This is part seven and the last (I think) of my forensic rant on what I believe to be the CRE Short of the Year and the dead REIT walking known as PEI. In this installment, I will show that PEI can't even sell off it's portfolio due to a lack of value add to its rather dire situation - nearly all of the properties are either underwater, negative cash flowing or fully leveraged. As concluded in my previous analyses, the company's assets are, in essence, of null or negative value to the shareholder. If you haven't yet read parts one or two or three or four or five or six, please do for there is a wealth of data and analysis behind them that will bring the new reader up to speed. Please refer to PEI Cashflows and Debt Preliminary Analysis, PEI Sample Property Valuation  and  PEI Foreclosure Scenario Analysis for the background to this document which is the 3rd of 3 scenario analyses that detail the likely bankruptcy of PEI.

Scenario III : Sale of properties to fund debt repayment

The “fire sale” or distressed asset disposition scenario seems like the least possible, least likely and the least practical scenario. The reason is that the Company’s portfolio has either properties (1) which have negative valuation after considering debt due on them or (2) have properties that don’t have specific debt against them but are mortgaged under the revolving credit facility.

Please see the details on valuation of 27 properties we have valued…


PEI Underwater  Overly Encumbered Properties
PEI Underwater Overly Encumbered Properties

The properties that we didn't specifically value had similar characteristics. Those properties that are highlighted in blue do not have a mortgage, but are used to collateralize credit facilities that are being actively used and are expected to be maxxed out.

PEI Properties Not Valued By BoomBustBlogPEI Properties Not Valued By BoomBustBlog

As illustrated above, almost all properties with a positive valuation (see Column L) lack property-specific debt against them. But all of these properties have been encumbered under the revolving credit facility. The properties not covered under the revolving credit facility and having positive valuation after deduction of debt due on them are (1) Exton Mall (2) Moorestown Mall (3) Patrick Henry Mall. The total positive value of these three properties is around USD 36 mn which is insufficient to meet net refinancing requirement of USD 295 mn (as of Nov. 2011) as detailed below:

Amount (USD million) – 2012

Cash at the beginning – Jan 2012

93.94

Cash flows from operations

77.34

Unused credit lines

155.00

Debt due for repayment

621.08

Shortfall (before proceeds from sale of properties)

294.80

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Published in BoomBustBlog

This is part six, and the second to last of my forensic rant on what I believe to be the CRE Short of the Year and the dead REIT walking known as PEI. In this installment, I will simply show that much of PEI's portfolio is either underwater, negative cash flowing or fully leveraged - in essence of null or negative value to the shareholder. If you haven't yet read parts one or two or three or four and five, please do for there is a wealth of data and analysis behind them that will bring the new reader up to speed. 

I'm releasing this proprietary blog research for two reasons:

  1. the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
  2. this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

I'll keep this one short and simple. Most of PEI is U-N-D-E-R-W-A-T-E-R!!! That translates to the majority of its portfolio being of no value to equity shareholders or bondholders upon sale. In addition, at least 4 properties are kick negative cashflows, draining valuable and much needed cash from the rest of the company. See below and  Click to enlarge to print quality...PEI negative cash flow properties

 

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names. In putting a realistic valuation on PEI, we independently valued a sampling of 27 of its properties. We found that many if not most of those properties were actually underwater. Most of those that weren't underwater were mortgaged under a separate credit facility.   

PEI Underwater  Overly Encumbered Properties

Of course, many may be asking, "Well, what about those properties that you didn't look into independently?". Well, the reason why we didn't look into the others independently (other than resource constraints - this stuff is a lot of work and consumes many man-months of analytical labor) is that the state of the properties were rather obvious without deep digging. Below is a list of those properties we did not value. Please keep in mind that we feel (and we're most likely quite correct) that the carrying value of assets on management's balance sheet are often heavily skewered to the optimistic side. Not to say that they are explicitly lying, per se, just that they may have been feeling particularly good the day they spit out the numbers. With that being said, notice the amount of red that you see below.

PEI Properties Not Valued By BoomBustBlog

Again, paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names.

