Financial, Real Estate, Stock Markets Trends and Current Affairs

We have incorporated data from GET's most recent filings and have updated our model's and findings accordingly. Subscribers can download the document below, as well as the quarterly review, and the original forensic analysis:

• GET Update Aug 2010
• GET 2Q10 review
• GET Forensic Analysis - Retail
• GET Forensic Analysis - Professional and Institutional

A few days ago I warned my subscribers that the lodging industry, and the economy as a whole, were not truly recovering to any material extent (see The Most Recent Lodging Co. Forensic Analysis is Available and We Think Management Have Been a Little Optimistic). Y-o-Y comparisons made everything look good when you are on the verge of insolvency last year! Well, in the headlines today we have:

• Weekly Claims Show Surprise Gain in Wobbly Jobs Market:  and exactly who is it was surprised by this??? Obviously someone who doesn't read BoomBustBlog! See “Are the Effects of Unemployment About To Shoot Through the Roof?”
• Many Retailers Post Weak July Sales, Short of Estimates: and exactly why were estimates so unrealistically high? There is close to no optimistic macro news out there, and fundamentals are worth doo doo.

Then there is the mainstream media and there reporting of earnings, without bothering to look past the marketing spiel put out by management. I can't blame management for this, I would probably do it to if it worked. Reference "Gaylord 2Q revenue up despite Nashville closure" 12 Jul 2010  -  The Associated Press. Actually, revenue was down - and down materially, but why let a few facts get in the way. Here is an excerpt of our review of Gaylord Entertainment's 2nd quarter earnings:

Buoyant stock prices are defying the physics of fundamentals. Equities are also floating on mist despite the gravity of the macroeconomic outlook as we believe the equity market falls prey to over-exuberance and excessive optimism. I query, have we entered into a double-dip recession? I'll answer my own question here, No! The reason is because I do not feel we have organically left the previous recession. The positive GDP prints and "green shoots" were the direct result of government bubble (re)blowing through fiscal and monetary stimulus, culminating in QE v1.5. As the effects wear off, we start to see were the economy really stands. Let's just grab the first four headlines today from CNBC.com a day after a 2%+ rally in the S&P:

• Pending Home Sales Plunge as Housing Market Weakens: Contracts for pending sales of previously owned U.S. homes fell to a record low in June as buyers sat on the sidelines, a survey from the National Association of Realtors showed on Tuesday. Of course, we at the BoomBust made it very clear this was a foregone conclusion, see As I Made Very Clear In March, US Housing Has a Way to Fall.
• US Factory Orders Drop for Second Straight Month: As was expected.
• Consumer Spending, Incomes Flat in June; Saving Up: No surprises here.
• US Unemployment Could Rise Before It Drops: Geithner: Of course, I guess Geither just read my piece from the "Green Shoots" era, “Are the Effects of Unemployment About To Shoot Through the Roof?”

Despite the flurry of the truth finally emerging from among rampant disinformation negative economic news, the markets is only off  2 points today after rallying 24 points for nothing yesterday. Bubble, Bubble, toil and trouble. Needless to say, this happy slappy effervescence cannot (and will not) go on forever. A typical example of said over exuberance is the highly economy and consumer sensitive US hospitality sector where the entire pack of hotel stocks have witnessed a substantial rebound from their lows in March 2009 owing to the recovery seen in the occupancy levels, while the markets ignore the weak prices that are offsetting most of the revenue gains and are undermining a healthy recovery in the sector. The sector is still struggling with the demand–supply gap that developed over the last two years when demand was pummeled by the economic downturn in combination with new supply that continued to add to the vacant rooms. Rooms are being booked at rates below the 2009 levels (post economic bust!) to boost occupancy with group bookings rates showing significant weakness. The subject of the accompanying forensic analysis’s business model is particularly vulnerable as the company derives nearly 78% of the revenues from group bookings and the prices are being slashed at all of its hotels. Price cuts have been more severe at its hotels in Washington and Orlando because of relatively higher supply-demand gap in these areas. Further, price cuts at a time when costs are increasing due to input inflation are likely to hit the margins at the same time that said inflation outstrips wages, income and asset appreciation, creating a profit sapping stagflationary environment. See Continuing the Deflation/Inflation/Stagflation/Depression/Recession Rant… for more on this topic.

