The Haiku of Finance for 02/27/24

Office building loans

Lenders can't afford re-set

Regional banks bust

The Haiku of Finance for 12/04/14

Rented high rise view

Investors stare out window

Cash blown on optics

The Haiku of Finance for 11/03/14

One World Trade Center
Open for business today
Tallest tower yet

The Haiku of Finance for 08/26/14

Candlestick Park plan
Housing and multi-use plots
Vibrant future land

Farewell to San Francisco's Candlestick Park

I never saw the San Francisco Giants or San Francisco 49ers play at Candlestick Park.  I was always too busy with my professional life to make time for a game.  The pending end of Candlestick Park's useful lifetime prompted me to find some way to see the venue before it is gone.  Fortunately, there was one way remaining.

The San Francisco Recreation and Park Department had a plan thanks to Amanda Tugwell.  She conceived and managed a public tour program that allowed people to see the Stick one more time while its operations wind down.  I secured a spot for myself on today's 9:30AM tour, with a discounted ticket price of $15 thanks to my veteran status.  Being a veteran has its perks, including a savings of three bucks off this ticket price.

I did not attend the Paul McCartney "Out There" concert that closed out the park's official schedule.  Friends said it was a cool show but I wasn't about to pay through the nose and fight traffic to see Sir Paul.  I'm sure the guy can sing quite well.  I would have been tempted to pay if Van Halen had played instead.

Amanda served as our tour guide and took us through the stadium, pointing out its notable features.  The statue of St. Francis of Assisi outside Gate A is supposed to be moved to Golden Gate Park at some point, and the "founders' bench" honoring the 49ers' first owners is supposed to move to Levi's Stadium in Santa Clara.  Once inside the gate we checked out the SFPD's two-room jail cell for fans who get too rowdy.  I'd sure like to throw some people I know in there.

We spent some time in the press box while some folks in our group told stories of their favorite games.  One common memory was the Loma Prieta earthquake in 1989.  The fans kept chanting for the game to go on, unaware that parts of The City and the Stick were severely damaged.  I was a high school student in Sacramento at the time, plotting my eventual escape to San Francisco.

The door to the SF 49ers locker room was immediately across from the visitors' locker room.  The trash talk must have been thick in the air if the two teams ever crossed paths.  I asked Amanda where the cheerleaders' locker room was located; it was upstairs somewhere and we would not get to see it.  Darn.  I was looking forward to seeing where the gals undressed and showered.  I'm pretty sure I'd have no difficulty getting an NFL cheerleader to date me, thanks to my extreme manliness.  My schedule is quite full so the ladies will have to get in line.

The 49ers locker room was exactly like what you'd expect from watching NFL games on TV.  No one is supposed to walk on the big team logo on the floor out of respect for tradition.  I played by that rule today.

The jerseys of famous former players hang high on the walls.  I'll bet more than a few of the multimillionaires on pro sports teams are banging each others' wives and girlfriends non-stop.  Rich people tend to do that when they're bored.

Amanda took us to another locker area that used to be the 49ers lockers when they shared the stadium with the Giants.  I stood where Steve Young's locker used to be situated.  The room later became the coaches' and trainers' area when the 49ers took over as sole tenant.

Amanda noted that the 49ers won all of those championships on the wall without the modern demands that wealthy athletes make upon their ball teams.  The ultra-modern Levi's Stadium has everything the players and rich patrons want.  We shall see whether it produces a comparable string of Super Bowl victories.

The final whiteboard lineup represents whatever the coaches were planning for the 49ers' final home game at Candlestick Park in 2013.  I have no idea what this stuff means but I captured it for posterity.  The tunnel leading out to the field used to have a Bill Walsh plaque that players would touch for good luck, much like the "Play Like a Champion Today" sign at the University of Notre Dame's stadium.  I never touched that sign when I was a Notre Dame undergrad and I never miss a chance to denigrate that school.  I do not like my alma mater at all.  I'm pretty sure the 49ers could beat the daylights out of the Fighting Irish any time they want.  Unknown vandals purloined the Bill Walsh plaque before it could be moved to Levi's Stadium.  If anyone knows who pulled that shameful stunt, they should contact SF Rec and Park and the 49ers to rectify the situation.

We got on the field and I asked Amanda to throw me one of the footballs she brought.  I fumbled the catch.  I threw it back to her and missed by at least one body length.  I can at least say I threw a football around on an NFL field for one day.  The goal posts were already down so attempting a field goal was not meant to be.  I never had the skills for team sports, so finance is definitely the better career for me.

