I'll admit it to everyone, I am absolutely disgusted with my investment performance over the past two quarters. I came into the second quarter up nearly 500% for the two years running thanks to top notch research across myriad sectors (see zipResearch_Samples 11/17/2008 for examples) and loss about half of that profit fighting the bull rally that I easily saw coming but severely underestimated the length, depth and breadth of. Having switched over to market neutral in the third quarter (see Recent strategy analysis sample available to the public) caused me to simply hover with a few percentage point gains here and there, since by then most of the drastic moves were over, but I was biding my time in mostly cash waiting for the fundamentals to kick back in. You see I am a fundamental investor, and I kill it when 2+2=4, and I do even better when it equals something else. The caveat is when it does equal something else, I have to wait until it starts moving back towards that number 4 for me to realize my meal. This severe boom/bust market is basically custom tailored to my investment style (see "The Great Global Macro Experiment, Revisited", and realize why I call it BoomBustBlog!) just to an aggravated extreme! 

Hey, y'all! It appears as if we may be approaching that time where 2+2 may again equal 4.

By now I'm sure we have soaked in the head-fake that was the "better than expected" GDP number. Well, the gross number was only marginally better than expected, and if one bothers to taken even the most cursory glance beneath the surface.... Whoa! Stimulus was quoted as the reason the economy expanded, but this is just not true. Stimulus is something that stimulates. That just didn't happen in this case. The main drivers reported for the GDP pop came from automobiles (the cash for clunkers so-called stimulus plan) and residential investment (the government tax break, more so-called stimulus). This is how I see it. Automobile sales are already down since the clunker plan ended, so there is no speculation as to whether or not this government effort stimulated anything, It didn't. All the government did was to literally "purchase" a few GDP basis points.  There was no multiplier effect. There wasn't even a material economic impact that lasted a month after teh plan ended. Basically, the government put $XX billion into car sales to get a $XX billion less slippage and administrative costs purchase of a few GDP points for the months in question. Basically, a waste of money that should have went into guaranteeing ABS for small business loans to take over the hole that CIT is making in entrepreneurial lending - with more realistic underwriting, of course.

How about the housing boost? Well, home sales and home prices have trended downward from what I can see, as soon as the deadline for the first time homebuyer credit approached. Damn near in real time. Again, now real multiplier and no lasting effect. I mean it didn't even last a month into expiration. Again, a waste of money in an attempt to reflate a bursting bubble.

So, what is it that I do see for the economy. Well, from my perch in NYC...

I'll admit it to everyone, I am absolutely disgusted with my investment performance over the past two quarters. I came into the second quarter up nearly 500% for the two years running thanks to top notch research across myriad sectors (see zipResearch_Samples 11/17/2008 for examples) and loss about half of that profit fighting the bull rally that I easily saw coming but severely underestimated the length, depth and breadth of. Having switched over to market neutral in the third quarter (see Recent strategy analysis sample available to the public) caused me to simply hover with a few percentage point gains here and there, since by then most of the drastic moves were over, but I was biding my time in mostly cash waiting for the fundamentals to kick back in. You see I am a fundamental investor, and I kill it when 2+2=4, and I do even better when it equals something else. The caveat is when it does equal something else, I have to wait until it starts moving back towards that number 4 for me to realize my meal. This severe boom/bust market is basically custom tailored to my investment style (see "The Great Global Macro Experiment, Revisited", and realize why I call it BoomBustBlog!) just to an aggravated extreme! 

Hey, y'all! It appears as if we may be approaching that time where 2+2 may again equal 4.

