Monday, June 4, 2007

Initiating Coverage on Corus (CORS): Part One

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

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

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

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

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

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

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

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

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

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

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

Therefore, we find ourselves back in 1983, when the New York Times wrote "AUCTIONEER'S GAVEL FINALLY MOVES LUXURY CONDOMINIUMS IN MIAMI." That year, Miami condos sold at auction for "30 to 45 cents on the dollar."

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

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

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

Jack McCabe talking about Miami condos: “When you drive by in the daytime, they are gorgeous, but when you drive by at night, there’s no furniture on the patios and only one light on out of 10.”

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


Miami said...

Old story, guys.
You are repeating 6 months old news?
Are You journalists or just copy writer?

The situation in Florida is not as bad as You say.

Anonymous said...

Not as bad as you say? there were 11k new condos absorbed from 1995-2004, cumulatively. That’s 1,100 condos per year, on average. So right now we have 22,000 existing condos on the Miami MLS system for sale, and another 20,000 condos under construction to be delivered over the next two years. This is a train-wreck waiting to happen.

Unknown said...

Indeed, the risk is fairly obvious, but this is a bank, not a condo developer. If they are (as they say they are) lending at 60-80% of COST (not the developers inflated value number), then even if the project tanks they can simply take the building and sell it to a REIT at a 5% cap rate. Of course, being a bank, there's always the risk they just firesale the building, but I think this management team is smarter than that.

Anonymous said...

Matt, Glickman always says they lend at 60-80% of VALUE, not cost. He said this in a 8/30/06 WSJ article and again at the 4/23/07 annual meeting for shareholders. Therefore, it doesn't take much of a value decline before the equity and mezz piece gets wiped out. Also, why would you use a cap rate to value a condo development?

CP said...

According to the Q:
"our initial loan exposures target approximately 55% to 65% of sellout"

WCI's gross margins were 23% in 2004, 24% in 2005, and 12% in 2006.

So if that 60% of sellout number was based on fanciful sellout prices from 2005 or 2006, their loans are

0.6/(1-0.235) = 78% of gross cost.

Also: that's the "initial" loan exposure. Do they mean that the developers can draw more than that?

This is really irrelevant to Matt's point about sale to a REIT.

Take a look at craigslist to see what Miami condos are renting for.

Cap rate of 5% values them at:


Unfortunately, CORS is into many of the condos for more than that.

Also, a 5% cap rate is ludicrous and by the time the default wave hits CORS, REIT spreads should widen.

A reasonable 8% cap would slash that $360k value by 38% to $225k.

Jason said...

I love reading some of these old comments, specifically user Miami's post, "The situation in Florida is not as bad as You say."

Nice work, CP.

CP said...

Thank you!

The question is, what are people doing/saying today that is as insane as the RE bulls were in June 2007?

How about ignoring the extreme bullish sentiment and stretched valuations?

Jason said...

I work in high yield and have been saying things are rich for 6 months. But of course they just get richer.

The recent PIK/Toggle issues are a bad omen IMO

CP said...


What do you think of Treasuries? Is there anything in HY that you can own anymore?


P.S. Send me an email at want to ask you something.