For those who follow me regularly and are familiar with my dealings with GGP, skip down to the bottom of this post to download my latest GGP analysis. For those who are not familiar with me and the BoomBustBlog, I am (to the extent of my knowledge) the first investor/media concern to go public with a short thesis on General Growth Properties (GGP) with a warning on commercial property in general, and a specific short on GGP in the 4^th quarter of 2007 (see "GGP and the type of investigative analysis you will not get from your brokerage house", BoomBustBlog professional subscribers can download the entire GGP composite history in .pdf format). I am a private investor that generates his own proprietary research. It is solid, independent, unbiased, and of extreme quality when compared to the highly conflicted sell side marketing fluff proffered as research, and apparently now stands out among the buy side as well. With all due respect to the successful investors referred to herein, there is a hint of "talking one's book" within the presentations. I have absolutely no problem with self promotion, but when it appears the promotion comes to odds with the validity of the analysis, it does tend to raise my brow, and apparently the brow of several institutions that have come to me for my opinion.

So, let's take an unbiased, empirical look at GGP from the guy who first pointed out the insolvency of this company in the first place. As for the self promotion aspect, I am now offering consulting services to those who desire independent, objective analysis. I will soon be releasing a very interesting study on real estate funds and residential mortgage related products from Morgan Stanley and Goldman Sachs, which will assuredly cause their clients to fall in love with them. More on that later, though.

As stated earlier, I articulated a roadmap to the largest commercial real estate failure in history a full year in advance of its filing. General Growth Properties was picked to be the big BoomBustBlog.com shorting opportunity in November 2007, when it was the 2nd largest commercial mall owner in the country, trading above $50, with an investment grade rating and buy recommendations from Wall Street. It filed for bankruptcy a year and a half later.

The following links lead to an extraordinary body of GGP and CRE research which I released through BoomBustBlog.

v  The Commercial Real Estate Crash Cometh, and I know who is leading the way! 06 January 2008

v  Generally Negative Growth in General Growth Properties - GGP Part II 08 January 2008

v  General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse

09 January 2008

More on GGP: A Granular View of Insider Selling and Lease Rate Growth 11 January 2008

v  GGP part 5 - The Comprehensive Analysis is finally here 19 January 2008

v  My Response to the GGP Press Release, which seems to respond to blogs... 21 January 2008

v  For those who were wondering what sparked that silly press release from GGP. 22 January 2008

v  GGP: Foreclosure vs Asset Sale 25 January 2008

v  GGP Refinancing Sensitivity Analysis 25 January 2008

v  GGP part 7 - Share value under the foreclosure analysis 31 January 2008

v  GGP part 8 - The Final Analysis: fire sale of prime properties 02 February 2008

v  GGP Conference Call 14 February 2008

v  Reader's legal observation on GGP 16 March 2008

v  Analysis of GGP's recent Q1 results 29 April 2008

v  GGP Can't Afford its Dividend 06 May 2008

v  Press release announcing new equity financing - 21 March 2008 something that I didn't explicitly model in my own analysis, but after reviewing information without the benefit of official documentation, there were no surprise nonetheless... 26 March 2008

v  We did find some surprises, and my blog readers chimed in with their expertise and opinions...

12 April 2008

Our approach is to evaluate the total credit risk attached to the CRE portfolio by

1.     Following a bottom up approach wherein each individual property is valued based on current cap rates and prevailing rentals;

2.     Comparing the fair value of each property with outstanding mortgage to identify the pockets with high LTV, which can lead to losses on liquidation,

3.     Factoring in the refinancing risk arising from short-to-medium term scheduled maturities.

The comparative analysis (Reggie vs Ackman vs Hovde) is available to the public here:  Middleton vs Ackman vs Hovde on GGP - public edition 2009-12-26 20:41:50 1.50 Mb.The full comparative analysis with updated valuation is available to subscribers here:  Middleton vs Ackman vs Hovde on GGP - subscription edition w. updated valuation 2009-12-26 20:43:17 1.51 Mb.You may click here to subscribe.

Note: I am typing this post at 3:30 in the morning, so there may be some typos and guffaws in the text, which I will try to catch and demarcate with a strikethough.

The mainstream media jumps when Goldman's sales and marketing staff analysts make a recommendation or prediction, despite the fact that no one really bothers to look back to see how profitable the GS sales and marketing staff analysts have been for their clients vs the risk-adjusted profitability for their bonus pool shareholders. One example that I have used in my previous posts was Lehman Brothers, who I became increasingly bearish on in early 2008 (if you're a regular reader, please bear with this rehash):

• See "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008)
• Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!)
• Lehman stock, rumors and anti-rumors that support the rumors  Friday, 28 March 2008 and Funny CLO business at Lehman  Friday, 04 April 2008. 

