Using Veritas to Construct the "Per…

29-04-2017 Hits:85845 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:80058 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:79919 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:84400 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:80938 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:83179 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:54191 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:82321 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:82164 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:82035 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:88079 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:85941 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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My first post on my blog in September warned about the coming drop in real estate prices. I revisited the topic a couple of weeks ago, as I prepared the research of a short position in the sector. Well, we are almost done with the research and the position and I will release a summary of the research and the performance (expected and actual) of the position after Christmas.

In the meantime, this is a tidbit gleaned from my studies. We literally modeled and valued 260 properties of a certain REIT (each model is about 65 pages long, and very detailed and analytical - in real terms, no fluff here) that came up in a scan for CRE participants with bad numbers. We canvassed brokers, institutional data sources, sellers and buyers (9 sources in total) to get a detailed understanding of the lease rates, climate, and sentiment of the geographic area of each individual property. This is probably one of our the most ambitious works this year, and makes for extremely informative reading for those who have a real interest in the sector. We covered 41 states 2 countries and a whole lot of cities, all accurate to within a distinct business district of each property, where available.

What I found was that, at least where this REIT operates, the commercial real estate bubble (yes, there was an easy money induced bubble) peaked in Q4'05, where the spread between new leases and existing leases maxed out at about $5.30/ft. This spread actually went negative in Q4'06, and that negative margin increased substantially.

What does this mean? Well, for one, most people think the commercial property sector will start to drop soon. They are not aware that the main value driver of CRE, NOI, started dropping 2 years ago. Operating expenses are rising due to inflation (which is real, and not to be confused with the fudd that the government puts out), while rents have been dropping.

In addition, the easy money liquidity has been pushing cap rates down (as if the falling net operating profit wasn't enough to do this), thus prices up. This money didn't dry up until a few months ago, probably marked by the Blackrock deal flipped from Sam Zell's properties in near real time . That was just a few months ago. So, revenues go down and expenses go up even as prices shoot up for two years straight (I guess nobody stopped to count the money), then easy and lax funding suddenly disappears... I have above a considerably astute constituency for my blog, so you know how this story ends. New rents are now coming in below existing rents as we approach a potential economic hard landing. To exacerbate the matter, leases expiring(ed) in '06 are 20% below that of the current asking price, and 29% below the average in place rent. This means that the companies renewing these leases have a much larger chunk coming out of their cash flows for rent. These are big numbers for low margin businesses, and even bigger numbers for low margin businesses going through an economic hard landing.

We will see what happens next, for those that bought buildings with lessors attached to highly inflated leases are going to get a lot of pushback for renegotiation, or worse, actual breach. Just as in the residential housing sector, stakeholders don't want to see their investments (leases, or homes) underwater and falling even farther as they struggle to make the payments. With such a big jump in rental prices up for renewal, landlords are going to be hard pressed to have any pricing power, for the resistance has already shown itself to be much more than just a few months ago. If you paid a 3% cap rate for a building with expenses trending upwards, you will need pricing power - and that is not even taking into consideration the use of leverage. Such inelasticity can lead to lower economic value.

This leads me to the value of the CMBS that these properties back. With a overly optimistic assumptions of cash flows, expenses and forward looking macroeconomic trends, there is no wonder why the spreads in these securities have widened so much as of late. It is not sympathy for the residential market - the commercial market has issues of its very own. Even the high end NYC (where it was thought that real estate was bullet proof - you know, the "But it's different this time" mentality) commercial real estate rags who have been bullish for the past 6 months while I have been a virtual grizzly bear, have decided to come around to my way of thinking. You think maybe they started reading my blog:-0

Neophyte and/or overzealous (like those who bought from Blackrock recently) investors are sure to be bathed in buyer's remorse as well, as the realization of purchasing at the top of a sinking market sinks in. No pun intended. A summary of the analysis will be available on www.boombustblog.com for free after Christmas (Merry Christmas), and the full analysis will be available to our paying subscribers.