By now I'm sure we have soaked in the head-fake that was the "better than expected" GDP number. Well, the gross number was only marginally better than expected, and if one bothers to taken even the most cursory glance beneath the surface.... Whoa! Stimulus was quoted as the reason the economy expanded, but this is just not true. Stimulus is something that stimulates. That just didn't happen in this case. The main drivers reported for the GDP pop came from automobiles (the cash for clunkers so-called stimulus plan) and residential investment (the government tax break, more so-called stimulus). This is how I see it. Automobile sales are already down since the clunker plan ended, so there is no speculation as to whether or not this government effort stimulated anything, It didn't. All the government did was to literally "purchase" a few GDP basis points.  There was no multiplier effect. There wasn't even a material economic impact that lasted a month after teh plan ended. Basically, the government put $XX billion into car sales to get a $XX billion less slippage and administrative costs purchase of a few GDP points for the months in question. Basically, a waste of money that should have went into guaranteeing ABS for small business loans to take over the hole that CIT is making in entrepreneurial lending - with more realistic underwriting, of course.

How about the housing boost? Well, home sales and home prices have trended downward from what I can see, as soon as the deadline for the first time homebuyer credit approached. Damn near in real time. Again, now real multiplier and no lasting effect. I mean it didn't even last a month into expiration. Again, a waste of money in an attempt to reflate a bursting bubble.

So, what is it that I do see for the economy. Well, from my perch in NYC...

BoomBustBloggers  have been on a wild CRE and residential rollercoaster ride over the last couple of years. Starting in 2007,we ran into Lennar and discovered things off balance sheet that the sell side and the company itself forgot to tell us (Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth), Ryland and their sell happy management (What does Reggie Middleton and Ryland's Upper Management have in Common?), Hovnanian and his you should by a house now (as he puts his on the market, Credibility is the Key to Success for a CEO – Hovnanian has Lost that Key: A letter to Mr. Hovnanian) and a whole host of other homebuilders. We gave

 Quick note: We are finishing up our scan of REITs that will have definitive refinance and/or cash flow issues in the next quarter or two, and have narrowed them down to four, with one finalist attempting to win the prize. I have the team running a cashflow and valuation analysis on each property in the portfolio and I should have somethingto munch on for subscribers sometime late next week.

an early warning on CRE in the 3rd quarter of 2007 (about a year before it was fashionable to do so - Will the commercial real estate market fall? Of course it will), then moved on to short General Growth Properties (now bankrubpt, GGP and the type of investigative analysis you will not get from your brokerage house) and Macerich (got this one to profit right before the market went coo coo for Cocoa Puffs -Macerich Forensic Valuation - Retail Macerich Forensic Valuation - Retail 2009-10-22 01:46:14 192.71 Kb - Macerich Forensic Valuation - Professional Macerich Forensic Valuation - Professional 2009-10-22 01:45:52 344.92 Kb - Macerich Sensitivity Analyis - Pro Macerich Sensitivity Analyis - Pro 2009-10-22 01:46:36 344.92 Kb) close to the top of their cycles (unfortunately, we're still waiting on ALX to speak to Mr. Reality for this one has benefitted from both a thin float and a fundamentally irrational market! - Alexander's Actionable Research Note Retail Alexander's Actionable Research Note Retail 2009-02-19 16:16:44 - Alexander's Actionable Research Note Pro Alexander's Actionable Research Note Pro 2009-02-19 16:20:08 and video too: February REIT Actionable Intelligence Note Update - remember, who are you going to believe, short term stock prices or your lying eyes!).

Keeping with this theme, the rabble rousing, digital rag known as ZeroHedge recent ran a couple of posts concerning the CRE crash and its effects on NYC hotels. 

Fcur Seasons Hotel In New York Is Latest Victim Of CRE Crash 

In addition to the Four Seasons, three other luxury hotels, which back a loan sent to a special servicer 10 days ago include the Four Seasons Biltmore Resort in Montecito, the ritzy Las Ventanas in Cabo, the destination of many a banker closing dinner, and the San Ysidro Ranch in Montecito.

The special servicing action has forced S&P to place 15 classes of bonds backed by a $425 million loan to Ty Warner Hotels & Resorts on "credit watch with negative implications." The catalyst for the action and the transition to special servicing was prompted by a staggering drop in cash flows from properties which came 46% below S&P expectations. The loan, which matures in January 2010, and which investors were hoping to recoup full principal on, may now be looking at substantial losses. And due to the declining cash flow, the loan would not qualify for an extension as it is in breach of it debt service coverage ratio.