The esteemed Goldman Sachs did not agree with my thesis on Lehman. Reference the following graph, and click it if you need to enlarge. Notice the tone, and ultimately the outright indication of a fall in the posts from February through April 2008 above, and cross reference with the rather rosy and optimistic guidance from the esteemed Goldman (Sachs) boys during the same time period, then... Oh yeah, Lehman filed for bankruptcy!!! 

Does anybody think that Lehman was a "one off" occurrence? Or for that matter does anyone believe that only Goldman is guilty of a lack of actual performance for their clients vs. their bonus pool???

In January of 2008, who among the Wall Street bank brand name crowd had a failure warning or even a sell call on Bear Stearns? Lord knows one was definitely called for, see Is this the Breaking of the Bear?. We can go on theme-wise with:

1. regional banks (As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades).
2. commercial real estate (The Commercial Real Estate Crash Cometh, and I know who is leading the way!),
3. the monoline insurers (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton -11/13/2007), Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion in Equity 11/29/2007), etc. I can go on for quite a while, but hopefully you see a trend here.

 As a matter of fact, many of these failed and failing companies actually managed to sell securities and raise capital at some of the worst time for any potential investor. Who do you think provided the optimistic research to lay the groundwork for said sales? More to the point, who do you think actually facilitated the sales? And the ass kicker question, "How did the buyer of said securities fare?" Looking back at two egregious examples:

• MBIA, who I warned about very early one, and even after my warnings and additional evidence sprouting from all over the place (see MBIA: A Low-Down Dirty Shame, -  Is MBIA About to Pull the Wool Over the Market's Eyes? - As was warned in my previous monoline posts... ), MBIA was still able to float a debt offering to institutions who really, really, really should have known better. See After Reading the Prospectus and Reviewing Potential Losses, Would You Buy These Notes? I dare anyone to investigate how well those notes turned out.
• How about GGP and their secondary offerings? AlthoughGGP Couldn't Afford its Dividend, they were able to have the Wall Street marketing wizards to enable a Press release announcing new equity financing - something that I didn't explicitly model in my own analysis (because I either didn't think anyone would be stupid enough to go for it or I probably severely underestimated the marketing prowess of the Wall Street machine - see sidebar below), but after reviewing information without the benefit of official documentation, there were no surprise nonetheless and my blog readers chimed in with their expertise and opinions...... For those who don't follow REITs, GGP filed for bankruptcy some months ago so you see how well that secondary did.

Well, the Wall Street Marketing Machine AKA "sell side research" is at it again.  Just as I turn bearish on CRE for the second time (see Re: Commerical Real Estate and REITs - It's About That Time, again...), check out the "pump and dump job" from Merrill: Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!. I received emails about DDR's predicament (Diversified Development Realty Email of Interest), which makes sense, because Goldman Sachs is pushing CMBS secured by this company's malls (Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), which of course had a AAA tranche (see more on this Goldman phenomena below). What a coincidence! If you think that is a

coincidence, just as pressure starts to turn up on in the CRE space with a bad macro outlook and an even worse fundamental outlook, Goldman upgrades the entire sector and issues a buy on Taubman (see my take. The Taubman Properties Research is Now Available). Anyone want to bet that Goldman won't help these REITs trade bad debt for more bad debt or bad equities??? Do you think they will have the gall, nerve, ability to push AAA financing for Macerich (A Granular Look Into a $6 Billion REIT: Is This the Next GGP?)?

Reference "Blog vs. Broker, whom do you trust!"  and you will be able to track the performance of all of the big banks and broker recommendations for much of the year 2008 for the companies that I covered on my blog. Since the concept of sell is rather remote to any big broker whose trading desk is not net short a particular position, it would be safe to assume that if the market turns the broker's recommendations will also turn in a similarly abysmal year as well. Just to be clear, this is not about ability, or who is the smartest. It is about marketing and conflicts of interest. Brokers do not charge for their research. Thus it should be obvious to anyone with even the slightest modicum of business savvy that the sunk costs that is freely disseminated research is most likely a loss leader (with the losses being born by the consumers of said research) otherwise known as the marketing arm for underwriting, sales and trading.

The blind following of Wall Street marketing research, and the abject worshipping of Goldman marketing, inventory dumping, sales research allows them to rake billions of dollars off of their clients backs, yet clients still come back for more pain. A fascinating, Pavlov's dog's/Stockholm Syndrome style phenomena. Have you, as a Goldman client, performed as well as their employees receiving $19 billion in bonuses? Don't get me wrong. I'm not hating Goldman, but now they are actually raping raking billions of dollars off of the tax payers backs as well. I do not do business with them, hence I do not want get my back raked - but it appears that as a US taxpayer I have no choice. A company that nearly collapsed a year ago, receives mysteriously generous government assistance (AIG full payout during its near collapse as an insolvent company) with the help of highly ranked government officials (many of which are ex-Goldman employees) and then pays out record bonuses on top of so many tens of billions of dollars of taxpayer aid with taxpayers facing high unemployment and sparse credit is not necessarily a company that should be looked upon as a scion of Wall Street. There is no operational excellence here. The only reason such an aura exists is because main street and Wall Street clients have an amazingly short memory, as I will demonstrate in the paragraphs below. This goes for the big Wall Street banks in general, and Goldman in particular.

