Concerns over realty holdings batter CalFed stock; analysts, however, say the market is over-reacting.

Concerns over realty holdings batter CalFed stock

Analysts, however, say the market is over-reacting

Concerns about California real estate may be dragging down the stock prices of thrifts based in Los Angeles County, but many industry experts think the real estate holdings of these companies remain sound investments.

"People looking at California real estate are giving it a harsher assessment than justified," said Campbell Chaney, analyst at Sutro & Co., based in San Francisco.

The company penalized the most for its real estate holdings appears to be CalFed, Inc., a top loser throughout last week, declining by $1 or more two days in a row. Trading in the $10 range, it is close to its 52-week low -- almost a third of its year high of $28.50.

The other major S&Ls, however, are also trading on the low side, even if they did not scrape bottom last week. H.F. Ahmanson, for example, closed at $19 last Wednesday, less than $3 above its year low.

Coast Savings, like CalFed, hit a new year low last week, falling to $3, but its junk bond holdings were a more immediate concern to investors that its real estate portfolio.

Despite weak stock prices, Tony Howard, analyst at Crowell Weedon & Co., based downtown, concurred with Chaney: "We do not foresee the disaster a lot of people are forecasting."

However, not all the experts are so roseate. "There is a real softening in some markets, and not all of them will hold up," commented Norm Katz, managing partner at MCS Associates, a consulting division of Grant Thornton, based in Irvine.

Few would argue that the market has lost steam, but the majority seem to think it will continue to chug along. As Stan Ross, partner at the accounting and consulting firm, Kenneth Leventhal & Co., said, "Most of the S&Ls' portfolios can be classified as good because California still has a market in residential real estate compared to the rest of the country."

To support this view, Ross points out that buyers have remained in the market and that there is not an ample supply of standing unsold inventory.

Howard said he could see single family homes declining in value as much as 15 to 20 percent, but such losses would not significantly impact the revenues of the major thrifts in the area.

So far, these institutions have had to take only minimal write-offs on their residential holdings, Howard indicated as a sign they can withstand a weaker real estate market. With non-performing loans of one to three percent of total assets at most of these companies, their track records are strong, relatively speaking, Ross added.

Although Howard believes the value of Los Angeles real estate will continue to deteriorate during the second half of the year, he foresees no dramatic drop. Consequently, write-offs may go up, but not at an alarming rate, he remarked.

Besides the good fortune to be based in a solid real estate market, some of the top local institutions were quicker at adjusting their portfolios than thrifts in Texas, the Northeast and other parts of the country, Ross said.

This has meant that as a group, they have deemphasized commercial real estate loans, Ross indicated. Coast, for example, backed off from this area as long as two years ago, Katz cited.

Commercial real estate loans are problematic because "the commercial real estate market has reached the saturation point; any more building will be building of vacant buildings, Chaney said.

Even with institutions' backing off from this area, some potentially nettlesome commercial real estate loans remain on their books, not to mention troubled construction loans, Howard said.

Ross, on the other hand, said most of these companies' construction loans should hold up, although those in certain local markets could turn bad.

Ross added that commercial loans are not a problem across the board. They are also a thornier problem for the commercial banks than the S&Ls, Chaney said.

Because some commercial and construction loans are healthy, Ross suggested you have to take a closer look at what commercial loans each institution holds. Those institutions most vulnerable would be those who made loans at 90 to 95 percent of value, Katz said. That means down payments of less than 10 percent, when many more conservative institutions would ask for down payments of at least 20 percent.

CalFed and GlenFed have the biggest chunks of these high loan to value loans, Katz said. The two biggest thrift companies, H.F. Ahmanson & Co., parent of Home Savings of America, and Great Western Financial, are less at risk because of their more conservative lending practices in this regard.

For this reason, among others, Chaney recommends Ahmanson and Great Western as buys. He said the stock market has inordinately penalized them for being in the much maligned S&L business.

Predicting that they will be survivors of the thrift crisis, he said, "I see a return to more normal growth rates."

Katz added both Ahmanson and Great Western will benefit from their geographic diversification. Ahmanson, for example, owns the Bowery Savings Bank based in New York. He advised caution with companies such as Coast Savings which have kept their lending activities close to home. Needless to say, this view runs counter to those who take comfort in the strength of Southern California real estate relative to other markets.