More indicative of the collapse in the luxury hotel segment is the drop in occupancy for the four properties from 69% in the last fiscal year to a meager 58% recently. Alas the Ty Warner penthouse pictured insert unfortunately does not seem to be seeing a lot of action (if any) these days.

The full blown impact of CRE deterioration on the hotel industry could escalate rapidly: according to RealPoint there are over 1,500 loans with a total balance of nearly $25 billion which may be in danger of default...

The Next CRE Casualty: Union Square's W Hotel
"... the iconic Union Square W Hotel may just be it. The hotel, which was acquired by Dubai's troubled sovereign wealth fund, Istithmar, for $285 million in 2006 (one of the few acquisitions of a hotel at a price of more than $1 million per room) has been bleeding cash lately after room rates have declined by 24%. The result has been an inability for the owner to even meet debt service obligations: a sure sign the current balance sheet is doomed, with an outright default just a matter of time.
... And here is why the math on every single REIT "upside case" out there is highly suspect:

The hotel’s net cash flow this year is running at an annualized rate of $8 million, down from $14.8 million in 2008, according to the servicer report. That barely covers the $7.5 million of annual debt service on the senior mortgage, but isn’t enough for the mezzanine loan. Like all luxury hotels in Manhattan, the W New York Union Square, at 201 Park Avenue South, is struggling with a drop in revenue because of the recession. Room rates are down $100 from a year ago, according to a servicer report. What’s more, the hotel’s annual property tax more than tripled, to $3 million.

If industry indications are any sign, the rebound is still far away for the troubled New York hotel segment:

The average occupancy for luxury hotels in Manhattan was 74.2% in the first eight months of the year, down from 81.9% a year earlier, according to Smith Travel Research. Room rates plunged 24%, driving room revenues down 31%.

As for those about to get whacked when and if Istithmar decided to call it a day: some very unhappy clients of Credit Suisse:

The purchase was financed with a $232 million debt package from Credit Suisse that consisted of a $115 million senior mortgage and a $117 million mezzanine loan. Credit Suisse securitized the senior loan and placed the mezzanine debt with one or more unidentified high-yield investors. The interest-only senior mortgage, with a 6.5% coupon, matures in October 2011. It was securitized via a $3.4 billion pooled offering (Credit Suisse Commercial Mortgage Trust, 2006-C5).

And while the maturity is only two years in the future (as are many other scheduled CRE maturity rolls), the likelihood that the loan will continue paying current income for the next 24 months is virtually nil.

So if this is the fate of one of the sovereign fund's landmark properties, what will happen to its two other trophy hotels?

Istithmar’s real estate holdings include two other Manhattan properties: the Mandarin Oriental at Columbus Circle and the office building at Six Times Square. Istithmar has been converting Six Times Square into a hotel, but work on the project appears to have slowed dramatically."...

BoomBustBloggers  have been on a wild CRE and residential rollercoaster ride over the last couple of years. Starting in 2007,we ran into Lennar and discovered things off balance sheet that the sell side and the company itself forgot to tell us (Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth), Ryland and their sell happy management (What does Reggie Middleton and Ryland's Upper Management have in Common?), Hovnanian and his you should by a house now (as he puts his on the market, Credibility is the Key to Success for a CEO – Hovnanian has Lost that Key: A letter to Mr. Hovnanian) and a whole host of other homebuilders. We gave

 Quick note: We are finishing up our scan of REITs that will have definitive refinance and/or cash flow issues in the next quarter or two, and have narrowed them down to four, with one finalist attempting to win the prize. I have the team running a cashflow and valuation analysis on each property in the portfolio and I should have somethingto munch on for subscribers sometime late next week.