As stated above, Goldman is now underwriting CMBS under a broad fund our $19 billion bonus pool "buy" recommendation in the CRE REIT space. Let's take a look at another big bonus development exercise, marketing push they made into MBS a few years ago...

In April of 2006, a Goldman Sachs formed "Goldman Sachs Alternative Mortgage Products", an entity that pushed residential mortgage backed securities to its victims clients through GSAMP Trust 2006-S3 in a similar fashion to the sales and marketing of  the CRE CMBS that is being pushed to its victims clients as described in the links above. The residential real estate market faced very dire fundamental and macro headwinds back then, just as the commercial real estate market does now. I don't think that is the end of the similarities, either.

Less then a year and a half after this particular issue was floated, a sixth of the borrowers defaulted on the loans behind this product, according to CNN/Fortune, where the graphic to the right was sourced from. Here's an excerpt from the article of October 2007 (less than a year after the issue was sold to Goldman clients, clients who probably didn't know that Goldman was short RMBS even as Goldman peddled this bonus bulging trash to them):

By February 2007, Moody's and S&P began downgrading the issue. Both agencies dropped the top-rated tranches all the way to BBB from their original AAA, depressing the securities' market price substantially.

In March, less than a year after the issue was sold, GSAMP began defaulting on its obligations. By the end of September, 18% of the loans had defaulted, according to Deutsche Bank.

As a result, the X tranche, both B tranches, and the four bottom M tranches have been wiped out, and M-3 is being chewed up like a frame house with termites. At this point, there's no way to know whether any of the A tranches will ultimately be impaired...

 ,,, Goldman said it made money in the third quarter by shorting an index of mortgage-backed securities. That prompted Fortune to ask the firm to explain to us how it had managed to come out ahead while so many of its mortgage-backed customers were getting stomped.

  The party line answer to the bolded phrase above is "risk management". Goldman is prone to say, "We were just hedging out client positions". Well, I wonder, were they net short or net long RMBS. You want to know what my guess is??? Looking back to there CMBS offerings of late, clients and bonus pool enhancement customers should inquire, "Is Goldman net short the trash, bonus pool enhancement CMBS products that they are peddling to me???"

Now, fast forwarding to the present day, we look into "GSAMP Trust 2006-S3" and we find (courtesy of a follow-up CNN/Fortune article):

...the formulas used by Moody's and S&P allowed Goldman to market the top three slices of the security -- cleverly called A-1, A-2 and A- 3 -- as AAA rated. That meant they were supposedly as safe as U.S. Treasury securities.

But of course they weren't. More than a third of the loans were on homes in California, then a superhot market, now a frigid one. Defaults and rating downgrades began almost immediately. In July 2008, the last piece of the issue originally rated below AAA defaulted -- it stopped making interest payments. Now every month's report by the issue's trustee, Deutsche Bank, shows that the old AAAs -- now rated D by S&P and Ca by Moody's -- continue to rot out.

As of Oct. 26, date of the most recent available trustee's report, only $79.6 million of mortgages were left, supporting $159.9 million of bonds. In other words, each dollar of bonds had a claim on less than 50¢ of mortgages.

All the tranches of this issue, GSAMP-2006 S3, that were originally rated below AAA have defaulted. Two of the three original AAA -rated tranches (French for "slices") are facing losses of about 90%, and even the "super senior," safer-than-mere-AAA slice is facing losses of 25%.

 

 As of Oct. 26, date of the most recent available trustee's report, only $79.6 million of mortgages were left, supporting $159.9 million of bonds. In other words, each dollar of bonds had a claim on less than 50¢ of mortgages.

... ABSNet valued the remaining mortgages in our issue at a tad above 20% their face value. Now, watch this math. If the mortgages are worth 20% of their face value and each dollar of mortgages supports more than $2 of bonds, it means that the remaining bonds are worth maybe 10% of face value.

...If all the originally AAA -rated bonds were the same, they'd all be facing losses of 90% or so in value. However, they weren't the same. The A-1 "super senior" tranche was entitled to get all the principal payments from all the borrowers until it was paid off in full. Then A-2 and A-3 would share the repayments, then repayments would move down to the lower-rated issues.