I will continue this analysis with a conclusion in the Fire Sale scenario, and offer professional and institutional subscribers property by property analysis in full and complete detail (about 10 pages per property). In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Published in BoomBustBlog

This is part five of my forensic rant on what I believe to be the CRE Short of the Year and the dead REIT walking known as PEI. If you haven't yet read parts one or two or three or four, they are necessary in order for you to get the full picture. In the spirit of full disclosure, although BoomBustBlog is a subscription research site, I'm releasing this fee-only proprietary content for two reasons:

  1. the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
  2. this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

If we look at PEI's response to the current weak macro economic environment, they are extremely defensive. Defensive - due to the reason that they realize where they stand. There has been no real capex over the last few quarters and (as I mentioned earlier conversations wiht clients) their strategy is to survive - moreso than to move ahead and fight with minimal odds. The mounting loan obligations and their struggle to fight each quarter is evident.

On top of this, a few of the properties have either been sold or have been used to raise mortgage finance, further making it tougher for the future years. In addition, the capacity to raise financing will dry up as all the properties stand 'effectively mortgaged' currently. Any imbalance in managing loan payouts can have a ripple effect. It will be interesting to see if the company manages to come out of it and if so, how it will do so. One thing for certain, with 3 senior managers getting a roughly $6 million slice of the cash flow pie while shareholders enjoy a mere $2 million slice in dividend increases, not only is there a lack of effective shareholder activism, but management appears to be ready, willing and able to drain the company's coffers via executive compensation faster than through cash return to shareholders. For a REIT whose mantra should be investor income, one would expect this to raise eyebrows at the very least. This REIT resembles the business/compensation model of Wall Street banks where employee compensation trumps ROI to investors as a corporate goal.

Subscribers, please refer to PEI Cashflows and Debt Preliminary Analysis and PEI Sample Property Valuation for the background to this document which is the 2nd of 3 scenario analyses that detail the likely potential bankruptcy of PEI. Those who are interested may subscribe to our research here.

Scenario II : Foreclosure of properties

In this scenario we assume that the Company would go the “Jingle Mail” route through allowing foreclosure on some of its properties, particularly those which have loans due for repayment in the next couple of years (2012-2014).

We looked at the portfolio of 27 properties that we valued and screened them to find out properties that are likely to have loans that would incentivize foreclosure. Below is the table showing such properties:

image001

We assume that in 2012 the company will possibly face foreclosure on (1) Beaver Valley Mall and (2) Cherry Hill Mall. The total amount of loans due on these properties in 2012 is USD 278 mn.

The following is likely to be the impact on revenues and operating expenses and net profit

Year – 2012

USD mn

Revenue loss

39.3

Operating expenses saved

24.2

Interest saved

15.9

Net Profit (negative impact)

0.8

Following is likely to be cash flow situation during 2012

Amount (USD million) – 2012

Cash at the beginning – Jan 2012

93.94

Cash flows from operations

91.8

Foreclosure of properties (Net WDV)

278.0

Proceeds from revolving credit facilities

155.0

Debt due for repayment

621.08

Shortfall

2.3

If the company forecloses both its properties having loans due for repayment in 2012, it may just be able to meet its loan obligations for 2012. However, this is going to have a cascading impact on the company in the form of the following:

  1. Interest rates on its existing debt will increase. As of now, in our assumptions for financial projections (below) we have assumed a reasonable increase of 120 bp, on average, for the company from around 6% currently.  This has materially increased its interest burden and its financial performance will deteriorate in kind.
  2. The Company has close to USD 443 mn and USD 140 mn in loans due in 2013 and 2014, respectively. A foreclosure scenario will make it almost impossible (considering its already stressed financial situation) for the company to refinance such loans or extend their maturity. The Company with the current deteriorating operating performance will be under more stress to refinance its obligations.
  3. The covenants under the revolving credit facility were recently revised under a modified agreement between the Company and the Lenders’ group led by Wells Fargo Group. Most of the revised covenants are considerably more stringent, making it highly unlikely the company will continue to have the credit facility under the agreement if the solvency ratios and interest coverage requirements are not met. These covenants are likely to be infringed if the interest rate on property loans is increased.

Projected Financials statements are furnished via the full foreclosure scenario document -File Icon Foreclosure Scenario Analysis
(Commercial Real Estate)
. Click here to subscribe.

