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I Present To You The First Probable US Commercial Real Estate Insolvency Of Many To Come

Reggie Middleton's picture




 

In this post I will present to BoomBustBlog subscribers evidence of the next GGP. For those who don't know the GGP story, it was the nation's 2nd largest

All payingBoomBustBlog subscribers are prompted to download theSample Property Valuationdocument which highlghts the dramatic discrepancies between actual cash flow valuations and the valuation that our subject company is carrying its portfolio inventory at. This document must be read in conjunction with theCashflows and Debt Preliminary Analysis in order to get a fuller picture. Extensive portfolio analysis and online valuation models will be available to professional and institutionalBoomBustBlog subscribersin order to assist in calculating timing and severity in regards to insolvency.

mall REIT, whom I went short on in 11/07 while it had:

  • an investment grade rating (What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog?),
  • buy recommendations from all the major investment banks that covered it (Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?),
  • a CFO issuing nonsense press releases contradicting my research (BoomBustBlog.com's answer to GGP's latest press release). This press release and my response to it outlines a situation that is eerily similar to that of the subject company that I'm presenting tomy subscriberstoday, to wit:
    • We analyzed GGP's financial position and its expected funds from operations (FFO) to check the company's ability to meet its debt obligations -

      With GGP'soptimisticassumptions of a cap rate of 7.5% and NOI of $365 mn and $415 mn for 2008 and 2009, respectively, (based on its historical growth rate of 5%) valuation for GGP's specific properties (on which debt is due for repayment in 2008 and 2009) comes to around $4.9 bn and $5.5 bn for 2008 and 2009, respectively. Based on LTV of 50% (which looks quite reasonable amid the current turbulence in the global credit markets) GGP should be able to raise $2.4 bn and $2.8 bn in 2008 and 2009, respectively. However, GGP's debt due for repayment in 2008 and 2009, respectively, is approximately $2.6 bn and $3.3 bn, translating into respective short-falls of about $188 mn and $577 mn (as shown below), even under the over-optimistic case presented by the company. Surprisingly, the company's financing requirement (as included in its press release) totally ignores the funding requirement for capital improvement and redevelopment programs required for sustained and long-term growth.

       
 
         
1 $1,246
Capital Improvements $542 $195 GGP's press release
failed to allocate any funds for growth, development, and
expansion
New Developments $1,040 $466
Total Financing
Required
$2,621 $3,344 $5,063 $5,251
Shortfall from
Re-financing
$188 $577 $2,769 $2,792 Even using the
extremely optimistic numbers of the press release, GGP falls short of the
mark!!!

 

    • However, we believe that GGP's assumption of NOI growth of 5% for 2008 and 2009 is unrealistic in view of the softness in the U.S
      commercial real estate market, which has already started to experience the ripple impacts of sub-prime crisis. The (now) highly probable US
      recession, along with deteriorating macro-economic conditions, would make operating environment extremely difficult for commercial real
      estate companies like GGP.

Well, I outlined the fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties in particular (November 2007) in illustrative detail for both subscribers and the general public:

  1. Will the commercial real estate market fall? Of course it will.
  2. Do you remember when I said Commercial Real Estate was sure to fall?
  3. The Commercial Real Estate Crash Cometh, and I know who is leading the way!
  4. Generally Negative Growth in General Growth Properties - GGP Part II
  5. General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
  6. BoomBustBlog.com’s answer to GGP’s latest press releaseandAnother GGP update coming… (among over 700 pages of analysis, review the January 2008 archives or search for “GGP” for more research).

You see, we had an obvious and evident CRE bubble, particularly in retail and mall properties...

This bubble popped, as most may remember, but we never had the opportunity to have the economic cycle complete itself for the powers that be tried their darndest to defy gravity. How, you ask?

  1. A public-private partnership of misdirection allowed the popping bubble to be disguised. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
  2. Money follows an economic "Circle of Life".This Circle Was Purposely Disrupted By Multiple Central Banks Worldwide!!!

  3. Even with the "kicking the can down the road mentality", fundamental and macro realities are bound to rear their heads. See The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance and then see Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

 Reggie Middleton on CNBC's Fast Money Discussing Hopium in Real Estate

For those of you who desire a long form explanation of the matters at hand in video form...