an early warning on CRE in the 3rd quarter of 2007 (about a year before it was fashionable to do so - Will the commercial real estate market fall? Of course it will), then moved on to short General Growth Properties (now bankrubpt, GGP and the type of investigative analysis you will not get from your brokerage house) and Macerich (got this one to profit right before the market went coo coo for Cocoa Puffs -Macerich Forensic Valuation - Retail Macerich Forensic Valuation - Retail 2009-10-22 01:46:14 192.71 Kb - Macerich Forensic Valuation - Professional Macerich Forensic Valuation - Professional 2009-10-22 01:45:52 344.92 Kb - Macerich Sensitivity Analyis - Pro Macerich Sensitivity Analyis - Pro 2009-10-22 01:46:36 344.92 Kb) close to the top of their cycles (unfortunately, we're still waiting on ALX to speak to Mr. Reality for this one has benefitted from both a thin float and a fundamentally irrational market! - Alexander's Actionable Research Note Retail Alexander's Actionable Research Note Retail 2009-02-19 16:16:44 - Alexander's Actionable Research Note Pro Alexander's Actionable Research Note Pro 2009-02-19 16:20:08 and video too: February REIT Actionable Intelligence Note Update - remember, who are you going to believe, short term stock prices or your lying eyes!).

Keeping with this theme, the rabble rousing, digital rag known as ZeroHedge recent ran a couple of posts concerning the CRE crash and its effects on NYC hotels. 

Fcur Seasons Hotel In New York Is Latest Victim Of CRE Crash 

In addition to the Four Seasons, three other luxury hotels, which back a loan sent to a special servicer 10 days ago include the Four Seasons Biltmore Resort in Montecito, the ritzy Las Ventanas in Cabo, the destination of many a banker closing dinner, and the San Ysidro Ranch in Montecito.

The special servicing action has forced S&P to place 15 classes of bonds backed by a $425 million loan to Ty Warner Hotels & Resorts on "credit watch with negative implications." The catalyst for the action and the transition to special servicing was prompted by a staggering drop in cash flows from properties which came 46% below S&P expectations. The loan, which matures in January 2010, and which investors were hoping to recoup full principal on, may now be looking at substantial losses. And due to the declining cash flow, the loan would not qualify for an extension as it is in breach of it debt service coverage ratio.

More indicative of the collapse in the luxury hotel segment is the drop in occupancy for the four properties from 69% in the last fiscal year to a meager 58% recently. Alas the Ty Warner penthouse pictured insert unfortunately does not seem to be seeing a lot of action (if any) these days.

The full blown impact of CRE deterioration on the hotel industry could escalate rapidly: according to RealPoint there are over 1,500 loans with a total balance of nearly $25 billion which may be in danger of default...

The Next CRE Casualty: Union Square's W Hotel
"... the iconic Union Square W Hotel may just be it. The hotel, which was acquired by Dubai's troubled sovereign wealth fund, Istithmar, for $285 million in 2006 (one of the few acquisitions of a hotel at a price of more than $1 million per room) has been bleeding cash lately after room rates have declined by 24%. The result has been an inability for the owner to even meet debt service obligations: a sure sign the current balance sheet is doomed, with an outright default just a matter of time.
... And here is why the math on every single REIT "upside case" out there is highly suspect:

The hotel’s net cash flow this year is running at an annualized rate of $8 million, down from $14.8 million in 2008, according to the servicer report. That barely covers the $7.5 million of annual debt service on the senior mortgage, but isn’t enough for the mezzanine loan. Like all luxury hotels in Manhattan, the W New York Union Square, at 201 Park Avenue South, is struggling with a drop in revenue because of the recession. Room rates are down $100 from a year ago, according to a servicer report. What’s more, the hotel’s annual property tax more than tripled, to $3 million.

If industry indications are any sign, the rebound is still far away for the troubled New York hotel segment:

The average occupancy for luxury hotels in Manhattan was 74.2% in the first eight months of the year, down from 81.9% a year earlier, according to Smith Travel Research. Room rates plunged 24%, driving room revenues down 31%.

