Implosions, Crashes & Turmoil – Turkey In The Markets

1.  Accelerated foreclosures/deeds in lieu/short sales leading to record inventories of unsold houses and for-sale pricing crashes nationwide;

2.  The inability of home builders, land developers and leveraged land investors/speculators to hold their positions creating a glut in the market which will bust the sponsoring entities and send values down to nothing as liquidity in the land markets drops to zero;

3.  Shopping Center, Distribution Warehouse and Business Hotel difficulties as the customers are going to go back to shopping at the 99 Cent store at Pico & Beverly in Beverly Hills for recreation, we’re going to be sending goods the other way and improving our trade balances as the value of the dollar falls and we become more like a 3^rd world economy and even the biggest corporations will be restricting their traveling employees to Motel 6/Accor and the other economy chains;

4.  Empty office buildings where real estate and real estate related entities close down;

5.  Bargains in building materials companies;

6.  Real estate service companies across the spectrum and without a real asset base will be worth liquidation value as they are unable to sustain any business model.

The Blackstone/EOP deal is beginning to kill me.  Maguire doesn’t have the capital to buy its contracted flips and can’t access the markets because its ratios show an over-leveraged condition. So they have bundled a bunch of their properties together with a few of the Blackstone properties they are acquiring and are looking for yet another round of excessive prices.  Maguire has great representation in Eastdil/Secured, but even the pros have to have markets that make sense.  I’m even beginning to get shaky about Don Bren’s plans in San Diego.  One thing for sure is that successful markets require liquidity and this man has an enormous land inventory in declining sales markets.  Everybody has a limit and maybe this is his.  If these are the best and first opportunities for Blackstone to turn a buck, that buck may be a long while coming.  It’s amazing how a quick flip can become a 15 year deal or go sour enough to need a distress sale under crisis conditions.

I’m concerned about Lennar, DR Horton, Pulte, Richmond American, Ryland, Standard Pacific, KB Home, Toll, Hovnanian – all of the big public and private boys.  These balance sheets are always set up with a capital ratio of 1:1 debt to equity and the properties are leveraged at minimum 75 % of cost.  This business is not like the supermarket or banking business where you’re looking for 1 or 2 pennies on the dollar for profit after taxes, but the reality at best is only 8 cents after taxes.  The downside is always nearby with that kind of leverage.  We forgot that this business depends on our great political system promoting home ownership and the liquidity of the markets.  None of that is going to be available for a bail-out of these companies.  The boomer generation of builders is done and it’s time for Generations X and Y standing in the ranks now to pick up the pieces and recapitalize.  I wouldn’t want to participate in the recapitalization now since the coming period is going to be characterized by the monetary recognition of the failure of currently existing business plans.  I recently read a 2005 article presenting the views of the Horton CEO about how he was going to handle the coming downturn and then went over his latest pronouncements – you might imagine that the two were hard to reconcile.  I assume he spoke in 2005 from a position of industry respect and leadership, so I wouldn’t want to proceed on the basis that his then peers were/are any different.

History handed us the Canadians, the Japanese and the Savings and Loan Cowboys.  Now the question is whether the Private Equity Funds, Hedge Funds, Australians, Dubai’s and the other investors will be any better.  I say that this generation missed the boat like the others.  We’re not going to see a return to the housing crazies of 2001-2005, we are overcooked in shopping centers, warehouses and office buildings and we’ll be holding auctions in 2010 to dispose of the glut in the upper end of the hospitality business.  Don’t worry, we’ll be manufacturing the heck out of every possible good as a world leader from our poor man’s economy.  The trade gap will disappear.  This time men and women will be standing in jeans at the computerized machines making it happen.  We won’t be unhappy, just different.  Don’t worry, the ladies will look just as good.

As your homework, go look at Countrywide, General Electric Company, GMAC, New Century, Trump Entertainment Resorts, FHMLC, Fremont General et al, yesterday’s filet’s now all turned turkey.