Month: August 2009

AAA CMBS Market has Been Rallying

Post author By ToddSullivan
Post date August 7, 2009

Thought you folks might want to know this because, you know, it has been ignored by just about everyone.

Spreads on AAA-rated CMBS have narrowed by 100 to 150 basis points as a rally in these securities continues for the second straight month, particularly in five-year triple-A paper, according to a new report from Trepp. Predictably, the spreads have narrowed more on loans backed by stronger collateral, Trepp says. The narrowing has occurred even amid what the CMBS information provider calls “continued negative headlines.”
Tom Fink, SVP at Trepp, tells GlobeSt.com that “the pricing is tightening up because people see that there’s an opportunity for doing a profitable trade by buying the bonds and then securing financing through the Federal Reserve’s TALF loan facility. That should provide a fairly stable underpinning for the five-year spread at least through the end of the year, which is how long the program is currently scheduled to last. If at the end of that, people start to see a good tone in the market and the performance of commercial real estate stops deteriorating, it could become permanent.”

Still to come are deals on new CMBS through TALF, but Fink says “the market’s fully expecting that there will be new issue on the TALF program between now and the end of the year. You have a number of large institutions that have talked to the Fed and they expect to pursue deals with the Fed. There’s plenty of folks down in Washington who are suggesting that it be continued a lot longer.”

Fink says he doesn’t expect the prospect of further actions by ratings agencies to discourage would-be buyers of CMBS paper. “The ratings agencies have taken their actions,” he says. “Now it’s a matter of the agencies moving through whatever watch lists they’ve put out. So regarding the uncertainty caused by people asking ‘what are the rating agencies going to do?’ well, now they’ve already done it, and it’s priced into the market at this point.”

At the same time, Trepp predicted that the delinquency rate on CMBS loans could double before 2009 is over. Given the decline in property values and drought of capital, “I don’t think it’s out of the question to predict that it could hit 6% to 7% by the end of the year”” says Fink.

Historically, he says, CMBS delinquency rates have lagged the economy by 12 to 18 months. “The Bureau of Economic Research said the recession started in the fourth quarter of 2007, and we saw delinquencies start to climb dramatically in the first quarter of ’09. We’ve got another nine months of rising delinquencies before that lag effect starts to work itself out.”

However, this will not deter investors’ interest in the paper. “You’ve got plenty of research out there talking about which loans are going to go bad and what the losses will be,” says Fink. “A lot of that information has already been absorbed by the market and is reflected in the prices.”

Now, when you couple this with the recent debt offering from Simon Property Group (SPG) one has to think the rumors of CRE’s demise are well overstated. Hat Tip @bobbrinker for that

Commercial real estate investment trust Simon Property Group (SPG.N) on Thursday added $500 million to its 6.75 percent senior notes due 2014, said IFR, a Thomson
Reuters service.

The size of the deal was increased from an originally planned $250 million.

The total amount is now outstanding is $1.1 billion. Citigroup, Deutsche Bank, Goldman Sachs, and UBS were the joint bookrunning managers for the sale.

BORROWER: SIMON PROPERTY GROUP
AMT $500 MLN* COUPON 6.75 PCT MATURITY 5/15/2014
TYPE REOPENING ISS PRICE 105.029 FIRST PAY 11/15/2009
MOODY’S A3 YIELD 5.476 PCT SETTLEMENT 8/11/2009
S&P A-MINUS SPREAD 275 BPS PAY FREQ SEMI-ANNUAL
FITCH A-MINUS MORE THAN TREAS MAKE-WHOLE CALL 50 BPS
*TOTAL AMOUNT NOW OUTSTANDING $1.1 BILLION

What appears to be happening is we are going to have a classic flight to quality assets. We will of course see pictures scattered across the TV of strip malls going out of business because, well, there are just too damn many of them out there. We will also be inundated with constant reminder of how many “billions of CRE debt is now in default” but won’t be told there is trillions of it out there (some perspective is needed). But what we will not see are the high quality regional malls going under. They will grow stronger as overall retail space declines and will then regain much of the pricing power recently lost.

Disclosure (“none” means no position):none

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General Growth Properties Reports Strong Q2

Post author By ToddSullivan
Post date August 6, 2009
4 Comments on General Growth Properties Reports Strong Q2

When we are looking at REIT’s and wondering how to value them it all comes down to NOI. With that in mind, lets look at Q2 for GGP:

NOI for the second quarter of 2009 was $615.8 million, a decrease of approximately 2.1% from the $629.1 million reported in the second quarter of 2008. Minimum rents (including temporary tenant revenues), overage rents and other revenues (including sponsorship, vending, parking and advertising) in the second quarter of 2009 declined as compared to the same period of 2008 due to the continued weakness in the economy and occupancy declines. In addition, we sold three office buildings in 2008, as discussed above, which also contributed to the decrease in NOI. Weaknesses in certain of our tenants’ businesses also led to a $3.9 million increase in our provision for doubtful accounts in the second quarter of 2009 as compared to the second quarter of 2008.

