Monday, 16 February 2009 23:00

Actionable Note Preview

I have released an actionable note preview for subscribers. See pdf Actionable Note Preview 2009-02-17 09:07:09 59.25 Kb

Published in BoomBustBlog

Shaun has fulfilled his pledge of posting his personal research on SPG to the discussion forum. Registered users should click here to access it. Those who are not registered can subscribe for free here. I urge all to participate with as much feedback an input as possible. The more you contribute, the more you get back in return.

Published in BoomBustBlog

In Seeking Alpha, I responded to a comment a guy made in which he quoted the following NY Times article (this is old hat to long time blog subscribers, so you may want to skip this, for it may be redundant)...

"In 2007, Sam Zell, the billionaire Chicago investor, sold a portfolio of 573 properties he had assembled over three decades, Equity Office Properties Trust, to the Blackstone Group for $39 billion. It was the largest private equity deal in history, but Blackstone did not stop there: it immediately flipped hundreds of the buildings for $27 billion.

Today, the wreckage of those purchases is strewn across the country, from Southern California to Austin, Tex., to Chicago to New York. Many of the 16 companies that bought Equity Office buildings are now stuck with punishing debt, properties whose values are plummeting and millions of feet of office space they cannot fill. ... "
http://www.nytimes.com/2009/02/07/business/07properties.html?ref=business

On Sept. 1 2007, I said:

"I noticed that many pundits are focusing on single family residential market, most likely because it is in the news so often. It is bad, very bad. I am an ex-residential real estate investor who sold off in 2005 due to fundamentals that were totally out of whack. It appears that many do not see how precarious the commercial sector has become, with many deals being done at 2-5% cap rates (net profit yields) in Manhattan and many major metro areas, which is absolutely ridiculous considering the risk and illiquidity of these deals. The compensation for these deals are coming no where near justifying the risk. I am sure the excessive liquidity coupled with significant demand caused the cap rate compression, but the buyers fell for it assuming liquidity and demand would continue for some time. Well, corporate liquidity has just dried up, and many are stuck holding the bag with buildings that are yielding as low as half that of treasuries, yet easily quadrupling the risk. Some are even selling at lower cap rates in successful flips (reference the Blackstone purchase of Sam Zell's portfolio, which was totally overpriced, yet Blackstone managed to flip much of the portfolio over to speculators, some of which actually flipped it over to someone else at a profit - ALL in a period of a few months). This has now become nigh in impossible, but in an attempt to raise the cap rates, commercial rents have skyrocketed to all time highs in the major metro areas, causing significant pressure on corporate profits (I have inside knowledge of this affecting MAJOR public and private firms who are looking to expand and are getting squeezed).
And now, on to small residential (single family and 1-4 family residential)..."
http://boombustblog.com/200709013/Thoughts-on-the-US-Publicly-Traded-Homebuilders.html

Then I said in December 2007:

"Of course commercial real estate is going to fall. Why? For the exact same reason residential real estate is falling. But, there hasn't been an oversupply of commercial real estate, you say. Well, the oversupply is not the core reason why residential is falling right now. Residential RE's problem is that easy, cheap money brought upon wreckless, imprudent speculation from players who were not well versed in the real estate game - and even those who should have known better. The current oversupply is a byproduct of that liquidity induced speculation. Why split hairs? Because the devil is in the details. The downfall of CRE is the rampant speculation that caused many to significantly overpay for assets that are quite illiquid and take significant expertise and time to improve (or even sell), even incrementally. Not only did they overpay, but they applied significant leverage as well, much more than the industry norm.

A Quick Commercial Real Estate Primer: Pricing Commercial Real Estate

There are several ways to price and value CRE, but the simplest and most straight forward is the capitalization rate (cap rate). "

http://boombustblog.com/Reggie-Middleton/22-Will-the-commercial-real-estate-market-fall-Of-course-it-will.-22.html

Then I said later on that month in 2007:

"My first post on my blog in September warned about the coming drop in real estate prices. I revisited the topic a couple of weeks ago, as I prepared the research of a short position in the sector. Well, we are almost done with the research and the position and I will release a summary of the research and the performance (expected and actual) of the position after Christmas.

In the meantime, this is a tidbit gleaned from my studies. We literally modeled and valued 260 properties of a certain REIT (each model is about 65 pages long, and very detailed and analytical - in real terms, no fluff here) that came up in a scan for CRE participants with bad numbers. We canvassed brokers, institutional data sources, sellers and buyers (9 sources in total) to get a detailed understanding of the lease rates, climate, and sentiment of the geographic area of each individual property. This is probably one of our the most ambitious works this year, and makes for extremely informative reading for those who have a real interest in the sector. We covered 41 states 2 countries and a whole lot of cities, all accurate to within a distinct business district of each property, where available.