As for those about to get whacked when and if Istithmar decided to call it a day: some very unhappy clients of Credit Suisse:

The purchase was financed with a $232 million debt package from Credit Suisse that consisted of a $115 million senior mortgage and a $117 million mezzanine loan. Credit Suisse securitized the senior loan and placed the mezzanine debt with one or more unidentified high-yield investors. The interest-only senior mortgage, with a 6.5% coupon, matures in October 2011. It was securitized via a $3.4 billion pooled offering (Credit Suisse Commercial Mortgage Trust, 2006-C5).

And while the maturity is only two years in the future (as are many other scheduled CRE maturity rolls), the likelihood that the loan will continue paying current income for the next 24 months is virtually nil.

So if this is the fate of one of the sovereign fund's landmark properties, what will happen to its two other trophy hotels?

Istithmar’s real estate holdings include two other Manhattan properties: the Mandarin Oriental at Columbus Circle and the office building at Six Times Square. Istithmar has been converting Six Times Square into a hotel, but work on the project appears to have slowed dramatically."...

From the Real Deal:

Manhattan mixed-use property values fall by half, Massey report shows
A buyer could get twice as much mixed-use space in Manhattan in the first half of 2009 than in the same period a year earlier, according to a new citywide mid-year report from commercial sales firm Massey Knakal Realty Services. The prices for mixed-use properties fell 53 percent to $535 per square foot from $1,135 per square foot in the first half of 2008, the firm's data show. The dramatic reduction highlights the changes in the market from a year earlier as credit tightened and the economy weakened. Sales in the first six months of the year in Manhattan, in all categories of buildings priced higher than $500,000, were down 82 percent to $1.9 billion, from $11 billion in 2008, and $30.8 billion in 2007, the firm reported. The transaction volume fell 74 percent from the first half of 2008 to 95 sales, totaling 122 buildings. 

From the Real Deal:

Manhattan mixed-use property values fall by half, Massey report shows
A buyer could get twice as much mixed-use space in Manhattan in the first half of 2009 than in the same period a year earlier, according to a new citywide mid-year report from commercial sales firm Massey Knakal Realty Services. The prices for mixed-use properties fell 53 percent to $535 per square foot from $1,135 per square foot in the first half of 2008, the firm's data show. The dramatic reduction highlights the changes in the market from a year earlier as credit tightened and the economy weakened. Sales in the first six months of the year in Manhattan, in all categories of buildings priced higher than $500,000, were down 82 percent to $1.9 billion, from $11 billion in 2008, and $30.8 billion in 2007, the firm reported. The transaction volume fell 74 percent from the first half of 2008 to 95 sales, totaling 122 buildings. 

Monday, 27 July 2009 20:00

PNC + CRE = DOO + DOO hitting the FAN!

To highlight more of the damage to be done to TARP recipient banks such as Wells Fargo and PNC, I know turn my attention to the commercial mortgage sector (see the previous post BoomBustBloggers appear to be pressuring PNC for background info). We have already hashed out risk in the residential mortgage sector with valuable research that I released for free: see The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets for our in depth take on loan losses to come for all banks who participated in residential real estate lending. I have visited commercial lending risk many times before, starting with my work on GGP, which is now bankrupt, but not before I gave my readers a warning nearly a year in advance   See my posts from 2007 and early 2008:

•·         Will the commercial real estate market fall? Of course it will.

•·         Do you remember when I said Commercial Real Estate was sure to fall?

•·         The Commercial Real Estate Crash Cometh, and I know who is leading the way!

Now that the nation's second largest mall property owner and REIT has just filed chapter 11, after I warned readers over a year and a half ago of this very distinct possibility, others are finally starting to jump on the bandwagon (See General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy then go on to read the 80 or so pages of research that I have generated to support riding the share price down from $60 to near zero: GGP and the type of investigative analysis you will not get from your brokerage house.)

