The world's most handsome and charismatic blogger stands outside his
beloved friends at Goldman Sachs to congratulate them on the
outstanding CMBS offering made through TALF government leveraging for
Developers Diversified Realty (notice
the funny looks that I am getting from the women in the background,
haven't they seen a handsome and charismatic blogger before???
).
I have a few questions about follow on offerings and what that may
portend for REITs who are in a even better situation than DDR, but
let's read up on why I walked past GS headquarters in the first place.
After the article excerpted below, we will discuss some tidbits of data
and info that neither Goldman nor the REIT prolific Merrill Lynch, or
anyone within a bonus' throw or subway distance from 85 Broad will
bother to tell you about the REITs, save that handsome and charismatic
guy who dares poke fun at the "Almighty at 85"!
From WSJ.com:
Demand is expected to be strong
Monday for the first sale of commercial-mortgage-backed securities
under a government rescue program designed, in part, to ease the
mounting stress in the commercial-property sector.But the strong demand is partly a reflection of the conservative underwriting of the $400 million in bonds backed by 28 Developers Diversified Realty
Corp. shopping centers, in terms of the quality of the assets
underlying the loan and the loan amount relative to the value of the
properties. [If BoomBustBloggers remember, DDR is the
company which was part and parcel of what appears to be (but only if
you were to really use your imagination) a "pump'em, dump'em, double
tax'em" plan with Merrill Lynch/BofA, see "Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!"]
While the deal may help reopen a vital funding source for some
commercial-property investors, it will likely provide little solace to
owners of tens of billions of dollars of office buildings, shopping
centers and other commercial real estate that are now worth less than
their mortgages. [more on this in a minute]
The deal is the first issue of
commercial-mortgage-backed securities under the Federal Reserve's Term
Asset-Backed Securities Loan Facility, or TALF, program. Under the
program, investors can borrow from the Fed as much as 85% of the CMBS
bonds' value by pledging the securities as collateral...The sale of the
real-estate investment trust Developers Diversified bonds is more than
three times oversubscribed, according to price talk among investors who
are considering buying the paper. The healthy appetite enabled Goldman
Sachs Group Inc., the underwriter of the issue, to lower the
unleveraged yield of the top-tier class of the bond issue to about 4%,
those investors said... [This
is interesting, considering the amount of risk in the sector, but since
I have not reviewed the offering maybe it might just be worth it... I
do want to take this time to congratulate Goldman for this home run,
though.]"It's a great execution for the
borrower," says Scott Simon, managing director and head of mortgage-
and asset-backed securities portfolio manager at Pimco, a leading bond
house. "If other real-estate investors can borrow money at that rate,
it would be a real game changer for the commercial real-estate market
that has been so devoid of financing." [With
rates at effectively zero, I don't think it is the cost of the money
that is the issue, it is the LTV requested by the borrower]Mr. Simon declined to comment on whether Pimco would buy any of the
Diversified Realty bonds. Bids for the securities are expected to come
from many mutual funds, insurance companies and other institutional
investors. Firms that are considering the deal include Babson Capital
Management, the investment-management unit of Massachusetts Mutual Life
Insurance Co. and Principal Financial Group, according to people
familiar with the matter. Babson Capital declined to comment. A
representative at Principal Financial didn't respond to requests for
comment. [I had a profitable dealing with a PFG position, see the research links below]Institutional investors are attracted to the deal because it is viewed
as a low-risk investment with relatively healthy returns when compared
with five-year Treasurys, which are yielding about 2%.[Isn't
that what investors thought about CMBS and MBS in the 2004 through 2007
tranches just two or three years ago??? Relatively low risk as compared
to what? If investors truly believe this is a low risk investment
because it was written at 50 LTV, they obviously weren't paying
attention to deals struck in 2007 at 50 LTV, which are anywhere from 70
to 100 LTV now. They obviously have not paid much credence to the CMBS
default rates climbing, see Moody's CMBS Delinquency Tracker Hits Decade High
from Zerohedge. They definitely do not subscribe to the US as Japan
thesis, for if they did... I, again (I know I'm wearing this chart out,
but it does tend to drive the poinnt home), refer you to the
relationship between GDP and property values in Japan from the "Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?" post.If we are entering a lost decade, 50 LTV can become 110 LTV faster than
you think. Ask the guys who thought they were being conservative just
two years ago... I'm not saying this is a bad deal, but I wouldn't harp
on how safe and relatively risk free it is for a mere 4% yield, either.