BoomBustBloggers have been on a wild CRE and residential rollercoaster ride over the last couple of years. Starting in 2007,we ran into Lennar and discovered things off balance sheet that the sell side and the company itself forgot to tell us (Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth), Ryland and their sell happy management (What does Reggie Middleton and Ryland's Upper Management have in Common?), Hovnanian and his you should by a house now (as he puts his on the market, Credibility is the Key to Success for a CEO – Hovnanian has Lost that Key: A letter to Mr. Hovnanian) and a whole host of other homebuilders. We gave

an early warning on CRE in the 3rd quarter of 2007 (about a year before it was fashionable to do so - Will the commercial real estate market fall? Of course it will), then moved on to short General Growth Properties (now bankrubpt, GGP and the type of investigative analysis you will not get from your brokerage house) and Macerich (got this one to profit right before the market went coo coo for Cocoa Puffs - Macerich Forensic Valuation - Retail 2009-10-22 01:46:14 192.71 Kb - Macerich Forensic Valuation - Professional 2009-10-22 01:45:52 344.92 Kb - Macerich Sensitivity Analyis - Pro 2009-10-22 01:46:36 344.92 Kb) close to the top of their cycles (unfortunately, we're still waiting on ALX to speak to Mr. Reality for this one has benefitted from both a thin float and a fundamentally irrational market! - Alexander's Actionable Research Note Retail 2009-02-19 16:16:44 - Alexander's Actionable Research Note Pro 2009-02-19 16:20:08 and video too: February REIT Actionable Intelligence Note Update - remember, who are you going to believe, short term stock prices or your lying eyes!).

Keeping with this theme, the rabble rousing, digital rag known as ZeroHedge recent ran a couple of posts concerning the CRE crash and its effects on NYC hotels.

Fcur Seasons Hotel In New York Is Latest Victim Of CRE Crash

In addition to the Four Seasons, three other luxury hotels, which back a loan sent to a special servicer 10 days ago include the Four Seasons Biltmore Resort in Montecito, the ritzy Las Ventanas in Cabo, the destination of many a banker closing dinner, and the San Ysidro Ranch in Montecito.

The special servicing action has forced S&P to place 15 classes of bonds backed by a $425 million loan to Ty Warner Hotels & Resorts on "credit watch with negative implications." The catalyst for the action and the transition to special servicing was prompted by a staggering drop in cash flows from properties which came 46% below S&P expectations. The loan, which matures in January 2010, and which investors were hoping to recoup full principal on, may now be looking at substantial losses. And due to the declining cash flow, the loan would not qualify for an extension as it is in breach of it debt service coverage ratio.

More indicative of the collapse in the luxury hotel segment is the drop in occupancy for the four properties from 69% in the last fiscal year to a meager 58% recently. Alas the Ty Warner penthouse pictured insert unfortunately does not seem to be seeing a lot of action (if any) these days.

The full blown impact of CRE deterioration on the hotel industry could escalate rapidly: according to RealPoint there are over 1,500 loans with a total balance of nearly $25 billion which may be in danger of default...

The Next CRE Casualty: Union Square's W Hotel

"... the iconic Union Square W Hotel may just be it. The hotel, which was acquired by Dubai's troubled sovereign wealth fund, Istithmar, for $285 million in 2006 (one of the few acquisitions of a hotel at a price of more than $1 million per room) has been bleeding cash lately after room rates have declined by 24%. The result has been an inability for the owner to even meet debt service obligations: a sure sign the current balance sheet is doomed, with an outright default just a matter of time.

... And here is why the math on every single REIT "upside case" out there is highly suspect:

The hotel’s net cash flow this year is running at an annualized rate of $8 million, down from $14.8 million in 2008, according to the servicer report. That barely covers the $7.5 million of annual debt service on the senior mortgage, but isn’t enough for the mezzanine loan. Like all luxury hotels in Manhattan, the W New York Union Square, at 201 Park Avenue South, is struggling with a drop in revenue because of the recession. Room rates are down $100 from a year ago, according to a servicer report. What’s more, the hotel’s annual property tax more than tripled, to $3 million.

If industry indications are any sign, the rebound is still far away for the troubled New York hotel segment:

The average occupancy for luxury hotels in Manhattan was 74.2% in the first eight months of the year, down from 81.9% a year earlier, according to Smith Travel Research. Room rates plunged 24%, driving room revenues down 31%.

As for those about to get whacked when and if Istithmar decided to call it a day: some very unhappy clients of Credit Suisse:

The purchase was financed with a $232 million debt package from Credit Suisse that consisted of a $115 million senior mortgage and a $117 million mezzanine loan. Credit Suisse securitized the senior loan and placed the mezzanine debt with one or more unidentified high-yield investors. The interest-only senior mortgage, with a 6.5% coupon, matures in October 2011. It was securitized via a $3.4 billion pooled offering (Credit Suisse Commercial Mortgage Trust, 2006-C5).

