Crystal River’s Q2 Write-Downs Could Bankrupt the Company 112 comments
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[Editor: Following review, we are republishing this article with two editor's notes and one clarification to the author's positions in stocks mentioned. Readers with differing opinions on this topic are invited to submit an article for publication.]
Crystal River Capital, Inc. (CRZ) is a leveraged financial entity structured as a Real Estate Investment Trust. I think that the company - within two to six months - will be insolvent and its stock worthless (and trade like other worthless REITS such as Thornburg Mortgage (TMA) for under 30 cents a share for awhile as it awaits delisting).
You might chide me for being Captain Obvious now for not speaking up about CRZ sooner. Predicting the demise of CRZ is not too bold a move, considering that its stock has plummeted over the past year, from about $25.50 to about $3.50. Nonetheless, one can still profit from buying puts on the stock as it falls to zero. The values of CRZ’s assets have fallen dramatically, but these declines are not reflected in its overpriced stock. Nor is the risk that the company could be suddenly wiped out by an inability to pay margin calls or meet its credit default swap obligations.
That swing has already happened, or very nearly so. I do not even think the company will be able to pay its next quarterly dividend [Editor's note: The author refers to the September 2008 dividend]. The market largely agrees, which is why stated dividend, if paid, would result in the stock having a yield of 34%. If the company does not announce that it is suspending its next dividend, its creditors will probably either issue margin calls or file a suit against the company to enjoin the dividend payment.
Balance Sheet Review
First, the company’s largest asset is available for sale securities, which it values at $271 million. The company took a big write-down on this part of its portfolio last quarter. I expect another large one when the company reports Q2 earnings and values as of 6/30/08.
Using the same method I used to estimate the write-downs in Redwood Trust's (RWT) portfolio, namely comparing similarly-rated segments of the CMBX to the securities in CRZ’s portfolio, I see CRZ’s CMBS portfolio decreasing in value from $271 million to $242 million. This is a somewhat larger percentage write-off than I am estimating for the CMBS portfolio of RWT. This is because RWT’s slightly older vintages of CMBS faired a bit better than CRZ’s newer CMBS.
Next is the company’s holdings of non-agency RMBS. Here, I estimate the company will report a $42 million write-down, again based on declines in the comparable ABX indices. While the CMBX and ABX are not perfect proxies of the value of CRZ’s MBS portfolio, many companies explicitly have disclosed that they rely on these indices in valuing their Level III assets, and in past quarters declines in these indices have closely mirrored the write-downs actually reported by CRZ and other public companies with these assets.
CRZ no longer owns agency MBS. These were once the largest part of the company’s portfolio, and its most stable liquid asset, which it was forced to sell in the first quarter.
In total, I predict a write-down of available for sale securities of $71 million. This is only slightly higher than the company’s first quarter writedown of these assets of $67 million.
Commercial Real Estate Loans
The company does not mark to market a portion of its commercial loan portfolio, but rather reports them at face value until it believes they are impaired. So far it has marked down the value of only one loan held at face value. In 2005, the company issued a “mezzanine” or junior loan of $9.45 million for the construction of luxury condominiums in Portland, Oregon. A few months later, the borrower fell into financial difficulties, and CRZ threw good money after bad and loaned the project more money at 16% interest. The project has stopped paying interest on the loan. In total, because of cost overruns, the average construction price of each unit is estimated to be $849,185. Thus its “wholesale” cost of condos in Portland as the country heads into a recession is nearly a million dollars!
“We believe that it is probable that we will not recover the entire loan balance,” the company writes in its latest 10-Q. No doubt! Amazingly, sales in the project appear to be going backwards. As of 12/31/07 CRZ reported that 47 of the 70 units had been sold. Now the figure is 35 sold and 10 “under contract.” It will be interesting to see the updated figure of 6/30.
After the borrower defaulted, CRZ took a $4.5 million write-down on the loan in Q4 2007 and then another hit $2.5 million in Q1 2008. It has $6.77 million left to lose. I expect, given the extreme weakness in residential real estate in Portland, that it will lose all of this money eventually and only the senior mortgage holder on this project will be paid from its proceeds.
Outside of this loan, CRZ has taken very little in the way of reserves for credit losses, despite the fact that these loans have a subprime average interest rate of 9.38% for junior loans and 11.98% for construction loans, showing the weak credit of the borrowers when the loans were made and/or the extreme degree of subordination of the loans.
What is the fair value for low-quality construction and junior loans made during the peak of the bubble on the open market these days? Certainly not close to the full value $50.7 million reported on CRZ’s books. $5.86 million of this is a junior loan on the Sheffield Building in Manhattan’s Hell’s Kitchen neighborhood, at 14.03% interest, and with $242.8 million in more senior debt as of 12/31/07. An article about the purchase in Real Estate Weekly, dated 1/19/05, noted that the sellers of the building were a “real estate family well known for its hesitancy to cash-out of properties” but were offered a price that was so high that it inspired “astonishment.”
The buyers won in a two-round bidding war that involved at least 15 other bidders. Unfortunately, about 11% of the units are going to have to stay “rent-stabilized” and can’t be sold until the tenants vacate, which in these types of situations doesn’t happen too often. Other troubles with the building that made news or blogs include protest marches, flooding lobbies, asbestos, and a buyer who had a “six inches in diameter and a foot high of solid concrete, [fall] directly into her tub.”
Why are the would-be Maklowes who bought the building so short on cash they are taking out loans at 14%? We’ll see if they default when the loan matures October of this year. In its held-for-sale real estate loan portfolio, the company took a $9 million write-down in Q1. I do not have enough information about this aspect of the company’s portfolio to venture an estimate on how it will be valued in Q2.
Commercial Real Estate
The company reports that as of 3/31/08 it values its commercial real estate portfolio at $233 million. Looking at rental revenues and related expenses, this is a reasonable - if somewhat aggressive - estimate. A better estimate of $210 million reflects the high cost of commercial real estate credit, the negative effects on rent of overbuilding office properties the past few years, and the deteriorating economic environment. I don’t know if CRZ is going to adjust the value of these assets downward, I suspect that, in line with past quarters, it won’t, except to account for depreciation. CRZ’s lenders, however, may want to consider the value of this property in determining whether to continue to loan the company money. I certainly would do so, and choose not to renew CRZ’s credit lines and issue margin calls to maximum extent the terms of the loans allow.
Going Out With a Bang or a Whimper?
CRZ reported equity of $132.6 million as of 3/31/08, or $5.33 a share. As of 6/30/08, the probable mark-to-market of the MBS securities portfolio will reduce that to $61.6 million, or $2.48/share. Another $2.5 million write-down on the defaulted condo loan in Portland would nick another 10 cents a share off book value, to $2.38/share. If the value of the CRE portfolio is just 10% lower than CRZ’s Q1 estimate, as I think it is, book value falls to a mere $1.44. Mark to market those high-risk junior loans (probably by 20% or more to reflect current conditions), and we are well under $1 a share.
The Q3 macroeconomic environment for commercial and residential real estate is looking like it will be to be much worse than Q2, which will mean additional write-downs and loan defaults. It wouldn’t take much to wipe out that last dollar of equity in the next couple months, assuming that it isn’t already already a negative figure. And with no profitable business model, a company whose stock has book value of less than 0 is worthless.
Instead of this “whimper” scenario of a relatively slow and graceful decline to below $1/share, margin calls on CRZ’s repurchase agreements or required cash payments pursuant to the terms of its credit default swaps may cause a sudden meltdown. New Century Financial, one of the first mortgage REITs to implode, closed on Friday March 2, 2007 at $14.65, but fell more than $10 a share the following Monday, closing at $4.56. Eight days later, it fell to 85 cents. Within three more weeks, the company filed for bankruptcy. Today the stock trades between 1 and 2 cents. The stories of the rapid downfalls of other mortgage REITs such as TMA, Luminent Mortgage (LUM), American Home Mortgage (AHM), NovaStar Financial (NFI), are similar, with the stocks collapsing 80% or more in a very short period of time.
Most of CRZ’s reported Q1 repurchase agreements were paid back in Q2 with the proceeds from the sale of its agency-MBS portfolio. That, however, still leaves $22 million in repo lines subject to margin calls. As the company notes:
As of March 31, 2008, our stockholders' equity was $132.6 million. If our stockholders' equity decreases below $100.0 million, we would be in default under these borrowing arrangements and … the lenders under those facilities would have the right to accelerate the maturity of the indebtedness.
My projection is that it will report soon that it is already well below $100 million. It’s possible the company will try some tricks such as writing down the value of its debt to stay above the $100 million mark, but there is only so much time to delay the inevitable. With a market cap well below $100 million, its clear that the market doesn’t think the company has that much equity. Last quarter 33% of the company’s write-downs were in securitized assets on its balance sheet, so this trick is still not enough to keep the company’s equity above $100 million given the extent of its likely writedowns.
Another problem that could suddenly bring down the company are its two remaining credit default swap [CDS] positions. The company closed out six CDS in Q1, losing $10.4 million on the transactions. The company’s exposure on these remaining defaults as of 3/31/08 appears to be $4.8 million. Losses in CDS have to be paid with cash to the counterparty, and CRZ had very little unrestricted cash as of 3/31/08. [Editor's note: See CRZ's 8K filings and Investor Presentation of April, 2008 (.pdf) for the company's statements of significant cash generated from Q1 asset sales.]
Conclusion
CRZ is going to report large write-downs when it reports Q2 earnings, which by themselves will cause it to violate minimum equity requirements on its repurchase agreements. This could cause the company’s sudden collapse. Even if this doesn’t happen, the company will have to drastically cut (for the second time) its regular dividend, if not suspend it entirely, which has also been the proximate cause of the collapse in stocks like CRZ with large MBS portfolios.
The price of CRZ stock has been rapidly falling the last few trading sessions. The time to get out of a long position, or start building a short position through the purchase of puts and the shorting of calls, is right now. At best, CRZ should be trading somewhere near an estimate of its book value, which is under $2 and dropping by the day as more and more homeowners and commercial developers default on the loans underlying CRZ’s mortgage portfolio.
Disclosure: Author is long CRZ puts, short TMA stock, short RWT stock, long RWT puts; no position in other companies mentioned.
[Editor's note: disclosure of author's RWT positions added 7/7/08]
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This article has 112 comments:
Regarding your disclosure ('Short TMA, Long CRZ puts, no position in other companies mentioned'):
Could you please confirm that you closed your short positions in RWT, a company you mentioned several times in today's article.
I'am asking because in your june 27 article (seekingalpha.com/artic...)
you disclose a short position.
Congratulations if you have closed it with a profit in the meantime, but could you please share the rationale with us, since RWT is still trading at 20 and you forecast a price of '8 to 4' by year end ?
Thank You,
Yomgui
Fatcat, FYI I'am long RWT: I don't share Greg point of view on this one and believe RWT has a significant upisde potential if you can wait a couple of years. It all depends on your time horizon I guess.
Liquidity could be an issue in buying puts, but when you're expecting short-term profits of more than 100%, it is not such a big issue.
I also sometimes hold puts until expiration, and then exercise them to create a short position. For example, most of my short position in FBR came from the exercise of 2.5 puts.
With these financial stocks, frequently all available shares to short were locked up a long time ago, and I don't think anyone is covering on companies like these that appear to be headed to 0.
Sometimes my brokers force me to close short positions shortly after they are created by exercising uncovered puts, but sometimes I am pleasantly surprised and the position is allowed to remain open even though the stock is not available to short.