What I found was that, at least where this REIT operates, the commercial real estate bubble (yes, there was an easy money induced bubble) peaked in Q4'05, where the spread between new leases and existing leases maxed out at about $5.30/ft. This spread actually went negative in Q4'06, and that negative margin increased substantially."

http://boombustblog.com/component/option,com_myblog/show,Do-you-remember-when-I-said-Commercial-Real-Estate-was-sure-to-fall-.html/Itemid,0/

Then the work began with GGP:

"A couple of weeks ago I informed BoomBustBlog.com readers that I was working on a big project concerning commercial real estate short candidates. I stated last year that I was sure CRE was headed down, hard. Well, I am now ready to start releasing the results of my research over the next week or so. Unfortunately, the market has moved against the subject of my research fiercely as I was completing it, but it appears to be far from over. Who is the subject of that research, you ask? General Growth Properties (GGP). I have actually seen this company pop up in the media and a few discussion groups from time to time, but they have no idea what the management of this company has been up to. First, a little background on how I got here. Those who are not versed in commercial real estate valuation are urged to read my quick and dirty primer on CRE valuation .

I told members of my analytical team to screen the commercial real estate trust, service, and development sector for the usual suspects, starting with the the guys that purchased Sam Zell's flipped properties from Blackstone. I made some of the companies available via blog post and download: icon Commercial Real Estate Cos. (43 kB). icon Forest City Enterprise Peer Comparison (198.98 kB), icon Vonardo Realty Trust (146.49 kB). After and exhaustive screen and resultant short list, we chose GGP. I then instructed the team to canvass local and national brokers (4), databases (5) and data aggregators (several) to get the most precise localized rental and expenses figures possible. This data, as well as purchase dates, prices, management actions, capital improvements, etc. were used to plug into models such as this 33 page illustrative example, icon GGPs Woodlands Village (612.34 kB), to ascertain the true value of GGP's portfolio. We also measured and valued their development operations, joint ventures, CMBS financing, off balance sheet vehicles and master planned communities. Sum total, I now have roughly 2 gigabytes of "REAL" valuation data on my servers covering 260 properties owned or partly owned by GGP. A this point, I may know more about their operations than they do.

What is more telling is the window of understanding this opens into the commercial real estate space in the US. It is my opinion that most are extremely over-optimistic regarding the prospects for this space. "

http://boombustblog.com/content/view/108/34/

The whole story is hear (1,000's of pages), from $60 per share in Nov. 2007, to $0.40 per share now:

http://boombustblog.com/20080615425/GGP-and-the-type-of-investigative-analysis-you-will-not-get-from-your-brokerage-house.html

Well, I have another REIT short report warning coming out next week after the stimulus plan is released, as well as a bank and an insurer (check my track record in these matters: http://boombustblog.com/20090108749/BoomBustBlog-Research-Performance-for-2008.html).

Anyone interested is advised to enlist the RSS feed to my blog or two create a subscription (there's a free option for those who don't feel compelled to pay for my work).

Published in BoomBustBlog

The unprecedented turn of events in the global financial space has frozen credit markets, jeopardizing global economic growth. This, coupled with a rapidly deteriorating retail climate and declining commercial real estate valuations, has severely damaged the fundamentals of real estate investment trusts (REITs) with significant amounts of debt maturities in the near-to-medium term. Macerich (MAC), which has nearly $4 bn of debt due over the next three years faces a daunting task ahead to navigate as a going concern. Further compounding the problems for MAC is the Company’s property portfolio, which is highly susceptible to the current crisis, built on high leverage (current LTV of 85% based on market value) and including a significant number of underwater properties with negative equity. As expectations of a recession are fast turning into a reality, a slowdown in consumer spending and a consequent impact on retailers would result in additional pressure on the Company’s occupancy levels, impacting its rental rate growth and net operating income. As we navigate through future, the problems in the financial sector are expected to get worse before they stabilize wherein our expectations of the Distressed scenario (of the four scenarios explained in the report) could well turn into a reality.

REITs are very labor and intellectual capital intensive companies to value properly. General Growth Properties and Macerich consumed an enormous number of man (and woman!) hours and required extensice modeling, macro research and fact gathering. Thus, this particular professional report is 37 pages long, nearly twice the normarl report size, and this is after releasing over 100 pages of preliminary findings! The effort is well worth it, though, for it illustrates the anwer to the quesion: Is Macerich an undervalued victim of a bear market slaughter, or is it a bankruptcy waiting to happen?

The work that went into this...

