Initiating Coverage on Corus (CORS): Part Two
This is the latest from Miami:
"...the most foreclosures at any condo development in [Miami-Dade county] this year."
"The 326-unit complex at 1331 Brickell Bay Drive had more foreclosures [17] than any other building in Miami-Dade and was second in South Florida..." That's 5.2% of the units, so far.
"Attempts to sell now are being compounded by falling appraisals and hesitant lenders. At least one has sworn off Jade already."
"Today, Miami-Dade has 28 months of existing inventory — without taking into account the new units that haven’t closed yet, said Ron Shuffield, president of [Esslinger Wooten Maxwell]." "In April 2005, there were 5,125 condos on the market. One year later, the number of available units spiked to 15,581, and the number rose to 22,924 in April, according to Multiple Listing Service research by EWM."
"Another problem for Jade owners trying to sell is that even willing buyers may have trouble finding a mortgage. Greenpointe Mortgage Funding stopped lending at Jade because of inflated appraisals and prior resale activity."
One of the themes of the nationwide condo bust is condo towers being converted to apartments, or condo conversions going back to apartments. From the Corus Q:
"An additional 3.8% of the loan portfolio ($147.5M) consists of one conversion loan and two construction loans that were previously classified as condominium loans. The borrowers ultimately failed to sell enough condominiums to make a condominium exit viable. For the conversion loan, the borrower has opted not to convert the property and will retain it as an apartment building. In the other two cases, the borrowers are negotiating the sale of the properties as apartment buildings."
Here's the two big pieces of bad news from the CORS Q:
- NPLs / Total Loans are 5.09% - up from 0.01% in 2006.
- "At this point, most of our problem loans are concentrated in the condominium conversion loan portfolio. We have a total of 48 condominium conversion loans totaling $1.0 billion, of which nine loans totaling $458 million are of particular concern."
"A significant portion of commercial loan officer compensation is ... the CLO Program... [which] generally holds back much of their commissions for up to nine years, during which time it is at risk of loss in the event the Company suffers a loss on the loans. Management believes the program motivates officers to make safe loans and aligns the officers’ goals with the Company’s interests."
This is admirable, but probably not enough because it gives the loan officers the same free option on the loan portfolio and they still don't have any skin in the game.
There's been an ongoing discussion in the comments section of the last CORS post that is worthy of publication.
Matt suggests that CORS will be able to take any foreclosed projects, sell them to REITs at a 5% cap rate, and break even.
There is a glut of condos for rent and for sale in Miami, for example. We could be very generous and assume that some REIT would be able to take a building and rent all the units for $2500/mo. We will assume that they can do this when 20,000 units are on the market simultaneously.
A cap rate of 5% would value one of these hypothetical units at (2500*12*60%profitmargin)/(.05) = $360,000.
Of course, if spreads widen to reasonable levels and condo rentals are yielding 8%, the value would be slashed by 38% to $225k.
If caps were at 8% and rents were only $1500 because of the inventory glut, the unit would be valued at $135,000.
32 comments:
Although sound, I don't think your back of the envelope analysis is of much use in evaluating CORS. Even in Miami, the apartment market is OK. Also view the recent ASN deal - there is real demand for apartments. Now, don't get me wrong, I'm no real estate bull - I've got some serious shorts in the REIT space. But what action do you suggest we take here? Short a stock with 60% of float already sold short? That's already been cut in half in the last year? This is a commercial bank, not a subprime originator. I wouldn't short it unless I thought it was going to zero, which I definitely don't think is the case.
My analysis shows they would have to take HEAVY losses on their loan portfolio before they get into regulatory capital issues - on the order of 50% defaults with a 25%+ loss ratio on those defaults. I just don't see it happening - if it's so bad down there, why haven't we see more problems yet? If it only gets twice as bad for CORS in terms of losses and NPA as it is today, I'll make a bundle on this stock.
RE: Loan Officers - I think they've still got plenty to lose. Regardless, The Glickmans have even more to lose, and I'm comfortable with their skin in the game. I've talked to condo developers who have worked with CORS, and Bob is heavily involved in the lending process.
