Thursday, 30 April 2009 01:00

The Residential REIT Q1 Review is aviailable for download

I want all to know that my outlook on the short to medium term has not changed one iota. The last 7 weeks amount to a bear market rally that, although predictable, has gotten way ahead of itself in the face of a total dearth of any fundamental reason to do so.

Short term blips in stock market prices are frustrating to say the least (at least when they move against you), but one must take a longer term view if one is to use my research to its most optimum effect. I have not be wrong very often over the last few years, and I do not believe I am wrong now. If I am wrong, trust me, I will be the first to declare it for that would be healthiest for my net worth.

The REIT that just reported did maintain FFO (and was able to sustain rents short term, contrary to our assumptions) and cut expenses, but it basically just kicked the can down the road. It's problems are still there, and actually have gotten marginally worse as debt to assets and debt to equity, as well as gross debt have increased. We have valued each and every property they have (using the same methodology employed with GGP), thus are fairly comfortable on the valuation in relation to debt. See ACC First Quarter 2009 Results First Quarter 2009 Results 2009-04-30 12:27:03 381.58 Kb for more.

YTD, the macro situation has progressed more or less as I anticipated, with bank credit metrics and highly leveraged companies suffering and bankruptcies and defaults significantly picking up pace. If things go as I anticipate next week, this rally should be broken, and if not they we will have one of the most highly overpriced equity markets of the past decade. Yes, that includes the dot.com era as well. We all know how that ended...

Last modified on Thursday, 30 April 2009 01:00

27 comments

  • Comment Link greenja1 Sunday, 03 May 2009 12:12 posted by greenja1

    The bottom line is, when the market wants to rallies, it does. Technicals drove this, nothing more. Quant short covering, etc. MHK missed earnings by 100% and the CEO said low interest rates and Obama stimulus (as Reg pointed out - a miniscule input into a 16 trillion dollar economy) will help things. The stock went up 30%. Its all a comedy. But LONG-TERM PUTS. for insulation and TAKE PROFITS DURING CRASHES. DON'T TRY TO TIME, JUST TAKE PROFITS. When I was making money hand over fist, I always took profits and ALWAYS missed making more but was almost never burnt in a rally and when I was underwater - which happened often, as Reg said - I simply waited. ITS A BEAR MARKET PEOPLE, its overvalued and bulls will take THEIR profits and run. The higher it is, the harder it will fall. We are in 3-10 week panic-euphoria phases. Figure out the phase and roll with it and ALWAYS take profits. Don't leave money on the table. Be prepared to lose money because you didn't follow the stock down further. Better than getting burnt the other way for 7 weeks. VMW example above is perfect. Who knows when overvalued firms will fall - buy long-term puts or use small positions and be patient. Take profits, don't short holes and always bet fundamentals. A-- is still screwed and a GM bankruptcy or other event will kick off a downtrend. At that point the enormous amounts of debt they carry will suddenly be nearly front page news and the fact that they can't refinance or pull any more tricks out will drag them down to a NEW low. They will become oversold, as will everything. Don't argue, don't be greedy. Take profits. God knows it kills you not to.

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  • Comment Link shaunsnoll Saturday, 02 May 2009 23:42 posted by shaunsnoll

    absolutely everyone, don't buy options without being afford to shrug it off should they all go to zero.

    i would also like to point out that there is a big difference between the stock and the company, some here may be confusing this.

    take a look at the education stocks for example, ESI, STRA, EDU, APOL, etc.

    these companies are STILL growing earnings in general quite well but look at the stock charts. i believe we have something similar here with this company. this REIT really must be in the top tier of all REITs in the market as far as valuation. so its not like this company has to implode for the short to work, if this stock is one of the most expensive in the sector even the hint of bad news will put major selling pressure on the stock and just imagine how blind sided investors will be betting this is recession resistant if the company stumbles on cash flow or rolling over debt or has to cut the dividend. anyone who is worried should take a look at what % of AFFO the company pays out as a dividend (here is a hint: over 100% most of the time)

    so make sure everyone is not getting caught up and thinking that the company has to go bankrupt in order for the short to work. take VMW for example too, many were short that company just because it was over valued and it went from like 80$ to 20$ and its still growing earnings and revenue at a good clip.