You may read more about what is happening in CRE lending in A Micro View of the Macro Damage to be Caused by Imploding Commercial Real Estate, but for now, I want to drill down to what these banks are holding.

 

Monday, 27 July 2009 20:00

PNC plus CRE = Doo Doo hitting the Fan

To highlight more of the damage to be done to TARP recipient banks such as Wells Fargo and PNC, I know turn my attention to the commercial mortgage sector (see the previous post BoomBustBloggers appear to be pressuring PNC for background info). We have already hashed out risk in the residential mortgage sector with valuable research that I released for free: see The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets for our in depth take on loan losses to come for all banks who participated in residential real estate lending. I have visited commercial lending risk many times before, starting with my work on GGP, which is now bankrupt, but not before I gave my readers a warning nearly a year in advance   See my posts from 2007 and early 2008:

Now that the nation's second largest mall property owner and REIT has just filed chapter 11, after I warned readers over a year and a half ago of this very distinct possibility, others are finally starting to jump on the bandwagon (See General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy then go on to read the 80 or so pages of research that I have generated to support riding the share price down from $60 to near zero: GGP and the type of investigative analysis you will not get from your brokerage house.)

You may read more about what is happening in CRE lending in A Micro View of the Macro Damage to be Caused by Imploding Commercial Real Estate, but for now, I want to drill down to what these banks are holding.

Monday, 27 July 2009 20:00

PNC + CRE = DOO + DOO hitting the FAN!

To highlight more of the damage to be done to TARP recipient banks such as Wells Fargo and PNC, I know turn my attention to the commercial mortgage sector (see the previous post BoomBustBloggers appear to be pressuring PNC for background info). We have already hashed out risk in the residential mortgage sector with valuable research that I released for free: see The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets for our in depth take on loan losses to come for all banks who participated in residential real estate lending. I have visited commercial lending risk many times before, starting with my work on GGP, which is now bankrupt, but not before I gave my readers a warning nearly a year in advance   See my posts from 2007 and early 2008:

•·         Will the commercial real estate market fall? Of course it will.

•·         Do you remember when I said Commercial Real Estate was sure to fall?

•·         The Commercial Real Estate Crash Cometh, and I know who is leading the way!

Now that the nation's second largest mall property owner and REIT has just filed chapter 11, after I warned readers over a year and a half ago of this very distinct possibility, others are finally starting to jump on the bandwagon (See General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy then go on to read the 80 or so pages of research that I have generated to support riding the share price down from $60 to near zero: GGP and the type of investigative analysis you will not get from your brokerage house.)

You may read more about what is happening in CRE lending in A Micro View of the Macro Damage to be Caused by Imploding Commercial Real Estate, but for now, I want to drill down to what these banks are holding.

 

Monday, 27 July 2009 20:00

PNC plus CRE = Doo Doo hitting the Fan

To highlight more of the damage to be done to TARP recipient banks such as Wells Fargo and PNC, I know turn my attention to the commercial mortgage sector (see the previous post BoomBustBloggers appear to be pressuring PNC for background info). We have already hashed out risk in the residential mortgage sector with valuable research that I released for free: see The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets for our in depth take on loan losses to come for all banks who participated in residential real estate lending. I have visited commercial lending risk many times before, starting with my work on GGP, which is now bankrupt, but not before I gave my readers a warning nearly a year in advance   See my posts from 2007 and early 2008:

Now that the nation's second largest mall property owner and REIT has just filed chapter 11, after I warned readers over a year and a half ago of this very distinct possibility, others are finally starting to jump on the bandwagon (See General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy then go on to read the 80 or so pages of research that I have generated to support riding the share price down from $60 to near zero: GGP and the type of investigative analysis you will not get from your brokerage house.)

You may read more about what is happening in CRE lending in A Micro View of the Macro Damage to be Caused by Imploding Commercial Real Estate, but for now, I want to drill down to what these banks are holding.

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