First off let me say up front I'm a recent long in CRZ having bought 500 shares at the recent lows, so I don't have much at stake. But I have to admit this has to be one of the most irresponsible hit jobs I've seen on a company, in part because of the histrionics headlines and the reliance on dubious market indices to pronounce that the company is dead. I've never been one to question business journalists, but if you are off the mark and you start a self fulfilling "run" on the company's share price which doesn't come to pass, then I would strongly recommend that the SEC look into you and your short position.
I say this because your entire premise, and the criteria you use to try to justify your short position and implosion thesis for this company, is the prevailing value of market indices that arguably have been driven down by short players and may not accurately reflect the performance of the underlying assets. In other words, your thesis is not based on any official communication from the company, or their cash flows, but arbitrary market indices that may not reflect reality. The one premise that would lead to a NEW, AHM or TMA type meltdown is an immediate call on their $20 repo debt based on your view that ABX & CMBX related marks would trigger net worth covenants and generate margin calls on this margin debt. To wit, here are my major problems with your article:
1. It implies the company will implode in part because of the arbitrary, arguably manipulated, ABX index that may not reflect reality:
www.bankstocks.com/Art...
2. It implies the company will implode in part because of the arbitrary, arguably manipulated, CMBX index that may not reflect reality:
www.reitwrecks.com/200...
3. Your thesis does not reflect the fact that SFAS 159 allows the company to mark the CDO Liability debt to match the asset marks, thereby offsetting your draconian net worth scenario.
4. Perhaps most important, the company declared a 30cent divvy on June 17, suggesting that barely 2 - 3 weeks ago, they felt they were not only solvent but in a position to pay 30cents. DID YOU ATTEMPT TO CONTACT THE COMPANY BEFORE PUBLISHING THIS ARTICLE TO SEE WHY THEY WOULD DECLARE A 30CENT DIVVY 2 WEEKS BEFORE YOU TELL THE WORLD THEY ARE GOING BANKRUPT? Unlike your hit job on RWT which we hadn't heard from since May, I'm very curious how you get to a bankrupt scenario so soon WEEKS after they declared a divvy, when 2 weeks ago ABX & CMBX were roughly where they are today. In other words, If the company felt they were facing liqudity draining triggers based on indexes, why didn't they suspend the divvy on June 17. Doesn't make sense.
I clearly agree that CRZ has impaired assets and their value has dropped since 1Q. My problem is that you are able to broadcast dubious bankruptcy headlines on a public blog, based on quetionable market indices, without a response from the company, barely a couple weeks after they decaled a divvy. If your scenario turns out to be wrong, then at a minimum you owe the company's stakeholders an apology for using a well known public blog to push your short position.
Best Regards.
Jazz, whining about markets being "manipulated" while holding on to stocks that a dropping like rocks is a good way of losing money.
Your point about valuing MBS according to cash-flow models is off the mark because the question is, how long with those cash flows continue? In the case of the junior MBS tranches that make up most of CRZ's portfolio, the answer the market has given is "not much longer." As I noted in my RWT article, some of RWT's MBS have already defaulted. Further, the cost of finance for these types of companies is going to get higher and higher, while availability is going to get lower and lower.
You show you don't know what you are talking about if you think the ABX and CMBS indexes are being manipulated. I urge you to visit Markit.com to learn more about them. Even accepting this false assertion as true, isn't it better to be making the same bets as the manipulators, which you claim are short?
My prediction that CRZ won't pay its next dividend is simply based on the fact that its loan covenants require a certain amount of equity, and the payment of any additional dividends would send it below that requirement (assuming that it already isn't below it.)
Since I own puts and am not short the stock, I actually would prefer the company to make one final dividend payment, since that would reduce book value and thus stock price by about the amount of the dividend, if not more. But it is just not going to happen.
But if you want to go long on a holder of toxic junior mortgage securities just as an already weak economy is tipping into recession, by all means do so, that's your right.
Greg Weston,
Thank you for responding to my comments, but whether the ABX and/or CMBX are manipulated were the least of my concerns. My main concern is that you have a financial interest in the stock going down, and you use a well know forum to publish a hit job suggesting the company is bankrupt, 2 weeks after the company declared a 30cents divvy suggesting bankruptcy was not imminent.
Significantly, you did not point out this critical factoid in your article (The company declared a 30cent divvy 90% through the quarter when ABX & CMBX indices were not all that different from today). Nor did you explain to your readers why the comment would declare a divvy, any divvy, barely a few weeks before becoming insolvent. In the case of your RWT hit job the other day, the last time the markets heard from RWT was the divvy announcement in Mid way approx 6 weeks ago so much could have changed since then. In the case of CRZ, Mgmt had to have most of the 2Q numbers in when they declared on June 17, yet you did not let your readers in on this critical fact. The only reasonable explanation I can come up with is that either CRZ Mgmt is dishonest, they declared things were OK for a 30cents divvy on June 17 when they weren't, or they have simply lost their marbles and things were not in great shape on June 17 when they declared. Either way, the fact that you didn't share this important data point with your readers when you clearly have a negative agenda is disturbing. That hasn'nt nothing to do with market indices and everything to do with full disclosure.
Telling me you own puts rather than being short is a difference without a distinction and you know it. You have a vested interest in the stock going down. I would have considered you more credible if you would have explained to your readers how Mgmt could declare a cash divvy weeks before bakruptcy. By leaving that tidbit out, I question your motives and it's a shame Seeking Alpha allows this without closer vetting and scrutiny. As I said, if you are wrong, you will owe a lot of people and apology at a minimum.
Best Regards.
If you are substantively wrong, and I suspect you are, I hope you are sued and prosecuted. This is not journalism. This is a hit piece. Even Cramer knows enough to not have a position in something he comments on.
And if I were I wouldn't want the SEC to be reading your comment on being pleasantly surprised when your broker allows you to keep what you know to be a naked short position open. You've just admitted to selling something you know that you neither own nor have borrowed.
Dumb.
Even if they are cash flowing?
Oh and a couple more points:
1. You appear to be assuming CRZ isn't generating the REIT income from it's assets to pay the divvy. That doesn't make sense either. Sure, paying divvys reduce GAAP book value. But that assumes the business isn't generating cash to pay it. You do realize cash from operations INCREASE book value don't you.
2. You do not fully adddress the SFAS impact on their Liabilities and that is raising my antenna as well. Effective Jan 1, 2008, companies are allowed to mark their Liabilities to match their asset marks. If so, then it is possible these markdowns you talk about which trigger net worth covenants are at least partially offset by corresponding Liability marks.
I see that you are a lawyer, but do you fully understand basic REIT Accounting. Not only did you leave out info on the company's June 17 divvy declaration, you make some dubious statements about divvy payments affecting BV without pointing out cash from the business increases BV, and you did not clearly discuss how SFAS 159 Liability marks affects your thesis.
This gets curiouser and curiouser. If you do get the SP dump you are looking for and get to cash in your puts in a big way, I hope you are able to look in a mirror if you are wrong and it can be proven you maliciously deceived investors by ommitting critical and germane information.
I don't have a vested interest in this stock or options so take it for what it is worth. I'm glad to see that you have put $ on the table and it looks like Greg has too. The beauty about markets is that we won't have to wait long and we'll find out who did some great analysis or got lucky, or both.
1) CMBS or ABX indicies manipulation -
Please, if anything these indicies are too conservative in their valuations and don't reflect real values at all. Why do you think LEH, UBS, MER, and others continue to tell us that "WE'RE ALL DONE WRITING THINGS DOWN" - yet continue to write down assets..... in the case of the ABX - those are significantly impaired and in the case of CMBS - just wait a few months and those will really come off as office lease rates and rent rolls begin to fall.
2) Your comments remind me of the guys that owned TMA right before it was blowing up. You suggest that the REPO debt wouldn't or couldn't be subject to being pulled..... wake up!!! IB folks, banks, and other liquidity providers are pulling lines all over the place. Just look at the PENN National Deal (there were many reasons why it didn't go, but one was that funding appearing to be backing out). Why hasn't there been a high yield issuance in Europe this year? CREDIT IT TIGHT and banks don't want to give it to potentially risky counterparties.
As I mentioned, I don't have a dog in this fight, but it sounds like you are way, way too defensive for someone that only has a 500 share stake. I will predict that the CMBS market rolls over (with or without manipulation of the CMBS indicies) and your 500 shares won't buy you a cup of coffee in 12 to 18 months.
Best of luck.
Ironic isn't it?
seekingalpha.com/artic...
Ex15,
You claim you do not have a dog in this fight, yet you know enough about me to conclude I have more than a 500 share stake. How prescient of you. I just started a small position and I'm looking to accumulate a lot more at these prices. But I don't want to accumulate shares in a company that is going bankrupt. Morever, I have a pet peeve about full disclosure on a public blog when the writer has something at stake, and the company in question cannot respond right away.
Look, I've been a stock market investor for 30 years, and a real estate/REIT investor for about 10 years. I am well aware what the sector is facing. The headwinds are unmistakable. I also realize there are conflicting opinions about ABX, CMX and related indices and the underlying default rates that are actually occurring.
Howvere, I am well aware that anyone can use public forums like these to make money, so my problem is FULL DISCLOSURE. In other words, the author left out 2 critical tidbits of information:
1. An explanation for why would the company declare a 30cents divy weeks before beoming bankrupt; and,
2. Why didn't the author fully disclose the impact of SFAS 159 - ie Would CRZ be able to offset the negative asset marks
CRZ may very become insolvent at some point, but that wasn't my key point. Since he doesn't want to answer those critical questions, and you are willing to defend him, how about if you answer those 2 critical questions on his behalf.
The smart REITs are mostly sitting on their assets, writing new high quality loans if they can, and erasing repo debt, if they haven't already, as fast as they can. That's what you seem to miss in your statements about CRZ. They deleveraged for a reason: to get rid of debt so they could ride this out. That's what said when they did it and that's what they appear to have done.
I could be wrong on that. I won't know until I see the 2Q (and maybe even 3Q) results, but I'm not going to jump off a cliff (as you appear be doing) without hard data in hand, and you clearly do not have the data to support 3/4's of what you say in this article, which is incautious in the extreme.
Smooth has a position (as do I), but I've seen comments from people without positions in other places that say, in substance, "this article makes me sick". You don't need a motivation to see this article as a wrongful hit job that is the extreme of everything that is wrong on the market right now. It simply is.
If CRZ goes below two next week without any other news, you will probably have succeeded in setting the amount of a damage claim against you. You are a lawyer. You should know better. I'm not even a lawyer and I know there are precedents that don't favor your position.
The pattern of 3 very negative Seeking Alpha articles on small companies where he holds a short or long put position is the most revealing pattern of all.
It may not be but it has the appearance that the prime motive is personal gain.
"1. An explanation for why would the company declare a 30cents divy weeks before beoming bankrupt"
So you think companies that are doing very poorly never try to make it look like everything is honky dory? Besides the obvious reason of "keeping up appearances" I can give you two other plausible explanations.
(1) suspending the dividend would cause the stock to drop at a time when management is considering an equity offering.
(2) if the company is clearly on its way to insolvency or already there, paying a dividend is a way to return money to shareholders rather than creditors. In this sense the company was acting in the best interest of its shareholders by paying a 30 cent dividend, despite its gigantic Q1 loss.