Then again, I'm not getting paid to underwrite and hawk the securities,
now am I?]The deal reflects the high bar the Fed has set
for loans eligible for TALF financing. The 28 shopping centers in 19
states securing the bonds have stable cash flow because they often are
occupied by discount retailers that tend to attract business even in a
recession. For instance, one of the properties is Hamilton Marketplace,
near Princeton, N.J., a 957,000-square-foot property whose tenants
include Wal-Mart Stores, Lowe's, BJ's Wholesale Club and supermarket
ShopRite. According to Fitch Ratings, the property has maintained an
average occupancy of 96.7% since 2006 and is 95.1% occupied. [Uhmm,
if we are currently below the three year average occupancy level,
doesn't that mean we are trending down by over 150 basis points?! Hey,
it must be me...]The $400 million loan represents about half of the value of the underlying properties. [Let''s
keep that figure in our head as we move on - 50% LTV is currently what
the market will bite, and according to the WSJ, bite with gusto]
By comparison, in the years before the financial crisis erupted in
2007, banks were willing to lend more than 70% of a property's value
because the debt could be easily sold as CMBS. [Yes, some deals were offered as high as 75 LTV at the height of the bubble.]
Even under a "stress" scenario, according to Fitch, the Developers
Diversified properties would produce a cash flow of about 1.44 times
what is required to service the debt. Back when credit was easy, the
ratio for stress scenarios would even fall below one [cashflow to
debt service coverage, but does that make sense? Wouldn't practically
guarantee a default unless you KNEW cash flows would increase???] for many CMBS offerings. [No
disrespect intended to Fitch and the rating agency cabal, et. al., but
isn't this the same crew that preached perpetual HPA just a couple of
years ago. For those that don't know, perpetual HPA = perpetual home
price appreciation. Their AAA RMBS ratings were based on the assumption
that housing prices would appreciate,,. FOREVER!!!!!
I'm dead serious. By extension, all derivative products based upon
those RMBS were also equally as flawed. Investors should take past
performance and some common damn sense into consideration when
ingesting rating agency fodder! Let's peruse an excerpt from the always
entertaining Mish Shedlock's blog:
Fitch Discloses Its Fatally Flawed Rating Model...
What follows are excerpts from Absence of Fear, an excellent article written by Robert L. Rodriguez at First Pacific Advisors.
We were on the March 22 call with Fitch regarding the sub-prime
securitization market’s difficulties. In their talk, they were highly
confident regarding their models and their ratings. My associate asked
several questions.FPA: “What are the key drivers of your rating model?”
Fitch: They responded, FICO scores and home price appreciation (HPA) of
low single digit (LSD) or mid single digit (MSD), as HPA has been for
the past 50 years.FPA: “What if HPA was flat for an extended period of time?”
Fitch: They responded that their model would start to break down.FPA: “What if HPA were to decline 1% to 2% for an extended period of time?”
Fitch: They responded that their models would break down completely.FPA: “With 2% depreciation, how far up the rating’s scale would it harm?”
Fitch: They responded that it might go as high as the AA or AAA tranches.Okay boys and girls, this is a graph of what the actual home price appreciation looked like over the last few years...
