Commercial Real Estate
by PlanMaestro
Here is some recent information on commercial real estate transaction prices as background information to the Sam Zell interview,. The market is behaving much better than residential real estate and it looks like the next shoe will not drop. Housing remains a concern.
That is very interesting. We should probably buy more stocks that are depressed due to the CRE issue. WFC will also benefit from the comeback of the CMBC underwriting business.
I am looking for 10x now, but it is pretty hard. Many depressed banks like CRBC may have 5x potential, but it is hard to be 10x.
You are taking risks with the 10x. I have been buying FPFC but they are in mortgages. I like the credit trends and they have taking some heavy NPAs valuation write-offs. I t would not surprise me if they are profitable next Q.
I don’t think 10x oppurtunities like CCME are risks. Their P/E is only 3, and their cost per 1000 viewer is 4 RMB, compared with competitors at 400 RMB, so they are able to sign long term contracts with famous companies such as Toyota that increase the advertisement price by 30-50% per year.
In addition their cost of growth is extremely low so they are able to achieve 100% ROE. They expand to new cities every month.
This could even become a 50x in 5-8 years. The best super growth company that I have seen so far, and they recently announced 10% stock buyback program, which is great catalyst.
If I was talking about so 10x banks or REIT, that would be high risk.
Got it, I thought you were talking about banks.
BTW, how do you are getting comfortable that Chinese reverse mergers like CCME are not a fraud? Not that I think CCME in particular is, but as you probably know several of this have been severely hit and I would love to have some way to get to the good ones.
Well, I do have found many frauds for Chinese companies. But usually if they are frauds, I can find some strange things out from their SEC filings, and avoid those. Most of them are pretty obvious just by looking at the 10-K. The numbers simply don’t add up. But CCME seems good to me so far, and also they recently hired Deloitte to review their 2009 10-Q and 10-K, and nothing wrong has been found out so far.
Also my friends in China have seen their bus advertisements all over, so we think this is a real story instead of a fraud. I have put 25% of my capital into it during the recent stock price drop.
Not every Chinese company is a fraud. We just need to be extremely cautious. If you know many friends living there, they could tell you if this company is doing real business, and has a real impact on their life. For example, when I was in middle school, I was still in China, NetEase.com has been famous and everyone’s using that, so not very likely to be a fraud. It later turns out to be a 50x in 7 years.
The thing is I have seen videos of the facilities of many of these companies (ONP, LTUS, SKBI, CMFO,…) and I am sure they are real. What I am more concerned about are balance sheet issues and diversion of cash frauds.
What have you been following?
Hey Zehua and Plan,
I’ve been following CMFO for a year now without ever pulling the trigger, as the story looks almost too good to be true (very high ROIC and incredible growth). Do you have any views on this company?
I saw a video of their facilities, but I still feel that it is outside my circle of confidence to have an opinion.
Hey Bart,
Sorry I didn’t pay attention to your post. I will take a close look at CMFO now, and get back to you shortly.
Thanks,
Zehua
In their latest 10-Q:
1. Since you have been following this company for a year, have you had a chance to check out their products on War mart pipeline? Usually for these kinds of products, when War mart is filled, they can no longer grow any more.
2. As far as I know, competition is intense in China East sea for catching the fish. I recently read a news paper that due to fierce competition, two groups of farmers over 100 people illegally fought in the sea, and several people died. In this case, how can this company maintain a high profit margin?
3. This seems a non-growth company. Their recent revenue increase is due to acquisition. Usually if a company is non-growth, but net margin is over 20%, I would still be interested, but only with a P/E of 3.
4. Their 10 major customers. Five of them suddenly appeared in 2008, and quickly disappeared in 2009. No stable customers is a warning.
5. Accounting firm is ZYCPA Company Limited. Have you heard of this firm? I checked their website. It is approved for US SEC fillings only in early 2009. I am not sure if their auditing is good enough to uncover scams.
The only bank I have now is TNCC. I have a few gas stocks as my major portfolio.
I think CCME has pretty low risk on balance sheet scams. The other companies’ auditors are all unknown small accounting firms, but CCME’s auditor is Deloitte, so that makes a big difference. In addition, the other companies keep printing more and more stocks. They use that as their money printer. CCME is buying back shares, and there are insider buys, so it is quite different.
I looked at SBAY, which keeps printing tons of new shares each quarter. And when they print new shares, they normally don’t even file a S-8 form.
NWKT, which has a P/E of 0.01, but a closer looks shows me that I can’t even figure out their total number of shares. In one 10-Q, they mentioned 5 times about their total number of shares, and they are all different, and the different is quite big ( 500% gap.)
CWS, in which one of their report, in a subsection, it starts with income(expense) and ends with (income) expense, so that means they are trying to cook the figures until they themselves are totally messed up and forgot if () means income or expense.
Another company that I forgot symbol, but tries to copy the business model of Expedia and Priceline. It makes one acquisition per month, and each acquisition’s goodwill usually takes 90% of the purchase price. This may not be fraud, but management definitely sucks.
NCTY is also a lie. It keeps saying that its contract renewal with Blizzard will have no problem, and currently under negotiation in 2007, until in 2009 they suddenly said it is never negotiated with Blizzard and the contract will not renew.