But under the security's rules, once the M-1 tranche -- the highest-rated piece of the issue other than the A tranches -- defaulted in July 2008, all the A's began sharing in the repayments. The result is that only about 28% of the original A-1 "super seniors" are outstanding, compared with more than 98% of A-2 and A-3. If you apply a 90% haircut, the losses work out to about 25% for the "super seniors," and about 90% for A-2 and A-3.

Next, I will look into the true performance of the residential, non-conforming mortgage market using information sourced directly form our government. 

More of Reggie on Goldman Sachs 

Subscribe  Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb - 17 pages  Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages

Free research and opinion

• Reggie Middleton on Goldman Sachs' fourth quarter, 2008 results
• Goldman and Morgan losses in the news, about 11 months late
• Blog vs. Broker, whom do you trust!
• Monkey business on Goldman Superheroes
• Reggie Middleton asks, "Do you guys know who you're messin' with?"
• Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
• Reggie Middleton on Goldman Sachs Q3 2008

§  As Reality hits, the Masters of the Universe are starting to look like regular bank employees

Reggie Middleton's Goldman Sach's Stress Test: Breaking Ranks with the Crowd Once Again!

Who is the Newest Riskiest Bank on the Street? 

 More remium Stuff!

 Goldman Sachs Report June 21, 2008 2008-10-20 16:48:01 361.18 Kb

 Goldman Sachs - Buffet's strategic investment and public offering 2008-09-26 02:29:15 895.36 Kb

 Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional 2008-12-18 10:12:37 267.49 Kb

 Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Retail 2008-10-20 15:45:05 348.99 Kb

 GS ABS Inventory 2008-02-25 06:48:56 1.22 Mb

 Goldman Sachs Valuation Model updated for PPIP - Retail 2009-04-04 19:50:51 388.04 Kb

 Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional 2008-12-18 10:12:37 267.49 Kb

In looking at the data that I am about to display, I want readers to think of MAC as an investment entity that you, yourself, would run as a real estate investor. Think of your ability to make money over time, and the viability of your entity if you would actually lose money. As a property investor, I view MAC's properties in terms of being underwater or being profitable on a capital appreciation and NOI basis. As of 11/09, many of MAC's properties are significantly underwater, the ramifications of which depend on the financing utilized, since the use of debt has literally wiped out all of the equity in some, has made others require an equity infusion to roll over the mortgage, and has simply destroyed shareholder capital in other cases.

Even those properties that are 100% equity financed represent a material loss to shareholders where they are underwater. As you will read below, this has occurred in many instances. Very few publicly disseminated REIT analyses seem to take into consideration the ramifications of REITs actually losing money on investments that don't have large loans against them. They should, though. A loss, is a loss, is a loss.  Leverage simply amplifies the loss. That being said, if I paid $30 million in cash for a property that is currently worth $20 million, I lost $10 million (less the real income derived from that property since acquisition) - no matter which way you look at it. At least with a cash purchase, I may have the option of riding it out to hope that the market returns. If I bought the property with a 70% LTV, $21 million loan), not only have I taken a 110%+ loss, but I would probably be forced to write the property off come time to refinance the loan. The leverage significantly reduces my flexibility. This is what happened to GGP.

The next question is, "Will the market come back to where it was when I made these high priced, high leverage purchases?". Reggie's assertion is, "No time in the near future!". Let's take a look at Richard Koo's chart on the Japanese asset bubble, after GDP started to ramp up...

If we are anywhere near the Japanese "lost decade" experience, we have a long sloth ahead of us. Now, let's take a look at the most recent bubble that got us into this mess. There are two major reasons most REITs are in a financing bind. The first is that there was a credit bubble that allowed REITs to borrow more than was fundamentally feasible, and/or viable. This bubble was blown, in large part (at least in regards to REITs), through the CMBS market. As you can see below, CMBS (credit) peaked in the 2nd quarter of 2007 after a run up that started in the 2nd quarter of 2003.

Sourced from http://www.jackmangroup.com/

The same can be said for the rent bubble, where companies apparently were signing leases with monopoly money, almost to the exact monthly range  as the credit bubble. The rent bubble was blown through the free access to credit by both companies that sought leases and by consumers who used debt to finance purchases from said companies. Economic activity was grossly exaggerated, and this gross exaggeration was transformed into grossly exaggerated rents.

Sourced from BoomBustBlog proprietary research

  These grossly exaggerated rents helped to justify grossly exaggerated business plans that required grossly exaggerated financing to build grossly exaggerated development projects (residential, office and retail). Now, that the CMBS/lending spigot has been shut down, bubble consumer credit has popped, and fundamentals are now ruling commercial real estate markets (having taken the place of euphoria):

1. rents are dropping rapidly;
2. CRE values are collapsing;
3. CAP rates are exploding;
4. the refinancing market is looking for much lower LTVs while the property values of recently purchased properties are dropping simultaneously,
5. and an often overlooked occurrence - REITs are selling off the more valuable assets to fund the gaps necessary to rollover overpriced debt, further reducing rent rolls and dramatically reducing the overall value of the existing portfolios.