We ended our tour in the players' former parking lot, where posters recount the 49ers' most memorable plays.  I remember watching "The Catch" on live TV as a kid.  My fascination with San Francisco probably started at right about that time.  I thanked Amanda for the great job she did as our tour guide.  Her innovative tour concept made money for The City.  Any sports organization should be glad to have her on board.

I did not wax nostalgic for Candlestick Park because this tour was my only experience inside the stadium.  Plenty of San Franciscans must have indelible memories of the Stick.  Families remember the fun times they had in the stands, cheering for their favorite team.  Wealthy people in the luxury suites remember the ostentatious displays of privilege that impressed their business partners and closed deals.  Players and coaches remember their bowl ring victories, shocking defeats, colossal paychecks, and the fun times on the road banging nameless chicks.  The San Francisco 49ers have moved to Silicon Valley, and hopefully they'll change their name to reflect their new neighborhood.  I'm not glad to see them go, but I am glad I got to see their old home at Candlestick Park.  

Ground Lease Notes

Today I learned about the "ground lease" at an Urban Land Institute seminar in San Francisco.  The speaker from Grosvenor Americas mentioned that these are common in the UK but not popular in the US.  I'll hazard a guess that it's a cultural preference.  Many American investors like healthy cash flows from commercial real estate investments.  Ground leases, according to our speaker, tend to raise a property's value over time but the cash flows from the property remain constant.

I don't know about you, but I would consider leasing a ground lease if I owned some vacant urban parcel and a big shot developer came along with deep pockets.  I would hire a decent real estate attorney to write covenants into the lease that assign all liabilities to the tenant so I don't get sued or assessed fines.  I would ensure that I am able to raise the lease amount annually if local authorities reassess the property's value after improvements and increase my property taxes.  If the lessee doesn't want to business on my terms, that's too freaking bad.  They can buzz off.  I make the rules once I own some property free and clear.

There must be a bunch of other things involved with ground leases that I can't address from ignorance.  These things are useful in developing property that would otherwise have limited economic use.  

The Limerick of Finance for 08/11/13

New construction all over this town
Blighted areas all coming down
Frisco grows and renews
Hiring skilled worker crews
Top developer deserves a crown

Basel III Capital Versus Incurred and Expected Loss Models

The GAO recently put out a study of small bank failures caused by bad loans in commercial real estate.  This kind of important work sometimes escapes wider public notice, although CFO Magazine noted this study's implications.  The incurred-loss model banks use to estimate CRE loan failures may be too flawed for the extremely leveraged world we have created.

My concern with the incurred-loss model (and its possible replacement, the expected-loss model) is its reliance upon a limited set of historical data.  Assessing losses based on the historical experience of a single bank would be fine if that bank never expands geographically or never expands its balance sheet faster than its long-term average growth rate.  The US economy's present credit bubble, with overall debt-to-GDP at historic highs, puts even historically sound banks in danger by tempting them to make irresponsible loans just to match competitors' asset base growth.  The GAAP approach to incurred or expected losses requires calculations to be performed in a vacuum, as if banks were atomized from the larger economy.  These limited accounting-based models invite unpreparedness for losses triggered by six sigma Black Swan macroeconomic conditions.

The Basel III regime's approach to measuring risk capital should apply to small banks too, not just systemically important ones.  Basel III capital rules add a leverage ratio to the assets banks must count as their Tier 1 and Tier 2 reserves.  Small US banks applying this standard will be discouraged from attracting yield-chasing depositors by offering CDs with abnormally high yields.  The usefulness of the Basel standard is that it applies across all national accounting standards.  Banks won't be able to hide behind GAAP if they get in trouble.

Small banks, here's your chance to act like the SIFIs you try to emulate by offering "financial supermarket" services.  Use every single one of Basel's designated shock absorbers, not just the ones designed for TBTF banks.  Jump on the Basel III bandwagon and use its countercyclical safeguards to stay healthy during the next credit crunch.

Trump Takes Gold Deposit In Signal To Ignorant Followers

Donald Trump likes PR that burnishes his image as a savvy guy on the cutting edge.  He's sort of joining the gold party by letting slip that he took gold bullion as a deposit from a tenant instead of cash.  I say "sort of" because I can't imagine The Donald ever going whole hog into the gold camp.  His real estate holdings are undoubtedly benefiting from the Fed's ZIRP focus.  Any rise in interest rates would put his heavily-leveraged properties seriously underwater and make loans for further development prohibitively expensive.  Taking a gold deposit from a precious metals dealer is good PR for the new tenant too.  Trump threw them a bone that didn't cost him anything extra. 

