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A Granular Look Into a $6 Billion REIT: Is This the Next GGP?
This is a corrected and extended update of my glance into the Macerich
update. This post was delayed due to material data input errors which
have been rectified. I've decided to offer a peak into the ongoing
analysis of its property portfolio, which combined with its credit and
cash flow situation brings to mind the concerns that I have had about
GGP about a year before it collapsed (see "GGP and the type of investigative analysis you will not get from your brokerage house.").
In looking at the data that I am about to display, I want readers to
think of MAC as an investment entity that you, yourself, would run as a
real estate investor. Think of your ability to make money over time,
and the viability of your entity if you would actually lose money. As a
property investor, I view MAC's properties in terms of being underwater
or being profitable on a capital appreciation and NOI basis. As of
11/09, many of MAC's properties are significantly underwater, the
ramifications of which depend on the financing utilized, since the use
of debt has literally wiped out all of the equity in some, has made
others require an equity infusion to roll over the mortgage, and has
simply destroyed shareholder capital in other cases.
Even those properties that are 100% equity financed represent a
material loss to shareholders where they are underwater. As you will
read below, this has occurred in many instances. Very few publicly
disseminated REIT analyses seem to take into consideration the
ramifications of REITs actually losing money on investments that don't
have large loans against them. They should, though. A loss, is a loss,
is a loss. Leverage simply amplifies the loss. That being said, if I
paid $30 million in cash for a property that is currently worth $20
million, I lost $10 million (less the real income derived from that
property since acquisition) - no matter which way you look at it. At
least with a cash purchase, I may have the option of riding it out to
hope that the market returns. If I bought the property with a 70% LTV,
$21 million loan), not only have I taken a 110%+ loss, but I would
probably be forced to write the property off come time to refinance the
loan. The leverage significantly reduces my flexibility. This is what
happened to GGP.
The next question is, "Will the market come back to where it was when I
made these high priced, high leverage purchases?". Reggie's assertion
is, "No time in the near future!". Let's take a look at Richard Koo's
chart on the Japanese asset bubble, after GDP started to ramp up...
If we are anywhere near the Japanese "lost decade" experience, we have
a long sloth ahead of us. Now, let's take a look at the most recent
bubble that got us into this mess. There are two major reasons most
REITs are in a financing bind. The first is that there was a credit
bubble that allowed REITs to borrow more than was fundamentally
feasible, and/or viable. This bubble was blown, in large part (at least
in regards to REITs), through the CMBS market. As you can see below,
CMBS (credit) peaked in the 2nd quarter of 2007 after a run up that
started in the 2nd quarter of 2003.
Sourced from http://www.jackmangroup.com/
The same can be said for the rent bubble, where companies apparently
were signing leases with monopoly money, almost to the exact monthly
range as the credit bubble. The rent bubble was blown through the free
access to credit by both companies that sought leases and by consumers
who used debt to finance purchases from said companies. Economic
activity was grossly exaggerated, and this gross exaggeration was
transformed into grossly exaggerated rents.
Sourced from BoomBustBlog proprietary research
These grossly exaggerated rents helped to justify grossly exaggerated
business plans that required grossly exaggerated financing to build
grossly exaggerated development projects (residential, office and
retail). Now, that the CMBS/lending spigot has been shut down, bubble
consumer credit has popped, and fundamentals are now ruling commercial
real estate markets (having taken the place of euphoria):
- rents are dropping rapidly;
- CRE values are collapsing;
- CAP rates are exploding;
- the
refinancing market is looking for much lower LTVs while the property
values of recently purchased properties are dropping simultaneously, - and
an often overlooked occurrence - REITs are selling off the more
valuable assets to fund the gaps necessary to rollover overpriced debt,
further reducing rent rolls and dramatically reducing the overall value
of the existing portfolios.
These five ingredients combine to make a deadly elixir. Click any of the charts below to enlarge...
Now, let's take a look at an excerpt of Macerich's property analysis (subscribers should reference 
MAC Report Consolidated 051209 Retail 2009-12-07 03:46:49 580.11 Kb , MAC Report Consolidated 051209 Professional 2009-12-07 03:48:11 1.03 Mb) that we have so carefully developed, keeping in mind the dates determined as a bubble in the charts above.
As you can see above, MAC has ramped up their real estate investments to full speed at nearly the exact bottom of US retail cap rates. It actually takes skill to time your investments so accurately to the inverse of potential profitability.
You know what they say in the real estate biz... "Location! Location!
Location!" Where you buy is often more important than what you buy. On
that note, let's take a look at where MAC bought.
California and Arizona are two of the worst hit states in terms of
both residential and commercial real estate decline.and by a very
significant margin...
The results of these activities have been congealed in our analysis
of Macerich's entire portfolio of properties (118+ properties),
including wholly owned, joint ventures, new developments,
unconsolidated and off balance sheet properties. Below is an excerpt of
the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).