Note: For GGP one must ignore the headline numbers for now as they will be skewed heavily by restructuring costs. We are simply looking at the health of the underlying operating businesses, not the final accounting number.

A 2.1% drop in this environment is simply outstanding. If we are talking about a cap rate to value GGP at, if we take a look at recent CRE deals, we see the current market for grocery anchored strip malls are selling for 8.5%-9% cap rates. Based on that and based on GGP’s results, if one would assume a 8% cap rate for GGP, that would be very reasonable. It also would not be unreasonable based on the historical averages to stretch it to 7.5% but we ought to stick with 8% to be conservative.

Using this we will based some assumptions on Pershing’s valuation table of GGP common post Chapter 11 under certain dilution scenarios. As we move down the Cap scale we find that the value of the common dramatically increases.

As GGP continues to post strong results, the assumption has to be that there will be more left for shareholders post Chapter 11. Occupancy, while up slightly was essentially unchanged at 91% giving credence to the strength and desireability of GGP’s locations.

Remember, GGP need not file a reorg plan until April, 2010. So, if you think the economy will continue a steady albeit slow rebound, then the numbers we see now ought to improve even further by then. If that is true, then the prospects for current shareholfders will improve with it.

Full Report
GGP Q2

Disclosure (“none” means no position):

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Dow Ag Sale Update

Thankfully this is looking far less likely every time the subject comes up…..

From the Q2 earnings call:

Don Carson – UBS

Thank you. Andrew, question on Dow AgroSciences. You mentioned that, you are now thinking that you, because of its growth, it should be an ongoing part of the Dow portfolio. Is that really reflect the fact that you are not able to get the kind of strategic premium that you think the business is worth?

Andrew Liveris

Don, we have obviously always carefully positioned ourselves here on Dow AgroSciences and that continues on this call. Dow AgroSciences is a very, I would say valuable property to everyone we’ve talked to and of course that includes, how we view Dow AgroSciences and we were very, very deep into a full divest process, because frankly, there was no choice a few months ago.

During that period of time, we had to make a lot of decisions about how much of that process would go all the way versus our alternatives. As we undertook that process, it was clear there were buyers out there that viewed this property with the same value that we viewed it, but obviously, negotiations didn’t get down to an exclusive. We believed that, if it went that far, that we would definitely realize a good valuation on Dow AgroSciences.

The key question really, is would that be good for Dow’s shareholders and when I say that, the EBITDA potential of Dow AgroSciences demonstrated and into the future feeds our income stream and our ability to be an earnings growth company and helps us on our gross debt-to-EBITDA ratios. So, it’s counterintuitive to sell it at anything less than a full premium and I think that’s really the mindset we are in right now.

We are still having ongoing discussions. They include part monetizations and they include strategic alliance with key players in the sector and we are still maintaining full optionality on that unit and at this point in time, though as I said on the remarks, my personal preference is to retain it in the portfolio and seek enhanced collaborations with others.

Don Carson – UBS

As a follow-up, do you think if you retain it in the portfolio that it will be properly valued in what’s really not obviously in Ag portfolio or is that why you also consider options like a partial monetization, partial IPO?

Andrew Liveris

Yes, I think your question answered your question. I mean, in essence the way you phrased the answer is exactly the way we think about it, Don.

Here are my thoughts from the May when the initial possibility of selling Dow Ag was announced.

Bottom line, it cannot and will not be sold even at “full value”. Right now the only scenario I see that may happen is a partial IPO. I would be a buyer of that IPO as the products in Dow Ag’s pipeline are simply awesome and will propel earnings for years. That is a scenario I could live with, it is not ideal, but I could stomach it as long as I could participate in the IPO.

Disclosure (“none” means no position):Long DOW

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AutoNation Beats: Notes from A Conversation With CEO Jackson

Post author By ToddSullivan
Post date August 4, 2009

The news:

AutoNation, Inc. (NYSE: AN), America’s largest automotive retailer, today reported 2009 second quarter net income from continuing operations of $55 million or $0.31 per share, compared to year-ago net income from continuing operations of $56 million or $0.31 per share. After adjusting for certain items disclosed in the attached financial tables, net income from continuing operations for the 2009 second quarter was $51 million or $0.29 per share, compared to $59 million or $0.33 per share in the prior year.

Second quarter 2009 revenue totaled $2.6 billion, compared to $3.7 billion in the year-ago period. The decrease was driven primarily by lower new vehicle sales. In the second quarter, total U.S. industry retail new vehicle sales declined 40% compared to last year, based on CNW Research data. In comparison, in the second quarter AutoNation’s new vehicle unit sales declined 38%.