Again, I hope the company does pay a dividend, because it will decrease the stock price by about the amount of the dividend. If I were short I would be indifferent since the stock would go down but I would have to pay the dividend, however holders of puts do not have to pay for regular dividends.
"2. Why didn't the author fully disclose the impact of SFAS 159 - ie Would CRZ be able to offset the negative asset marks"
I devoted a full paragraph to this. Try reading the article again.
www.russell.com/indexe...
The owner of the Russell 2000 and 3000 ETFs is Barclays Global Investment, which in turn owns 678,644 shares of CRZ as of 3/31/08.
I know some people trade on additions/deletions to the major equity indexes. Maybe someone who does can comment further on this, but it seems to me that some passively managed funds that are big holders of CRZ are going to be selling hundreds of thousands of shares when the deletion becomes official.
I am surprised of your recommendation, "do not go long anything in real estate now - to wait at least a year." I find it odd that with the number of analyses you and your associate, Tim Haag, apparently do, that absolutely nothing in this secotr suggests a long position. Is not a glass ever half-full?
I also find it suspect that your recent prior posts regarding RWT and FED were both made after the markets had closed; first on a Sunday and then on a Friday when you had a, "captive readership."
Most importantly, why are you sharing your "insight and helpfulness" to investors you have absolutely no relationship with. Law school, and certainly Harvard, does not teach this.
It does not require a lot of gray matter to understand your true motivation: quick, personal financial gain. Perhaps, ego may play a minor role. Then again, since you are on your own with a new firm, maybe the need " to get business" is also a motivator.
Shakespeare said it best about your blogs, "me thinks thou doth protest too much."
So as to avoid some of the heat you have generated, you quickly posted a few minutes ago that CRZ would soon be excluded from 2 of the Russell Indexes and that will account for future near term selling.
Sorry, you are a week late. The exclusion from these indexes was effective Friday, June 27th. So any sell-off resulting from that has already occurred.
You seemingly will write anything to achieve the result you want. My gift to you - take a course in ETHICS.
I am long some individual tech growth plays such as China Mobile, long the S&P 500 and TIPS via my 401(k), and long the Swiss Franc (FXF).
While I obviously don't think all real estate companies are overvalued, most are, and I have yet to find one worth investing in.
"1. An explanation for why would the company declare a 30cents divy weeks before beoming bankrupt"
So you think companies that are doing very poorly never try to make it look like everything is honky dory? Besides the obvious reason of "keeping up appearances" I can give you two other plausible explanations.
(1) suspending the dividend would cause the stock to drop at a time when management is considering an equity offering.
(2) if the company is clearly on its way to insolvency or already there, paying a dividend is a way to return money to shareholders rather than creditors. In this sense the company was acting in the best interest of its shareholders by paying a 30 cent dividend, despite its gigantic Q1 loss.>
Greg Weston, Regarding your 7/4, 9:44pm post:
So let me get this straight: This company would knowingly go ahead and declare a dividend on Jun 17, 2 weeks before it was insolvent, because it was in the process of raising money via an equity offering and was acting in the interest of shareholders in spite of a huge 1Q loss???? Good god. You do realize that the divy is paid out of REIT income (Which was 63cents in 1Q and does not include MTM losses) not GAAP income, which reflect MTM losses correct. Your answer makes absolutely no sense.
Furthermore, your minor blurb mentioning SFAS 159 near the end of the article does not address the question I was asking: Whether CRZ will be able to mark their CMBS & RMBS related CDO debt to offset the asset marks you are saying will bankrupt them. You barely touch on this by noting "the company will try some tricks such as writing down the value of its debt" at the end of your piece without really discussing SFAS 159 at all and how it may affect your thesis.
Finally, and perhaps most important, did you have a chance to review the "First Quarter 2008 Update" slide from the following presentation before you published your CRZ is bankrupt article. If so why did you not tell your readers they raised $45M in April by selling assets and freed up another $52M.
files.shareholder.com/...
You will note on that slide, the company stated:
1. It raised net cash of $45M from the sale of its Agency MBS
2. It freed up $52M on their funding line
3. Has $100M of unencumbered assets as of mid April
And you claim they are going bankrupt 8 weeks after saying this? Are you stating flatly this Mgmt team is lying when it said it raised $45M in cash and freed up $52M in funding as recently as April? Mr Weston, Did you thoroughly research this company before publishing this article or is this a get rich quick scheme. If you do cash in your puts for big bucks and your article turns out to be sloppply written and proven false, I hope you eventually have to cough up your profits somehow someway.
Due to fundamental shifts in the US economy things like financials, real estate and builders are in for a long brutal decline. Apparently many have trouble handling a falling market; like Smooth Jazz they lash out at the bearers of bad news. Smooth Jazz, get a grip, Greg doesn’t have the power to make or break a stock; if you are so confident in CRZ, he has merely given you a chance to increase your position at a lower price.
Greg, great call on FED; and this from a Michigan graduate.
Fatcat,
Cut the BS. This isn't about you, RWT or some imaginary Wall Steet mind police. This guy could be the sharpest guy in the kitchen. Or he could be a sheister looking to cash in some puts for a quick buck. I agree it would be tough to put the guy in jail without absolute proof, but he did leave out 3 critical points from his article which would call into question his entire thesis:
1. The company gave a presentation barely 8 weeks ago where they said they freed up approx $100M (cash & a credit line) via the sale of their Agency MBS. Why didn't the writer mention this. Or explain how a company that just freed up $100M in liquidity in April and had only $20M in callable repo debt is insolvent by the end of June.
2. He doesn't satisfactorily explain why the company would declare a 30cents divvy on Jun 17, 2 weeks before he claims they are insolvent. Telling me that Mgmt is just dishonest without proof doesn't cut it. Perhaps they have the liquidity to pay the divvy given they just freed up $100M (See Point #1 above), and his "Mgmt are crooks because they want to pay the divy to shareholders and not creditors before they go bankrupt " (See his 7/4, 9:44pm response) makes absolutely no sense.
3. He doesn't discuss how SFAS 159, which allow companies to mark their CDO debt to match asset writedowns, would call into question his entire thesis by allowing CRZ to offset the CMBS & RMBS writedown he is estimating will bankrupt them with similar debt writedowns.
I do not have much skin in this game, but the more I think about this author's ommisions, non explnanations and duplicity, I get more disturbed when I see that he is trying to use a well known blog for financial gain, without the company having an opportunity to respond beforehand. Yeah, He's safe alright! He could always use the "I was careless" explanation long after he has banked his puts.
I'm going to put this simply. People have, in the past, paid huge fines and gone to jail for this kind of article and, especially, the admission he made about knowingly naked shorting shares. Its not easy. The SEC, by its own admission, doesn't have the tools to attack illegal naked shorting, but you can make it easy for them. Hedge funds don't make it easy. I won't tell you how they don't make it easy. It appears that Mr. Weston has made it easy, and in a very public, even flamboyant set of articles that say "look at me".
The feds may not have the tools to attack illegal naked shorting, but they are looking for scapegoats that they can take down. Nobody can stop the behavior right now, but they can discourage it, and Mr. Weston really has painted a target on his forehead. They may not have the tools to do everything they'd like, but they do know how to track down brokers, gather evidence, and line up a brokerage statement against a set of very public articles and to recognize really damning evidence. I'll tell one thing that Greg wouldn't want any jury to look at: the smirking picture he uses at the top of his articles.
As for the issue of libel/slander, there is existing legal precedent for such suits against individuals by businesses for on-line statements. Businesses have won in the past where a malicious intent has been established. Seeking alpha may (and I stress may) be protected by those precedents, but it does have an editor and looks more like a newspaper (where precedents that extend liability to the publication have long been established) than a bulletin board (where the service provider is protected so long as they don't pre-screen messages and make appropriate deletions when requested).
I'm not making this stuff up and I'm not threatening at all. Mr. Weston appears to have gone on a self-serving crusade of sorts. I'm sure he has another real estate financial in his sights for next week. I'm simply indicating that the self-serving element of his articles, combined with the patent lack of research that Smooth Jazz (a extremely good analyst in my view) has documented, sets up the possibility of some serious legal consequences.
theskeptic,
Stop patronizing me, and insist that the writer answer the basic questions. I know full well the sector stinks and that CRZ's business model is currently broken primarily because they cannot easily raise money in these turbulent credit markets. I also know the difference between a CRZ, which as of April funded 98% of its income with long term, non recourse CDO funding, and NEW/AHM/TMA/etc. which funded their entire business with repo, margin debt and taken down when lenders called in that debt.
The author needs to answer one basic question for me to consider him anything but a huckster using a well known public forum to make a quick buck: How can a company which had $100M of liquidity and about as much in encumbered assets as of April (See "First Quarter 2008 Update" slide from the following presentation) suddenly implode and go belly up when it only has $20 in repo debt. This makes absolutely no sense and it is disturbing he did not let his readers know about the company's actions in April to shore up liquidity. This has nothing to do with a "falling market" or "fundamental shifts in the US Economy" and very much to do with the veracity of one writer with an agenda who leaves out pertinent facts in his thesis.
files.shareholder.com/...
Maybe Mgmt is dishonest and lying. It is also possible the writer did not properly research or due adequate DD in this one instance, his other "good" calls, including FED, notwithstanding. I will not go as far as to call him dishonest. Yet.
Greg Weston,
You have got to be kidding me. You are posting articles about companies going bankrupt, and you make such a grevious error. The Russell deletions occurred on June 27 (You're more than a week late), and most of the selling was done PRIOR to that date so that Russell based index funds are out of the stock by the day of the deletion. Good grief. That blatant error about the Rusell rebalancing suggests maybe you are careless and might not do exhaustive research all of the time.
mreits.blogspot.com/20...
As for your most recent comment, I couldn't care less whether you respond to my legit questions or not, but I can almost surely guarantee you this: If you profit from a situation where you were careless and you turn out to be wrong, you will need to explain to someone how you excluded from your hit piece the convenient fact that the company reported approx $200M in available liquidity in an April 8K ($43M cash from sale of Agency MBS, $50 availabale funding line and $100M in unencumbered assets) when they only had $20M+ in repo debt.
I got a feeling that this one will end nasty given the vast difference between your bankruptcy storyline, and the company's reported $200M liquidity backstop. If Mgmt turns out to be sheisters, you're home free. But if you were wreckless and wrong, responding to legit questions from board "trolls" will be the least of your worries.
Peace out.
and a company that reported $200M in available liquidity
Here's one from Davis where he notes he "tripled his position" in DFR, when the stock was above 3 (but after dropping from 7 the previous week). Less than two weeks later the stock was below $1.
messages.finance.yahoo...
"Smooth Jazz" was posting for years in defense of NFI, which is down more than 99.5% from the prices where he was pumping it up.
messages.finance.yahoo...
A few more minutes with Google with find many more examples.
They appear to be committed to going down with the ship yet again on yet another failing REIT. That's their right, but discount their arguments accordingly.
My long is doing fine, thank you. I should note that people are fined and sometimes do time for engaging in fraud on the long side as well.
That is the key point here. A naked short is a fraudulent transaction. So is selling overselling a position on the long side. But shorting has a special problematic status; so much so that it is completely illegal (even at the level of borrowing) on some markets. No long position ever caused a depression, but excessive shorting has been regarded as a key cause of the great depression ever since it occurred. Indeed, the SEC was created specifically to reign in shorting and excessive margins. It did a good job with this until the late 90's, but lax enforcement has allowed things to go deeply out of control.