Notice the loan to value ratios of the properties acquired between 2002
and 2007. What you see is the result of the CMBS bubble, with LTVs as
high as 158%. At least 17 of the properties listed above with LTV's
above 100% should (and probably will, in due time) be totally written
off, for they have significant negative equity. We are talking about
wiping out properties with an acquisition cost of nearly $3 BILLION,
and we are just getting started for this ia very small sampling of the
property analysis. There are dozens of additional properties with LTVs
considerably above the high watermark for feasible refinancing, thus
implying significant equity infusions needed to rollover debt and/or
highly punitive refinancing rates. Now, if you recall my congratulatory
post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off),
the WSJ reported that the market will now willingingly refinance mall
portfolio properties 50% LTV, considerably down from the 70% LTV level
that was seen in the heyday of this Asset Securitization Crisis.
Even if we were to assume that we are still in the midst of the credit
bubble and REITs can still refi at 70LTV (both assumptions patently
wrong), rents, net operating income and cap rates have moved so far to
the adverse direction that MAC STILL would not be able to rollover the
debt in roughly 37 properties (31% of the portfolio) whose LTVs are
above the 70% mark - and that's assuming the credit bubble returns and banks go all out on risk and CMBS trading. Rather wishful thinking, I believe we can all agree.
Now, let's assume that the markets can be convinced to rollover the
debt at 70LTV, with some pretty onerous (yet potentially sweet to the
lenders) terms. Despite the significantly higher debt service, MAC will
still need to come up with the equity to patch those rather large
holes. I point subscribers to our MAC 3Q09 Results Analysis in order to illustrate MAC's attempts at financing said gaps.
Out of the total 43 consolidated properties (excluding new
developments), the fair value of 17 properties (40% of the total)
currently stands below the net cost/ carrying value in the balance
sheet. In the case of unconsolidated properties, 24 properties out of
total 48 properties stand below carrying cost. This is a reflection of
the MAC management’s failure to create value for its shareholder, which
is now becoming increasingly apparent in this litmus paper environment
of distressed market conditions.
As mentioned earlier in this missive, I find that many REIT investors
have been focusing on property LTVs, which may cause one to miss sight
of the forest due to that big tree that's in the way. When one takes a
loss on a real asset purchase, leverage simply amplifies the loss. The
lack of leverage does not remove the fact that a loss was taken. In the
last column of the table above (Property Appreciation since
Acquisition), you can see where Macerich has taken significant (capital
appreciation) losses, and in the full version of the analysis, you can
see some of the properties even have relatively low LTVs or no mortgage
at all. Alas, a loss, is a loss, is a loss. As a matter of fact, for
the history of the entire on balance sheet portfolio, MAC has added a
mere 2.2% of appreciative value since acquisition.
Reposting that Richard Koo/Nomura graph of what we are likely to see in
the near future should make the purchasers of MAC's recent equity
offering and any subsequent offerings shudder. After all if no gains in
value were made over the last few bubblicious decades, what does this
portend for the future when all macro and fundamental factors are
pointing downwards...
Do I feel Macerich is in trouble? Well, I'll let my readers hazard a
guess. There is a wealth of stuff that my team dug up, and even more we
were able to extrapolate as a result of our deep dive into the
netherworld known as off balance sheet accounting. This may very well
be a situation where "extend and pretend" and "kicking the can down the road"
may not be enough fantasy to overcome the economic reality of the
fundamentals. We shall see. Banks beware!You see how profitable
ignoring the problem was for GGP's lenders and creditors.
I am also working on a macro report that extends and builds upon the
work of Richard Koo from Nomura (the author of that oft-used Japanese
lost decade chart above), in an attempt to verify (or disprove) the US
as Japan in the 19 year "lost decade" thesis. This should have
significant ramifications for banks and real estate investors, alike.
Again, I welcome any banks, lenders or those with economic interests in
MAC's (or Taubman's [TCO] or any other REIT) properties to reach out to me to discuss my forensic analysis. I can be contacted through this link.
Key assumptions and metrics
Our Research team conducted a detailed valuation of each of the
properties in the MAC portfolio of 118 properties - consisting of 70
consolidated properties and 48 properties under unconsolidated JVs. The
property valuation required assumptions on rentals, cap rate, discount
rate, rental growth, occupancy, etc as detailed below.
Rental Assumptions:
1. For each property, the
team sourced information on likely rentals based on rents prevailing
for similar properties in the same locality or area. We sourced the
initial information from Loopnet and CB Richard Ellis (CBRE). The
median rentals from these two sources were averaged to get information
on rentals that MAC’s property should command amid the current
distressed real estate scenario.
2. For properties which required some premium to the above derived
average rents due to their nature (regional and super regional,
location, ranking among the top malls in an area or region, higher
sales per square feet), we applied a premium to arrive at what we
considered to be the most likely rentals.
3. The BoomBustBlog team also solicited quotes for certain
properties from other brokers and MAC’s management (since most of these
properties are managed by MAC’s management for rental and other
purposes), both categories of which we assumed would be on the
optimistic side but whose numbers stood for the sake of creating a
conservative analysis. These quotes were used in cases where there was
additional evidence such as sales per square foot, ranking
(popularity), etc to substantiate quotes.