Commenting on the second quarter, Mike Jackson, Chairman and Chief Executive Officer, said, “Despite extraordinarily difficult industry conditions, AutoNation delivered solid profitability, driven by cost reduction, lower interest expense, and our disciplined operating model and inventory management. The second quarter was a pivotal moment for the automotive industry. Long-awaited volume stabilization, the successful government-led restructuring of General Motors and Chrysler, and significant dealer consolidations were accomplished. The industry is now positioned for a healthy rebound when macroeconomic conditions, particularly consumer credit, improve.” Mr. Jackson also noted, “Our continued disciplined inventories led to a year-over-year improvement in gross profit per vehicle retailed and lower floor plan expense.”

Mike Jackson added, “The stabilization of the SAAR in the second quarter is the first step to a gradual recovery and marks the first time since the end of 2007 that we did not see a significant sequential decline in industry new vehicle sales. We also expect the ‘Cash for Clunkers’ program to stimulate new vehicle sales. Going forward, we expect a gradual improvement of new vehicle sales beginning in the second half of 2009 and intend to increase our inventory of vehicles in a disciplined manner to meet demand. Having weathered the storm, AutoNation remains in an excellent position to capitalize on dealer consolidation and the gradual recovery in industry volumes. We will continue to benefit from our $200 million structural cost reduction program.”

At the end of the second quarter, AutoNation had nearly $450 million in liquidity, including cash of $129 million and remained well within the limits of the financial covenants in our debt agreements.

AutoNation has three operating segments: Domestic, Import, and Premium Luxury. The Domestic segment is comprised of stores that sell vehicles manufactured by General Motors, Ford, and Chrysler; the Import segment is comprised of stores that sell vehicles manufactured primarily by Toyota, Honda, and Nissan; and the Premium Luxury segment is comprised of stores that sell vehicles manufactured primarily by Mercedes, BMW, and Lexus.

• Domestic —Domestic segment income for the second quarter of 2009 was $26 million compared to year-ago segment income of $33 million. Second quarter Domestic retail new vehicle unit sales declined 34%.

• Import —Import segment income for the second quarter of 2009 was $42 million compared to year-ago segment income of $57 million. Second quarter Import retail new vehicle unit sales declined 41%.

• Premium Luxury —Premium Luxury segment income for the second quarter of 2009 was $43 million compared to year-ago segment income of $52 million. Second quarter Premium Luxury retail new vehicle unit sales declined 34%.

For the six-month period ended June 30, 2009, the Company reported net income from continuing operations of $108 million or $0.61 per share compared to $111 million or $0.62 per share in the prior year. After adjusting for certain items as disclosed in the attached financial tables, net income from continuing operations for the six-month period ended June 30, 2009 was $91 million or $0.51 per share, compared to $114 million or $0.63 per share. The Company’s revenue for the six-month period ended June 30, 2009 totaled $5.0 billion, down 32% compared to $7.4 billion in the prior year.

CEO Jackson on the morning shows:

Mike Jackson on CNBC 7-31-2009 from http://marccannon.vox.com/

Mike Jackson on Bloomberg 7-31-2009 from http://marccannon.vox.com/

I spoke with Jackson and Maroone after earnings were released and there were a few comments worth sharing:

The $1 billion (as of last Friday) spent on cash for clunkers did more to stimulate the economy than “the entire previous $750 billion” according to Jackson
For the first time in over a year, Jackson appears open to the idea of making an acquisition
Dealership closures nationally are “about 80% done”
He is now satisfied with having domestic dealership make up 30% of his portfolio after the changes the companies have gone through
Given a choice, Ford (F) is now the clear favorite among the domestic automakers with customers due to their lack of a bailout
Banks are beginning to lend again although they are requiring larger down payments
Speculation that families are downsizing the number of vehicles they own is temporary and not a trend
The decision to let Lehman go under “was a catastrophic failure”
The industry bottomed in February and will continue a slow climb out

This is a great company that is really well run. In every category their declines are less than the industry as a whole and any positive increases they are seeing exceed the industry as a whole. Their market share continues to increase and the new business model at the auto maker level is going to increase pricing power.

Jacskon said he thinks the days of 16 million units a year are gone for a while but that with the new pricing power dealerships will have, they will not need anywhere near that number in order to post very strong profits.

Here is the Q2 earnings call transcript

Disclosure (“none” means no position):Long AN, none

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Weekend Reading: CRE in 2009

Post author By ToddSullivan
Post date August 1, 2009

I love reading stuff like this a while after it happened. By doing it this way we can get a modestly accurate gauge their predictions based on what has already happened vs what they though would happen. This “Round Table” has been very accurate up to this point. It appears to be from early 2009. There is a great line there regarding what will happen to CRE in 2009, “Business will pick up in 2009. It has to. You can’t get lower than nothing”. Classic…

All agreed in January that 2009 was going to be “worse than 2008” and to this point it has. All were looking forward to 2010 as they though much of the current dislocation will have passed. This isn’t to say 2010 will be an easy year, but that the stronger players will begin to see the market ease for them as opposed to 2009’s mass oppression.

This is worth the read…

Real Estate Outlook 2009

Disclosure (“none” means no position):

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