Mr. Weston has made claims to being an honest reporter analyst, but has ignored a large amount of evidence and and misrepresented the small amount of evidence he did have. There may indeed be a problem with the property in New York he mentions, but there may be no problem at all. Surprise at the size of an offer does not translate to a failed loan. He quotes the seller without offering the buyers perspective or information. Beyond that he offers two properties, one clearly failed and one not, as exemplars for what will happen to the rest of CRZ's portfolio. He may be right. Heck, it might even happen in two weeks or two months. But he has not offered anything close to the level of evidence necessary to make a claim of imminent bankruptcy and ignored a great deal of evidence that suggests the opposite. Worse, his time frame explictly ends at options expiration and before quarterly reporting. He has engaged, in short, in well established logical errors, and at least gives the appearance of having done so with the intention of profiting from the misinformation.
When, pressed, he offers no reasonable defense at all, but labels the posts made here as "bile". In short, he simply doesn't get it. All the information I offered is well supported in legal precedent. All the information smooth offered is high quality. I don't see any bile in any post here (although I've seen some elsewhere). Mr. Weston has simply failed to do his research, and I won't be surprised to discover that he hasn't really done his research on FED or RWT either. The stock price offers no evidence on this, as it is far too easily manipulated. Only the quarterly reports of these companies will give us any clear sense of what is happening. One hopes that those who have shorted or written puts on these companies have the wisdom to cover their positions before the quarterly reports come in.
As I indicated to Wes, my long positions are doing fine. Some are not doing so well right now. Others are quite profitable.
I would note, however, that in this market, there are very few profitable positions at the moment. A long position is evidence of nothing but a willingness to take a long view (several years at this point) and a willingness to build capital rather than destroy it.
I could be wrong, but I believe you have grossly misrepresented CRZ. If you have, and the price goes down anyway, I will almost certainly profit from your misinformation over the long term, but lots of other people will not. Some will actually believe what you say and sell, turning unrealized losses over the long term into realized losses in the short term.
The women who suggested that you take a course in Ethics was not wrong. You are creating harm. You will probably prefer to label that as bile. Lets just say you won't find many people who agree with you when presented with the facts.
A few more minutes with Google with find many more examples. They appear to be committed to going down with the ship yet again on yet another failing REIT. That's their right, but discount their arguments accordingly.>
Greg Weston,
Tocuhy, Touchy are we. I was about to leave your forum for good but couldn't resist.
A few more minutes with Google with find many more examples. They appear to be committed to going down with the ship yet again on yet another failing REIT. That's their right, but discount their arguments accordingly.>
Greg Weston,
Touchy, Touchy are we. I was about to leave your forum for good but couldn't resist. WHAT DOES MY POSTING HISTORY FROM A FEW YEARS AGO HAVE TO DO WITH THE POSSIBILITY THAT YOU ARE PERPETRATING A FRAUD BY NOT TELLING YOUR READERS THE COMPANY YOU SAY IS INSOLVENT HAD $200M OF AVAILIABLE LIQUIDITY AND $20M IN SHORT TERM DEBT AS OF A MONTH AGO.
Yeah, tell your readers to GOOG smoothjazz0204 on Yahoo. They may see upwards of 20 profitable trades in companies such as NFI, NCT, JRT, RAS, RSO, MCGC, LEND PFD A, NRF, ABR, etc, over the past few years. Like I said earlier: You left out critical liquidity information about CRZ that has nothing to do with me, and now you are in a dither and lunging at straws now that you been called on your omission.
If I were you, I would spend less time on GOOG and more time coming up with an answer regarding why your bankruptcy hit job did not mention up to $200M of liquidity identified by the company in April. I would also look to profit from your puts while your hit piece is "hot".
Peace out.
Greg,
Your readers should feel free to GOOG davisfoulger on Yahoo as well. I don't cover nearly as much territory as smooth, but we share something in common. We analyze stocks and look for good value based on that analysis. I really couldn't care less where this stock or any other is in two weeks or two months. I care about two to three years from now or longer.
I see pumpers come through the boards I participate on a fairly regular basis. I generally challenge them. I see bashers come through the boards I participate on a regular basis too. I generally challenge them as well. In this market, at least, pumpers don't seem to care much, but bashers often label folks who are just trying to do good analysis as pumpers. Bad news. The world is not dichotomous. People don't become pumpers just because they challenge your incomplete analysis.
In this market, at least, just using the term "pumper" to describe smooth or I says more about the bias you brought to your article than anything else you've said. People who look at my history will find a fair bit of balanced analysis, especially relative to the kind of short term weather forecast you are making. You would do well to find a little balance, yourself.
I think you are wrong, and have misread and misrepresented much of the current status of CRZ. I don't think you have done this purposely, but I think you are trying to be self serving.
Your credentials for education are impressive. However, you have no proven credentials in investing. You do have a blog that you started in February, and have written three articles on Seeking Alpha.
I post alot on the boards also, and have large positions in preferred shares and trade some of the common. I do not have a position in CRZ - yet. I did just sell puts last week as I think they have significantly strengthened their position with reduction of debt and have the ability to hunker down for awhile.
I read where you think they are paying the dividend to get money to shareholders before they go under? I believe as an attorney that you know this would be fraud.
Dividend payout is already in the stock price. In fact once they do pay, CRZ will probably bounce up.
Dividend payout is already priced in. In fact, once they pay the stock will probably bounce.
Again, I hope the company does pay a dividend, because it will decrease the stock price by about the amount of the dividend. If I were short I would be indifferent since the stock would go down but I would have to pay the dividend, however holders of puts do not have to pay for regular dividends.
Relax - 7/5, 9:37pm:
Dividend payout is already in the stock price>
Glad other people are noticing how careless this writer is. He appears to be completely oblivious to the fact that CRZ just declared a 30cent dividend a few weeks ago, and already went XDividend on Jun 28. Maybe that explains why he shrugged off my "Why did the company declare a divvy on Jun 17" question with unintelligible babble about company officers being crooks. Perhaps he wasn't aware they just declared a divy and that is why he didn't mention it in his article.
Just like he when he mistated when the Russell delisting would occur. These misstatements and omissions from his article are starting to pile up. As more people comment and call this guy out on his sloppy and self serving work, more people will take notice and it WILL eventually have an impact if enough people catch these errors.
We regards to this piece....Never Trust a Lawyer!" period! The idiots who follow this kind of hit piece are as bright as the writer which as Smooth and other have pointed have little knowledge in investing and obvious agenda in accelerating the fall of the stock price.
What is funny to see are the couple of follower that Weston as accumulated in past few months. It just shows the depth of people's knowledge when they can not relate the fall of other stocks mentioned by Weston from few months ago as lot more to do with the overall meltdown of the US stock market in the past month but yet a point for Weston that he must of known what he was talking about. Amazing!
Weston, I hope you get investigated if the herd of sheep that follow you can actually affect this stock on Monday. I will certainly be watching and if so, I will make inquiries to SEC on you.
Good luck
P.S. I do not have any holdings in CRZ or other stocks Weston has put a hit on.
Can you believe the hubris of this guy?? He said that to me when I asked him the "Why would they declare a 30cents divvy if they were going bankrupt" question. I think he is getting a little too arrogant after his takedown of RWT. This CRZ hit job was too blatant.
I tend to be very level headed on these things. I've seen quite a few negative articles like this in nearly 30 years of investing, but the ones I've seen at least pretend there is a counter argument to their thesis. The obfuscations, ommisions and dubious facts in this CRZ article are so disturbing, that I have for the first time decided to simultaneously write to the Seeking Alpha editors, The SEC TIPs line, CRZ Investor Relations and Brookfield Investor relations (See below).
This guy may yet laugh all the way to the bank with this dubious hit job, but, at a minimum, I want him on the radar of a few folks. Peace out all.
messages.finance.yahoo...
messages.finance.yahoo...
CRZ Article 7/4 by Greg Weston
From: smoothjazz@msn.com
Sent: Sat 7/05/08 9:34 PM
To: contact-editorial@seek...
Hello There,
I am very disturbed by a 7/4 article written by Greg Weston entitled "Crystal River’s Q2 Write-Downs Could Bankrupt the Company" because he left out some key points that would be germane to his readers. I have no problems with writers on your blog posting negative articles on struggling companies in out of favor sectors. I also have no problems with your writers having a vested financial interest in the articles they post. What I do have a problem with is the veracity of writers who leave out critical information in their articles that run counter to their thesis, especially when they can profit handsomely when the stock falls.
My problem with Mr Weston's article is two-fold:
1. The author failed to disclose to readers CRZ recently raised $100M via the sale of their Agency MBS portfolio and had another $100M of unencumbered assets. This is significant because as of June 2008, CRZ had only $20M in callable, margin debt that could easily be paid down with their current liquidity. Unlike TMA, NEW & AHM which all went bankrupt in an instant because they financed their business with $billions of margin debt, CRZ doesn't have that problem. Please see the "First Quarter 2008 Update" slide below:
files.shareholder.com/...
I find it truly disturbing that he would not mention that perhaps as $200M in CRZ avialable liquidity in an article about bankruptcy. Was this a lack of research on his part or something more nefarious? He has not responded to my question about why he left out their recent liquidity moves in the comments section of his article. If he cashes in his puts for big profits if the stock tanks and his thesis was wrong, I suggest he be prepared to answer the question.
2. When I asked him why a company would declare a 30cent dividend a few weeks before he claims they are insolvent, he responded with the following (Please see his reponse in his 7/4, 9:44pm post):
seekingalpha.com/artic...
"So you think companies that are doing very poorly never try to make it look like everything is honky dory? Besides the obvious reason of "keeping up appearances" I can give you two other plausible explanations.
(1) suspending the dividend would cause the stock to drop at a time when management is considering an equity offering.
(2) if the company is clearly on its way to insolvency or already there, paying a dividend is a way to return money to shareholders rather than creditors. In this sense the company was acting in the best interest of its shareholders by paying a 30 cent dividend, despite its gigantic Q1 loss."
In other words, his reponse is Mgmt is dishonest.
In conclusion, your site has become very popular for investors looking for BOTH short and long ideas. But NO site can prosper if it is demonstrated that contributors with a financial interest deceive investors by only presenting "part" of the story.
Best Regards,
Smooth Jazz
With respect to your recent article concerning CRZ, it would seem the author and the editors, who are charged with guaranteeing “quality and consistency” along with “standards of rigor and clarity,” have failed to live up to their responsibilities.
The fact that you publicly list in your criteria for publication the following concern, “Does the article help a fundamentally-oriented investor decide whether to buy or sell the stock in question,” suggests you are not only aware of the impact such articles might have on the share price of a particular stock, but that you make such an impact a requirement. When you further state, “does it provide meaningful information about or analysis…” you are suggesting your standards of “rigor and clarity” require information and analyses to be “meaningful” in the strictest sense of the word given their potential for impact. I believe you have blatantly failed to live up to your stated responsibility and will be reporting your publication to the SEC.
Further, I do not believe the first amendment allows someone to yell “fire” in a crowded theater without basis, nor do I believe it allows someone to yell “bankruptcy” in a crowded investment community without basis. That is, both acts of irresponsibility may lead to considerable personal harm to bystanders.
The company has publicly stated they will not go bankrupt. The company has publicly stated they have $100 million in unencumbered assets, the lion’s share of a $100 million credit facility available, and have deleveraged to the point that they are now looking “cautiously” for opportunistic investment.