These three combine to make a deadly elixir. Now, let's take a look at an excerpt of Macerich's property analysis that we have so carefully developed, keeping in mind the dates determined as a bubble in the two charts above. We have analyzed Macerich's entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).

Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs of 158%, 108%, 132%, 125%, etc. At least 10 of the properties listed above with LTV's above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of over $1.3 BILLION, and we are just getting started. Now, if you recall my congratulatory post on Goldman Sachs (see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis. Even if we were to assume that we are still in the midst of the credit bubble and REITs can still refi at 70LTV (both assumptions patently wrong), rents, net operating income and cap rates have moved so far to the adverse direction that MAC STILL would not be able to rollover the debt in the 7 properties whose LTV figures are highlighted in yellow - and that's assuming the credit bubble returns and banks go all out on risk and CMBS trading. Rather wishful thinking, I believe we can all agree. 

Now, let's assume that the markets can be convinced to rollover the debt at 60LTV, with some pretty onerous (yet potentially sweet to the lenders) terms. Despite the significantly higher debt service, MAC will still need to come up with the equity to patch those rather large holes. I point subscribers to our MAC 3Q09 Key Findings and MAC 3Q09 Results Analysis in order to illustrate MAC's attempts at financing said gaps.

As mentioned earlier in this missive, I find that many REIT investors have been focusing on property LTVs, which may cause one to miss sight of the forest due to that big tree that's in the way. When one takes a loss on a real asset purchase, leverage simply amplifies the loss. The lack of leverage does not remove the fact that a loss was taken. In the last column of the table above (Gain/Loss since Acquisition), you can see where Macerich has taken significant (capital appreciation) losses on properties that have relatively low LTVs. A loss, is a loss, is a loss. As a matter of fact, for the history of the entire on balance sheet portfolio, MAC has added absolutely no value since acquisition. The consolidated JVs have actually destroyed 17% of shareholder value attributed to them. Including new developments, there is still a loss of 9%.

Reposting that Richard Koo/Nomura graph of what we are likely to see in the near future should make the purchasers of MAC's recent equity offering and any subsequent offerings shudder. After all if no gains in value were made over the last few bubblicious decades, what does this portend for the future when all macro and fundamental factors are pointing downwards...

 Now, let's take the discussion off balance sheet, where the sell side fears to tread. Below is an excerpt of properties from our analysis. The first thing that should jump out at you is that Macerich's off balance sheet properties are worth less now than they were purchased for, in total. I feel at least three need to be totally written off, with a total of about half a billion dollars taken with them (reference the long red bars in the Loan-to-Value column).

In addition, you can see that not only have the off balance sheet and unconsolidated assets depreciated signficantly in value with a sharp drop in value over the past year, but at least 5 of them will need a significant equity infusion in order to roll over their debt. Of note is the fact that many of these properties were not purchased during the bubble years (although it is quite possible that they were refinanced for a large amount during the bubble years). Do I feel Macerich is in trouble? Well, I'll let my readers hazard a guess. There is a wealth of stuff that my team dug up, and even more we were able to extrapolate as a result of our deep dive into the netherworld known as off balance sheet accounting. This may very well be a situation where "extend and pretend" and "kicking the can down the road" may not be enough fantasy to overcome the economic reality of the fundamentals. We shall see. Banks beware!You see how profitable ignoring the problem was for GGP's lenders and creditors.

The Macerich Forensic Analysis update will be ready for subscribers in a few days and it is packed with analysis, data and info. It is probably one of the most complete real estate works that I have released yet, at least rivaling that performed on GGP. I am also working on a macro report that extends and builds upon the work of Richard Koo from Nomura (the author of that oft-used Japanese lost decade chart above), in an attempt to verify (or disprove) the US as Japan in the 19 year "lost decade" thesis. This should have significant ramifications for banks and real estate investors, alike. Again, I welcome any banks, lenders or those with economic interests in MAC's (or Taubman's [TCO] or any other REIT) properties to reach out to me to discuss my forensic analysis. I can be contacted through this link.