I'm not trying to be antagonistic, but I've yet to hear a persuasive baer take on this stock that doesn't begin and end with "the condo market is bad". Thoughts?
You do point out the bad news regarding NPLs, but you neglect to tell the complete story:
"Nonaccrual loans at March 31, 2007 include four condominium conversion loans. The underlying properties are located in Phoenix, San Diego and two in southwestern Florida...
In many cases where a condominium project is not performing as well as we (or the borrower) would like, the borrower, or a mezzanine lender subordinate to Corus, has supported the loan with additional equity. These additional equity contributions have come in many forms, including cash payments that have been used to keep a loan current or, in the case of a delinquent loan, bring it current. As a result of such payments, three of the above nonaccrual loans, totaling $149 million, were actually “current” relative to principal and interest as of quarter-end."
First, I find it itersting that they had no NPL's in Miami-Dade as of Q1.
Second, one could argue that only $47 million of loans were NPLs (196-149 that were brought current).
Looking at the March quarter, Corus had a one time $15 million charge related to its FMT investment. They made a $5 million loan loss provision and still earned $0.46. So in the coming quarter they could provision $20 million for the loan loss reserve and still end up at near $0.46 for the quarter.
Since most loans last abaout 3 years, every quarter the loans performs puts it that much closer to dropping off.
Also, how did you come up with a margin of 60% for the back of the envelope calculation?
http://finance.yahoo.com/q/co?s=ASN
Archstone has 41% operating margins. AIV is 21%, AVB is 38%, EQR is 28%, the industry average is 26.4%.
These are some of the likely bidders and there is no way that they would assume higher margins than their portfolios have already.
Clearly the 60% margin is too high.
Except you cap NOI, not operating income, and NOI is closer to EBITDA. All the companies you listed have EBITDA margins close to 60%.
It doesn't matter as the calculation isn't meant to be exact. The point is just to say that the buildings will retain some value close to cost, and IMO, it will likely come it at or above cost, limiting the downside to CORS.
Here in Phoenix I saw a 14th floor condo in a 15 story building renting out for $1995 a month -- it was a 2 bedroom penthouse which would sell for about $895,000. Based on a $575 maintenance charge, this would leave $1420 for the owner as income per month on his $895,000 investment. Or, a cap rate of 1.9%. It's a very nice unit, and the developer clearly is sold out of this project at much lower prices, but at a 1.9% cap rate I'm thinking that investors aren't going to be beating down the door for investments like these.
the Fmt in their Portfolio is now in postive terr.
Amcore Financial Inc. 69,100 2.082m
Associated Banc Corp. 121,179 4.0159m
Bank of America Corp. 670,594 33.932m
Bank of NY Co. 100,000 4.2m
Citigroup Inc. 225,000 12.197m
Comerica Inc. 264,300 16.444m
Compass Bancshares Inc. 108,750 7.543m
Fremont General Corp. 2,542,400 31.525m
JP Morgan Chase & Co. 500,864 25.408m
MAF Bancorp Inc. 204,850 11.082m
Merrill Lynch & Co. Inc. 132,000 11.806m
Morgan Stanley Dean Witter & Co. 82,000 7.2m
National City Corp. 74,520 2.548m
Regions Financial Corp. 515,154 17.7m
SunTrust Banks Inc. 48,000 4.348m
US Bancorp 268,870 9.2m
Wachovia Corp. 398,191 21.502m
total 222.733m updated as of 12:37pm June 19th 2007
If you care to magnify your analysis, just about every company could appear weak. Granted there is a weakness in the housing market, but the demand will return. When it does, Corus is very well positioned to make a great deal of money. The company has shown their astute management by declaring a special dividend with no promises of future ones. However, there is a strong hint that future considerations will be made thus taking advantage of the favorable treatment of dividends until December 2010. This is extremely encouraging to any current shareholder. The shorters should be sweating bullets and I would anticipate large volume as they scramble to cover positions. With around 60% of the float short, the next month or so of trading this stock will be momentous. My only amazement is that this is not among the assets in the Buffet portfolio.
nice post, it's really interesting for me today, thx
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