I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Published in BoomBustBlog

 This is part four of my forensic rant on the the dead REIT walking known as PEI. If you haven't yet read parts one or two or three, they are necessary in order for you to get the full picture. As stated in my last missive on this topic, although BoomBustBlog is a subscription research site, I'm releasing this proprietary blog research for two reasons:

  1. the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
  2. this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

Blog subscribers can access the full recapitalization document here - PEI Recapitalization Scenario. Those who are casual readers, please see below...

I left off demonstrating how PEI only had a mere handful of properties that were able to take on additional debt (assuming banks were to do a halfway decent job at underwriting), and the additional cash available from leveraging those properties would do very little to assist in digging PEI out of the hole. The incremental loans expected to be availed by the Company is detailed below:                                                                                                                        USD Million

Property Name

Debt

Cap Rate (%)

Market Value of Property

Incremental loan

New Debt-to-WDV ratio

Exton Square Mall

68.4

6.19%

98.5

30.1

82.4%

Moorestown Mall

55.2

7.67%

66.6

11.4

101.5%

Patrick Henry Mall

91.9

7.71%

98.6

6.7

93.5%

Total

48.3

The Company would be able to get 48.3 mn loan if it goes for refinancing based on recapitalization of its properties - and that's using sky high optimistic assumptions. The Incremental interest due to from the above financing based on the assumption that the lenders would raise  the interest on the loans roughly 50 basis-point (bp), roughly US 4.6 mn. The net cash-inflow would be USD 43.8 mn. This is grossly insufficient based on total requirement of around USD 295 mn. 

Our analysis was originally performed in the 4th quarter of last year, and since then PEI has raised $100 mln in a preferred offering. A few readers have asked if this alters our scenario, to which I reply - take the optimistic debt refinancing presented above, combined with the $100mln 8% preferred, and an addition $100 mln 8.5% preferred, and you are still observing PEI with a  roughly $50mln shortfall and a hell of a heftier debt service to boot. As I said, this is a dead REIT walking!!!

Alternate options

The other options before the Company are as under:

  1.  Raise finance against properties which have no specific mortgage against them. However, we looked at the covenants for loan facilities restricting company’s access to these properties for raising finance. Almost all of these properties have been mortgaged under revolving credit facilities.
  1. Raise finance against properties that we have not yet valued as part of the current analysis of valuation of PEI. We valued 27 properties. We looked at other properties to assess probability of raising finance against them.

Out of the remaining 19 properties, 10 properties were acquired between 2003 -2005 and the rest were acquired before 2000. The properties acquired between 2003-2005 are likely to have their valuation fallen in line with the valuation we have witnessed for the properties we valued. As such, probability of raising adequate finance on such properties is also quite minimal. The properties acquired before 2000 already have high debt-to-Net WDV ratio and therefore are likely to have less cushion for further debt.

Schedule of properties not valued

Properties highlighted in blue have been mortgaged under revolving credit facilities

 PEI unvalued properties

Looking at the graphic above, it is plain to see that the company has leveraged its portfolio to the hilt, either through property depreciation or outright equity stripping. Those potential cash sources that were unlevered properties have been wrapped up as credit line collateral, while most of the other properties are dramatically underwater - I mean dramatically. What makes this even worse is that these numbers are from management's proclamations and history tells us (as well as BoomBustBlog analysis) that management's views are usually always much more rosy (read bullshitistically unrealistic) thine own hand borne calculations.

Forecasted Financial Statements

Below are PEI’s projected financial statements for 2012 based on the assumption that the shortfall (though unlikely) is met through additional borrowing and as a result the average interest increases to 6.7% annually.... Blog subscribers can access the rest of the full recapitalization document here - File Icon PEI Recapitalization Scenario. Click here to subscribe.

I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Published in BoomBustBlog

In continuing my proclamation of truth, my rant in favor of that long lost art of investment valuation known as old fashioned fundamental analysis, I bring to the BoomBustBlog reading public my 3rd installment of PEI - Dead REIT Walking (or, the short candidate from hell). If you haven't yet read parts one and two, they are necessary in order for you to get the full picture. I'm releasing this proprietary blog research for two reasons:

  1. the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
  2. this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

In Excellent Short Candidate Also Known As Dead REIT Standing! I left off posing the question of PEI breaking covenants. While it hasn't happened yet, methinks it's simply a matter of time. OF course, since the banks involved are engaged in their own incessant can kicking exercises, this may very well be a moot point - at least for now, but more on that later when I not only list the banks that have lent to PEI but show how far underwater their loans are and exactly how, why and where those properties have tanked.