The article published on your web site has been termed a “hit job” by many readers. There have been numerous objections to the article ranging from a lack of full disclosure to a lack of consideration of many of the essential elements that should be a part of any “rigorous” and “meaningful” discussion of the threat of bankruptcy.
It appears the writer stands to profit from a falling share price on Monday.
If my stock goes down on Monday, I will be forced to consider a class action law suit against the owner of your site, the author of the article, and those members of your editorial staff who were in a position of authority as responsible gatekeepers for the content published on your site (and possibly those who advertise on your site).
> Predicting the demise of CRZ is not too bold a move considering that its stock has plummeted over the past year, from about $25.50 to about $3.50.
A minor logic error, but significant, as it is his first (and I would argue strongest argument). A stock price has no relationship to a companies ability to withstand a stock market downturn. Many other factors, including available cash, debt position, and cash flow, have a great deal more bearing on the question. Realistically, CRZ has taken a hit in a cyclic sector downturn. Many companies with good cash flow and a minimal debt position have not only survived such downturns but risen to achieve substantial returns for shareholders. CRZ has both. Greg acknowledges neither in the remaining article.
> The values of CRZ’s assets have fallen dramatically, but these declines are not reflected in its overpriced stock.
Here the author ignores an important data point. The company announced a strategic change at the end of 1Q and made a management change consistent with that strategic change. They decided to de-leverage, to sell off assets and reduce debt (note that I've already marked "debt position" as something that is important to survival in this market). They announced in advance that would sell assets and that income would fall as a result. They predicted that the de-leveraging would reduce the dividend by about half, to 30 cents (which suggests that the sale of assets would reduce taxable income by half). The stock has fallen substantially since that announcement, the 30 cent dividend, and the stocks deletion from the Russell 2000. None of these factors play in Greg's analysis. I won't comment on the possible hyperbole of the "overpriced stock" comment beyond noting that, based on the information I've already provided, that the market has in fact, priced a large drop in CRZ's assets into the price. We won't know how inaccurate until the 2Q results are published, but the stock has a 35.8% yield (something Greg notes in the article) and facts I will supply below suggest that the company currently has a book value that may be as high as $6.40/share (a possibility that Greg directly contradicts based on outdated data, but more on that below). Hyperbole may not be material inaccuracy, but the hyperbole is not, in fact, supported by facts in evidence, as we will see below.
> Nor is the risk that the company could be suddenly wiped out by an inability to pay margin calls or meets its credit default swap obligations.
CRZ explicitly sold assets with the stated intent of reducing this risk. We won't know until the 2Q results are announced how good a job they've done with this, but other REITs have reduced or eliminated repo debt with similar strategies and there is at least one substantial indication that CRZ has as well. Here I refer you to slide six of the an April 8 SEC filing (files.shareholder.com/...) in which CRZ purports to have reduced its repo debt from $1.2 billion to $28 million, well within the $100 million of unencumbered assets that the company claims on the same slide. Here we have a clear material inaccuracy which Greg proceeds to compound.
> I do not even think the company will be able to pay its next quarterly dividend.
CRZ has already announced its next quarterly dividend, a fact which is absent from Greg's presentation. That dividend has already gone ex-div, which means it is already off the books and in a restricted cash account. It pays the dividend on July 28. Dividends can, of course, be cancelled, but readily available information suggests that this statement is materially inaccurate. If, by chance, he is referring to the 3Q dividend, he simply does not have the information on which to base such a claim. The date of the 2Q results announcement hasn't even been set yet, but those results will provide the first real view of any data that might support or refute this claim.
> The market largely agrees, which is why stated dividend, if paid, would result in the stock having a yield of 34%. If the company does not announce that it is suspending its next dividend, its creditors will probably either issue margin calls or file a suit against the company to enjoin the dividend payment.
This is an extreme claim that Greg no basis for making, as he has no idea what creditors remain, who they are, or what basis they have for filing such a suit. We know that as of April 8, that repurchase debt had been reduced to $28 million. We known that the 2Q results will provide some transparancy on the issue, but slide 8 of the presentation cited above provides additional insight into what we may see 2Q. The total of all repo debt, including funding facilities (reduced from $80M to $48M) and repurchase agreements (reduced from $1.2M to $28M) is $76M, well within the companies available assets.
Smooth Jazz challenges this in another important way: "You appear to be assuming CRZ isn't generating the REIT income from it's assets to pay the divvy. That doesn't make sense either. Sure, paying divvys reduce GAAP book value. But that assumes the business isn't generating cash to pay it. You do realize cash from operations INCREASE book value don't you." It is fair to presume, based on the dividend alone, that CRZ is in fact generating income sufficient to pay its dividend. Greg presumes the opposite.
Indeed Greg later responds to this aspect of Smooth's critique by presuming criminal intent on the part of CRZ management: "So you think companies that are doing very poorly never try to make it look like everything is honky dory? Besides the obvious reason of "keeping up appearances" I can give you two other plausible explanations. (1) suspending the dividend would cause the stock to drop at a time when management is considering an equity offering. (2) if the company is clearly on its way to insolvency or already there, paying a dividend is a way to return money to shareholders rather than creditors. In this sense the company was acting in the best interest of its shareholders by paying a 30 cent dividend, despite its gigantic Q1 loss." sbgicon icon calls him on this: "I read where you think they are paying the dividend to get money to shareholders before they go under? I believe as an attorney that you know this would be fraud." This fraud allegation occurs within the article as well.
> Balance Sheet Review
Much of the balance sheet review is an estimation of the value of CRZ's portfolio based on a comparison with the CMBX and ABX. This is a questionable methodology for a number of reasons. Chief among these reasons is that it applies the general to the specific. Even if one were to assume that the CMBX and ABX were accurate, some companies would have better quality loans and some worse. Without data (especially the 2Q data), Greg is not in a position to assume which end of this spectrum CRZ (or RWT, to whom he applied this methodology previously) is at. The accuracy of the the CMBX and ABX is open to question, however. See, for instance www.reitwrecks.com/200... and www.bankstocks.com/Art... (references which I've read previously and Smooth Jazz provides in the comments). Both of these articles are based on hard data. Hard data to assess Greg's article won't be available until 2Q, but the data available suggests he is wrong.
Greg is using a methodology (both in this and the RWT article) that is likely to be materially inaccurate. As Smooth Jazz puts it in his comments, these indexes are "arbitrary, arguably manipulated" and "may not reflect reality." Smooth also correctly notes the effects of "SFAS 159", which "allows the company to mark the CDO Liability debt to match the asset marks, thereby offsetting your draconian net worth scenario." Finally, Smooth notes that "the company declared a 30cent divvy on June 17, suggesting that barely 2 - 3 weeks ago, they felt they were not only solvent but in a position to pay 30cents." Smooth asks Greg at this point "DID YOU ATTEMPT TO CONTACT THE COMPANY BEFORE PUBLISHING THIS ARTICLE TO SEE WHY THEY WOULD DECLARE A 30CENT DIVVY 2 WEEKS BEFORE YOU TELL THE WORLD THEY ARE GOING BANKRUPT?" Greg does not ianswer this question in his comments other than to indicate that the company may be knowingly misrepresenting its assets (e.g. committing fraud).
Smooth summarizes the problem here nicely: "I clearly agree that CRZ has impaired assets and their value has dropped since 1Q. My problem is that you are able to broadcast dubious bankruptcy headlines on a public blog, based on quetionable market indices, without a response from the company, barely a couple weeks after they decaled a divvy. If your scenario turns out to be wrong, then at a minimum you owe the company's stakeholders an apology for using a well known public blog to push your short position."
This is a valid concern given the April presentation. That doesn't mean CRZ may not have more write downs 2Q (I would expect some given the April presentation, but the sale of assets could actually result in write ups, as they are no longer on the books). It does raise questions about Greg's assertion that CRZ is not positioned to weather the storm.
> Commercial Real Estate Loans
This section opens with a critique of CRZ's accounting of commercial loans. He is operating on opinion here. CRZ's accountants apparently disagree with him, but that's not the problem in this section. His primary argument here involves minimalist case studies of two commercial borrowers, one of which has defaulted on a a part of its loans (leaving more at risk) and the other of which apparently is guilty of the cardinal sin of winning a bidding war in a New York City real estate purchase almost four years ago. His most recent data point on this sale is over six months old, and he appears to have made no attempt to refresh the information. It may be that both of these loans will fail, but Greg oversteps once again in extending from the specific to the general, as he uses these properties as a basis for re-estimating CRZ's entire commercial portfolio. The change isn't huge. He restates the value of the commercial real estate loans at $210M against 3/31 numbers of $231M. It remains that the methodology of the revaluation is highly questionable.
> CRZ’s lenders, however, may want to consider the value of this property in determining whether to continue to loan the company money. I certainly would do so, and choose not to renew CRZ’s credit lines and issue margin calls to maximum extent the terms of the loans allow.
I've already reviewed the relevant credit lines above. CRZ does have a large debt associated with its commercial portfolio, but it is not short term repo debt (the kind that depends on renewal of lines). Margin calls simply aren't at issue for CRZ right now. Indeed, that's why CRZ restructured its portfolio 1Q. This statement is not only materially inaccurate, but attempts to incite actions on the part of CRZ's creditors. It can be regarded, in short, as an attempt to manipulate the market.
> Going Out With a Bang or a Whimper?
> CRZ reported equity of $132.6 million as of 3/31/08, or $5.33 a share. As of 6/30/08, the probable mark-to-market of the MBS securities portfolio will reduce that to $61.6 million, or $2.48/share.
It also reports, on April 8, that it has paid down its repurchase debt and funding facilities to a small fraction of what they were while rasiing or freeing up $107 million of cash, leaving it with $100 million of unencumbered assets. We won't know the entire picture (the combination of restricted and unrestricted cash) until the 2Q report, but all of the estimates that Greg uses in this section are based on outdated numbers that have already been updated in the public record (just one line up in CRZ's SEC filings from the information he does use). I have already indicated that these figures translate to a book value as high as $6.39. I doubt the number will be that high, but I do expect it will be well above the current stock price. He may be right in his mark to market analysis, but he has already started from a dubious number, given he amount of change in CRZ's portfolio reported in April. If he's right, then the current share price actually fairly represents book. If he's wrong, and ignoring the April 8 report suggests that he probably is, then he has understated the companies value. The rest of his subtractions are even more dubious, leading Greg to conclude that:
> with no profitable business model, a company whose stock has book value of less than 0 is worthless.
Ignoring the obvious hyperbole of this statement, he commits a cardinal sin of omission, because the value of CRZ in the moderate to long term is in its continuing cash flow from the payments on its loans (e.g. its funds from operations), the taxable earnings they generate, and the 90% of taxable earnings dividend they provide to shareholders. If CRZ can maintain a 30 cent dividend, a possibility that seems likely given that they have sold their lower performance agency assets in favor of a range of higher performance assets while dramatically reducing their debt, then (at current margins), CRZ is likely to pay investors back for their current investments faster than once every three years. The expectation that a CRZ without significant callable debt can in fact do this from cash from is hardly hyperbole: it is the most likely outcome. If this is a whimper, its a whimper with a 35.8% annual return (at current prices).
> Instead of this “whimper” scenario of a relatively slow and graceful decline to below $1/share, margin calls on CRZ’s repurchase agreements or required cash payments pursuant to the terms of its credit default swaps may cause a sudden meltdown.
