Eye on Corus Bankshares (Part I)

| About: Corus Bankshares (CORS)

Corus Bankshares Inc. (CORS) is the holding company for Corus Bank, N.A., the Chicago bank that is a pure play on condo loans in bubble markets. Corus’ lending focuses almost exclusively on condominium projects including both construction of new buildings and conversion of existing apartments.

As of March 31, 2007, their $3.85B loan portfolio was 64% condo construction ($2.46B) and 25% condo conversion ($0.98B) loans.

To fully understand the CORS story, you need to be familiar with the adverse cyclical events that are affecting condo towers and conversions and will be persisting for several years.

Just as with single family residential construction, an astonishing proportion of people signing condo purchase contracts were speculators. Because there is such a long lead time before the closing of condo purchases, speculators can make highly leveraged bets on real estate prices far in the future.

After the last real estate crash in the U.S., and after the 1990's crashes in Asian markets, economics and finance researchers began modeling these purchase contracts as call options. This is strictly accurate only if the developer has no specific performance remedy for buyers who back out of the purchase (e.g. when the market crashes).

However, that is a common circumstance: the contracts usually call for the deposit to be the liquidated damages, and specific performance is difficult even when your counter party is not an overleveraged amateur speculator. (See also: As Condos Rise in South Florida, Nervous Investors Try to Flee)

Further, many of these contracts are contingent upon buyers being able to finance the purchases. But if there is a credit tightening associated with a real estate bust, then the speculators lose their financing and thereby have an assured "out" from any performance obligations.

(A related wrinkle occurs when buyers who want to close on their units can't, because the units no longer appraise for the sale price and the buyers can't get financing. This is an easy way for a tower project to fall into a death spiral.)

Anyway, under the "presale" model that developers use, the speculators get a call option (often underpriced), and the developer gets a unit "sold," which brings them closer to the threshold of sold units needed to close construction financing.

The 25% y/o/y real estate price increases combined with the high leverage of these implicit call options attracted legions of speculators. This led to increased development activity, and a positive-feedback loop was born.

Unfortunately, there is hardly any actual demand to live in these units at any price that will allow the developers - and possibly Corus - to be made whole.

Therefore, we find ourselves back in 1983, when the New York Times wrote "Auctioneer's Gavel Finally Moves Luxury Condominiums in Miami." That year, Miami condos sold at auction for "30 to 45 cents on the dollar."

As a percentage of funded balances of Corus' commercial real estate loans: Florida is 38% (Miami/SE FL is 22%), California is 16% and Las Vegas is 10%.

Which means that Corus' lending is concentrated in the most overbuilt bubble markets. In Miami-Dade County alone, 8,000 new condo units will be completed this year and nearly 12,000 more in 2008.

In Las Vegas, there are "4,214 existing [condo] units with another 13,409 under construction." Las Vegas also has a 16.5 month supply of residential inventory.

Jack McCabe talking about Miami condos:

When you drive by in the daytime, they are gorgeous, but when you drive by at night, there’s no furniture on the patios and only one light on out of 10.

Stay tuned for the next post about Corus' portfolio, already showing signs of trouble.

CORS 1-yr chart