Using Veritas to Construct the "Per…

29-04-2017 Hits:86478 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...

Read more

The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:80583 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.

Read more

What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:80407 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...

Read more

Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:84891 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...

Read more

This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:81427 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...

Read more

What is the Value Proposition For Verita…

01-04-2017 Hits:83617 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...

Read more

This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:54660 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...

Read more

Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:82810 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...

Read more

Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:82606 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...

Read more

The Country's First Newly Elected Lame D…

27-03-2017 Hits:82489 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...

Read more

Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:88636 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.

Read more

The Transformation of Television in Amer…

21-03-2017 Hits:86432 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...

Read more

In Straight Talk From the Homebuilder CFO: The tricks builders use to disguise the true losses on their, the impairment game was discussed as a method of hiding losses on builders' balance sheets by taking impairments on what could be considered exaggerated book values. The exaggeration may not be that hard considering how far, how fast, and potentially how long property and land values can continue to fall.

Again, I refer to the comparative chart that shows the appreciation rate of Japan's major city real property values as their GDP started to ramp up and out of a major recession:

japanese_land_vs_gdp.jpg

This brings me to mind of what is actually going on in the CRE space now. As my regular readers know, I tend to actually analyze the portfolio of REITs by hand, which acts as a check and balance against overzealous reporting of book values that may or may not run in line with realistic market values. Upon performing this exercise with General Growth Properties, solvency issues became quite obvious during a time when most of the street still had a buy on this company ( see my work with GGP).

Well, I'm back to taking the forensic microscope to various companies' portfolios and it is interesting what can be found. Here, an institutional real estate owner describes a voluntary impairment of its asset in a 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.

This company has seen its share price rise despite these negative evens, and further analysis reveals that this is probably going to be necessary another 3 to 6 times over the coming quarters (or potentially 25% or so of their portfolio) - all on top of a rising share prices and what I see as a further deteriorating macro environment. The big question is, "Who is there to call this, or any other REIT, out on valuation issues?" The sell side has strong buys on the company and not one that I know of has bothered to seriously address the valuation of the portfolio. This is/was the case with GGP, and all of the other REITs that I have covered or are anticipating covering.

The underlined phrases above are instrumental in determining true value in the REIT portfolio. 100 LTV+ loans (in reality, any loan over 85 LTV in the CRE space), negative cash flows and excessive vacancies are the banes of this industry of the next 12 or so quarters. Many loans that are underwater from a valuation perspective will be able to continue debt service, with the blessing of many (or most) banks making the ability to truly identify distress in these situations a bit more befuddled due to the government endorsed "extend and pretend" rules now in place. We have government complicity in the purposeful opacity of the values of mortgage assets (see the FDIC "Prudent Commercial Real Estate Loan Workouts" guidance issued Oct 30th, as reported by the WSJ: Banks Hasten to Adopt New Loan Rules and the new FDIC guidance that states performing loans "made to creditworthy borrowers" will not require write downs "solely because the value of the underlying collateral declined").

Now, keep in mind that although banks may not be calling these under water loans in, they are essentially under collateralized, or in some cases literally uncollateralized loans (any mezzanine level loans should be considered worthless in many of these deals). This changes the risk profile immensely, and if the graph above depicting the Japanese land values bears any semblence to what is to come in the US,  the pretending stance of the banks will simply lead to defaults with minimal or zero, if not negative recovery values. This may increasingly be the case in non-recourse situations when the borrower has tough decisions to make. Very much like the residential home owner and jingle mail, certain REITs may simply throw in the towel, which will leave the banks in a lurch, particularly since  they decided to ignore prudent lending practices by pretending the loan that shouldn't have been written now doesn't need to be called in when there is some value left in the term recovery value.