PEI OBservations page 5

There are only three options of PEI:

Scenario I : Refinancing through debt based on recapitalization of properties

Scenario II: Foreclosure of select properties

Scenario III: Firesale of select properties

Of course, there's always the possibility of the company mixing and matching these three scenarios. 

Scenario I : Refinancing through debt based on recapitalization of properties

Refinancing requirement for 2012...

PEI has a total shortfall of around USD 295 million which it needs to finance. We have projected its operating results and have looked at available resources (cash balance, unused credit lines, etc). The following table shows the summary of the Company’s finances for 2012.

Amount (USD million) – 2012

Cash at the beginning – Jan 2012

93.94

Cash flows from operations

77.34

Unused credit lines

155.00

Debt due for repayment

621.08

Shortfall

294.80

Under the current scenario, we have assumed that the Company would try to avail itself of an increased loan on its properties, particularly on those which have (relatively) reasonable cap rates and debt-to-market value (LTV) ratios. Consequently, we looked at the company’s portfolio of 27 properties, each of which were valued independently by our team.

The table below shows that while there are quite a few properties with Debt-to-Net WDV (written down value) ratio of less than 100%, those with Debt-to-Market Value ratio are only three in number (where market values is defined as teh value derived by our proprietary analysis based upon market-based inputs and actual cashflows). Put another way, out of 27 properties analyzed, only three of them actually had any value to shareholders from a sale perspective. That's right, 88% of the properties of examined by us were underwater!!! Of the three that weren't underwater, all had reasonably good cap rates (more than 6% in all cases) and would therefore, in our opinion, enable the company to avail itself of incremental loans from its existing lenders on the properties. We (over)optimistically assume that the Company would be able to raise up to 100% of market value on these loans. From a realistic perspective, this is probably unlikely - highly unlikely actually. Remember, we are being optimistic here.

Portfolio of 27 properties valued – Table showing incremental finance that can be availed.thumb PEI Assets Eligible for Cash Out Refinancing

 

Despite all of this, the stock is actually close to its highs! 

I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.

Published in BoomBustBlog

In continuing with yesterday's empirical rant Lazy Analysis Allows For Outright Silly Pricing Of Near Insolvent REITS: A Forensic Analysis Of A Prime Example (a must read for anyone with exposure to - or interest in - this company, whether short or long), I continue with the piece meal release of Q4's BoomBustBlog primary CRE short candidate...

 PEI's share price has surged despite an absolute dearth of positive prospects for the company....PEI stock chart

As a matter of fact, the company has clocked continuous and increasing losses into an ever darkening fundamental and macro outlook. PEI has accomplished a net increase in occupancy due to its strip malls, unfortunately that net occupancy increase comes with a dramatic decrease in revenues - i.e. base rents.

PEI OBservations page 3

From a balance sheet solvency perspective, one of PEI's primary problems is the average cost of its portfolio and points of acquisition. Net-net, the overpaid for many properties during the peak of the bubble. Now that prices are normalizing (facing reality), PEI faces a dramatic portion of its portfolio underwater. Let's take a look at the mall CRE picture during the bubble...

 

As you can see, Q4 2005 marks the absolute tippy top of the bubble in terms of rents (which drive prices). Now, let's take a look at when PEI acquired the bulk of its portfolio...

PEI OBservations page 4

My subscribers and team actually know precisely what properties are underwater and what properties aren't since we actually valued roughly 78% of the properties by hand using discrete, individual and independently derived inputs. I will be releasing both the summary of that exercise as well as some individual property analysis throughout this week.

Of course, if the company acquired the bulk of its portfolio at the peak of the CRE bubble, and rents have basically trended nearly straight down from that point, one need not wonder which direction cashflows are headed, no? As European banks choke on sovereign debt issues and they face a historically high CRE debt rollover period (now that should be fun), and American banks choking from 360 degree fraud (LIeBORgate, Fraudclosuregate and mortgage putbacks) and litigation contingent liabilities on top of having balance sheets full of the stuff that funded companies's CRE acquisitions such as PEI's in the first place, I really don't see who is going to give PEI the cash to dig itself out of the hole. Of course you can always rely on the foolish equity investors, after all, just look at the share price. It's not as if some smart ass blogger or independent investor is going to snatch the covers off to show these guys naked and completely under-endowed, is it????