  Here is a wealth of research to keep subscribers busy until the newest reports are released:

• MAC 3Q09 Key Findings
• MAC 3Q09 Results Analysis

•  March Real Estate Sector Intelligence Note 2009-10-22 01:47:20 143.74 Kb 
•  Macerich Summary 2009-10-22 01:44:45 910.94 Kb
•  Macerich Statistics Spreadsheet - Pro 2009-10-22 01:47:00 356.00 Kb
•  Macerich Sensitivity Analyis - Pro 2009-10-22 01:46:36 344.92 Kb
•  Macerich Forensic Valuation - Retail 2009-10-22 01:46:14 192.71 Kb
•  Macerich Forensic Valuation - Professional 2009-10-22 01:45:52 344.92 Kb
•  MAC Intelligence Note - 1Q09 Earnings 2009-10-22 01:45:34 307.68 Kb

 And some content on Taubman Compannies

• TCO Report - Professional
• TCO Report - Retail

The following table summarizes the valuation of each property through NOI-based and CFAT-based approaches. Individual property valuations will be discussed in detail separately, and released to professional subscribers.

Click to enlarge...

                      
The two deep underwater properties - The Piers Shops at Caesars and Regency Square were written down to the fair value by recording impairment charge in 3Q09. While the former is being handed over to the lenders for auction proceedings, the latter still remains with the Company and the Company continues to service its debt obligations.  Additionally, there are 5 more properties with LTV of more than 80%, making them highly susceptible to reach the negative equity territory in case of further declines in rentals or increase in cap rates.

It is noteworthy that properties with high LTV include a) the new developments during 2005- 2008 phase and b) the existing properties against which additional debt was raised during 2005-2008. Among the properties with LTV of more than 80%, Northlake Mall was the new development in 2005, The Piers Shops was acquired in 2007, while additional debt was raised against International Plaza, The Mall at Short Hills, The Mall at Wellington Green and Waterside Shops during 2005-2008.

Additionally, there are four properties - MacArthur Center, The Mall at Partridge Creek, Stony Point and Westfarms - with LTVs in the "immediately at risk" zone.

So, I am sure many are wondering if these properties are destined to be written off, or what??? Well, let's look at the trend...

Sharply rising cap rates combined with...

  Dramatically increasing mall vacancies.

Subscribers can download the full reports here:

 TCO Report - Retail 2009-11-27 11:41:15 355.95 Kb

 TCO Report - Professional 2009-11-27 11:42:05 663.14 Kb

I will probably be releasing the lenders to these properties in the upcoming week. Any banks that have economic interests in these properties, or others should feel free to reach out to me via phone or email to discuss my research.

• Dubai Debt Delays Revive Fear of Financial Crisis
• US Markets Bracing for Selloff on Dubai Debt Worries
• Stocks Fall as Treasuries, Yen, Swaps Rise on Dubai Attempt to Delay Debt
• Yen Strengthens to 14-Year High, Prompting Speculation Japan to Intervene
• Fujii Says Japan May Contact U.S., Europe After Yen's Jump to 14-Year High
• Abu Dhabi Commercial Bank Is Said to Be Owed $1.9 Billion by Dubai World 
• Treasuries Jump on Demand for Safer Assets After Dubai Asks to Delay Debt
• Sony, Toyota, Japanese Exporters Brace for `Breaking Point' as Yen Surges
• Japan's Hirano Says Rapid Currency Moves Are `Undesirable' as Yen Rallies (you betcha, reference the JPM links which highlight interest rate and currency exposure for JPM below)

My regular readers should remember my warnings on the currency trade risks (Japan's Hirano can testify), and interest rate derivative concentrations (let's see what happens to the counterparty daisy chain if Dubai defaults): "The Next Step in the Bank Implosion Cycle???". As excerpted:

Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

High dependency on Forex and interest rate contracts

Continued growth in trading revenues on back of growth in overall derivative contracts, (especially for interest rate and foreign exchange contracts) has raised doubt on the sustainability of revenues over hear at the BoomBustBlog analyst lab. According to the Office of the Comptroller of the Currency, notional amount of derivatives contracts of U.S Commercial banks grew at a CAGR of 20.5% to $203 trillion by 2Q-09 from $87.9 trillion in 2004 with interest rate contracts and foreign exchange contracts comprising a substantial 84.5% and 7.5% of total notional value of derivatives, respectively. Interest rate contracts have grown at a CAGR of 20.1% to $171.9 trillion between 4Q-04 to 2Q-09 while Forex contracts have grown at a CAGR of 13.4% to $15.2 trillion between 4Q-04 to 2Q-09.

In terms of absolute dollar exposure, JP Morgan has the largest exposure towards both Interest rate and Forex contracts with notional value of interest rate contracts at $64.6 trillion and Forex contracts at $6.2 trillion exposing itself to volatile changes in both interest rates and currency movements (non-subscribers should reference An Independent Look into JP Morgan, while subscribers should reference JPM Report (Subscription-only) Final - Professional, and JPM Forensic Report (Subscription-only) Final- Retail). However, Goldman Sachs with interest rate contracts to total assets at 318.x and Forex contracts to total assets at 11.2x has the largest relative exposure (see  Goldman Sachs Q2 2009 Pre-announcement opinion 2009-07-13 00:08:57 920.92 Kb,   Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb,  Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb,). As subscribers can see from the afore-linked analysis, Goldman is trading at an extreme premium from a risk adjusted book value perspective. 