Gold is the hot asset class now, so Trump's leap onto its bandwagon means that the aspirational, wanna-be, know-nothing, Robert Kiyosaki-reading, suburban NASCAR dad, part-time real estate mini-mogul who bought a duplex last year and plans to flip it this year is going to start buying bullion.  That crowd can't scrape up enough cash for a 32-oz. bar but that's okay.  They'll be rushing on down to the corner pawn shop to drop cash on spare gold teeth and earrings that aren't acceptable as currency at your local grocery store.  I hope they really go for it.  They'll make it easier for me to reduce my GDX holdings at record high prices and build the cash pile I'll use to buy the real estate they won't need after they're bankrupt. 

Full disclosure:  Long GDX with covered calls.

Rent Control Likely To Survive Hyperinflation

Real estate is arguably an inflation hedge, but it is crucial to identify what kind of real estate - residential, commercial, undeveloped land, etc. - is likely to perform well in a hyperinflationary scenario.  Hyperinflation often brings unpredictable political changes that can affect the attractiveness of real estate. 

One early casualty of hyperinflation is the control landlords can exert over rental property.  Local governments often implement rent control laws to ameliorate public outcries over the rising cost of living.  This is good news for renters who live in rent-controlled apartments and bad news for multi-unit landlords who can't raise rents to match their increasing costs for utilities and maintenance. 

Commercial property may or may not be subject to rent control depending on how it is zoned.  Rent controls are designed to protect live human beings who vote in elections and support political campaigns.  Commercial tenants may not be a protected class during hyperinflationary politics, so their rents may not be protected.  That's potentially good news for commercial landlords.  Property that has no live tenants - warehouses, mini-storage units, etc. -  may be able to maintain cash flow that keeps up with inflation.  The valuation of the property is another story.  Rising interest rates in an inflationary economy will depress the value of real estate. 

Undeveloped land is another story.  Raw land with rights of way, minerals, farm/ranch potential, and other goodies will not be subject to rent control.  The unpredictability of development costs and the general lack of credit available during hyperinflation may prohibit all but the most rudimentary development of raw land.  Developers with deep pockets and cash flows that keep place with inflation will not suffer.  Investors buying raw land as an inflation hedge should see it as a store of value that will not be available for cash flow until after hyperinflation ends.  The remainder of their portfolios should be in assets that will generate inflation-indexed cash flows. 

Consider hyperinflation under Germany's Weimar government as a possible template.  Germany printed its Papiermark into oblivion to alleviate its war reparations burden.  The introduction of the Rentenmark ended the hyperinflation by reorienting Germany's currency toward hard, productive assets.  Gold bugs will be dismayed that the new currency was not directly redeemable in gold, but was subject to a complex valuation involving gold bonds, agricultural land, and industrial assets.  Any similar innovation to halt hyperinflation in the U.S. has the advantage of an immediate supply of assets with which to back the new currency.  The problem is that these assets - mortgage backed securities held by the Federal Reserve and bank stocks/warrants held by the U.S. Treasury under TARP - may have very questionable valuations themselves.  The U.S. government will need additional stores of assets - perhaps stocks and bonds confiscated from investors' retirement accounts - to back a new currency.

We will keep wargaming hyperinflationary endgames here at Alfidi Capital.  Meanwhile, we can seek out investments that will offer some hope of retaining value during hyperinflation.  Rent-controlled residential properties probably are not among the safest choices for investors. 

Mall Vacancies At Dot-Com Crash Levels

Check out just how badly commercial real estate is faring in this so-called recovery:

Mall vacancies hit their highest level in at least 11 years in the first quarter, new figures from real-estate research company Reis Inc. showed. In the top 80 U.S. markets, the average vacancy rate was 9.1%, up from 8.7%.

I guess all of those job seekers who've left the workforce (according to the government's figures citing an "improving" job picture) shouldn't waste time sending resumes to mini-mall owners.  The U.S. hasn't seen vacancy rates like those since the dot-com recession of 2000-2002 or so.  Developers built too many mini-malls in unsustainable exurban areas that will someday be farmland again. 

