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."

Corus has an unusual loan officer compensation program:
"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.