We have arrived at MAC’s valuation by valuing each of MAC’s 103 properties (including that of consolidated and unconsolidated JVs) after consideration of their expected rental income and debt repayment obligations. Each individual property valuation assumes rental income based on the current prevailing market rentals for similar properties in the same location (zip codes) sourced through prominent info sources and brokers including Loopnet and CB Richard Ellis. The rental stream for each property has been projected for the next 20 years based on macro-economic factors like expected population and household growths at each of the subject property location. In addition, the valuation takes into account the total gross leasable area and rentable area, occupancy rates, property management expenses including insurance and taxes, renovation and maintenance capex, mortgage outstanding, and refinancing requirements.

The above methodology has been followed under four different scenarios - Refinancing scenario, Asset Sale scenario, Foreclosure scenario and Distressed scenario. We have arrived at MAC’s valuation based on weighted average (probability of likelihood being weights used) of valuations arrived at under each of these scenarios.

A sizeable portion of MAC’s portfolio was acquired over the last 5 years, during the period when property prices were on an upswing. As of September 30, 2008, MAC had an ownership interest in 103 regional shopping centers and community shopping centers, primarily concentrated in the western US, with 80.7 mn square feet of gross leasable area. Of these properties, nearly 32% were acquired between 2002 and 2004, and 25% were acquired after 2004. With nearly 57% of the properties acquired in or after 2002, when the commercial real estate prices were witnessing a steep rise, a sizeable portion of MAC’s properties currently have a market value lower than the book value (purchase cost net of depreciation) and have a loan-to-value greater than 100%, representing negative equity.

Subscribers may download the full reports here (the files have been updated):

icon Macerich Forensic Valuation - Retail (264.45 kB 2008-11-28 14:49:36)

icon Macerich Sensitivity Analyis - Pro (298.73 kB 2008-11-20 12:02:08)

Published in BoomBustBlog

The unprecedented turn of events in the global financial space has frozen credit markets, jeopardizing global economic growth. This, coupled with a rapidly deteriorating retail climate and declining commercial real estate valuations, has severely damaged the fundamentals of real estate investment trusts (REITs) with significant amounts of debt maturities in the near-to-medium term. Macerich (MAC), which has nearly $4 bn of debt due over the next three years faces a daunting task ahead to navigate as a going concern. Further compounding the problems for MAC is the Company’s property portfolio, which is highly susceptible to the current crisis, built on high leverage (current LTV of 85% based on market value) and including a significant number of underwater properties with negative equity. As expectations of a recession are fast turning into a reality, a slowdown in consumer spending and a consequent impact on retailers would result in additional pressure on the Company’s occupancy levels, impacting its rental rate growth and net operating income. As we navigate through future, the problems in the financial sector are expected to get worse before they stabilize wherein our expectations of the Distressed scenario (of the four scenarios explained in the report) could well turn into a reality.

REITs are very labor and intellectual capital intensive companies to value properly. General Growth Properties and Macerich consumed an enormous number of man (and woman!) hours and required extensice modeling, macro research and fact gathering. Thus, this particular professional report is 37 pages long, nearly twice the normarl report size, and this is after releasing over 100 pages of preliminary findings! The effort is well worth it, though, for it illustrates the anwer to the quesion: Is Macerich an undervalued victim of a bear market slaughter, or is it a bankruptcy waiting to happen?

The work that went into this...

We have arrived at MAC’s valuation by valuing each of MAC’s 103
properties (including that of consolidated and unconsolidated JVs)
after consideration of their expected rental income and debt repayment
obligations. Each individual property valuation assumes rental income
based on the current prevailing market rentals for similar properties
in the same location (zip codes) sourced through prominent info sources
and brokers including Loopnet and CB Richard Ellis. The rental stream
for each property has been projected for the next 20 years based on
macro-economic factors like expected population and household growths
at each of the subject property location. In addition, the valuation
takes into account the total gross leasable area and rentable area,
occupancy rates, property management expenses including insurance and
taxes, renovation and maintenance capex, mortgage outstanding, and
refinancing requirements.

The above methodology has been followed under four different scenarios
- Refinancing scenario, Asset Sale scenario, Foreclosure scenario and
Distressed scenario. We have arrived at MAC’s valuation based on
weighted average (probability of likelihood being weights used) of
valuations arrived at under each of these scenarios.

A sizeable portion of MAC’s portfolio was acquired over the last 5 years,
during the period when property prices were on an upswing. As of September 30, 2008, MAC had an ownership
interest in 103 regional shopping centers and community shopping centers,
primarily concentrated in the western US, with 80.7 mn square feet of gross
leasable area. Of these properties, nearly 32% were acquired between 2002 and
2004, and 25% were acquired after 2004. With nearly 57% of the properties
acquired in or after 2002, when the commercial real estate prices were
witnessing a steep rise, a sizeable portion of MAC’s properties currently have
a market value lower than the book value (purchase cost net of depreciation)
and have a loan-to-value greater than 100%, representing negative equity.