Bold face lies are quite common in China stock market. We should be extremely cautious about that, but that also means opportunities as most investors just walk away and don’t look at it. NetEase.com, SOHU and Perfect World are all decent companies that almost any one in China knows about.
Your chart shows that CRE is improving, so builders, banks and REITs will revive. Do you have any good REITs that have 10x potential and low risk in mind? I think MPG might still be a 10x, but risk is a bit high.
I tried to find a good builder, but it seems hard. Toll brothers’ stock price is already up in the sky. Other builders are dying.
All of them have some measure of risk. You might want to check NCT, GKK and SFI
I took a look at GKK. This REIT is not as simple as MPG. It also invests in loans, which makes me feel quite confused. It is not a bank that attracts deposit at a low cost, and invest in loans. It seems like it has to issue debt to obtain funding, which is costly, and it has a number of loan losses. Since the interest spread is so much narrower than the banks, it will be hit harder to recover from the loan losses. It’s quarterly loan loss provision is decreasing, so that looks good. I am just confused why it even need to have this subsidiary.
The realty part of this company looks good though. Tenants are all high quality renters like BOA, and occupancy is over 85%.
The clarity of GKK is much lower compared with MPG, which gives out details about each property.
GKK is pretty vague regarding what kind of loans they invested. I am really confused here. “The Company maintained a reserve for loan losses of $391,426 against 24 separate investments with a carrying value of $619,332 as of June 30, 2010, and a reserve for loan losses of $418,202 against 23 investments with a carrying value of $536,455 as of December 31, 2009. ”
It looks indeed like their reserve is high enough to absorb the losses. I think this is very interesting. It is unlike MPG who cannot lease up its properties to profitable levels. GKK’s realty part has not much trouble, and its lending part, if the loan loss reserve is indeed enough, then I think it would be set in the position for high profits next year.
I did not say it was easy and simple (smile)
Yeah. All of the three REITs are pretty complex and lack of clarity.
None of their insiders buy at current bargain prices, which makes me feel bad. I think GKK is all set for profitability next year, so I am really confused why no insider buys.
Maybe I will just avoid them, as I remember in your turnaround lessons, you said insiders will kick in first.
From their latest 10-Q:
“At June 30, 2010, the Company had one subordinate interest in a whole loan, one second lien loan, one third lien loan and one mezzanine loan with an aggregate carrying value of $0, which were classified as non-performing. ” What does that mean…… That looks so odd.
” At June 30, 2010, the Company had three first mortgage loans and one mezzanine loan with an aggregate carrying value of $126,103 classified as sub-performing.” So sub-performing assets are decreasing compared with December 2009 of $160k.
Charge-off is dropping, and reserve is $391k, which is pretty high. Their sub-investment grade loans are about 30% of total loans, according to their 10-K. Their total loan is around $2,300k, so this reserve should be enough to absorb losses.
This is really a big black box. What do you think are the major risks for investing in this company? I am not happy that it is not disclosing as much as MPG, and no insiders are buying. Other than that, I think it is fine.
Thank you! I will look at those one during the weekend.
I have never done short selling before because it requires margin and makes me nervous. But what about Put Options for companies that have a clear catalyst for death? For example, ONP’s problems have been fully exposed by Muddy Water, but it stock price is still reasonably high, so maybe that is an opportunity for put options? There could be hundreds of Chinese companies listed in US stock exchanges and I would say at least 20% of them are scams and are decent short candidate.
So if we go this path, it is much easier to find short opportunities than finding decent companies to long. What do you think?
I only use shorts for hedging, but I might consider right out frauds. Bronte Capital looks to have found one and if you know of others please say so. Not sure about ONP being a fraud, Muddy Waters seems to be pretty shady themselves.
I just found an interesting chart on Fannie Mae’s latest 10-Q, page 5, early delinquency after they bought the loan. The loans issued in 2009 have historical low delinquency rates. I think that is very encouraging. How do I post an image here?
I do not think you can, maybe it is better if you send me an email with the image. I know from FRE that recent vintages are performing very well this could be very good confirmatory evidence.
Could you please share your view on GKK? I think it is better than the other two. They have lots of loans due in the near term, but since their realty group is profitable, they should be able to get refinance, or restructuring.
They have about 30% of their loan investments in sub-investment grade, but the loan loss reserve is also pretty high.
I am mostly concerned with no insider buys. What do you think?
GKK’s mezanine loans are colleteralized by the enter company’s equity. That looks scary to me. They have a major amount due in 2011, which I think is really hard to refinance if the real estate price continues to be soft.
My understanding is that they are collaterized only by GKK Realty. The corporate cash and GKK finance is free and clear.
Yeah, that is true. So if the realty part is entirely foreclosed, that would be huge, and they are only left with the bond investment department, which I don’t feel too confident about it either.
I think pure REIT are much easier to analyze their outcome.
I am trying to figure out each property’s value of MPG now, by look at when they did refinancing, assume the loan/value ratio was 80% when they did the refi, consult the chart you recently posted on CRE prices to see what is it worth now. Was refinancing at a strict 80% LTV even in 2007? I know for residential properties they can do 125%.