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TranceAddict Investors Club @ Marketocracy (pg. 88)
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| Krypton |
Bear market or not, I'm going to start building a position in GKK, a property management (REIT) company. I believe it is substantially under priced by a margin of some 300%. I look for high probability events, and GKK seems to me a very high probability of explosive upside potential. I put my money where my mouth is right here right now. GKK people.
I'm also considering, NVDA, AUO, TNH, TKC, GLW |
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| jerZ07002 |
| quote: | Originally posted by Krypton
GKK people. |
from their 10-K
| quote: |
We invest in a diversified portfolio of real estate loans, including whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, distressed debt, CMBS, preferred equity, and net lease investments involving commercial properties throughout the United States. We have also established a real estate securities business that focuses on the acquisition, trading and financing of commercial mortgage backed securities, or CMBS, and other real estate related securities. When evaluating transactions, we assess our risk-adjusted return and target transactions with yields that seek to provide excess returns for the risks being taken. |
those areas are about to get pummeled. There are certain RE projects in the NYC region that were partially financed prior to the credit crisis which now stand uncompleted. I wouldn't want to get into distressed debt, CMBS, or mezz loans at this point. Additionally, commercial properties is not the place to be during the back half of a recession or slow down. The real estate cycle lags the general economic cycles.
they don't paint a pretty picture for themselves later in the 10-K
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Current Market Conditions
During 2007, the global capital markets experienced unprecedented volatility, resulting in dramatic increases in credit spreads, declines in prices of financial assets, decreases in liquidity and the availability of debt and equity capital, and increases in the cost of debt and equity capital. The impact has been most severe in the single-family residential real estate mortgage markets in the United States, but has more recently affected the commercial real estate debt markets in which we invest. In particular, subsequent to the issuance of our third CDO in August 2007, the commercial real estate securitizations markets have experienced severe declines in transaction activity, reductions in short-term and long-term liquidity, and widening credit spreads. We have historically relied on the securitization markets as a source of efficient match-funded financing structures for our portfolio of commercial loans and CMBS investment portfolio. Currently, the new issue market for structured finance transactions including commercial real estate CDOs is dormant. This capital markets environment has led to increased cost of funds and reduced availability of efficient debt capital, factors which have caused us to reduce our investment activity. These conditions have also materially adversely impacted the ability of commercial property owners to service their debt and refinance their loans as they mature. While delinquencies in the commercial real estate market remain low in comparison to historical measures, the lack of liquidity in the CMBS and other commercial real estate finance markets, and worries about weakening fundamentals in commercial real estate due to slowing economic activity, are harming sales and financing activity. It is widely believed that the credit crisis and slowing economic activity may contribute to a decline in the operating performance and value of commercial real estate. We believe these risks are most pronounced in connection with loans involving certain property types, including construction loans generally, residential land, commercial land, and residential condominiums. We further believe these risks are most pronounced in regions that recently experienced rapid growth in population, employment and real estate development, including California, Nevada, Arizona, and Florida.
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We believe our businesses will benefit in the long run from a market environment where assets are priced and structured more conservatively. In addition, our pending merger with American Financial will combine the existing operating platforms of American Financial with our own to create an integrated commercial real estate finance and operating company, and will transform us from primarily a specialty finance company into a $7.6 billion diversified real estate enterprise with complementary business lines consisting of commercial real estate finance and net lease property investments. |
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| Krypton |
| I'm not paying much attention to the market. This is a risk position. I'm betting on this company making it through the recession and coming out the other side as one of the survivors. I know the market is total crap. GKK would also be my smallest investment, since it is the riskiest of them all. |
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| mndeg |
| oohh option arms. i wonder how fast this market will fall when it eventually happens. it will probably be like 15% in one day. |
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| Krypton |
| quote: | Originally posted by mndeg
oohh option arms. i wonder how fast this market will fall when it eventually happens. it will probably be like 15% in one day. |
An option on adjustable rate mortgages?? |
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| Shakka |
| quote: | Originally posted by Krypton
An option on adjustable rate mortgages?? |
no. Potentially the most toxic of the non-subprime breed that are just now starting to reset. Option Arms are going to kill. Wachovia bought a huge portfolio of them with Golden West. The problem with option arms is that they are ticking time bombs that, unlike subprime loans, won't default until the last possible second because with option arms the mortgage holder can pay as little or as much (yeah right) as he/she wants and the amount they choose not to pay simply gets tacked on to the mortgage as additional principal (i.e. they have an option to pay even less than the minimal interest required to service the loan and keep it from becoming "non-performing"). Some of these people are going to see their mortgage payments jump 50-80% overnight and they'll have huge negative equity. What kind of government bailout will we see then? Our elected (and unelected) officials are pathetic. The horse left the barn years ago.