![]()
If Fitch's models would break down and invalidate AA and AAA ratings
with an extended period of 1% to 2% home price depreciation, what in
the world would happen with an extended period of 20% to 50% price
depreciation. Essentially, no one will know whether these tranches are
AAA or junk! I really wonder if better due diligence was actually
performed for these CMBS investments. After all, I would think it is
safe to assume that Goldman has a tight relationship with Fitch, and
Goldman really wanted that deal done, right??!!!Further excerpted from Mish's interesting post:
Disclaimers
S&P: “Any
user of the information contained herein should not rely on any credit
rating or other opinion contained herein in making any investment
decision.”Moody's: "Moody's has no obligation to perform, and does not perform, due diligence."
'Nuff said. Let's move on to focus on the facts and the truth as Reggie sees them.
The problem with the CMBS market, or vanilla commercial mortgages for
that matter, as I see it, is not availability of credit. It is the
solvency of the deal and LTV needed to secure the loan. Too many
players (nearly all of them) leveraged themselves at the top of a real
estate bubble, and now have to roll over underpriced loans on
overpriced properties. Haircuts, no not haircuts, literal scalpings
have to take place in order for these deals to go through. As we have
read from the WSJ article above, prudently priced deals with ample
collateralization will sell. The problem is, where are the commercial
REITs going to get ample collateralization from after blowing their wad
during a free credit binging asset buying bubble?
I have analyzed Taubman Properties and am about to release a full
forensic analysis to my blog's subscribers (hopefully available by the
middle of next week, since we are are still fine tuning certain
aspects). This is actually a relatively well run company (that is in
comparison to some other REITs). The sell side has an average rating of hold on the stock. Luckily, I am not a sell side analyst. Here is an excerpt from Taubman's most recent 8K filing:
The Board’s decision considered that The Pier’s current cash flows, as well as estimates of future cash flows, are insufficient to cover debt service and operating
costs due to economic conditions, tenant sales performance, high
capital requirements to complete the property’s lease-up, high
operating costs, and the anticipated refinancing shortfall at the loan’s maturity in May 2017.
After recognizing the noncash impairment charge, representing the
excess of book value of the investment over its estimated fair value,
the consolidated joint venture’s remaining book value of the investment
will be approximately $52 million. A default on this loan will not
trigger any cross defaults on the Company’s lines of credit or any
other indebtedness. The Company’s cash investment in The Pier is
approximately $35 million.The Company
has concluded that the investment in Regency Square is also impaired
based on current estimates of future cash flows and the expected
holding period. After recognizing a non-cash charge in the range of
approximately $55 million to $58 million, representing the excess of
book value of the investment over its estimated fair value, the
remaining book value of this investment is expected to be approximately
$30 million. At the current level of cash flow, Regency Square intends to continue to service its non-recourse mortgage loan. This loan has a current principal balance of $74.5 million, with
$71.6 million due on this amortizing loan at its maturity in November
2011. On September 22, 2009, the Company issued a press release
announcing the write down of the book value of The Pier and Regency
Square to fair value.
These impairments are significant, but do they really end here? I don't
think so. Recalling the financeable LTVs that the market is currently
willing to swallow, we are somewhere around 50% LTV (according to the
WSJ article excerpted above). This is how the Taubman porftolio breaks
down from a truly fundamental investor's perspective:
Of course, the chart above is subject to change as we fine tune our models.
This is the same methodology that I used to determine the demise of GGP nearly a year ahead of Wall Street (see my work with GGP), and about a year and a half before their bankruptcy filing. Professional BoomBustBlog subscribers
can download the rough draft NOI and CFAT analysis of all 26 of
Taubman's properties (both fully consolidated and partially owned)
here:
TCO Consolidated Property Analysis PDF Outputs 2009-11-17 11:49:09 2.28 Mb. Be
aware that these are rough models, and we are still fine tuning some
aspects. Any assumptions or roughage, has been cast considerably to the
conservative side, on purpose - any variation from the finished models
are not expected to break the ~17% boundary. In addition, the vacancy
and credit allowances were calculated separately, thus are not
explicitly outlined in the models.