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  • Comment Link Reggie Middleton Saturday, 02 May 2009 18:08 posted by Reggie Middleton

    All should remember that the thesis of the short is three pronged:
    1) decreasing general housing prices
    2) overpaying for the last acquisistion
    3) debt coming due this year that they don't have cash for

    Revenue did drop, but costs dropped faster and core occupancy in its original portfolio inched upward. Kudos for management for that, but I don't think it will last. There is too much supply in housing and as it works its way through the system it will bring rents down. There is also the apparent need for even tighter cuts since debt increased and shareholder equity decreased. It remains to be seen how this plays out and if revenues will drop or not. Be aware that I can afford to be wrong on this, because there are two other parts to the thesis, though.

    The signs of the overpayment are there and they won't go away. That is a 5-10 year mistake and this part of the thesis is bulletproof.

    The debt is the ringer. They can't afford to roll it over and the market is quite tight. If they can renogotiate it or refinance, then they have successfully kicked the can down the road and although the profit prospects are still there, the position should be re-examined.

    Be aware that this position should either be small enough or hedged that all can afford to have it go against them, though. That goes for any and all positions that you may take.

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  • Comment Link uniprof Saturday, 02 May 2009 13:22 posted by uniprof

    I work at a university and live in a college town.

    Rents and house prices have been very sticky downwards. They are not immune but shall we say resistant. This resistance is particularly true for university-sanctioned living spaces as it appears this company owns/operates. Freshman live in these not so much for "lodging" but to make friends etc. and parents pay for the "safety" of their children. Also, students have ample access to loans and Pell grants that can be used for lodging expenses(and Obama is supporting these). So I can say I did not think through my short here.

    My guess is that the short will eventually payout because this recent Bubble is so stupid and manipulated. However, if I can get back my investment, then I will probably move on. In summation, the nature of the student housing market may be less price sensitive than many think.

    PS: As an aside, IMO Obama was bought by GS and cronies and will never abandon his patrons.

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  • Comment Link uniprof Saturday, 02 May 2009 13:20 posted by uniprof

    I work at a university and live in a college town.

    Rents and house prices have been very sticky downwards. They are not immune but shall we say resistant. This resistance is particularly true for university-sanctioned living spaces as it appears this company owns/operates. Freshman live in these not so much for "lodging" but to make friends etc. and parents pay for the "safety" of their(and Obama is supporting these). So I can say I did not think through my short here.

    My guess is that the short will eventually payout because this recent Bubble is so stupid and manipulated. However, if I can get back my investment, then I will probably move on. In summation, the nature of the student housing market may be less price sensitive than many think.

    PS: As an aside, IMO Obama was bought by GS and cronies and will never abandon his patrons.

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  • Comment Link shaunsnoll Friday, 01 May 2009 23:33 posted by shaunsnoll

    i also am happy to see the increased discussion and comments. there are many smart investors on here and that is a valuable resource.

    i personally hope they push this day of reckoning off as far as possible, i'll happily take the losses in my puts because if they hide/postpone this eventually the stock will get blindsided with a down 50% day and the increase in vol will make some truly ridiculous returns in put options.

    the longer they push this off the more complacent shareholders will become and the more violently they will dump their shares when the truth becomes apparent. this rally is a gift in many ways.

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  • Comment Link bloombergsen Friday, 01 May 2009 18:20 posted by bloombergsen

    To me the comment on the GSE facility means that ACC's mortgage/construction lenders told it to get bent regarding refi-ing the loans, evidently because of the firm's leverage and highly limited liquidity (almost no cash and hard-to-liquidate properties).

    That said, if the GSE facility closes and ACC exercises the extension option on the construction loans the refi burden shifts towards next year and year after with 180M due in 2010 and 348M in 2011.

    Aside from that the $78M on the revolver also have an extension, but would increase the 2010 debt refinancing needs to $250M. Not pretty, but indeed may take quite some time to play out.