From what I have read, the Option Arm area is ripe with alt-a liar loans and probably even a lot of prime loans. Barring more massive intervention like Paulson's "Bazooka" of unlimited purchasing authority, FNM and FRE should be completely ed. |
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| mndeg |
funny thing is that FAASB actually delayed the changing of accounting regulations so these IB's could hide the toxic stuff. Lehman actually dumped (transferred?) it's toxic assets onto a corporation that's run by Lehman staff just downstairs from their HQ. I dunno what kind of bullets the fed have left but it'll be interesting.
I can't believe anyone would actually enter into a negative amortization loan or pay less than interest, or even just interest. That whole concept is depressing. You are literally paying just to survive when it's just interest, if less than interest you are incurring MORE debt in which should (historically) be an asset and not a liability.
So... continually dropping house prices + people that can't pay their mortgages = massive defaults because they are "upside down". What they owe is worth more than the market value of the house itself. Who wouldn't want to default in that case?
http://registeredrep.com/mag/finance_stock_markets_da/
The last time I checked HGTV still had these flip your house television shows. The worst is far from over. And Wachovia 3 months ago were still advertising option ARMS. |
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| jerZ07002 |
| quote: | Originally posted by Krypton
I'm not paying much attention to the market. This is a risk position. I'm betting on this company making it through the recession and coming out the other side as one of the survivors. I know the market is total crap. GKK would also be my smallest investment, since it is the riskiest of them all. |
why would you ignore market conditions? that seems like a terrible strategy. the company's financial position after the downturn is highly correlated to the current market conditions. |
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| Krypton |
| quote: | Originally posted by jerZ07002
why would you ignore market conditions? that seems like a terrible strategy. the company's financial position after the downturn is highly correlated to the current market conditions. |
I don't ignore them, but they play no part in my decisions to buy or sell a company. I am a bottom-up investor. I believe predicting macro-economics is virtually impossible so I don't even try.
As for GKK, let's take a look at the company itself, and forget about the market...
GKK revenue the 2nd quarter of 2008. What other REIT can you say did that? They still have positive net income all the way through this economic downturn. Their cash flow is negative only in the 2nd quarter from "Other Investing Cash Flow". Seems like they spent money on investing in something. Now if they were negative cash flow because of say paying debt or something, that might be something bad, but it really isn't. They've got $55 million cash, $86 million in accounts receivables, and $3.4 billion in long term investments. Long-term debt is a low $150 million and has been at that level for several quarters. The thing I don't like is their Notes Payable/Short Term Debt which is $5.5 billion. I wonder what that debt is and who its owed to. If they can get this down, that would be a very good thing. But all-in-all, the fundamentals are surprising much better than even most of the money-center banks are. And at $6, this is one of the biggest bargains I've ever seen. Time will tell if I'm right...;) |
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| jerZ07002 |
| quote: | Originally posted by Krypton
GKK revenue the 2nd quarter of 2008. What other REIT can you say did that? They still have positive net income all the way through this economic downturn. Their cash flow is negative only in the 2nd quarter from "Other Investing Cash Flow". Seems like they spent money on investing in something. Now if they were negative cash flow because of say paying debt or something, that might be something bad, but it really isn't. They've got $55 million cash, $86 million in accounts receivables, and $3.4 billion in long term investments. Long-term debt is a low $150 million and has been at that level for several quarters. The thing I don't like is their Notes Payable/Short Term Debt which is $5.5 billion. I wonder what that debt is and who its owed to. If they can get this down, that would be a very good thing. But all-in-all, the fundamentals are surprising much better than even most of the money-center banks are. And at $6, this is one of the biggest bargains I've ever seen. Time will tell if I'm right...;) |
they have 5.5 billion in short term debt because they do mezz financing, bridge loans, and CMBS. They don't hold onto investments for long.
| quote: | Risk factors highlighted by the company
The current dislocations in the residential mortgage sector, and the current weakness in the broader financial market, could adversely affect us and one or more of our lenders, which could result in increases in our borrowing costs, reduction in our liquidity and reductions in the value of the investments in our portfolio.