This kind of market is terrific for investors seeking bargain properties but horrible for mortgage note investors.  Note holders will be left holding the bag if mall owners default.  PIMCO doesn't agree and intends to launch a REIT focused on CMBS.  That may be the wrong move in this environment.  Instead of throwing my money at PIMCO, I'd rather watch the foreclosure listings in my area to see if any desirable properties are coming up for auction. 

Nota bene:  No positions in real estate or PIMCO products at this time. 

CRE Trouble Justifies Pessimism

Yesterday a friend of mine asked me why I'm so pessimistic on the economy.  Part of the explanation is that I'm not amenable to the positive spin that mass media reports put on most economic news.  It's an election year, and most journalists (including financial journalists) are in the camp of the incumbent party. 

Furhtermore, I can't help but notice items like this one on the dangers posed by delinquent commercial mortgages:

According to a report from the analytics firm Trepp, spiking delinquencies in CMBS could cause bank failures to increase as much as 30% in 2010. The delinquency rate for loans in commercial mortgage-backed securities (CMBS) spiked to 7.61% in March from 6.72% in February, according to the report.

Private analysts aren't the only ones with concerns about the banking system's stability:

By the end of 2010, about half of all commercial real estate mortgages will be underwater, said Elizabeth Warren, chairperson of the TARP Congressional Oversight Panel, in a wide-ranging interview on Monday.

The TARP's chief overseer has admitted that none of the banking system's problems have been solved.  The U.S. banking system is still insolvent, and any seemingly minor hiccup can push us right back into crisis.  Now you know why I'm still a pessimist on the economy.

First Dubai, Now Kuwait

There is probably no country on earth that can insulate itself from the next phase of the credit crunch. Witness the case of Kuwait, in Kuwaiti bankers' own words:

Most of Kuwait’s multibillion-dollar investment company industry could be wiped out by debt repayments on the finance houses’ leveraged investments made before the recession, senior bankers have warned.
(snip)

While bankers said the investment company woes were largely contained in Kuwait and should not spread, they could lead to distressed sales of overseas assets and were weighing on the exposed local banking sector.

I love the mention of "distressed sales of overseas assets." Take a guess where those assets are located. If you have trouble, just look out your window at the nearest shuttered shopping mall. While you're at it, let your neighbors know that they should slash the asking prices for their homes right now if they want any hope of selling. That's the only way they'll get ahead of the coming CRE debt crash.

These observations are tantamount to an admission that Middle Eastern sovereign wealth funds will be too preoccupied with their own solvency problems to fund any more debt-fueled stimulus in the Anglo-West. The U.S. can forget about a second fiscal stimulus. I blogged about all of this in 2009. Nobody listened to me and that's okay. My historical record is there for anyone to search.

That cloud you see on the horizon is a swarm of Black Swans. You do see it, don't you?

AMB Property Still Losing Money

In the ongoing debacle that is commercial real estate, AMB Property reveals the end of a bad year:

The year’s losses, primarily the result of impairment charges in the first quarter, more than quadrupled the $6.8 million loss in the previous year. In the fourth quarter, the situation eased as demand started to turn around. Fourth quarter losses came to $10.1 million, compared with a $199.2 million loss in the fourth quarter of 2008.

I do pay attention to companies in my backyard, like San Francisco-based AMB. Investors looking for contrarian plays might be inclined to consider a stock like AMB as a turnaround possibility. I'm more skeptical, given the company's negative net income two years running. Their long term debt has also been increasing for three years, which IMHO is not a good sign in a recession.

I seriously think the real estate sector has further to fall.

Nota bene: Anthony J. Alfidi has no position in AMB at this time. He is long puts on IYR as a bet against the entire real estate sector.

CRE Bomb Flattens Stuyvesant Investors

The CRE default train is picking up speed. A huge and storied residential development in the Big Apple just got handed to its creditors (i.e., the Greater Fools) via jingle mail:

Tishman Speyer Properties LP and BlackRock Inc. will cede control of Stuyvesant Town-Peter Cooper Village to lenders after the value of Manhattan’s largest housing complex fell and they were prevented from raising rents.

X
Oh, BTW, CalPERS was one of the biggest investors in this property's mortgages. Remember their plan to double-down on illiquid assets? Great idea. :-( BOHICA, California taxpayers, because you'll get the bill to fill CalPERS' smoking holes.

Stuff like this is making me happy that I bought puts against IYR, a real estate ETF.