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  • Comment Link jarret Friday, 01 May 2009 14:19 posted by jarret

    Anyone have any thoughts on this

    "In addition, we recently executed a term sheet with P&C as the servicer for a Freddie Mac facility for up to $125 million, which we anticipate closing in June or July. The proceeds from the Freddie Mac credit facility will primarily be used to repay the remaining $51 million in fixed rate mortgage debt that is scheduled to mature in 2009 as well as the $30 million balance on the Chestnut Ridge construction loan."

    On a side note I appreciate you shares some of your overall views both in the blog and in discussion with Phirang. I may in the minority but I like seeing more discussion take place on these boards.

    Any chance we will see an update on the gambling company as I find it hard to believe that the events of the last week change the 12ish valuation in the research report drastically.

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  • Comment Link shaunsnoll Friday, 01 May 2009 10:29 posted by shaunsnoll

    risk = reward

    how much do you want to try to make?



    can't make money if you're always hedged.

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  • Comment Link squashnut Friday, 01 May 2009 04:21 posted by squashnut

    When money is tight, college students more than most can adjust. My first semester at Cornell, there was a shortage of dorm space, so 6 of us lived in the lounge. That was a blast.

    There is a glut of houses. Rents must fall.

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  • Comment Link Reggie Middleton Friday, 01 May 2009 04:01 posted by Reggie Middleton

    [quote]I"m not trying to sabotage his efforts, but I just think it's dangerous to make such strong positional trades in a CLEARLY manipulated equity and credit market.

    The other thing is, valuation trades are VERY hard in this market; look at MBI: that thing is a total zero, yet somehow, it levitates above 0.01.

    I know people are losing their jobs etc, but you don't think in 3 months, there'll be a HUGE debt issuance and the government will have make-work projects to keep people busy?[/quote]

    It is risky taking the directional trades, which is what makes the payout on the trade more profitable if approached correctly and it pans out. I never professed to be a low risk investor, and you will never be able to make 3 digit returns without taking risk. Hey, you could be in cash and would not be negative for the quarter, but where would that land you TTM?

    Valuation trades are not that hard in this market Phirang. Again you are being very short sighted, and probably because you have been drawn down. Believe me, you really need to break that habit. The market is more than the last 7 weeks. I think it will break down next week, but if it doesn't, then I am prepared.

    MBIA was the picture perfect valuation play. Massively overvalued with a management that sang the perfect song (sound familiar?). I went bearish on it and Ambac somewhere around the 80's and was massively drawn down on both of them. I actually popped out of one of the positions, moaning and bitching like you have been (yes, even I can succumb to the short term-itis), and then it collapsed 50% per day, every day for several days in a row! Luckily I was able to get back in very quickly, but I increased my risk and decreased my profit simultaneously by trying to trade in and out of drawdowns versus staying the fundamental course with protection and prudent risk management (actually, it wasn't too large a position, though).

    You are complaining about the valuation play on MBI now, a year and a half after the trade was recommended here on this blog, when it was the contrarian and at its most profitable. You were probably one of the naysayers. You are not going to make money doing what everybody else does, Phirang. You have to be ahead of the pack.

    Although I am quite pissed I didn't see the absolute extent of the market rally, I am proud that I saw it coming as well as seeing the market meltdowns before hand. I have lost most if not all of the profit for the quarter, but my numbers are still phenomenal - some of the best that I have seen. It is because I choose to be methodical and stay the course. I am not a money manager that must report to investors an incremental gain every quarter. I simply need to make as much risk adjusted gain as possible on a yearly basis. I will even go for 2 year gains, given the projected risk adjust returns. In case you are not clear on what that means, I will suffer through a two year drawdown if I am convinced the outcome will be worth it.

    I did this regularly in real estate and technology. Not everything panned out, but net-net, I was well rewarded for my efforts.