Let's not forget about the other subjects in today's news as market and US futures approach the 4% loss mark for the day. In Dubai, word has it that if creditors reject proposals to postpone near-term debt obligations until May 2010, the Dubai government could be forced to hold a fire sale of its international real estate. In order to avoid what is probably inevitable (that real estate is probably being carried on the books at the same outrageous premium that US REITs and banks are carrying their real estate at), Dubai World is asking for a reprieve from their lenders. In other parts of the world, I am sure the Japanese multinational banks are pressuring the government to intervene on behalf of weakening the currency.

All of the events above have the propensity to inject volatility into the carry trade and currency/interest rate derivatives market, which I have written about in the past. We are talking trillions of dollars of risk, essentially unhedged (or hedged between a small handful of counterparties with very high correlations and related exposures, as I said, essentially, unhedged). If one catches a big default, it will daisy chain, causing the others to hog capital and liquidity (as if they weren't doing this already), thus exacerbating what is going to be a monumental problem for commercial REITs and US RMBS, consumer and small business debt, and mortgages stateside.

Let's go over some of those I told ya' so's, but before we do I just want all to know that this might not even be the catalyst to bring us back to respecting fundamantls. Dubai World is by far not the only player that binged on debt during the bubble to dabble in overpriced, rapidly depreciation assets. Reality will start rearing its (now rather ugly) head in many other places throughout the globe and sooner (or later) it will pop up in a place that causes this big, globally central bank coordinated charade to come tumbling down (Dubai Shows Limits of Government Rescues, Roubini’s Das Says). It may be this (black) Friday, next (black) Monday, or some other day in the future. All I know is that there are still hundreds of billions of dollars of losses in the system that have been ignored as risky asset prices have partied like it was 1999. After all, it is not as if Dubai World was the only one binging at the free credit punch bowl, where they??? Now, back to some of those I told you so's...

•  As the markets climb on top of one big, incestuous pool of concentrated risk...
• Any objective review shows that the big banks are simply too big for the safety of this country
• Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?

The following is a Must Read for those that think the big US banks will be immune to contagion and shocks born across the pond in interest rate and currency markets: An Independent Look into JP Morgan. This contains the "public preview" document (JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is free to download.

• JPM Report (Subscription-only) Final - Professional
• JPM Forensic Report (Subscription-only) Final- Retail

• Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?: Balance sheet recessions combined with real and financial asset bubbles within a bubble sustained by "extend and pretend" policies, will literally bring an end to banking dominance withing entire nations. Those who don't believe me should take a closer look at the Japanese experience and ask yourselves just how many Japanese banks are left in the Global top 20. Here's a hint, they dominated 90% a couple of decades ago.
• Now That the Im pairments Are Starting, Will Anyone Bother to Look into How Realistic They Are?: Ignore those asset impairments if you wish, sooner or later someone is going to want their money back, if not Dubai Worlds' creditors then somebody else. All of a sudden, the covers get snatched off and we see naked bodies...
• You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?: Hey, the government lied to you about the stability of those banks in the stress tests. Here's the evidence...
• At What Point Does Accounting Gimmickery Become an Outright Lie? Let's Ask PNC

1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank
4. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo
5. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 5 - PNC Bank

I will be releasing some very interesting research to subscribers along with public excerpts today and Monday. Posting will be very light today(except for one research report) due  to the holidays, but I will be following the markets closely and may comment.

"We have seen some bulk purchases by investors, but we are not picking up that data through the Multiple Listing Service or through our release data, but we do know that there is some bulk purchases by investors who plan on releasing those properties within a year's time, when they see a better market condition."

I don't believe "better" market conditions are coming any time soon. We are just coming off of the best market conditions anyone will see in their lifetime. Those market conditions were predicated upon unsustainable conditions, hence they came crashing down. They are crashing down, not crashed - as in past tense. I believe we have some ways to go. That is why I am not buying real estate, and I believe that those that are jumping in now are jumping in prematurely.

Personally, I don't consider Mr. Yun to be a credible source, either. He may be smart and capable, but the extreme bias of his employer (the ultimate real property perma-bull) and the incredibly biased reports of his predecessor color his opinions by default. He is not nearly as bad as David Lereah (who was literally sensationalist-style perma-bullish) was, but he is still not objective. See  The Reggie Middleton Real Estate IQ Test - Who believes the NAR?

