2010 CRE Outlook and Response to the Ackman/Pershing Square Presentation

By: Reggie Middleton | Tue, Dec 15, 2009
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I recently received a link to Ackman's (from Pershing Square) presentation basically pushing retail CRE malls (Ackman's CRE presentation). Several of my subscribers have commented on his success with GGP as well as the upward climb of REITs in general. I decided to go out of my way to create a comprehensive overview of the US commercial real estate market in order to illustrate exactly where my (more bearish than the consensus) views stem from. The following document started out as a reply to the Ackman presentation, but ended up as a full blown white paper. It is free to download here: CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb.

I invite all to read both documents thoroughly. It may take some time, but I feel it is definitely worthwhile for anyone with an economic interest in this space to review both the bull and the bear arguments from entities that actually invest in the markets. I welcome any and all "constructive" comments and feedback.

For those who are interested, my first exposure to Mr. Ackman was after reading a similar Powerpoint presentation on the monolines. I was stunned at the assertions and the alleged misvaluations. After I and my team went over it, I too jumped on the bandwagon. The man had a very valid point and the stocks were trading in the stratosphere in relation to the risk they carried. That was in 2007 at roughly $80, and they are trading for pennies now. Ackman held his bearish stance for 5 years through some apparently nasty drawdowns, to ultimately have been proven right. Kudos to the man. See my work on the monolines that I shorted in 2007-8:

A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton
Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billi
Follow up to the Ambac Analysis
Download a "Window" into Ambac's Problems
Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibili
Moody's Affirms Ratings of Ambac and MBIA & Loses any Credibilty They May Have Had Left
What does MBIA, Ambac, and Brittany Spears have in common?

The next time I came across his work was his special purpose fund dedicated to Target. I patently disagreed with the thesis behind that one. I didn't think the risk concentration of the fund was prudent, and I thought he was much too optimistic about the real estate holdings and the future of land values. It appears that I was right on that one.

One of my subscribers then forwarded to me his work on Realty Income "O". While I think that this company is hiding many problems and probably does not have that bright a medium term future, I believe that there are better short opportunities in the space. The more I look at the company, though, the better a short candidate it appears to be, it is just that there are companies with clearer and more immediate issues at hand. Subscribers can see the comparison between this and my other REIT shorts in a clear comparative analysis:

Realty Income Preliminary Review 2009-12-11 04:55:391.35 Mb
Realty Income Observations 2009-11-16 02:31:35 384.50 Kb

My subscribers hit the ball out of the park with the GGP short ($60 or so on down to a bankruptcy filing trading under a dollar, depending on where you covered/sold your puts). Pro subscribers can download the 300 page tome here: GGP composite history 2009-12-10 04:15:45 3.60 Mb. Retail subscribers can find relevant analysis in the commercial real estate portion of the downloads section and non-subscribers can see the html version of the history (minus exhibits and models) here: "GGP and the type of investigative analysis you will not get from your brokerage house". Earlier this week, one of my subscribers pointed out that Ackman hit the ball out of the park with his GGP long, which he did (bought under a dollar, currently trading at about $10). I mentioned to him that GGP is currently trading around where my original analysis had the entity valued. I was not sure Ackman would be able to extract that value out of the company due to the precarious selling and financing situations surrounding CRE after GGP's bankruptcy, but I literally had no idea what his strategy was and never looked into it thus my opinion was unqualified. He pulled off a magnificent trade, although I believe the post bankruptcy share price was assisted by this outrageous bear market rally. There is value in the GGP portfolio, but it is a bit more muddled than it appears on the surface. Alas, he performed well on this one regardless of the reason and kudos to the man. This brings us to the latest presentation from Ackman, in which he is hyping CRE. Here, as in the Target venture, I believe he is being unrealistically optimistic in the CRE space, possibly due to the following of false positives in the economic "recovery" and more importantly missing the fact that this is a "balance sheet" recession, which is not your garden variety economic downturn. Simply ask Japan. As my readers know, I am still rather bearish on CRE (particularly certain companies).There probably will be strong bull plays in the sector, but for now they are simply trading plays and not suited for a fundamental investment, at least in my opinion.



Reggie Middleton

Author: Reggie Middleton

Reggie Middleton

Reggie Middleton

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