Greg proceeds to justify that statement by drawing on a large number of examples of melt-downs in residential real estate. This is a common rhetorical move these days, but an inappropriate one. Residential real estate had a major melt-down. It took a number of residential lenders (including some with strong portfolios, even now) down. The presumption that the same will happen to a predominently commercial portfolio is a large leap and, in my view, a material misrepresentation of the current commercial real estate environment. Other analysts have made better justified extensions from residential to commercial by referencing recent history, but they generally ignore the fact that history is actually contradictory on this point. Greg makes a much more specific case, and one that has no real basis in the most current data from CRZ.
> Most of CRZ’s reported Q1 repurchase agreements were paid back in Q2 with the proceeds from the sale of its agency-MBS portfolio. That, however, still leaves $22 million in repo lines subject to margin calls.
This is materially inaccurate, if trivially so. As of April 8 the company had $28M in repurchase lines subject to margin calls. It is significant, however, because he fails to note that, again as of April 8, the company has $107M in unrestricted cash to cover such calls, were they to occur.
> It’s possible the company will try some tricks such as writing down the value of its debt to stay above the $100 million mark, but there is only so much time to delay the inevitable. With a market cap well below $100 million, its clear that the market doesn’t think the company has that much equity. Last quarter 33% of the company’s write-downs were in securitized assets on its balance sheet, so this trick is still not enough to keep the company’s equity above $100 million given the extent of its likely writedowns.
Greg is apparently willing to accuse the company of fraud at this point. He makes the point again, more stridently, in his replies to comments, as noted above. I'm sure that every company works the books as best they can, but accountants have to sign off on them consistent with generally accepted accounting practices. Greg is also willing to assert that the markets valuation of a stock is a better indication of a companies equity value than the books are. The market, however, is subject to many kinds of manipulations, few of which ever have to pass an accountants scrutiny. This is a commonplace argument, but it is an apples to oranges comparison or, to put it bluntly, a fallacious argument. If his statement is, in fact, materially inaccurate (not unlikely), he has opened himself (and perhaps Seeking Alpha) to a charge of slander or libel.
> Another problem that could suddenly bring down the company are its two remaining credit default swap (CDS) positions. The company closed out six CDS in Q1, losing $10.4 million on the transactions. The company’s exposure on these remaining defaults as of 3/31/08 appears to be $4.8 million. Losses in CDS have to be paid with cash to the counterparty, and CRZ had very little unrestricted cash as of 3/31/08.
A clear material inaccuracy. As of April 8, CRZ has over $100 million in unrestricted cash. It is well able to pay its rather minimal CDS exposure.
> The time to get out of a long position, or start building a short position through the purchase of puts and the shorting of calls, is right now. At best, CRZ should be trading somewhere near an estimate of its book value, which is under $2 and dropping by the day as more and more homeowners and commercial developers default on the loans underlying CRZ’s mortgage portfolio.
Here he concludes by repeating several material inaccuracies. He does not know the companies book value, but existing data suggests it is far closer to $6 than the $2 his faulty methodology suggests. He does not know what, if any, new defaults CRZ is experiencing. Nonetheless, he recommends abandoning ship with prejudice (both selling your long and entering a short position via puts or shorting of calls).
> Disclosure: Short TMA, Long CRZ puts, no position in other companies mentioned.
Another material inaccuracy. Greg is also put and short on RWT, which he mentions in the article. This is disclosed in subsequent discussion when he is congratulated on selling his previously reported RWT position.
More to the point, his position suggests that the material inaccuracies and faulty methodologies used in this article have been chosen with the intent of manipulating the market.
I would hope that this clarifies my prior note, but I would also refer you to another of Greg's comments, in which he admits to knowingly creating a short by exercising a put. If nothing else in this article painted a target on Greg's forehead, this comment does, because the SEC is actively looking for scapegoats in this arena. By disclosing this in an article in which he grossly misrepresents CRZ's current position, he sets himself up for additional SEC interest as well as opening the possibility of a slander or libel suit (which could easily touch Seeking Alpha as well).
This article should be pulled and an apology posted for the gross negligence of the writer in his apparently willful errors of omission and commission. I will reinforce this by returning to the top of the article:
> Crystal River’s Q2 Write-Downs Could Bankrupt the Company
He has not made a case for this at all. He ignores the impact that ongoing cash flow on this outcome, misrepresents the companies rather small remaining callable debt position as a likely path to margin calls (which he attempts to incite) and bankruptcy, and materially misrepresents the companies probable book value using a series of questionable methodologies.
> I think that the company - within two to six months - will be insolvent and its stock worthless (and trade like other worthless REITS such as Thornburg Mortgage (TMA) for under 30 cents a share for awhile as it awaits delisting).
I see no evidence of this at all. If anything, CRZ has set itself up to survive the current market onslaught with a continuing 30 cent dividend based on higher earnings. We won't really know one way or the other until we see 2Q or 3Q data, but there is data that is more recent than Greg uses ... and he ignores it completely.
To be clear. CRZ may well reach penny stock territory, especially with articles like this published on otherwise repected blogs. It may well face delisting as well. Neither of these outcomes, if they occur, are likely to substantively change CRZ's income, default rate, or dividend.
Sometimes when people know they are losing an argument, they seek to censor it. That's a shame.
I don't blame him, he is consitently wrong, and no doubt is bitter from having believed the dividends on failing REITs would continue indefinately.
Here is a post from him advising people to investing the now-bankrupt company NovaStar Financial.
209.85.173.104/search?...
As with CRZ, the defenders of a failing company seeking to attack the messengers warning them to get out while they still can.
Here is a Herb Greenberg article describing Novastar's "nonsense." Notice the large number of hostile comments, including BS anonymous threats of legal action.
blogs.marketwatch.com/.../
Sorry guys, sometimes the truth hurts.
SA was careless in publishing Mr. Weston's piece on July 4th when he so clearly stated that he would profit if the stock fell in value.
Objectivity is usally lost, or at least should be suspect, when financial self-interest is present.
I am afraid your latest response to smoothjazz is nothing more than an ad hominem attack. Such abuse is almost always an admission that one's own position is factually bankrupt.
Plese refrain from any further personal attacks. If you feel the need to post to this thread, I suggest you post your responses to the problems many posters had with your article. Once again, no more name calling, please!
Just to be clear. I've been in and out of CRZ several times in this market. The sweet spot for Commercial MREITs right now is in the 15%-28% range. If the yield falls below 15%, its probably time to sell. When its gets much above 28%, its probably a screaming bargain. That range has changed somewhat over the last ten months, but I've made a lot of money trading yields based on this general algorithm, and I'm ahead on CRZ overall, even now. But even if I wasn't, I have no reason to be bitter. This is at least a $6 stock in the not to distant future. If they maintain the dividend at this level, probably considerably more than that. If you had driven it down below a dollar, and there is a remote chance it will get there without your article, I'll have a screaming bargain ... and the right kind of bargain. Better to make money building value than destroying it.
There is no censorship here. Your article appeared online for almost two days, and can still be found online if you know where to look for it. Censorship is all but impossible on the Internet. What happened was the legitimate exercise of a documented editorial policy.
Attacking "SmoothJazz" for "low quality" writing ignores a fundamental reality. He is a far better and more careful analyst than you appear to be based on this article. His writing is generally excellent, in my experience, as I would expect from someone who does computer system architecture. In any case, there is no real anonymity on the Internet. Anybody can be tracked down if there is a need to do so.
Indeed, his analysis of NovaStar, could be a model for some of the ways in which you could improve your writing. First, he actually understand the difference between the different kinds of income that REITs report. You don't seem to appear to. Second, he restricts his analysis to that which is known. Third, he documents some of the unknowns in stating why he might be wrong. He is, in short, neither pumping nor bashing (and because of the numbers, some might interpret the piece either way), but doing a balanced analysis.
It remains to be seen whether NovaStar and other pure play residential REITs provide a model for what will happen to pure play and predomininantly commercial mREITs. You would like to equate CRZ to pure play residentials (most of which are dead or on life support), but the truth is that NO predominently commercial mREIT has done anything more problematic than deleverage in order to avoid the possibility of margin calls. That's just a fact. That could change, but it is not yet in evidence that CRZ is, as you call it, a failing company.
I don't see any reasonable equivalence between your piece and the Greenberg article you cite. Greenberg sticks to the facts. NovaStar really did reach a deal with MassMutual. His interpretation of those facts was open to debate, which occurred, but I don't see anyone challenging his ethics. I only see one mention of possible "legal action", but there is a name associated with it. It may be BS, in that case, but it is not anonymous.
To be clear. I didn't threaten you. I simply observed that your article was both careless with its facts and self-serving in ways that have led to legal problems for others. I occasionally teach media law and have served on national commissions on what kinds of laws the Internet needs. I am reasonably familiar with the relevant precedents here. My view remains that you overstepped considerably relative to those precedents. You should probably thank SA for pulling the article, as it may have saved you a world of trouble.
Best of luck.
Greg Weston,
How can you say I am consistently wrong when you don't even know me. On the other hand, I believe you are shark trying to manipulate markets and a well known blog site. As previously stated, my problem is not so much what you wrote (even though I see quite a few inaccuracies), it is what you DIDN'T say, namely:
1. The company recently deleveraged away repo risk, and recently enhanced liquidity up to approx $200M including unencumbered assets; and,
2. The company recently declared a 30cents dividend. Companies going bankrupt
By leaving out these critical data points, you did not provide your readers with a "complete" picture and calls into question your motives.
In any event, the editors from Seeking Alpha have contacting me about rebutting you. I intend to do so by reminding the readers of Seeking Alpha of CRZ recent liquidity actions which you omitted from your "article". We'll see if the editors can get it up on the site quickly enough so that investors get a balanced view and can make up their own mind.
209.85.173.104/search?...
Greg Weston,
This is getting almost comical. You reference a post of mine from 11/5/2006 where I estimate Novastar's GAAP and Taxable for 3Q2006, without pointing on the post 2 days later which showed my estimates were almost dead on:
www.investorvillage.co...
And what does Novastar 2006 have to do with anything? These stocks go in cycles and I traded in an out of Novastar (Including the Preferred) about 15 times between 2004 and 2007. A GOOG search of my Yahoo NFI posts going back a few years clearly shows that. I have no idea why my trading philosphy on Novastar in 2006 had to do with their status in 2008 or CRZ today.
Get a grip and stop being so defensive. Just try to include data points that go against your these next time and let the reader decide what is germane.
It is unclear what will happen as a result of this article. Clearly the CRZ is already down 47 cents this morning on a day when, at least so far, the market, and most REITs are up. In this Mr. Weston appears to have succeeded in having his way with the market.
I expect that CRZ's 2Q results will prove this article an embarrassment, however. Seeking Alpha will have to live with the consequences of allowing such shoddy research.
In Regards to your article on CRZ, myself and many others have already filed complaints with the SEC. Here is the link for others wishing to do so.
www.sec.gov/complaint....
Obviously you were able to get away with this. If the stock keeps falling, at some point the company will HAVE to respond at the urging of either the NYSE or on its own initiative. It is really sad that someone of the blue can use a respected public blog to manipulate stocks in this manner using dubious assumptions and omitting key elements of a contrarian thesis. A bullseye is now on you. IF you profit from this manipulation and IF it is proven you were malicious, at least you'll have some profits to put towards legal fees in defending yourself when you are sued.
Best Regards & peace out.
