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Reggie Middleton's 2010 CRE Outlook and Response to the Ackman/Pershing Square Bullish Presentation
I recently received a link to Ackman's (from Pershing Square) presentation basically pushing retail CRE malls (Ackman's CRE presentation).
Several of my subscribers have commented on his success with GGP as
well as the upward climb of REITs in general. I decided to go out of my
way to create a comprehensive overview of the US commercial real estate
market in order to illustrate exactly where my (more bearish than the
consensus) views stem from. The following document started out as a
reply to the Ackman presentation, but ended up as a full blown white
paper. It is free to download here:
CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb.
I invite all to read both documents thoroughly. It may take some time,
but I feel it is definitely worthwhile for anyone with an economic
interest in this space to review both the bull and the bear arguments
from entities that actually invest in the markets. I welcome any and
all "constructive" comments and feedback.
Here are a few choice graphs from the presentation...
Not to be a killjoy, but the bulk of the GDP boost came directly from
government stimulus, which is apparently fading very quickly.
The fall in single family home values pales in comparison to the fall in CRE values...
The US and UK single family home price bubble have outsripped - by far
- that of Japan. If real asset pricing bubbles contributed to the lost
decade, one can only imagine what we are in for stateside!
For those who are interested, my first exposure to Mr. Ackman was after
reading a similar Powerpoint presentation on the monolines. I was
stunned at the assertions and the alleged misvaluations. After I and my
team went over it, I too jumped on the bandwagon. The man had a very
valid point and the stocks were trading in the stratosphere in relation
to the risk they carried. That was in 2007 at roughly $80, and they are
trading for pennies now. Ackman held his bearish stance for 5 years
through some apparently nasty drawdowns, to ultimately have been proven
right. Kudos to the man. See my work on the monolines that I shorted in
2007-8:
- A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton
- Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billi
- Follow up to the Ambac Analysis
- Download a "Window" into Ambac's Problems
- Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibili
- Moody's Affirms Ratings of Ambac and MBIA & Loses any Credibilty They May Have Had Left
- What does MBIA, Ambac, and Brittany Spears have in common?
The next time I came across his work was his special purpose fund
dedicated to Target. I patently disagreed with the thesis behind that
one. I didn't think the risk concentration of the fund was prudent, and
I thought he was much too optimistic about the real estate holdings and
the future of land values. It appears that I was right on that one.
One of my subscribers then forwarded to me his work on Realty Income
"O". While I think that this company is hiding many problems and
probably does not have that bright a medium term future, I believe that
there are better short opportunities in the space. The more I look at
the company, though, the better a short candidate it appears to be, it
is just that there are companies with clearer and more immediate issues
at hand. Subscribers can see the comparison between this and my other
REIT shorts in a clear comparative analysis:
- Realty Income Preliminary Review 2009-12-11 04:55:391.35 Mb
- Realty Income Observations 2009-11-16 02:31:35 384.50 Kb
My subscribers hit the ball out of the park with the GGP short ($60 or
so on down to a bankruptcy filing trading under a dollar, depending on
where you covered/sold your puts). Pro subscribers can download the 300
page tome here:
GGP composite history 2009-12-10 04:15:45 3.60 Mb. Retail subscribers can find relevant analysis in the commercial real estate portion of the downloads section and non-subscribers can see the html version of the history (minus exhibits and models) here: "GGP and the type of investigative analysis you will not get from your brokerage house".
Earlier this week, one of my subscribers pointed out that Ackman hit
the ball out of the park with his GGP long, which he did (bought under
a dollar, currently trading at about $10). I mentioned to him that GGP
is currently trading around where my original analysis had the entity
valued. I was not sure Ackman would be able to extract that value out
of the company due to the precarious selling and financing situations
surrounding CRE after GGP's bankruptcy, but I literally had no idea
what his strategy was and never looked into it thus my opinion was
unqualified. He pulled off a magnificent trade, although I believe the
post bankruptcy share price was assisted by this outrageous bear market
rally. There is value in the GGP portfolio, but it is a bit more
muddled than it appears on the surface. Alas, he performed well on this
one regardless of the reason and kudos to the man. This brings us to
the latest presentation from Ackman, in which he is hyping CRE. Here,
as in the Target venture, I believe he is being unrealistically
optimistic in the CRE space, possibly due to the following of false
positives in the economic "recovery" and more importantly missing the
fact that this is a "balance sheet" recession , which is not your
garden variety economic downturn. Simply ask Japan. As my readers know,
I am still rather bearish on CRE (particularly certain companies).There
probably will be strong bull plays in the sector, but for now they are
simply trading plays and not suited for a fundamental investment, at
least in my opinion.