Reggie Middleton discusses the fall of commercial real estate in the US

Yes, It’s on FIRE!

 In regards to the subject company at hand and proffered to my subscribers as a dramatically distressed concern, I offer you the following excerpts the document recently posted for download...

Valuation of properties

Observation  of Company Reported Valuations

 

Property Name

Acquired Date

Gross Value (as reported by company)

Net Value

Debt

Debt/Net Value

XXX

2003

78,195,000

62,378,000

34,340,000

55.05%

XXX

1998

100,654,000

67,872,000

150,000,000

221%

XXX

2003

92,082,000

70,830,000

85,727,000

121.03%

XXX

2005

185,530,000

157,460,000

151,608,000

96.28%

 

BoomBustBlog Valuation of Properties

 

Property Name

Gross Value (as reported by company)

Debt as per B/S

PV, Net Operating Inc. & Sale Price less cost of sales

PV, CFAT and Sales proceed after Taxes

XXX

78,195,000

34,340,000

(478,503)

(34,000,392)

XXX

100,654,000

150,000,000

171,982,661

17,402,660

XXX

92,082,000

85,727,000

38,948,777

(44,819,724)

XXX

185,530,000

151,608,000

165,892,248

11,805,610

 

Key Observations:

  • Properties acquired in 2003 have negative valuation (after deduction of loan)
  • These properties have lower rentals and lesser operating margins against assumed operating expense of $13.99 per square feet. In other words,they are running negative cash flow, which upon capitalization actually gives them a negative valuation once sales expenses, mortgages and encumbrances are taken into consideration.
  • The properties acquired in 2003 have valuations that are DRAMATICALLY OVERSTATED on the company’s balance sheet. The subject company carries the first property listed on its books at $78,195,000 with a Loan to Net Value of 55%. We have the property valued at ZERO (actually, it has a negative valuation). The 3rd property listed is carried at $92,082,000 where we valued it at significantly less than half of that.
  • Needless to say, these properties' mortgages are substantially underwater.

Extensive portfolio analysis and online valuation models will be available to professional and institutionalBoomBustBlog subscribersin order to assist in calculating timing and severity in regards to insolvency. Other BoomBustBlog links of interest to those interest in the weakening of the CRE space...

The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet!

Prepare For CRE Crash And Burn Marks At A Shopping Mall Near You

Real Estate Cap Rate (Yield) Expanision in Europe

Reggie Middleton Featured in Property EU, one of Europes leading real estate publications

Those who wish to download the full article in PDF format can do so here:Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?

 

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Fri, 01/27/2012 - 10:38 | 2102350 Christophe2
Christophe2's picture

Uh huh.  C++ is NOT an object-oriented language...

 

It has objects+classes, polymorphism, and inheritance (even multiple inheritance).  Where is it abortive?  What features are missing and are not available from libs like Boost?  What's the performance cost for your fancy Smalltalk?

Fri, 01/27/2012 - 12:43 | 2102732 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

What's the performance cost for your fancy Smalltalk?

Serious or </sarc>??? 

If you're posing that as a serious question I'll have guess that you manage to exploit Multiple Inheritance, probably 2-3 times a day. ;)

Fri, 01/27/2012 - 01:44 | 2101782 ucsbcanuck
ucsbcanuck's picture

You're right, thanks and sorry for the mistake.

 

Thu, 01/26/2012 - 18:51 | 2101106 moondog
moondog's picture

Thank you for pointing this out. True genius is rarely rewarded publicly. The slick used car salesman types garner the accolades from the work of others.

I too am sick of the Apple cultists. My brother in law is an annoying example of one.

Fri, 01/27/2012 - 02:01 | 2101797 ucsbcanuck
ucsbcanuck's picture

To be fair though, all of these people did get rewarded publicly and got accolades for their work.

Credit where credit is due - Steve Jobs did build a highly successful company and was good at keeping consumers happy. He's a great entrepreneur.

But don't call him a "computing pioneer".