And while the maturity is only two years in the future (as are many other scheduled CRE maturity rolls), the likelihood that the loan will continue paying current income for the next 24 months is virtually nil.

So if this is the fate of one of the sovereign fund's landmark properties, what will happen to its two other trophy hotels?

Istithmar’s real estate holdings include two other Manhattan properties: the Mandarin Oriental at Columbus Circle and the office building at Six Times Square. Istithmar has been converting Six Times Square into a hotel, but work on the project appears to have slowed dramatically."...

I received this email a couple of days ago. I looked into him and he is a relatively large concern. It is not just the little guy getting shafted...

Reggie - I am a large hotel company and have been treated like a thief by the doo doos [he is referring to Reggie Middleton's notorious Doo Doo 32 (As I see it, these 32 banks and thrifts are in deep doo-doo!)]. It infuriates me everyday. This statement is obviously false and banks are using every coverage or ltv test they can to make borrowers pay loans down. Please do not use my name in anything...

http://www.marketwatch.com/story/suntrust-reports-third-quarter-results-2009-10-22

Additionally, commercial loans have declined due to weak loan demand as a result of the recessionary environment and borrowers' desire to restrict capital spending and pay down existing debt facilities.

The Company has substantial available liquidity as the inflows of high quality deposits and longer term financing sources have largely been retained in cash and invested in high quality government-backed securities.

Anyone interested in my latest take on the Suntrust numbers (remember, I warned you about them a long time ago) should look here: Reggie Middleton on Suntrusts Q3-09 Earnings

Subscribers can access the latest lodging research below and via the downloads section:

Lodging Report 290709 Retail 2009-08-03 01:52:38 420.81 Kb

Lodgin Report_290709 Pro 2009-08-03 01:53:54 635.54 Kb

HOT's 2Q09 results analysis

Starwood Hotels reported a tough 2Q09 with revenues (excl other revenues from franchised and managed properties which are reimbursements of costs incurred on behalf of managed hotel properties and franchisees) declining 31.5% (y-o-y) to $707 mn in 2Q09 from $1,032 mn in 2Q08. Steep declines in ADR and occupancy are pushing down the REVPAR at owned hotels, resulting in 36.5% (y-o-y) decline in revenues from owned, leased and consolidated joint venture hotels to $394 mn in 2Q09 from $620 mn in 2Q08. REVPAR for comparable owned hotels worldwide declined 32.6% (y-o-y) with hotels in North America witnessing a decline of 31.4% and international hotels recording 34.8% decline. Starwood's management and franchise fees declined 14.2% (y-o-y) to $187 mn in 2Q09 from $218 mn in 2Q08 as the revenues at the managed and franchised hotels plunge due to double digit decline in REVPAR at the managed and franchised hotels. REVPAR for the comparable systemwide hotels, which include worldwide owned, managed and franchised hotels, declined 25.9% with sharp declines recorded across all geographies. Further, the revenues from vacation ownership declined 35.1 %( y-o-y) to $126 mn in 2Q09 from $194 mn in 2Q08.

This earnings season has shown this quarter's research to be quite accurate. I am still bearish on the market, and the weak earnings performance coupled with the still elevated equity prices and valuations make me even more suspect. The last time this happened to this extent (well, not quite to this extent) was right before the dot.com crash. As a quick recap for the past week.

Wells Fargo, right on point, nearly to the "T":

• WFC Investment Note 22 May 09 - Retail 2009-05-27 01:55:50 554.15 Kb
• WFC Investment Note 22 May 09 - Pro 2009-05-27 01:56:54 853.53 Kb
• and for non-subscribers, Wells Fargo reports in a few hours and I wonder how forthcoming they will be with their credit losses

Caterpillar, very, very close to perfection. I also believe we have caught CAT in a shenanigan or two, which I will post on later:

• Caterpillar Inc. Preliminary Analysis 2009-06-17 10:34:20 666.50 Kb
• CAT Forensic Analysis Retail 2009-06-25 15:43:20 374.87 Kb
• CAT Forensic Analysis Professional 2009-06-25 15:44:27 836.39 Kb
• and for non-subscribers - CAT’s 2Q09 results analysis

GS, results are on point, valuation is through the sky as I have anticipated.

And just this morning, Starwoods, whose actionable intelligence item I posted very recently: Starwood Hotels (HOT) Intelligence Note_072009 - 2009-07-22 03:45:18 927.84 Kb. From WSJ.com:

New research is available in the download area for subscribers. Feel free to discuss this in the private forums - Hotel Industry Intelligence Note_072009 - 2009-07-22 03:45:18 927.84 Kb. The company featured here reports soon.