Assumption on Cap rate and Discount rate
The team considered cap rate of 7.5% to value each property. The cap
rate used was lower than the average US retail cap rate of 8.71% (as
per CBRE in 3Q09) to incorporate the premium of the upscale regional
and super regional malls, as well as to err on the conservative side,
if we were to err at all.
A discount rate of 7.5% for PV calculations was used, which is in line
with MAC’s weighted average cost of capital (WACC) of 7.27%.
Occupancy Rates
For property valuation purposes, the occupancy rates were assumed at
roughly the current levels (on an average basis) for each year as we
assume them to decline in coming years and then rise a little after the
current crisis subsides.
Rental Growth
The rental growth in future years was forecasted based on region-wise population and consumer spending increases.
Quality Control via Cross Reference of Assumptions with Data Attained from Bloomberg
In order to compare our NOI estimates with the property level data
available from Bloomberg (via the reported operating data of the
properties of CMBS), we performed a comparison for a number of
properties owned by MAC, by collecting data for nine wholly owned
consolidated properties which have significant contribution to
Company’s total NOI.
The variations primarily stem from two reasons:
- Our NOI estimates are based on current rentals in the market
for similar properties while the property may be earning rents higher
or lower than the market rate owing to long term contracts which have
not recently renewed (but may very well be under pressure for
renegotiation due to the sharp compression in leasing rates) and - Expense
ratios and recovery ratios at the individual property level may vary
from our assumptions owing to a lack of precise property wise data. We
assumed expense and recovery ratios to be equal to the levels observed
on consolidated company level.
Additionally, data from Bloomberg, in many cases, references older
periods that pre-date the rout in CRE rents. Out of 9 properties, our
estimate for NOI is lower in 5 cases and higher in 4. Notably, in two
of the cases where our data is lower, Bloomberg reports significantly
older data – more than old enough to miss the bulk of the drop in CRE
rental values.
More of my opinion on MAC and CRE
The professional level of the MAC updated is data heavy, and about 30
pages long. I will be following up on both the TCO and MAC reports with
analysis of the CMBS performance in which the mortgages of many of the
properties of these companies are packaged. Goldman Sachs is the
originator of most of the CMBS, which is interesting since they just
upgraded the sector in direct contravention to my opnion of the CRE
outlook. My next post will review the performance of Goldman's vintage
CMBS products the last time they hawked issues like these to their
clients. As a hint, it doesn't look very pretty.
Latest Subscription Content
- MAC Report Consolidated 051209 Retail 2009-12-07 03:46:49 580.11 Kb
- MAC Report Consolidated 051209 Professional 2009-12-07 03:48:11 1.03 Mb
- MAC 3Q09 Results Analysis
Earlier work on Macerich
- March Real Estate Sector Intelligence Note 2009-10-22 01:47:20 143.74 Kb
- Macerich Summary 2009-10-22 01:44:45 910.94 Kb
Macerich Statistics Spreadsheet - Pro 2009-10-22 01:47:00 356.00 Kb - Macerich Sensitivity Analyis - Pro 2009-10-22 01:46:36 344.92 Kb
- Macerich Forensic Valuation - Retail 2009-10-22 01:46:14 192.71 Kb
- Macerich Forensic Valuation - Professional 2009-10-22 01:45:52 344.92 Kb
- MAC Intelligence Note - 1Q09 Earnings 2009-10-22 01:45:34 307.68 Kb
And some content on Taubman Compannies
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It's not nice to delete Anonymous comments Reggie. I thought we were dogs, bro.
Reggie, you need to go long on GGP. I'm sitting on $385,000 of profits since buying started in March on this stock. You crushed it on the short side, now get in on this from the long side. You'll be rewarded.
Did a MFD job recently in Fresno. That mall may have appreciated, but I bet you a $.25 it won't last. Fresno is a disaster
Reggie, you are always a welcome read my friend. Nice work.
Quick question, on a scale of 1 to 10, 10 being most like GGP, how would you rate MAC.
All the best.
Go get 'm tiger!
You honestly can't get this stuff elsewhere. Well done, Reggie. And thank you.
Dear Reggie,
Could you please ask The Dictator, the one, to add an item to the Swag Store. What I was looking for is a plastic bobblehead replica of Reggie(you), styling and big pimpin.
http://i49.tinypic.com/wuqmpi.jpg
Time is of the essence as the season of giving is almost upon us. I'm going to get a few for my Zero Hedge shrine.
MAC 30.13 up from 28 last week.
I hereby decree that Reggie and company are the new CSI for the US Treasury in Washed up DC......
You're beautiful Reggie, like a sharpshooter in a shooting gallery.
Reading your stuff reminds me of reading a scientific paper, I leave it to other smarter people to quibble over the data and the analysis in the meat of the report and tend to skip to the section subtitled Conclusions....but love that you put all the data out there.
Thanks, good stuff. Your specifics are sharp knife to cutting through general BS.
Thank you my friend :-)