The continuing dislocations in the sub-prime mortgage sector and the current weakness in the broader financial market could adversely affect our counterparties providing repurchase agreements funding for our loan or CMBS investments, and could cause such counterparty to be unwilling or unable to provide us with additional financing. This could potentially limit our ability to finance our investments and operations, increase our financing costs and reduce our liquidity. If one or more major market participants fails or withdraws from the market, it could negatively impact the marketability of all fixed income securities, and this could reduce the value of the securities in our portfolio, thus reducing our net book value. Furthermore, if our counterparties are unwilling to or unable to provide us with ongoing financing, we could be forced to sell our investments at a time when prices are depressed. If this were to occur, it could prevent us from complying with the REIT asset and income tests necessary to fulfill our REIT qualification requirements or could cause us not to qualify for an exemption from the Investment Company Act, and otherwise materially harm our results of operation and financial outlook.
Recent developments in the market for many types of mortgage products have resulted in reduced liquidity for these assets. Although this reduction in liquidity has been most acute with regard to residential assets, there has been an overall reduction in liquidity across the credit spectrum of mortgage products.
If we are unable to generate sufficient funds or obtain financing for future capital commitments, we may not be able to repay indebtedness or fund our other liquidity needs, which could have a material adverse effect on us.
At December 31, 2007, we had future funding commitments of approximately $297.7 million related to real estate debt investments we held. Our ability to fund future capital commitments will depend, to a certain extent, on general economic, financial, competitive and other factors that may be beyond our control. We cannot be certain that our business will generate sufficient cash flow from operations, that we will be able to raise funds in the capital markets or that future borrowings will be available to us in an amount sufficient to enable to us to fund our liquidity needs. Our inability to fund future commitments may cause borrowers to take legal action against us, which could have a material adverse effect on us. However, as of December 31, 2007, we believe our cash flows from operations, available cash and cash equivalents and available borrowings will be adequate to meet our future liquidity needs. For more information on our contractual commitments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations" and the notes to the consolidated financial statements in this Annual Report on Form 10-K.
Liquidity in the capital markets is essential to our businesses and future growth and we rely on external sources to finance significant portion of our operations.
Liquidity is essential to our business and our ability to grow and to fund existing obligations. A primary source of liquidity for us has been the equity and debt capital markets, including issuing common equity, perpetual preferred equity and trust preferred securities. We depend on external financing to fund the growth of our business mainly because one of the requirements for the Internal Revenue Code for a REIT is that it distributes 90% of its taxable income to its shareholders, including taxable income where we do not receive corresponding cash. Our access to equity or debt financing depends on the willingness of third parties to make equity investments in us and provide us with corporate level debt. It also depends on conditions in the capital markets generally. Companies in the real estate industry, including us, are currently experiencing, and have at times historically experienced, limited availability of capital, and new capital sources may not be available on acceptable terms. Our ability to raise capital could be impaired if the capital markets have a negative perception of our long-term and short-term financial prospects or the prospects for mortgage REITs and the commercial real estate market generally. We cannot be certain that sufficient funding or capital will be available to us in the future on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms, we will not be able to grow our business, which would likely have a negative impact on the market price of our common stock and our ability to make distributions to our stockholders.
In addition, the liquidity in our portfolio may also be adversely affected by possible margin calls under our repurchase agreements. Our repurchase agreements allow the counterparties, to varying degrees, to determine a new market value of the collateral to reflect current market conditions. If such counterparties determine that the value of the collateral has decreased, it may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. A significant increase in margin calls as a result of spread widening could harm our liquidity, results of operation, financial condition, business prospects, and our ability to make distributions to our stockholders. Additionally, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses and adversely affect our results of operations, financial condition, and may impair our ability to maintain our current level of dividends.