That's pretty much the way I see it. One of the biggest drops in the stock this year and only one piece of proximate news. The bullseye has certainly been painted on Greg. I gather you are volunteering to be regarded as a party to a stock manipulation, as Seeking Alphas editors have.
Crystal River Statement
NEW YORK, NEW YORK, Jul 07, 2008 (MARKET WIRE via COMTEX News Network) -- Crystal River Capital, Inc. ("Crystal River" or the "Company") (NYSE: CRZ) issued the following statement:
As of July 7, 2008 Crystal River had approximately $70 million of undrawn capacity on its secured revolving credit facility. The available capacity under the revolving credit line can be used to address any maturing debt including the outstanding repurchase debt balance of $22 million and the Company's remaining non-cash collateralized credit default swap exposure of approximately $3 million.
Forward-Looking Statements
This news release, and our public documents to which we refer, contain or incorporate by reference certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements relating to our future financial results and our future distributions. Forward-looking statements that are based on various assumptions (some of which are beyond our control) may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," "should," "intend," or similar terms or variations on those terms or the negative of those terms. Although we believe that the expectations contained in any forward-looking statement are based on reasonable assumptions, we can give no assurance that our expectations will be attained. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements include, but are not limited to, changes in interest rates, changes in yield curve, changes in prepayment rates, the effectiveness of our hedging strategies, the availability of mortgage-backed securities and other targeted investments for purchase and origination, the availability and cost of capital for financing future investments and, if available, the terms of any such financing, changes in the market value of our assets, future margin reductions and the availability of liquid assets to post additional collateral, changes in business conditions and the general economy, competition within the specialty finance sector, changes in government regulations affecting our business and our ability to maintain our qualification as a REIT for federal income tax purposes. For more information on the risks facing the Company, see the risks we disclose from time to time in our filings with the Securities and Exchange Commission (the "SEC"), including the risk factors disclosed in Exhibit 99.1 to our Form 10-Q for the period ended March 31, 2008, which was filed with the SEC on May 12, 2008. We do not undertake, and specifically disclaim any obligation, to publicly release any update or supplement to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
seekingalpha.com/tag/s...
Please report everyone on that list as well.....I'm sure the SEC is really interested.
The company put out a statement about a half hour ago:
"As of July 7, 2008 Crystal River had approximately $70 million of undrawn capacity on its secured revolving credit facility. The available capacity under the revolving credit line can be used to address any maturing debt including the outstanding repurchase debt balance of $22 million and the Company's remaining non-cash collateralized credit default swap exposure of approximately $3 million."
This seems directly in response to Greg's questions about liquidity. This secured revolver was provided by Brookfield, a party affiliated to CRZ, and seems secure. Brookfield owns CRZ equity and isn't going to force a margin call on this line or they lose their own equity investment. More likely they would recap and convert their debt interest to equity.
Our master repurchase agreements with Credit Suisse First Boston, LLC and Credit Suisse First Boston (Europe) Limited and our secured revolving credit facility *each contain a restrictive covenant that would trigger an event of default if our stockholders' equity declines ... below $100.0 million.*
The statement was meaningless. If the company reports less than $100 million in equity, it will be in default.
"The values of CRZ’s assets have fallen dramatically, but these declines are not reflected in its overpriced stock. Nor is the risk that the company could be suddenly wiped out by an inability to pay margin calls or meet its credit default swap obligations.
That swing has already happened, or very nearly so."
The company's credit facility has been available all along for those who cared to research the truth.
In their Credit Suisse CC, mgmt said they had deleveraged to the point they would not be going bk. They provided the figures and clearly stated their credit facility was in tact and more than enough to take care of any pressing debt. Subsequent to that call, it seems mgnt took further steps to preserve capital and increase liquidity.
My statement has nothing to do with mgnt's statement today. It is simply what I posted yesterday, what Smooth, Davis, and others have been saying all along, and what was readily available to all who wished to live up to the standards posted by the editorial board on this site.
If you do not believe the class action suit is coming, you are, in my very humble opinion, more foolish than Greg's hit piece.
This article is something else. It has been reported as "news" in many places, but is demonstrably substantively wrong on many points. If it appeared on a bulletin board, I wouldn't care to much. I'd respond, but that would be the extent of my action. Free speech is accompanied by the responsibility to speak wisely. When one doesn't, there can be consequences.
The company statement reinforced my entire point regarding my problems with his article: The he OMITTED germane information such as the company only had $22 of Repo exposure that could be more than covered with adequate liquidity to prevent bankruptcy. And to make matters worse, his hit job appears on a day when financials are being taken to the woodshed and shot yet again, excascerbating CRZ's drop.
I sincerely hope this short pays for this!
Allowing an insolvent company to borrow $100 million in order to save an *illiquid* investment of about $5 million. Well you do the math. I saw illiquid, because if Brookfield actually tried to turn its state in CRZ into cash, the stock price would get hammered.
Also, if Brookfield has such warm fuzzy feelings for CRZ, why include the minimum equity requirement at all if it doesn't intend on using it.
If Brookfield is like just about every other financial institution these days, it does NOT have spare capital to throw tens of millions of dollars away at a mere LIBOR + 2.5% at a troubled company, just to save a very small investment in the borrower's common stock.
The 10-Q goes on to say:
"If our stockholders' equity decreases below $100.0 million, we would be in default under these borrowing arrangements and *if we were unable to obtain a waiver or an amendment of those terms*, the lenders under those facilities would have the right to accelerate the maturity of the indebtedness and we could be forced to repay such indebtedness..."
The $100M secured revolver is provied by an affiliated party (Brookfield Asset Management, publicly traded as BAM). CRZ is managed by Hyperion Brookfield, a subsidiary of BAM, and BAM holds 7.5% of CRZ equity. If BAM were to force a margin call on their revolver with CRZ, they would further jeopardize their own investment in CRZ.
Much more likely is that they would provide a waiver or amendment, and I would guess converting some or all of their indebtedness into equity. This might mean dilution for CRZ but would also mean survival. BAM did the same thing for Fraser Papers, another of their small subsidiaries who is struggling.
In any event, IMHO the major hole in your analysis is that CRZ's liabilities are likely to be marked down along with the market indexes along with their assets, so the hit to book value is going to be a lot less than you predict. Generally, any impairments to the assets that are primarily market driven are likely to be matched with impairments to the liabilities (this was the whole point of the new accounting treatment after all), resulting in minimal change to book value. The hits to book value would have to come from asset-specific write-downs such as defaults at specific properties. Which isn't to say that there won't be any, but that is likely to be far less than you estimate.
I don't have a dog in this fight though, I'm neither long nor short CRZ, though I'm familiar with it and have been following it for a year or two.
Uncle
You miss the most important part of the press release. Callable debt is down to $25 million from the $78 million you failed to report in your article (a serious omission, since the company reported $107M in unrestricted cash in the same presentation).
The press release did not report the companies cash position, which it might easily not know at this point in the 2Q results computation cycle, but with debt down $53 million from the figures ignored previously, it is a safe bet that their cash exceeds their credit facilities.
We will know more when their 2Q numbers come out. It is doubtful they will match the projections of a flawed analysis based on already outdated data. In the meantime, you appear to have perpetrated a fraud. Congratuations, I suppose. Hope you covered your positions.
The best thing to do in this situation is to convert the debt to equity, which both protects the debt-holder's investment and also gives the investee more breathing room, and allows them both to experience upside if and when the market recovers.
Aside from Fraser Papers which I mentioned earlier, Brookfield did the same with Maax. One of their bridge lending funds held a senior debt position, and in a restructuring they converted that to a control equity position. There are numerous other examples of similar transactions.
This makes good business sense, but part of the motivation is not direclty tied to short-term results. If Brookfield gains a reputation for leaving its children out in the cold during a storm, they will be in a decreased negotiating position when trying to make new acquisitions.
You're right that a mark to market in liabilities will improve book value, but unless you have some reason to think the % of the writedown in assets that will be offset by a M2M in liabilities is going to be dramatically higher in Q2, it is still not enough to keep equity above $100 million, or even close to $100 million.
Could CRZ sell equity to Brookfield to cover the shortfall? Anything is possible, but as you note this would still be terrible for shareholders.
They de-levered substantially during Q2, which you're also omitting. I think extrapolating Q1 results to Q2 doesn't make sense for this reason. I agree that they're cutting it a bit close if they want to stay above $100M since they only have $32M to spare. But there are a lot of moving parts. We should know soon as they put out their quarter. Again, I'm here for the analysis, since I don't have a bet on the table, but I don't think book value is going to change much at all.
I would also assign a very high probability to Brookfield NOT delivering the death blow. If book value goes below $100M, they will just amend the credit agreement. As I mentioned, this might mean dilution for CRZ, but ensures survival.
First of all, to use accurate numbers, the company announced that they had $70M of undrawn capacity on the revolver, implying that they are now $30M drawn. There are $22M of repos coming up, plus CDO swap exposure of $3M, totaling $25M. If they drew down their revolver to cover these liabilities, they'd be $55M drawn, not $100M, and would then have no other pressing liabilities.
Now let's say for argument's sake that this happens, and book value comes in below $100M, let's say $75M just to have a number to discuss. Would Brookfield force a margin call on $55M loaned out against a company with book value of $75M, when they also have a 7.5% equity interest? I suppose they could, but they'd lose their equity investment, and then go from being a lender to direct owner of the assets. Would this put them in a better situation? I don't think so. Remember that the assets are already managed by a subsidiary of theirs, and the three management teams (BAM, CRZ, and Hyperion) have many people in common. They'd certainly make no friends by forcing the margin call.
Instead they'd almost certainly amend the terms of the agreement to give CRZ some more breathing room, but they'd want something in exchange for that. A higher interest rate would only exacerbate the liquidity problems, so the obvious solution is equity of some kind.
I dunno, a whole lot of unlikely things have to happen in a row for them to hit the liquidity wall. I think they still have plenty of room. If the secured revolver were not with an affiliated party, I think that would be a major risk. It is usually a margin call on the medium-term financing that puts the MREIT's under. But in this case they don't have that risk.
Actually I thought of that too. The timing of that release is interesting -- after the end of Q2, but before the Q2 numbers are released. They specifically said that the revolver "can be used to address" the other liabilities (i.e. present tense). Could they make that statement knowing that their book value is already below the covenant? Can they accurately estimate their book value at this point? Many tantalizing questions... but no answers yet.
Uncle
I disagree that "a whole lot of unlikely things have to happen in a row for them to hit the liquidity wall."
You seem to be assuming that even if CRZ defaults under the repo agreement and credit line, the terms of the credit line will be renegotiated. While that is possible, I would not make investment decisions on such an assumption.
Also, please note that my opinion about a possible "blow-up" date in the article is two to six months from now. Conditions in the general economy, option-ARM blow-ups, high fuel prices, etc., are continuing to take a toll on RE credit markets. I think conditions are going to continue to deteriorate in Q3 and Q4.
Finally another point about the press release. The company did not disclose interest payable and other forms of very short-term liabilities, or the amount of unrestricted cash. For all we know, these may be higher and lower, respectively, than in Q1.
All we got were two figures out of the many that would be needed for the press release to be meaningful.
1. Do you concede that it is likely that the equity reported as of 6/30/08 will be below $100 million?
The 1/3 figure of $99 million in MBS M2M that was offset by liabilities M2M was only the private label MBS, not the agency MBS. CRZ made it a lot harder to estimate the impact of liability write-downs than RWT, whose accounting was much more straightforward on this issue. But again, why would the M2M of liabilities be much greater than the Q1 figure? Your previous answer of the sale of agency MBS could not be the answer for the above reason.