We will be releasing an even more comprehensive analysis on a larger
REIT the week after next, and quite possibly another two weeks after that. Stay
tuned.
Relevant Research and Opinion on the companies mentioned in the WSJ article:
The venerable Goldman Sachs
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Free research and opinion
- Reggie Middleton on Goldman Sachs' fourth quarter, 2008 results
- Goldman and Morgan losses in the news, about 11 months late
- Blog vs. Broker, whom do you trust!
- Monkey business on Goldman Superheroes
- Reggie Middleton asks, "Do you guys know who you're messin' with?"
- Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
- Reggie Middleton on Goldman Sachs Q3 2008
§ As Reality hits, the Masters of the Universe are starting to look like regular bank employees
Reggie Middleton's Goldman Sach's Stress Test: Breaking Ranks with the Crowd Once Again!
Who is the Newest Riskiest Bank on the Street?
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Goldman Sachs Report June 21, 2008 2008-10-20 16:48:01 361.18 Kb
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Principal Financial Group (subscribers only):
Principal Financial Group Actionable Intelligence Note 2009-02-23 09:13:22 162.29 Kb
Principal Financial Group Actionable Intelligence Note - Pro version 2009-02-23 09:13:39 252.74 Kb



Well done Reggie...The number crunching is impressive.
And I love the swagger....
Reggie....you are something to behold. Brains and brawn..(sighhhh...). And into the lexicon goes a word from your heading: "con trag u late." It has that visceral, hands on the throat feel to it. In addition to GS, I would love to contragulate the Fed, BoA, and Bob Toll. I think I have some contragulation devices in the naughty drawer.
Some guys get it all -- brains, looks, charm, charisma, adoring crowds, unparalleled awesomeness…
All I get is old.
Life ain’t fair.
(Kudos, Reggie;)
How about them SPG group properties. Up 2.32 and no problem. Any views on the finances there?
How can you be quite sure you are the "most handsome and charismatic blogger"? You know I could make a come back someday, and then . . .
Hey, I'll settle for 2nd place. That still puts us above a lot of other guys :-)
How have you been, my friend?
You're a clown!
http://i48.tinypic.com/i1iv69.jpg
Who cares if he's a clown, a mutant porcupine, a Sarah Palin stunt double, or a 15th century Sufi poet -- his analysis stands, his work is complete end-to-end, and he's contributing his time and talent at Zero cost.
If you don't like him, don't pay him any attention. If you find fault with his work, point it out and impress us with your brilliance.
Otherwise, get back to work and make Lloyd some more money -- you're a tool for Lloyd, and Lloyd doesn't like it when you remove your lips from his hindquarters.
What a dork.
Here is your real photo in front of GS.
http://i48.tinypic.com/i1iv69.jpg
Reggie the Clown.
That was a very poor photoshop job.Very, very low quality.FAIL
Reggie in front of GS....WIN.
So, they now supply Photoshop on the trading desks of GS these days??? I may be a dork, but I'm a secure dork :-)
If you were so secure(and had a sense of humor) you would have already replaced the above photo with the schopped one.
Looking sharp Reggie!!
They were just probably saying. Oh here comes trouble!!
If only I had enough time to click on every link...
The depth of the research really sets the bar very high, where it should be.
Universal Start of Boom. LOL.
What a good year that was for me.
I'm lovin your swagger.
"Most handsome" & "most charismatic blogger" AND modest, to boot!?
Watch out ladies....
:-)
Did you see FINRA Broker Check for GS ...the amount of fines they pay are staggering. Its like a annual dues.
http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm
Reggie readers were put off by the headline ...try ...I reamed a GS employee on 85 Broad St. Nice content though
Reggie,
You've set the bar too high for the "World's Most Handsome and Charismatic Blogger". Tyler has his work cut out for him.
Once I got past the movie star looks, the material was quite good.
Excellent research ... really nice piece! Thanks for sharing it with us Reggie ... great analysis that I'm printing out right now to sift through. Thanks again!