Subscribers may download the full reports here:

icon Macerich Forensic Valuation - Retail (264.45 kB 2008-11-28 14:49:36)

icon Macerich Sensitivity Analyis - Pro (298.73 kB 2008-11-20 12:02:08)

Published in BoomBustBlog
Tuesday, 25 November 2008 01:00

GGP back in the news

From Benjamin Spillman of the Las Vegas Review-Journal. I would like to
take the time to commend Mr. Spillman for his professionalism in his
given vocation. He literally read through each and every page of
research that I published on GGP, and that was a minimum of several
hundred pages (see GGP and the type of investigative analysis you will not get from your brokerage house, and GGP Shenanigans: How much value do you place on the credibility of management?).
This is not CRE developer or investment specialist, either. He then
took the time to contact me several times to make sure he had a firm
grasp on what he read, he fact checked my research (too bad he just
couldn't take my word for it :-)) and even asked other reporters what
their experience has been with me. In other words, he dug deep - very
deep, to get the FACTS and then took to the time
to both comprehend and verify him. I'm not knocking all journalists,
but there are some guys and girls who do not put forth have the
investigative effort and research that this man has. Kudos, it is well
deserved.

Hedge fund buys up to 20 percent interest in mall giant General Growth Properties


A
New York-based hedge fund bought an interest in up to 20 percent of
mall giant General Growth Properties for just $9.3 million in cash — a
company that had a market capitalization of nearly $9 billion as
recently as February...

It’s
the first vote of confidence in General Growth in several months, but
by itself won’t dig it out from about $900 million in debt that comes
due by December on Fashion Show Mall and Shoppes at Palazzo on the
Strip.

General Growth Shares have lost more than 98 percent of
their value this year and were hovering beneath $1 each until the
Pershing announcement boosted them to as high as $2.

Pershing
acquired 7.5 percent of General Growth shares for $9.3 million and an
interest in another 12.4 percent through, “total-return swaps,”
according to Bloomberg.com...

... Brooklyn-based investor Reggie
Middleton was one of the first to raise red flags about General
Growth’s debt problems, which can be traced back to an $11.3 billion
purchase of Rouse Co., in 2004. Middleton said Pershing might have
gotten a steal if General Growth management can somehow right the ship
andrefinance the debt due Friday plus another $3 billion next year. But
Middleton also said if he had the money he would cherry-pick individual
malls from the company’s portfolio of about 200 properties in 44 states.

Middleton cited South Street Seaport in New York and the Las Vegas properties as potential winners.

“There are quite a few gems, marquee properties,” Middleton said.

Published in BoomBustBlog
Thursday, 20 November 2008 01:00

The Macerich Sensitivity Analysis

This is an actionable intelligence note for profesional level subscribers.

We have done a sensitivity analysis of Macerich's (MAC) valuation based on different scenarios representing re-financing conditions and sale assumptions. We have broadly assumed four scenarios loosely based upon the options that were available to GGP (see GGP and the type of investigative analysis you will not get from your brokerage house), which had a vastly superior portfolio:

  • Re-financing scenario: Macerich would be able to re-finance all its loans, though at higher interest rate (6.5%, which is slightly conservative considering they just announced 2 loans at 6% and 7.5% in an increasingly adverse environment).
  • Sale scenario: Macerich would be able to re-finance its properties at 65% LTV and the balance of re-financing requirement would be met through sale of some of its properties. We expect MAC to sell a few properties at a discount to the current NOI-based valuation (assuming 15% discount, again taking into consideration the success of GGP over the last few months given their significantly superior portfolio).
  • Foreclosure scenario: Macerich would be able to refinance its properties at 65% LTV and will have to foreclose some of its properties to meet its re-financing requirements. As a result of foreclosure, we expect MAC's interest rates to increase (by 250 basis points).
  • Distressed scenario: Macerich would be able to
    re-finance at 50% LTV and would have to sell and foreclose some of its
    properties to meet its re-financing requirements. This is the worst
    case scenario under which we expect a 20% discount on NOI-based
    valuation on sale of properties and increase in refinancing costs by
    350 basis points. All these conditions may drive the company close to a
    bankruptcy situation.

macerich_chart.jpg
Professional subscribers may download the actionable note here:
Macerich Sensitivity Analyis - Pro. Adobe Acrobat Reader version 9 or better required.

Published in BoomBustBlog