2. Do you concede that, to the extent that Brookfield is willing to excuse a default, it will do so on terms that are in the best interest of Brookfield rather than CRZ?
Don't fudge and say that the interest of Brookfield and CRZ partially overlap. Of course they do to some extent. But when a company is in default and lacks the ability to pay, it is in a very weak negotiating position. If Brookfield does agree accept equity in return for excusing the default, why not demand shares for 50 cents each? Is CRZ in a position to say no? In this environment, does it have other sources of capital at reasonable terms?
In the past, when companies with toxic real estate debt have sought to go to capital markets, the results have been horrible for common shareholders. cf TMA and BKUNA.
Since you are the only person commenting here who has made any intelligent bullish comments, I'd love to also hear your general case for this stock.
Coverage here:
calculatedrisk.blogspo...
And residential RE just keeps going down:
www.bloomberg.com/apps...
Greg "Hitman" Weston,
Meaningless?? The company just obliterated one of the the 2 major tenets of your hit piece: Namely that bankruptcy was imminent as they wrote down the value of their assets in 2Q according to you. As Davis and I mentioned to you and the editors of Seeking Alpha a number of times yesterday which you casually omitted from your "objective" article, the liquidity available on a funding line is more than enough to cover the modest $22M of callable debt they have outstanding.
The other major tenet of your article, that negative marks will be material and "might" trip covenants, will not have an answer until CRZ Mgmt officially joins the fray and publishes their numbers. You may eventually be right that they have significant negative marks. I admit that this is a possibility and the one positive aspect of your article was the significant work you put into estimating the potential marks.
But CRZ SP rise late in the day, on an absolutely brutal day for financials, and the $2.60 - $2.65 AH bid/Ask according to Schwab at 6:30pm EST, suggests it MAY start to recover somewhat from your ambush. I think the company shot down your imminent bankruptcy thesis this afternoon. We'll just see where we go from here with credit markets in such terrible shape.
The growing realization that companies with a high ratio of Option-Arm assets to equity are toast. Charred, black, yucky, overcooked toast.
"Allowing an insolvent company to borrow $100 million in order to save an *illiquid* investment of about $5 million. Well you do the math."
First, the company would not need to borrow $100 million to cover the $25 million mentioned in their recent press release.
Second, the company would not be insolvent.
This is more than poor logic, it is irresponsible, self-serving gibberish posing as analysis. This is the same level of "rigor" SA apparently required in the original article.
Speaking of SA, is it not the case that by pulling the article and then reposting it, SA has implied the article meets the highest level of editorial standard claimed on its site? To pull the article and then repost it suggests the headline is well-justified based on the "rigor" SA's editorial staff requires of all articles posted on its site. In fact, it may be that SA's actions are responsible for the terrible hit the stock took today.
Oh the tangled web we weave. . .
When a stock falls in price like CRZ did today, lots of investors lose money. Typically, there are only two parties to sue.
First, if the company has been dishonest in its appraisal of its ability to remain solvent, pay a dividend, and go forward into this investment climate with the intention of increasing shareholder value, then the company is usually the target of a class action suit (as it should be).
Second, if manipulation, misrepresentation of circumstances, or the self-serving selection of facts is presented as "rigorous" research, then it would seem appropriate to file the suit against those parties that participated in such behaviors.
I do not see a third party in this instance, so I must believe either the company or Weston/SA will be named as a defendent in response to the catastrophic drop in share price we witnessed on Monday.
I guess my point is that someone is going to get sued, and from my perspective I think the company has been completely forthcoming all along.
YOU do the math!
My thoughts are those of an investor who is long the stock, and may be biased in favor of that position.
Best of luck to all who have posted here (except those who seem to have difficulty posting the whole truth - now there's a strange concept).
www.tv.com/uservideos/...
Seeking Alpha has done nothing I can see to give the article the same prominence that Mr. Weston's piece. While this is a poor substitute, there is now at least some mention of it here.
[SA Editor Mary Hunt responds: Both articles had equal "prominence" as originally posted. The reposting of Mr. Weston's article is precisely for the reason of addressing concerns such as those you raise.]
Well they might also be lower and higher, respectively. It's pretty obvious that cash is going to be higher than Q1 for example. But really we have no idea, because we don't know what has transpired in what was certainly a very busy Q2. Clearly they are keenly aware that they need to eliminate their short-term liabilities.
In April 2008 they disclosed $100M of "unencumbered" assets, $45M of net cash, and the repo lines were down to $28M, and all of the agency MBS were gone. Some of that happened after the end of Q1, so the Q1 balance sheet doesn't reflect all of this. Surely they continued the sales into Q2.
>>> 1. Do you concede that it is likely that the equity reported as of 6/30/08 will be below $100 million? <<<
Possible, but not likely, and I don't mean that as an evasive answer, really we don't have enough data. CRZ management is all too aware of the $100M equity limitation and was clearly willing and able to sell assets at a loss to preserve equity.
You're basing your book value write-downs on the movement of the indices and the assumption that they hold much the same assets at the end of Q2 as Q1. The first assumption is maybe the best thing analysts have to go on, but is nothing more than a wild-ass guess, and some liabilities will change along with the assets. For the second assumption, I would not be surprised to find that they have sold all of their non-agency RMBS and a signficant portion of their real estate loans, about 62% of which they reclassified as held-for-sale in Q1. That could represent another $100-200M of de-levering during the quarter.
To the extent that they have a strategic focus (note that I am not really that positive on the company to begin with, I mean hey, Lou Ranieri is on the board, you just gotta love that), they seem to want to focus on agency MBS, A-credit CMBS, and direct ownership of commercial property. So that clearly puts the non-agency MBS and residential loans in the jettison category.
>>> 2. Do you concede that, to the extent that Brookfield is willing to excuse a default, it will do so on terms that are in the best interest of Brookfield rather than CRZ? <<<
Of course not. BAM is going to watch out for themselves, but as long as they feel there is some long-term value in CRZ, they're going to strike a balance between all of the respective interests.
I am more familiar with BAM than CRZ and have seen the way BAM supports its distressed offspring during rough times. If you think that CRZ has been a bloodbath, I direct your attention to Fraser Papers. The losses there have truly been awe-inspiring (or perhaps awww-inspiring), yet BAM has steadfastly supported the company. Aside from backstopping a rights offering and helping them to convert debt to equity, they've lined up financing deals to help Fraser monetize some assets and gain business from other BAM affiliates. BAM has done the same with several other companies in similar situations, and certainly has the resources to help CRZ in the same way. One advantage that CRZ already has is access to BAM's deal flow, which is world-class. This is not 100% predictive of what BAM will do with CRZ, but they have long shown the willingness to support their subs and affiliates, and have plenty of motivation to do so here.
To look at it another way, what does BAM have to gain by foreclosing? They would go from being the senior lender secured by a bunch of squishy assets to the direct owners of the same. Is their exposure diminished or accounting treatment any better after foreclosing? No. They are not dumb enough to foreclose and then try to liquidate the assets into a terrible market, and the ~$50M of debt is not meaningful to their ~$100B asset base. More likely they'll convert their debt to equity ownership so they reduce their downside risk and increase their share of the upside if and when things turn.
It is telling that CRZ has chosen to pay off the repo lines with BAM's line of credit, instead of the other way around -- clearly they believe that BAM is a friendlier party than their repo lenders.
>>> In the past, when companies with toxic real estate debt have sought to go to capital markets, the results have been horrible for common shareholders. cf TMA and BKUNA. <<<
Yes but TMA and BKUNA did not have well-heeled parent companies, nor did Homebanc, New Century, Delta Financial, or the whole host of other blow-ups. A few billion of liquidity in the hands of a friendly party can go a long way during rough times.
>>> Since you are the only person commenting here who has made any intelligent bullish comments, I'd love to also hear your general case for this stock. <<<
Well really I am neither long nor short, but I've been following cRZ pretty closely for about 4-6 quarters looking for an oppotunity to go long. When the fit first hit the shan, they had a fair amount of "dry powder" in the form of agency securities that I thought could be sold and redeployed into higher yielding assets, but that didn't really pan out so well, because agencies didn't hold up as well as anyone thought they would. Then things really started to go pear-shaped, and they started to sell agencies for survival rather than redeployment.
However, the market should be rife with opportunities for those with capital to deploy, and many participants are talking about mid-teen unlevered yields in A or higher rated securities. Of course an A or even AAA rating doesn't mean what it used to, and maybe it's all crap at this point.
Generally, I don't like MREIT's of any type or variety because they don't have any balance sheet to them, and generally don't add any economic value -- they are just a passive portfolio. I prefer REITs that are direct owners and operators and those that add value through expertise and redevelopment. Even moreso, I like property management companies that are not obligated to pay out all of their income as a dividend so they have more balance sheet and liquidity (examples are BPO and FCE). So, in light of all that, I'm never going to get excited about going long CRZ unless the situation is more stable than this one is, though the discount is starting to look pretty compelling. I'll definitely wait for the Q2 report to come out before making any calls.
Uncle
The line of credit and the repos default if the company's equity goes below 100M. Remember a lot of the prices CRZ reports for its assets are theoretical values that are probably above the price they would fetch if actually sold.
Further, if the pace of write-downs continues at the Q1 and my predicted Q2 rate (which are about the same), the company will have negative book value fairly soon. You could argue things are going to get better later this year, but I don't think this will happen, in fact I think commercial RE in particular is going to get much worse in Q3 and Q4.
It would be naive to think that they took these actions without consultation with Credit Suisse, but that seems to be a base assumption of this article.
The whole REIT industry is down. You know that. In many cases it has nothing to do with quality of management or portfolios. Management doesn't control that stock price (and can't without violating the law and risking stockholder lawsuits). They can recognize the state of the market and the position there company is in relative to the market and take steps to prevent things from getting worse. That is what "getting ahead of the curve" is all about: taking actions that you'd prefer not to take before you are forced to take them.
That won't stop "analysts" like yourself from ignoring the action and its implications, assuming the worst based on numbers taken out of context, and broadcasting a general feeding signal to shorts. Neither will it prevent you from being investigated as per www.marketwatch.com/ne...
The speculation among the longs is that BAM will waive the terms of the credit line in order to save its $5 million or so investment in CRZ.
The problem with this argument is (1) If you investment relies on a bank waiving terms on a loan in default, it probably isn't a good investment (2) It is illogical for a company to extend $100 million in credit to protect an _illiquid_ investment of about $5 million.
I made my short call at 3.50, and the stock is now around 50 cents, down 85% in less than 5 months.
I made over $12,000 in 8 months by being long RZ (Now CYRV) from the bottom to the crest for the rebound.
Mr. Weston, perhaps you made as much being short?
On 2008 Dec 01 09:54 PM Greg Weston wrote:
> CRZ announced today they will be delisted.
>
> I made my short call at 3.50, and the stock is now around 50 cents,
> down 85% in less than 5 months.
On Sep 01 02:17 AM Ernesto Gomez III wrote:
> And I bought several thousand shares under .55 each in Nov-Dec 2008,
> then sold them in August 2009 in the $2 range.
>
> I made over $12,000 in 8 months by being long RZ (Now CYRV) from
> the bottom to the crest for the rebound.
>
> Mr. Weston, perhaps you made as much being short?