Thursday, 26 January 2012 05:55

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

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

Timely Subscriber Material

All paying BoomBustBlog subscribers are prompted to download the Sample Property Valuation document 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 the Cashflows and Debt Preliminary Analysis in order to get a fuller picture. Extensive portfolio analysis and online valuation models will be available to professional and institutional BoomBustBlog subscribers in 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 to my 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's optimistic assumptions 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.

      $ million GGP's Assumptions Reggie's Assumptions      
        2008 2009 2008 2009      
      Property specific NOI $365 $415 $244 $369      
      Cap Rate 7.50% 7.50% 7.50% 7.50% Overly optimistic
      Cap Rate, but I'l give them this to prove a point
      Value of Properties $4,867 $5,533 $4,589 $4,919
      LTV 50% 50% 50% 50%      
      Maximum re-fi available $2,433 $2,767 $2,294 $2,460      
      Debt due at
      maturity
      $2,621 $3,344 $2,621 $3,344      
      EMI on prior year financing     $861 $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 release and Another 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, I see portions of CRE 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 institutional BoomBustBlog subscribers in 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?

Last modified on Thursday, 26 January 2012 17:03

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