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Reggie, for a guy who has a blog you don't seem to understand how most blogs work. Blogs subject people who post analysis, ideas, comments, etc. to scrutiny and questioning by others. Obviously when it comes to your own blog you can delete posts you don't like and/or block people who question you. That's not the way it works at ZH. You seem to think you're entitled to a forum where you can post your advertising and nobody can question it.
You post your stuff like you want people to read it, yet when I question a formula you claim to be too busy to defend it. Come on, you're the alleged expert on all things banking and real estate and I'm some guy who knows so little that you think I should be buying your research. So why can't you explain this formula? Just a simple example with 3 hypothetical numbers for 1) overall default rate, 2) Case Shiller and 3) LTV to calculate Loss Rate?
These loss rates are calculated as follows: Overall default rate - Recovery rate (Case Shiller - LTV) = Loss Rate
You can't explain it because the formula is absurd. It makes no sense whatsoever. Case Shiller minus Loan to Value equals Recovery Rate? Default rate minus recovery rate equals loss rate? Are you serious?
If you have a better way of forecasting losses with public data, post it here or on my blog. I will gladly publish it.
You're not even willing to explain a calculation you posted yet you expect me to give you a better method?
Green Sharts and Howard, do you guys realize that I have a business to run, investments to manage, and a family - not to mention my on blog to whom I am obligated to? Do you realize that you have not paid for the information that you are demanding? Take it easy.
I don't troll ZH looking for unanswered questions. I am here sometimes, and when I'm busy I am not.
I don't use ETFs. They are too imprecise for a guy like me that relies nearly solely on fundamentals (I'm like a private equity investor that will invest in anything). I need to granularly pick my exposure and companies and need to know exactly how the vehicle of exposure is constructed and operates. ETFs don't give me that.
I believe they are more of a trader's tool.
As for the mortgage data, bank's specific losses are not freely offered on that granular a level in a timely fashion, so I extract and extrapolate from NY Fed, Call sheet, and other sources. Once a loan is written off or even goes 90 to 120 days past due when secured by collateral that is worth less than the loan, it is a safe bet that loan will end up in a loss. If you have a better way of forecasting losses with public data, post it here or on my blog. I will gladly publish it.
how can srs go down with this cre train wreck
Because SPG is at new highs and Vornado ins't far behind. Big Momo there.
Howard, relax! Reggie makes his money on brains, he is not Goldman! Glad to have him here, posting what he does without charge.
And Ackman is pushing CRE Malls simply to push his GGP stake. I agree w/ Reggie that his analysis is off; some of the false positives that Ackman is hanging his hat on are ludicrous. Like the "drop" in unemployment from 10.2% to 10.0% recently.
Does everyone here know who Ackman's daddy is? He's a commercial real estate financier. SHOCKING! And Reggie, after 12 hours, thanks for your non-input. You apparently don't care to respond to us on ZH and there seems to be less and less comment activity on your posts. I respect your opinion but if I ask a question, try responding.
Good luck getting an answer from Reggie.
http://www.zerohedge.com/article/truth-truth-bankers-cant-handle-truth#comments
by Green Sharts
on Mon, 11/30/2009 - 18:12
#146795
Below are the loss rates by state. Be aware that these are "LOSS RATES", not delinquencies or charge offs. This is what the actual losses will end up being (sans admin and legal costs, which will driver the losses higher). These loss rates are calculated as follows: Overall default rate - Recovery rate (Case Shiller - LTV) = Loss Rate
Uh, that's not how you calculate loss rates on mortgages.
reply flag as junk (0)
by Green Sharts
on Tue, 12/01/2009 - 10:07
#147516
No explanation of that calculation Reggie?
I'll give you my opinion on SPG ... vastly overpriced.
No shit sherlock....and to lighten it really up, in case you don't know how no shit sherlock got the name:
http://jack.zunino.net/knowjack.htm
Reggie,
Any input on your part regarding SPG would be greatly appreciated. I understand your thesis that Mall REITS will be impacted by U/E, lower rents, etc. However, SPG is causing major havoc in the ETF's due to it's heavier weighting and they did pay cash (I'm pretty sure) for the fire sale of Prime Outlets. Any thoughts appreciated.Thanks.
Don't they own lotsa office property in New YOrk?