that a municipal bond, in general, is a pretty safe investment.
But buyers of some Los Angeles Housing Authority bonds know better.
In 1992, the city Housing Authority issued tax-exempt $14 million in bonds to help fund the conversion of a 70-year-old downtown Skid Row hotel the Hayward Manor into a 525-unit single room occupancy project. The authority ceased paying on the bonds in June of last year.
In theory, money garnered from the federal government, in the form of Section 8 housing subsidies, should have re-paid bondholders.
But, evidently, much went wrong at the Manor, including cost overuns in rehabilitating the structure.
The renovation was never fully completed, although at times the hotel was 80 percemt occupied.
And the old hotel never generated enough income to honor bond payments, instead tapping a reserve until it was exhausted.
The bond’s trustee, big Northern California bank Wells Fargo Bank NA, has filed suit against the city and hired Neal Millard, in the Los Angeles offices of White & Case, to press its case.
The suit alleges fraud on the part of the city Housing Authority, saying it misrepresented the potential revenues from the project and failed to uncover construction and administrative problems with the project.
The city has not yet responded to the complaint. But Attorney Eric Rowen of Jones Davis Reavis & Pogue, which was hired to defend the Housing Authority, said bondholders cannot expect the city to bail them out.
“The prospectus makes clear the only recourse is the property, and income generated by the property,” said Rowen.
In other words, the bonds are not “general obligation” bonds, backed by full faith and credit of the city or the state, or any other public entity.
How much is the Hayward Manor worth today?
“Well, one developer offered us $500,000,” Rowen said.
A bondholder’s committee has hired Harold Riechwald, of Manatt, Phelps & Phillips, as legal representative.
For bondholders, the facts are this: They haven’t been paid since June a year ago, the building (which is collateral) is worth probably less than $1 million, and the courts look to be the only hope of salvation.
That’s a long way from a safe investment.
99 forever?
For those Walter Mitty-types who like to imagine themselves on par with Berkshire Hathaway’s Warren Buffett, or his Los Angeles-based sidekick Charles Munger, I have this suggestion: Buy 99 Cents Only Stores Inc. stock, and hold it forever.
Not that Berkshire has a stake in the City of Commerce-based discount retailer. But the buy-and-hold strategy would seem to make sense in this case: The company went public at $14.50 a share in May of 1996, and last week the stock traded in the $32-a-share range.
One reason for buying the stock is simple: The headline a few weeks back suggesting that the state population would surge by 18 million to 49.3 million by 2025, a 57 percent hike from today.
Births and immigration will be a big contributor to growth.
It sounds like California is going to have millions of extra shoppers looking to squeeze the most out of their budgets. The 99 Cents Only Store has nearly 50 stores based in the state, and is growing.
Of course, much can go wrong ‘twixt cup and lip, including the population projections being off California could choke on itself, for example or a better retailer emerging. Or maybe an 89 Cents store.
But in the meantime, one could hold the stock, and tell friends, “Like Warren Buffett, I look for long-term values….”
Dow Dogs
Downtown-based money manager Payden & Rygel Investment Group has built a successful money fund on a simple concept: buy the 10 stocks in the Dow Jones Industrial Average with the highest yields.
Payden & Rygel started the “Dow Dogs” mutual fund last November, and it already has $150 million under management. The 14-year-old company has $25 billion total under wing.
Why Dow Dogs?
“The theory is that highest-yielding stocks are high-yielding because they are undervalued,” said Greg Brown, director of institutional marketing at Payden & Rygel. “All the companies on the Dow are large, well-capitalized, with global reach, good management. If a stock is undervalued, it is probably temporary.”
For years, investors have tinkered with buying the “10 cheapest” Dow Jones stocks, either by price-earnings ratios, or the 10 worst-performing in the latest one- or five-year period, or by some other measure. A number of years back, a book, “Beating the Dow,” by Michael Higgins, popularized the topic (within stock market junkie circles, anyway).
Due to certain federal mutual fund regulations regarding diversification, only one-half of the Dow Dog fund is actually in the 10 stocks; the other half is invested in an index fund made up of the S & P; 500, a broad mix of blue-chips.
So far, the Dow Dogs fund is just about even with the Dow, but only nine months are under the belt, points out Brown. “It’s really too short of a test period.”
No one, probably, is complaining. As of last week (but after the 257 point Tuesday gain in the Dow), the Dow Dogs fund is up more than 30 percent since its inception.
Flush with success from the Dow Dogs, Payden & Rygel recently launched a new fund, based upon the 30 largest securities in Euriope, which are also high-yielding, said Brown.
The “Euro Dogs” fund also allows investors to play on the idea that European companies are getting ready to become lean and mean, as did their American competitors. “They are facing the same restructuring that we have already gone through,” said Brown. For investors, that could mean higher earnings per share in the future.
By the way, Payden & Rygel got kudos in an Aug. 25 issue of Forbes as one of the most efficient fund managers in the United States, expending and charging less on administration than all but two other major funds.
Senior Reporter Benjamin Mark Cole covers the investment community for the Los Angeles Business Journal.