For information about our available sources of funds, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" and the notes to the consolidated financial statements in this Annual Report on Form 10-K.
We utilize a significant amount of debt to finance our portfolio, which may subject us to an increased risk of loss, adversely affecting the return on our investments and reducing cash available for distribution.
We utilize a significant amount of debt to finance our operations, which can compound losses and reduce the cash available for distributions to our stockholders. We generally leverage our portfolio through the use of secured and unsecured bank credit facilities, repurchase agreements, securitizations, including the issuance of CDOs and other borrowings. The leverage we employ varies depending on our ability to obtain financing, the loan-to-value and debt service coverage ratios of our assets, the yield on our assets, the targeted leveraged return we expect from our portfolio and our ability to meet ongoing covenants related to our asset mix and financial performance. Substantially all of our assets are pledged, or subject to a negative pledge, as collateral for our secured borrowings or to support our unsecured borrowings. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire. For example, we have purchased, and expect to purchase in the future should we issue additional CDO's, subordinate classes of bonds in our CDOs which represent leveraged investments in the collateral debt securities and other underlying assets. The use of leverage through such CDOs create the risk for the holders of the subordinate classes of bonds of increased exposure to losses on a leveraged basis as a result of defaults with respect to such collateral debt securities. As a result, the occurrence of defaults with respect to only a small portion of the collateral debt securities could result in the complete loss of the investment of the holders of the subordinate classes of bonds.
Our debt service payments, including payments in connection with any CDOs, reduce the net income available for distributions. Moreover, we may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations. Under our repurchase agreements, our lenders take title to our assets and may have an ability to liquidate our assets through an expedited process. Currently, neither our charter nor our bylaws impose any limitations on the extent to which we may leverage our assets.
The recent downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, which has negatively impacted our business, and may have a material adverse effect on us.
During 2007, the sub prime residential lending and single family housing markets began to experience accelerating default rates, declining real estate values and increasing backlog of housing supply. The residential sector issues quickly spread more broadly into the asset-backed, corporate and other credit and equity markets. Since the sub prime meltdown, volatility and risk premiums in most credit and equity markets have increased dramatically while liquidity has decreased. These issues have continued into the beginning of fiscal 2008. Increasing concerns regarding the U.S. and world economic outlook, such as large asset write-downs at banks, rising oil prices, declining business and consumer confidence and increased unemployment, are compounding these issues and risk premiums in most capital markets remain near historical all-time highs. Although we do not have any direct sub prime exposure or direct exposure to the single family mortgage market, the factors described above have resulted in substantially reduced commercial mortgage loan originations and securitizations, and are precipitating more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, are finding it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt.
Due to these conditions, the commercial real estate finance market has experienced higher volatility and less liquidity despite continued relatively strong credit performance across the sector. Credit has become more expensive and difficult to obtain for the Company and its competitors. The cost of financing as well as overall market-demanded risk premiums in commercial lending have increased. Most lenders are imposing more stringent restrictions on the terms of credit and there is a a general reduction in the amount of credit available in the markets in which we conduct business. The negative impact on the tightening of the credit markets, further declines in real estate values in the U.S. and continuing credit and liquidity concerns may have a material adverse effect on us. Additionally, there is no assurance that the increased financing costs, financing with increasingly restrictive terms or the increase in risk premiums that are demanded by investors will not have a material impact on our future profitability measures. However, we expect that a portion of the impact of increased capital costs will be offset by increased yields on newly-originated assets, particularly if assets in our existing commercial real estate CDOs are repaid.
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the company highlighted over 20 pages of risk factors, with a whole lot related to the current credit markets. I didn't read all of the risk factors, but i would say about 20 significant risk factors were directly related to the credit markets. The company is too highly dependent on credit spread for me to put any faith in it. Their primary source of financing were CDOs (collateralized debt obligations) and that source of financing is all but dried up. Good luck ;) |
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| Krypton |
| No doubt market conditions are very bad. GKK is a speculation bet that it will survive the credit turmoil. |
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| jerZ07002 |
| quote: | Originally posted by Krypton
No doubt market conditions are very bad. GKK is a speculation bet that it will survive the credit turmoil. |
oh - sorry, i din't realize that the bet was simply that they would survive. i thought you were trying to make money also. :p |
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