Despite all of this, the stock is actually close to its highs!

I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.

The next installment of the PEI saga (24 hours from now on BoomBustBlog) will go into intricate detail as to the reasons this REIT has close to no way out besides bankruptcy or a foreclosure/fire sale routes. As a precursor to that, we will go over covenant issues, though.

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Published in BoomBustBlog

A few weeks ago I commented on my gathering of Armageddon Puts and Truly Busted CRE REITS. Basically, I was looking to capitalize on both the potential mispricing of options and the actual mispricing of certain REIT shares. As recent history unfolds, and as the sell side of Wall Street continuously spews optimistically biased hype, the share prices of the primary REIT that we have targeted has been on a tear. Unfortunately, it has tore in the wrong direction! As a result, I will break rank with tradition here and post proprietary subscription content here that is still quite current and fresh. To put this in other words, I will use proprietary, paid for BoomBustBlog research to show that the emperor hath no clothes!!!

Since the research behind this was a massive undertaking, I will release certain pertinent research on a bit by bit basis. I learned back in 2008 that no matter how insolvent and essentially bankrupt a company may be, it can both kick the can down the road and maintain unrealistically rosy pretenses for a very long time- much longer than a long dated option expiry or the time it takes to add up untowardly expenses in one's margin account used for shorting. That is, unless someone actually takes it upon themselves to do something about the farce - as I did in 2007. Reference the following excerpt from GGP and the type of investigative analysis you will not get from your brokerage house for a story that is eerily similar to the one I am presenting today. In addition, keep in mind that at the time of my initial analysis, GGP was the 2nd largest and one of the fastest growing REITs in the country, was rated investment grade by every rating agency that followed it, and had a buy rating by every brokerage house that followed it:

This missive is more than probably any outside investor in GGP knows about GGP, plus some. The accuracy of the contents below is not guaranteed nor warranteed in any form or fashion. I try my best to be accurate and exact, but things do happen - thus all contents in this post is based upon information and belief. Thus, I invite all to roll your sleeves up, and dig in to do some research for yourselves. This is the type of research that I expect to come from my local brokerage houses. It doesn't happen, thus I must do it myself. Please be aware that I have a bearish position in GGP stock. Read this complete missive, and it will be easy to understand why.

Table of Contents

    • Short summary of the 3 elements of this report
    • Background Information on the founding Bucksbaum Family
    • Background Description of General Growth Properties’ Business
    • Item 1- Clear evidence that GGP is heading into a refinancing-induced liquidity crunch
    • Item 2- One-time items are holding up deteriorating core operational performance
    • Item 3- Evidence that GGP is potentially misrepresenting itself

 I started shorting GGP in the high $60s in 2007 and it filed for bankruptcy (after swearing that my analysis was garbage and had no financial issues it couldn't handle) in 2009 with a share price of roughly $3. The company below is in a very similar pickle, and I simply don't see any way for them to get out of it - that is, other than the hard way! Check after the video break below for the first of several installments of the empirical truth in CRE analysis. These "truths" will include the most rigorous analysis you have every seen of PEI (hundreds of pages) including a property by property independent valuation and cashflow analysis. 

PEI Observations page 1

PEI Observations page 2

 

PEI stock chart

I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.

The next installment of the PEI saga (24 hours from now on BoomBustBlog) will go into intricate detail as to the reasons this REIT is really BUST!

Related reading...

  1. We had a massive CRE bubble which bust - See The Commercial Real Estate Crash Cometh, and I know who is leading the way.
  2. The CRE bubble bust, even as disguised and manipulated as it was, claimed some serious retail casualties. See GGP and the type of investigative analysis you will not get from your brokerage house.
  3. 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?
  4. 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 
  5. ... and will do so both in the US and abroad, see The "American Realist" Says: Past as Prologue - Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!!
  6. Those who truly believe that the more conservative EU nations will skate past this are sorely mistaken. See "Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?" Then see The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History
 
Published in BoomBustBlog

Yesterday, I posted The Difference Between Money and Wealth and Why You Can Easily Print One But Must Actually Create The Other, and as if on cue, global inkjet nozzles 'round the world started whizzing - to wit:

Why such rampant printing? The whole world's afraid Europe's impending implosion will engulf global economies. They very well shoud be, this was quite evident 3 years ago (Pan-European sovereign debt crisis) and the can kicking is nearing the end of its useful cycle... ECB's Draghi: We See Now a Weakening of Growth in Whole Euro Area

Here's the secret that BoomBustBlog subscribers know yet seems to be lost on much of the European powers that be: cutting rates and printing will absolutely NOT prevent the nuclear winter in Real Assets. Since loans behind real assets are anywhere between a vast chunk and the majority of bank loans, when this thing goes the European banking system goes with it. This will manifest itself stateside (see sidebox), but the Europeans will get hit harder, at least initially... The reason? Well, it doesn't really matter how low interest rates are - if banks don't lend, borrows will not gain access to capital. Banks are too weak and skittish to lend despite "so-called" record profits, billions in bonuses and compensation, and trillions in bailouts. I repeat, and I repeat again, the only solution is to let the insolvent fail.

The REIT analysis referred to in the chart can be found here forsubscribers (the property by property valuations are for Professional/Institutional subscribers only):

I have just revisited the performance of this company (last update was at least a quarter ago). If my paid subscribers recall, we valued the company at rougly 10% of its current market price (see File Icon Cashflows and Debt Preliminary Analysis), with a variety of scenarios to be played out that may affect said valuation. This was based on valuation of key properties of the company, which together accounted 78% of the total portfolio in value terms.

Since then the company has released its full year 2012 results and 1Q2012 quarterly performance. There is no visible improvement in the performance of the company. The company is struggling to handle massive leverage, industry average defying LTVs, proportionately large debt liabilities coming due - the bulk of which is expected to face the music sometime in 2012 in view of upcoming liabilities of over nearly $700 million during the remainder of the year.

Reference the quite informative post from which the graphics below were excerpted: Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE

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 So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

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Fastforward to today, and NIEUWE STEEN INVESTMENTS N.V. - NSI (one of our shortlisted REIT) suffered the most due to revaluation of their Dutch office portfolio. It therefore witnessed 26% decline in last 4 months.

NSI

NSI is simply a microcosm of what's to come for many larger real asset investors. I have warned that the Dutch, with what many consider to be a strong and relatively stable economy, was not immune to the European contagion, reference Are The Ultra Conservative Dutch Immune To Pan-European Economic Contagion...

 

 

 

 

Published in BoomBustBlog

Yesterday, I received a couple of emails along the lines of the one displayed below...

"Hi Reggie,

Can you please put out any guidance on your Armageddon Puts for your lowly retail subscribers?

Thanks"

Well, I would like all to know that I'm not a typical mo-mo type trader. I'm a strategist. With that being said, I'm also not the one to look a strong risk/reward proposition in the face and do nothing. Below is a set of charts that should drive the mindset home.

SPX_puts

The actual chart with the series and strike of the puts can be found in the retail investor's discussion forum. I will also be available to chat there as well.

The REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

I have just revisited the performance of this company (last update was at least a quarter ago). If my paid subscribers recall, we valued the company at rougly 10% of its current market price (see File Icon Cashflows and Debt Preliminary Analysis), with a variety of scenarios to be played out that may affect said valuation. This was based on valuation of key properties of the company, which together accounted 78% of the total portfolio in value terms.

Since then the company has released its full year 2012 results and 1Q2012 quarterly performance. There is no visible improvement in the performance of the company. The company is struggling to handle massive leverage, industry average defying LTVs, proportionately large debt liabilities coming due - the bulk of which is expected to face the music sometime in 2012 in view of upcoming liabilities of over nearly $700 million during the remainder of the year.

In recent times the company has used revolving credit facilities to fund debt repayments.It looks unlikely it will be able to do so this time around. Below is the depiction of projected cash shortfall in 2012...

Subscribers can download this full update from the next post, to be published within 24 hours...

Published in BoomBustBlog

A few months ago, I warned all to Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE. This warning was an offshoot of the extensive research that I did on the European banking sector, sovereign debt and CRE. In a nutshell, I said It appears as if there were a few who failed to heed said sage warning. Bloomberg reports Commercial Landlords Fail to Pay Loans Amid Crisis, Moody’s Says

Landlords of commercial properties in Europe are struggling to repay mortgages as banks pull back from refinancing the loans, according to Moody’s Investors Service.