Banks May Have Peaked

The golden boys and girls at Goldman Sachs rarely disappoint . . . that is, until just about now:

Goldman Sachs Group Inc. reported a surge in third-quarter profit driven by trading and investments with the firm’s own money. The shares declined as earnings fell short of the bank’s record.

GS is a roulette wheel disguised as a bank holding company; it is one big moral hazard. Other banks are also successfully disguising their problems:

Citigroup Inc., the lender 34 percent owned by the U.S. government, posted a $101 million profit, defying expectations for a loss as the company added the smallest amount to loan-loss reserves in two years.

Watch out, Citi, those pitiful loan loss reserves aren't going to help much when CRE really starts cratering in 2010. And in a surprise development, the market responds rationally to this news:

U.S. stocks dropped, dragging benchmark indexes down from their highest levels in a year, as Goldman Sachs Group Inc. and Citigroup Inc. fell on earnings that disappointed some investors.

If the banking sector's health is peaking, a renewed downturn in the larger economy may not be far away. That's why I continue to add to my cash pile.

Housing Crash Redux 2009

This is it. No, not Michael Jackson's posthumous album. I mean the beginning of the second part of the housing bailout:

Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.

That says it all. I don't think I have to quote any more from the NYT for you to get the picture. I'm so glad I went on record last year with my opposition to the housing bailout. I knew that if America started down that path it would spell the end of our status as a great power. A second mortgage bailout will cement our national decline and ensure that any hope of reversing it will be monumentally difficult within the remaining lifetime of Generation X.

I'm gradually building cash that I can use after the market tanks to buy equities. I don't think I'll have to wait very long for another real estate-related implosion to bring that on. If both FDIC and FHA need simultaneous bailouts . . . hello 1932 all over again.

Commercial Property Woes Reveal Bank Insolvency

Reading between the lines in this Bloomberg article tells us everything we need to know about why the economy is in a phantom recovery and why this bear market rally is built on nothing. Let's take a look at commercial real estate:

Commercial-property sales in the U.S. this year are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s.

Okay, this isn't much of a surprise, although CRE industry veterans quoted in the article are aghast that they've never seen a buyer's drought of this magnitude in their careers. The lesson for investors is farther down:

The default rate on commercial mortgages held by U.S. banks more than doubled in the second quarter to 2.88 percent, according to New York-based Real Estate Econometrics. It may reach 4.1 percent by year end, the highest since 1993.

That may mean more pain for banks that hold the mortgages and signal that this year’s gain in real estate investment shares may be overdone.

Banks are nowhere near healthy, depsite all of the happy talk you hear on CNBC. Bankers are happily paying themselves huge bonuses again, and I suspect they're doing so out of fear that they may never see such income levels again if the banking system heads over a cliff soon. Three more snips from the article will show us where we're headed:

“We’re not forcing the banks to disgorge” distressed properties, said Susan Wachter, professor of real estate at the University of Pennsylvania’s Wharton School in Philadelphia. “It’s a different crisis, a far worse crisis.”

FDIC regulators who should know better are not forcing banks to write off bad loans and seize properties, so technically insolvent banks continue to function.

Maturing commercial property loans are high on the “worry list” of San Francisco Federal Reserve President Janet Yellen, she said in a July 28 speech to the Oregon Bankers Association.

Leaders at the Fed know banks' true conditions and are maintaining a ZIRP funds target to forestall the second phase of our systemic crisis.

The entire real estate dynamic has shifted, said Frank Liantonio, executive vice president of Cushman’s capital markets group. Liantonio, 60, with a career that goes back to the early 1970s, said he’s been through six down cycles from the mid-1970s to the dot-com bust of the early 2000s. This is the worst, he said.

“Property is no longer controlled by the owner,” he said. “It’s controlled by the lender, and the lender in most instances doesn’t have the ability to take the charge to earnings and sell the property. That’s one reason why you’re not seeing any transactions.”

I bolded part of that final quote to show how the continuing insolvency of our banking system keeps the real estate market frozen. This is why REITs and ETFS like $IYR have rebounded recently. Investors are attracted to the false hope that commercial real estate will remain attractive because of the inability of insolvent banks to foreclose on defaulted loans.

Note that IYR is up almost 100% and XLF is up almost 140% from their March lows. These price levels are unsustainable given the slow-motion crash in CRE disguised with the full complicity of bank regulators.

Disclosure: Anthony J. Alfidi has no position in XLF or IYR at this time.