Honestly speaking, examples of true combination of successful entrepreneur/computing pioneer would be:

- Gordon Moore/Bob Noyce at Intel

- Page/Brin at Google

I would argue that Google has had a way greater impact on society than Apple. Google has revolutionised the way people think and do work - it's made searching and finding information so much easier, such that the act of searching and finding info is not nearly as valuable as:

- formulating the correct search terms

- analysing and synthesising search info

I can do without a Mac. However I can't do without Google.

Thu, 01/26/2012 - 13:15 | 2099980 I am a Man I am...
I am a Man I am Forty's picture

reggie does not talk about apple anymore, he is pretending all of his comments, research, etc. never existed.  he just wishes he had the ability to delete posts like mine.

Fri, 01/27/2012 - 12:31 | 2102708 Calmyourself
Calmyourself's picture

Foxconn=mass suicide, fixed that for ya..

Thu, 01/26/2012 - 13:36 | 2100077 sabra1
sabra1's picture

how much did Apple, GE, pay in corporate taxes again? what's the reason they're in China again?

Thu, 01/26/2012 - 13:30 | 2100047 Toolshed
Toolshed's picture

While I grow weary of Reggie's boasting, I am quite sure the passing of time will prove him quite correct on Apple. Fanboys are the only ones that can't see the writing on the wall. Say it with me now.......margin compression and increasing R&D to remain competitive. It's not rocket science ya know.

Thu, 01/26/2012 - 15:26 | 2100531 Centauri
Centauri's picture

Of course that time will come - eventually. The point here is twofold: 1 - relevance is attained by adding a time frame that can be acted upon. Just saying sh!t is worthless. 2 - Reggie fell all over himself with congratulations when they had a "miss" in the last 4th Q, while the actual numbers reported were stellar and stock price remained strong.

Thu, 01/26/2012 - 17:13 | 2100859 Reggie Middleton
Reggie Middleton's picture

relevance is attained by adding a time frame that can be acted upon.

What is your point here? I operate a commercial research service. Actionable material is behind a paywall, hence you know how to obtain actionable material. I don't recall you offering anything actionable in these comment sections for free, so why is it that you are expecting behavior different from yours from others?

Reggie fell all over himself with congratulations when they had a "miss" in the last 4th Q

Because I said they would have a miss in the 4th quarter and 10,000 fanbois such as yourself swore that it's genetically impossible for Appe to have a miss because it's not a C corporation, its an experience!!!

Thu, 01/26/2012 - 18:38 | 2101085 JamesBond
JamesBond's picture

Reggie -

Your take on japanease commercial realestate market for the coming year?

 

Thanks.

Thu, 01/26/2012 - 17:43 | 2100941 Ruffcut
Ruffcut's picture

I appreciate your efforts, but looking at fundamentals is like sticking your head into a big steaming turd.

Can't trust a balance sheet, earnings report or the gov reports. Long gave up reading tea leaves and bullshit. Look at sentiment and price action. Get in, get out just like the fine peice of  ass, down the street. It is the only safe way to play.

Thu, 01/26/2012 - 13:43 | 2100116 catacl1sm
catacl1sm's picture

Couldn't Apple doing the same thing as CAT with channel stuffing? That would surely bring up their Q4 numbers. I think we'll know for sure at the end of Q1.

Thu, 01/26/2012 - 15:57 | 2100644 CompassionateFascist
CompassionateFascist's picture

Apple will do just fine so long as the monthly worker suicide rate at Foxconn does not exceed 10%.

Thu, 01/26/2012 - 16:10 | 2100683 falun bong
falun bong's picture

We have MACD, RSI, Fibs...now we have a new metric to follow: MWSR

(monthly worker suicide rate)

How does it work? Is there a moving average? And shouldn't it be MWPWSR (monthly widely-publicized worker suicide rate)? That would give extra credit for companies who can successfully hide it...

Thu, 01/26/2012 - 21:48 | 2101466 Al Gorerhythm
Al Gorerhythm's picture

RSI sounds good. Recorded Suicide Index.

Thu, 01/26/2012 - 12:30 | 2099816 Default to Reality
Default to Reality's picture

Keep up the good work Reggie! Appreciate the posts.

DtR

Thu, 01/26/2012 - 15:15 | 2100496 Dermasolarapate...
Dermasolarapaterraphatrima's picture

Solid work, Reggie. Thank you!

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