This is an excerpt from that post on Tuesday, 08 January 2008

From CNBC.com

Home Sales Seen Holding Steady In Coming Months

Pending sales of existing U.S. homes inched lower in November and should hold steady over the next few months, a real estate trade group said. (I ask, "Why should they do that? Credit is tighter, recession evidence is stronger. Supply is greater, and demand is lower. Hmmm, let me consult the book written by that ex-NAR guru for the answer." )

The National Association of Realtors Pending Home Sales Index, based on contracts signed in November, dropped 2.6% in November, to 87.6 from an upwardly revised 89.9 in October.

Economists polled by Reuters ahead of the report were expecting pending home sales to decline by 0.5 percent from October's originally reported 87.2.

The November number was down 20% from a year earlier.

The pending homes sales data suggests that the volume of sales will hold steady for a while before turning upwards before the end of the year, said NAR chief economist Lawrence Yun.

 With all due respect to Mr. Yun, Mr. Lereah and the NAR, anyone swift enough to complete the registration form for this blog should know, by now, to discount this association's data and opinions. They do not do the industry justice with this nonsense. Realtors should actually be the first in the protest line. It is their credibility that is being called into question, for this is THEIR trade group. Credibility is the key!

Notice how accurate that prediction was for 2008! From my blog post that day in 2008:

My take: I believe that my blog's readers are considerably above average in financial acumen and common sense. The NAR is simply not an entity to be taken too seriously, due to the obvious conflict of interest exemplified by their ex-economist, [[David Lereah]], who published some of the most absurd BS I have ever seen come from a nationally reknown organization. Examples of his work from Wikipedia: Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade, And How to Profit From Them was published in February 2005 at just about the tippy top of the bubble (that takes some talent). One year later in February 2006, as the market is already on it's way down, Lereah retitled his book Why the Real Estate Boom Will Not Bust and How You Can Profit from It. Lereah's previous book The Rules for Growing Rich: Making Money in the New Information Economy touting investment in technology company equities was published in June 2000 at the onset of the collapse of the dot-com bubble.  This extreme cheerleading has died down substantially, but the overly optimistic spin is still evident with their new economist, Lawrence Yun.

I actually believe the Case Shiller graph above to be misleadingly optimistic due to my doubts about seasonality filtering and the exclusion of investor related properties (flips, see A reminder concerning popular housing indices) which are dominating the lower end of the market.  On this note, Ms. Olick consults someone who I feel is considerably more credible and who I have dealt with personally...

  I found that so interesting that I emailed over to Mark Hanson, a housing and mortgage expert out in California. He says the bulk buying was much bigger last year than it is now, and in fact there is no shadow inventory around to buy in California today. Yun says the same: "Interestingly what I hear from Las Vegas, San Diego, Riverside and other areas is they are really desperate for inventory in the lower price range....and even though they have buyers that want to buy there's not enough inventory." Yun put it out there to banks to release anything they have. [Reggie note: Which brings us to the logical argument that supply must meet demand, and pricing must come down significantly to meet the demand at the lower price points. The demand and credit/liquidity at the higher prices points is very, very low.]

But in my chat with Hanson, he said I should be focusing on something else: "Flip Adjusted Sales.'

This is adjusting total sales to back out flips....

"Buy and hold is not the top strategy of these investors," claims Hanson. "It is buy and sell quickly. So unlike any other time in history, the exact same house is being counted twice within a 2-6 month period of time, skewing the numbers. These investors were especially motivated to sell before the end of the tax credit on Nov. 30th -- or thought to be the end -- which is why median and average prices keep falling." [Reggie note: this will not skew the Case Shiller numbers though, for they use an econometric model that filters for just such events, although this filtering introduces other unrealistic biases as well.]

Ms. Olick goes on to state:

"When the investor flips the property, it is not listed as a distressed sale, but as an organic sale [Reggie note: Nearly all flippers buy from distressed owners, so this can be misleading as well]. I don't know if anyone could ever figure out the real "Flip Adjusted Sales" numbers, but as we see more foreclosures come to market in the coming months, we shouldn't underestimate the trend. Right now there are about seven million homes somewhere in the foreclosure process, and banks are moving borrowers through the modification more quickly than ever. No question we will see rising distressed inventory come 2010, and investors will undoubtedly be poised to take advantage."

 Well, I agree with Mark (who really, really knows his stuff - he busted Lehman with their overstated inventory very early on as Mr. Mortgage on YouTube), and Diana. As for the ability to find the "flips", it can be done by literally performing the opposite of the Case Shiller index. Look for properties that were held for less than one year, and have different and/or dissimilar names in the most recent transaction in the chain of title - usually from an LLC to personal names. The vast majority of these will most likely be flips. Back those out and you will get a much clearer picture of the organic sales numbers. In terms of the Case Shiller index, add those in and adjust for seasonality, etc. and you will bet a much clearer picture of the direction of actual pricing. 

If the flippers and investors are the ones involved in most of the action on the lower end, and most of the action is on the lower end, then the sales price increases reflected by the Case Shiller index are quite misleading.