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Re: Commerical Real Estate and REITs - It's About That Time, again...
Last Saturday I posted some thoughts on investing, NY real estate, and my macro outlook - Boo!!! Will Halloween Scare the Market into Respecting the Fundamentals?,
and I will continue that rant today since it leads into my most recent
endeavors - gathering shorts and puts in the commercial REIT space
again. These positions were very lucrative in 2008 and the first
quarter of 2009. Be aware that they are like private equity investments
and take time to develop. My first bear positions were in 2007
(residential homebuilders and mall owners). It took about a year and a
half to come to fruition, but threw off a blended return of about 400%
- Mostly from GGP going bankrupt after I loaded up with puts and shorts
at around $60. Well worth the wait in my opinion. Examples of the
research that powered this and other related gains are available at the
end of this article for those of you who are not familiar with my work.
The recent bear rally has driven most of the solvent, semi-solvent and absolutely insolvent
CRE stocks up, quite a few approaching 100%, while their macro outlook
has deteriorated significantly, along with their fundamentals. Quite a
few have actually acted in cahoots with the banks that held their
increasingly worthless debt, having issued secondary offerings
basically converting the bank holdings of debt that didn't have an
icicles chance in the hottest portion of Hell of getting repaid, into
worthless toilet paper, heretofore marketed as stock certificates. They
have also begun offering this used toilet paper as dividends. That's
right, worthless stock issued in lieu of loans that couldn't be paid
back are also being issued as dividends to cash flow investors from
companies that can't afford cash dividends out of their cash flow. If
this isn't the sector screaming for me to come back and short it, I
don't know what is.
2010 is the first of a series of heavy CRE debt rollover years, and the
CMBS market is close to dead. The insurance companies and pension funds
are having their own asset/liability mismatch problems (see "This supports both the HIG research and the recent reinsurer research"),
and although they have benefited from the most recent market run, I
believe it is just a bear market rally that has pretty much run its
course. If I am right, they will be seeing devastation in their
portfolios that will make March of this year look like a bull market.
The banks aren't lending due to the many issues that I have elaborated
on in my other articles, such as:
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
- And the next AIG is... (Public Edition)
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 5 - PNC Bank
In addition to a lack of available credit, credit terms are tightening.
On top of tightening credit terms is the difficult to overcome issue of
many investors that simply overpaid for properties over the last 5
years - producing LTVs in this higher cap rate environment that simply
wouldn't get refinanced even if we still had a credit bubble. You see,
when you buy a property for $100 million using a loan of $75 million,
it is hard to refinance that $75 million loan with collateral that is
now worth $60 million. Many CRE investors simply have not wrapped their
head around this valuation issue as of yet. I am confident the credit
markets will wrap their head around it for them.
If these problems don't sink the ship, the dwindling cash from
operations may, for many REITs are literally relying on lease
cancellation penalties as recurring income. This is a bad omen. If they
can replace the tenants that leave (and in this environment, that is a
"if"), it will be at drastically reduced rents. This smashes head-on
with the pie-in-the-sky business plans that were proffered to banks and
investors in the CRE bubble that promised big rents now, to be rolled
into bigger rents later, that will eventually bloom into the biggest
rents of all time as the projections of cap rates that approached ZERO
marched on.
So, I had my team perform a fresh, new scan of RE investors with no
limitations except minimal capitalization (some very weak companies are
so thinly traded it is hard to get in and out of the positions),
minimum share price and, of course, being a public traded company.
We came up with a lost less candidates this time around than we did in
2007 and 2008. On balance, the opportunity is just about as good how as
it was back then though, thanks to the Bernanke put option that caused
the market to bounce nearly 100% on top of deteriorating fundamentals.
The initial shortlist came down to 59 companies, out of which we
handpicked 11, and reduced that group to two after studying the filings
and footnotes. Both of these companies will run out of money in 2010
sans some miraculous financing event. Even if that miracle does occur
(you do believe in miracles, don't you), it would most likely occur via
a significantly shareholder destroying, event. Dividends and capex will
have to be cut, and/or properties will have to be sold on a distressed
basis. Do you guys remember when I made the same claim about GGP and
they attempted to attack me because of it? Well, GGP filed for bankruptcy
after swearing in their press releases and conference calls that any
mention of the words "bankruptcy", distressed sales or "foreclosure"
was heresy. Here is the chronology:
- GGP: Foreclosure vs Asset Sale
- GGP Refinancing Sensitvity Analysis
- GGP part 7 - Share value under the foreclosure analysis
- GGP part 8 - The Final Anaysis: fire sale of prime properties
- For those who were wondering what sparked that silly press release from GGP...
- My Response to the GGP Press Release, which seems to respond to blogs...
-
General Growth Properties Files for Bankruptcy - DealBook Blog ...
This is simple cash flow and valuation math. It can be done with a
calculator. There are many CRE companies that are at risk of doing the
GGP! I will release research on the first one for subscribers next week,
and the next company the following week. Currently, we are in the
process of valuing each property, both consolidated properties and
those in unconsolidated JVs as well as off balance sheet debt and
contingent liabilities, of the respective companies' portfolios and
rolling them up into our entity models.
Of course, CNBC, that bastion of investigative fundamental analysis, offers a counter-opinion:
US Commercial Property Up in Third Quarter: Index
Relevant and Sample Research
Research samples on companies in various sectors from food processors
to insurance companies to investment banks and
industrials/manufacturing - free to download. I dare you to compare this to what you get from your local brokerage house: 
Research_Samples 11/17/2008 for examples). Show
it to them and tell them you got it from a blog! I would like all
retail and institutional investors to think long and hard about what
you are getting for your commission dollars at the big sell side banks.