And the reason they are pulling back has been well documented on BoomBustBlog for some time. See Is Another Banking Crisis Inevitable? 04 February 2011

Seventy-nine percent of the loans packaged into commercial mortgage-backed securities rated by Moody’s that came due in the first quarter weren’t repaid on time, Frankfurt-based analyst Oliver Moldenhauer wrote in a report. The non-payment rate more than doubled from 35 percent in 2009 and reflects “the current weak state of the lending market,” Moldenhauer wrote.

Whoa!!!! And to think everyone is worried about sovereign debt in Europe. Once all of that rapidly depreciated real estate collapses mortgages that have been leveraged 30x, you'll really see the meaning of AUSTERITY! I'm trying to make it very clear to you people, you ain't seen nothing yet!!!

The economic slowdown is hurting landlords of properties from office blocks to car parks and shopping malls across Europe. A total of 38 billion euros ($47 billion) of commercial real estate loans come due this year and next, Moody’s said.

“As banks need to deleverage due to regulatory requirements, commercial real estate financing will remain constrained,” Moldenhauer wrote. “Most loans will not be repaid.”
...“Not only can underwater loans not be refinanced, borrowers also face difficulties refinancing moderately leveraged loans that are simply too large in the current lending market,” said Christian Aufsatz, an analyst at Barclays Plc in London. “For CMBS, the situation will become worse.”

Real estate with mortgages that match or exceed the value of the property -- a so-called loan-to-value ratio of 100 percent or higher -- suffered defaults in “nearly all” cases in the first quarter, Moody’s said. About a third of borrowers with LTV ratios of up to 80 percent didn't pay up on time, according to the report.

Keep in mind that the LTV of these properties are safe in the 50-60 LTV range. We're now discussing 80 to 100+ LTVs. Think about it? Whose going to cough up the missing equity? Quick answer - bank equity investors! More thought out answer - Taxpayers the world over as their hardheaded ass government officials rush in once against to try to bailout banking systems that are too big to be bailed out, leaving what few decent sovereign nation economies left insolvent - once again!!!!


Most of the loans that were repaid were for less than 25 million euros, while just one of the 15 mortgages worth 75 million euros or more was paid on time, Moldenhauer wrote.

As queried many times on this blog, "What do you think, pray tell, happens when the liquidity starved, capital deprived, over leveraged banks fail to roll over all of that underwater EU mortgage debt?" Excerpted from Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE:

So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?

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So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

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 My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Stay tuned!

My next post on CRE will show how this is not just a European phenomena. Yes, US REITS will come crashing back to reality as well. Subscribers should pay attention as I ladder puts and shorts into this REIT which we have calculated to fall roughtly 95% in value if math comes to the forefront. To date, the price has not broken out of a relatively narrow range, which means the opportunity is still there. I am considering making the research public after it is clear all long terms subscribers have attained positions.

icon Cashflows and Debt Preliminary Analysis (493.89 kB 2012-01-19 09:19:16) - compete cash flow analysis showing this REIT coming up short in every possible practical scenario.

icon Fire Sale Scenario Analysis (303.76 kB 2012-02-10 09:17:04) - illustrates the situation if a fire sale was pursued to raise cash.

icon Foreclosure Scenario Analysis (414.15 kB 2012-02-09 10:16:12) - illustrates the situation if properties were allowed to go into foreclosure to ease debt service.

icon Sample Property Valuation (360.45 kB 2012-01-26 09:03:33) - one of over 40 property valuations performed by hand, with on the ground inputs using our proprietary valuation models.

I will go over this opportunity in more detail over the next 72 hours as well as reviewing the path taken by European real estate to show what can be expected here in the US and the FIRE sector.

Please note that we independently value REIT portfolios - property by property - with independently sourced rents and expenses to ascertain a truly accurate valuation picture. This is how we called the short on General Growith Properties in 2007, a year before they were downgraded from investment grade status and still buys on them from all the major sell side houses that followed them. I rode GGP down from the $60s to about $8, the shares eventually fell to $1 and change or so. The General Growth Properties short generated returns deep into the three digits... Deep enough to come close to registering a four digit return.

Follow me on Twitter: http://twitter.com/#!/reggiemiddleton. Click here to subscribe to BoomBustBlog research!

Published in BoomBustBlog