    As for employment, the government may or may not have make work efforts going, but that will effect a computationally miniscule amount of the work force. The only way to get people back to work is to get the private sector to start hiring again en masse. Do you know of any companies hiring en masse? Do you know of any companies with immediate plans to do bulk hiring? If the answer to those questions are no, then you know what the next two quarters are going to look like. If stocks go up while earnings go down, you are mixing a recipe for a market crash. Earnings will go down if consumers and businesses don't spend, and consumers don't spend if they are unemployed with decreasing wealth from their home equity and market investments, which means that businesses won't spend because they get their revenues from consumers and other businesses.

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  • Comment Link shaunsnoll Friday, 01 May 2009 02:49 posted by shaunsnoll

    hey rumi, would you post that ag vs. gold data somewhere?? i'd be really interested to see that.

    also, markets during high periods of inflation actually have a lower P/E multiple, the lowest S&P P/E multiple ever was in the late 1970's. makes logical sense too, why would i pay MORE for every dollar in the future if i know most of that earnings growth is just due to inflation?

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  • Comment Link Rumi Friday, 01 May 2009 01:59 posted by Rumi

    //16 P/E on the S&P is nuts, thats like twice as much as historical bear market bottom valuations. //

    I happen to think you're correct, but a different way to approach it is to say that the market is pricing in massive (price) inflation due to all this money being printed and spent all around the world.

    Although it's far from a perfect indicator, it probably would help to price the (S&P/price of gold) ratio as a function of time to get a better perspective. Doing so Vs agricultural products instead of gold shows that ag is hugely, laughably, stupidly cheap right now by any sane measure.

    Again, this is just my amateur opinion

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  • Comment Link shaunsnoll Thursday, 30 April 2009 19:17 posted by shaunsnoll

    i agree, this credit spread tightening is nuts, totally crazy imo, market is no longer pricing in a mild recession but is now pricing in the recovery too IMO and i think that is a bit aggressive. 16 P/E on the S&P is nuts, thats like twice as much as historical bear market bottom valuations.

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  • Comment Link Reggie Middleton Thursday, 30 April 2009 16:34 posted by Reggie Middleton

    Derivative spreads are just that, a spread on a derivative security. It does not enable a tenant to pay its rent, or a mortgagee to make a mortgage payment. You have to pay attention to the underlying fundamentals. It is these fundamentals that caused spreads to blow out in the first place and despite the massive amounts of government liquidity injected, unless the fundamentals change it will be these fundamentals which will cause them to blow out again. As unemployment increases (it actually has been relatively tame up until a quarter or two ago), things will get worse, much worse as people and corporations will simply stop spending and consequently stop paying. Spreads will blow out again and the government will have to dedicate more resources it doesn't really have to close them artificially.

    This has been my argument with the government's process from day one. Up until very recently they have addressed liquidity with massive resources which made the symptoms better, but the problem was never liquidity. The symptoms were lack of liquidity, the illness was and still is insolvency. As another poster alluded, the 10 year as crept up even after the Fed has purchase mucho billions of dollars of its own debt, not to mention a multiple of that in trash assets.

    You are overestimating the abiliy the fed to power over this situation. The most efficient (albeit the most painful in the short term) is to flush the banks investors and management out, recapitalize and start anew. Up until now (ex. the Bush administration), they just tried to recapitalize. I told you that wouldn't work, and now we know it won't. We may see next week of Obama takes the tough stance with the banks that he took with the auto companies (which I applaud, BTW). If he does, kudos. If he doesn't be prepared for a rally and look to capitalize on the fools bullish buying in about 4 to 6 months.

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  • Comment Link phirang Thursday, 30 April 2009 16:24 posted by phirang

    He's 100% correct *well, not in RF *

    I"m not trying to sabotage his efforts, but I just think it's dangerous to make such strong positional trades in a CLEARLY manipulated equity and credit market.

    The other thing is, valuation trades are VERY hard in this market; look at MBI: that thing is a total zero, yet somehow, it levitates above 0.01.

    I know people are losing their jobs etc, but you don't think in 3 months, there'll be a HUGE debt issuance and the government will have make-work projects to keep people busy?

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  • Comment Link shaunsnoll Thursday, 30 April 2009 16:18 posted by shaunsnoll

    cool phirang, i've been bullish on some of the agriculturual commodities too. i'm still not sure how i feel about Gold though on a macro level....

    would be great to see your research on which commodities your bullish on and why.

    and i guess that is why you are in disagreement with Reggie and most here, pretty bearish site this place is. i happen to be in the "S&P hits 550" group, but its good to hear alternative arguments.

    you are right too, credit spreads have COLLAPSED, although i believe in an unsustainable way, and really i don't care if all my puts expire worthless, that just means when i put more cash to work i'll make 2-3x as much because i view the correciton as inevitable and i'm happy to pay some money just to be well positioned for that.

    the collapse in credit spreads and huge equity rally makes me wonder if we'll see a crazy blowout quarter for the insurance companies like HIG/PFG etc. could be an interesting short for when/if credit spreads get blown out again.

    thanks phirang.

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  • Comment Link NDbadger Thursday, 30 April 2009 16:16 posted by NDbadger

    the banks are still all good shorts despite what credit spreads are telling you. but they're very hard to short because there is so much business risk around it.

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  • Comment Link Reggie Middleton Thursday, 30 April 2009 16:16 posted by Reggie Middleton

    Phirang, it is obvious when you are losing money, you become emotional in your posting. Yes, I went to college, and rental rates around universities are effected by supply and demand - just like everywhere else. I had my guys canvass the state and projected rental rates of the universities and they came up with a decrease. Either there was a lag in their somewhere or an error was made in an assumption. University housing demand and supply are not static - particularly supply. As more housing comes onto the market in the surrounding areas, pricing goes down, even in the college markets. In addition, if you notice that despite higher FFO and lower expenses, the company still had to draw down on it's credit line and shareholder equity still decreased.

    You are letting your emotions get the best of you. My being underwater on a trade does not affect my logic in the least bit. I am underwater on a lot of trades, a lot of the time. It is what happens when I am not underwater on a trade. I aim for the endgame, not the process along the way. I believe you are too short term in your thinking and not analytical enough, but then again that's just my humble opinion. I aim to be very dispassionate when moving in or out of positions. Sure, I make mistakes or don't always perform optimally, but I try to make sure that emotions are not the cause or the underperformance. I am not saying I'm perfect, but I definitely do not fall in love or hate with any position. I will also be wrong sometimes. It's part of the job. The key is to be right more often and with more money than I am wrong.

    Every single big gain I have had published on this blog was a contrarian play, when guys like you (actually, several times it was you) said it will never work. To be honest, part of my recent draw down was most likely from my trades getting too crowded. I actually feel better when I am by myself.

    Now, as for "debt meaning nothing", you are obviously on the wrong site. This is a fundamental analysis site. If debt means nothing I suggest you talk to the Chrysler shareholders who just got wiped out in bankruptcy, GGP, GM, and a variety of other equity investors. Yes, Wynn negotiated an extension. It can happen, but not only is it not a foregone conclusion, without the underlying fundamentals changing it is simply kicking the can down the road. I can understand you not liking this idea, but this site is rife with ideas. Most of them have bore ripe fruit. The market has moved against the fundamentals aggressively over the last 7 weeks or so, but that is not a legitimate reason to lose you cool or start making statements like "debt means nothing". Yes, there is a chance that ACC can get a loan renegotiated, but it is only a chance and that again kicks the can down the road. If the fundamentals change, then the thesis changes - but until then...

    Hey, if this doesn't pan out then it goes into the bin of very few ideas that didn't pan out. Do you really think everything will always go your way?

    If you would have taken my advice of taken profits often, you should still be playing deep in the house money. I go through this because, again, the negative tone is irritating as hell and I don't like it. Listen, dissenting opinions and contrarian viewpoints are good and healthy for debate, but it's the way that you are delivering them that is bothersome.

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  • Comment Link NDbadger Thursday, 30 April 2009 16:15 posted by NDbadger

    Since you didn't mention valuation, does this mean you kept it the same?

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