As times get harder, their already conflicted analysts are being pared
back even more!
Relevant Real Estate Research: There is the venerable "GGP and the type of investigative analysis you will not get from your brokerage house" and my work on dated Macerich (subscriber only):
-
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
On the residential builder side there was (these are free to download for non-subscribers):
- Lennar Forensic Analysis and Valuation update - 2/2009 2009-02-23 09:12:53 485.65 Kb
- Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth
- Lennar Insolvent: Enron redux???
- Lennar, Voodoo & the Year of the Living Dead!
- Now, a "Realistic" View of Lennar's Solvency
- Bubble, Banks and Builders
- Even
as the corporate management, the treasury secretary, the Fed Chairman
and the sell side called a bottom in 2007, 2008, and even now in 2009
(sound familiar) - see Bubbles, Bank, & Builders - Pt IV: I can't believe this guy and Again, I say, Credibility is the key, Mr. Hovnanian.
Reggie, what do u think chances of a fed bailout are for this sector? I'm very interested to short this, but if something like that hit the tape, these things would melt up like crazy when they did during March/April w/ announcements of programs like QE & PPIP.
Thanks for the article.
Holding some SRS and its certainly testing my patience.
BREAKING NEWS
The brazilian residential real estate bubble season is officially OPEN!
(It's in portuguese, but it says that restrictions for loans to people with bad credit history is banned)
http://economia.uol.com.br/ultimas-noticias/valor/2009/11/03/cae-aprova-...
Reg: Is there a way for the average retail investor to take part in the trend you're laying out here--via inverse ETFs and the like?
I'm more of a stock picker, so I am not comfortable with ETFs. In addition, I am loathe to give investment advice over the Web. I hope you understand, I am not a snob or anything of the such. I just want to stay clear of the "Cramer" effect, if you know what I am saying.
There is a smart community on my blog that should have no problem answering your questions, without the hamstring restraints that I may have.
There are a lot of bright real estate and equity (although I think this is mostly a trader orientated venue, I am a fundamentals type) guys on ZH as well, although they may not be very active in posting comments. I'm new to interacting here, so I am simply assuming.
Reggie, thanks for the post. But I'm afraid you're mistaken on GGP. Yes, you hit a grand slam on the way down, but this company is going back up. They are solvent and they will emerge from bankruptcy with common equity intact, albeit somewhat diluted. Your analysis on the remainder of the REIT sector is correct, but GGP is a good long play with a time horizon of 2+ years.
Thanks,
Mark
I don't see how I'm mistaken. It appears as if GGP played out exactly as I anticipated. In order for common equity to be intact, you will need a few the shares to trade back up to $60.
Shares don't need to be back to $60 if they were purchased at around $1. Take a look at the proposition of this being a great long play. How sweet would it be to profit going down on the short side and then again going long. Take a serious look as the risk-reward remains solid at a $4 pricetag, albeit it was much better at $1.
"Of course, CNBC, that bastion of investigative fundamental analysis, offers a counter-opinion:"
LOL..hilarious
+10
Real estate is no longer about "location, location, location;" but rather reduction, reduction, reduction. It will take many, many years to stabilize.
agreed, CRE is in the toilet, and reggie no doubt is able to pick out the losers of the industry worth shorting.
-but- readers, beware. the concept of REIT as a business model has a very bright future picking up cheap RE after further deteriorations in the market over the next few years. hopefully the smart ones haven't spent all their cash yet, or, will raise more capital. All they have to do then is patiently wait for the bottom and then after that come up with enough financing to sit on their empty properties for a few years. After a little pain, and perhaps some sacrificial victims a-la-lehman, the FED and the US government *WILL* help the bigger players.
don't get hosed betting against money that can get bailed out by the government. The ones that will die have to die relatively quick before the bailout happens.
That's not the concept of the REIT, that's the concept of "astute, competent management". It really has nothing to do with REITs. The prudent and calculating will always be able to feast off of the spoils of the brash, ignortant and hubristic.
Long Gold - Short Reits. Excellent heads up! Thanks Reggie
AUDIT THE FED BILL GUTTED by Mel Watt of NC---(Here is what you can do)--
CALL THIS CORRUPT CRIMINAL (Defending Bank of America in his district of Charlotte)
at Tel. (202) 225-1510. Demand to know WHY he choses to destroy America at your childrens expense!!
This should come as no surprise but Ron Paul says Federal Reserve Policy Audit Legislation ‘Gutted’
Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.
The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.
“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”
Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.
Keith Kelly, a spokesman for Watt, declined to comment and said Watt wasn’t immediately available for an interview. Watt’s district includes Charlotte, headquarters of Bank of America Corp., the biggest U.S. lender.
Call The Capital Switchboard
Conservative For Change has this advice in Ron Paul's Audit the Fed Bill Gutted.
It is time to get on the phone with everyone in Washington...Congressman and Senators and demand action against the illegal Federal Reserve. Call the Capitol Switchboard 202-224-3121 and speak with everyone you can!
Call Democratic Central Committee
On October 8, in Audit The Fed Revisited Jacob Dreizin offered this advice.
Without a flood of citizen lobbying, they will most likely water down H.R. 1207 into something meaningless, or else ignore it altogether.
The committee Democrats' central phone number is (202) 225–4247, and the fax is (202) 225-6952. Alternately, and perhaps more effectively, you can politely email some or all of the committee's most senior Democrat staff directly, as follows: