Tuesday, 24 August 2010

First Allied Corporation watch no. 2: more defaults as predicted

This is the second in an occasional series keeping an eye on the Glazer family's US property business, First Allied Corporation. As with previous posts on this subject, if you don't see the relevance of any of this to the fortunes of Manchester United or the Tampa Bay Buccaneers I suggest you stop reading now!

Information on First Allied comes from monthly and quarterly reports by the company to the trustees of the Commercial Mortgage Backed Securities ("CMBS") which contain the relevant mortgages, and from the company's own website which shows vacant space. My original work on First Allied, used by the BBC Panorama team, was based on information available in the May CMBS filings. We have now had three months of additional data (the August filings are in) and as I predicted originally, First Allied continues to deteriorate with no signs of a pick-up in performance.

In May I identified 34 shopping centres (out of a total of 64) which I thought were at serious risk of going bust in the next twelve months (to add to the four that had already gone that way). Three months on and the mortgages of five of these centres have become "delinquent", that is to say the centres have started to miss mortgage payments. Whilst occupancy rates at some of First Allied's centres have risen, at others occupancy has fallen further and overall the vacancy rate has increased slightly over the three months (from 10.5% to 11.1%).
The delinquent centres are:

So these five centres, originally valued at over $38m with over $7m of equity, have become delinquent in the last four months. For all but Ulster Terrace, the issue is clearly very poor occupancy (readers may recall University Plaza in Houston as it was featured on BBC Panorama). Ulster Terrace is interesting because First Allied's website shows it as fully let (it was only 79% let in July), yet it has still failed to make a mortgage payment. The explanation is that Ulster Terrace is one of the 31 centres coming off interest only deals in 2010, in this case the interest only period ended in April. On my calculations, Ulster Terrace will still be unable to meet the new higher payments, which will now include repayment of the capital, even when fully let. I expect many other centres to run into similar problems in the next few months.

Returning to the original list of 34 "at risk" centres, 15 have seen material changes in occupancy (more than 5%) since May, occupancy has fallen by more than 5% at 8 centres and risen by more than 5% at 7 centres. The changes in occupancy and the level of their debt service coverage ratios ("DSCR") at current occupancy can be seen in the chart below:

Four centres are probably out of the woods for now, with DSCR back above 1x (the same goes for another, Murphy Crossing in Texas, where occupancy has risen 3% since May). Whilst these five centres are no longer at risk of default, five new centres (Golf Glen Mart Plaza, Heritage Plaza, Preston Lloyd, River Plaza and Allen Central Market) which had previously been covering their mortgages, have now joined the "at risk" list after seeing falls in occupancy.

First Allied's problems are not just a product of a weak US economy struggling to come out of recession, they are in large part due to aggressive financing structures put in place before the credit bubble burst. For 15 shopping centres, the terms of the mortgages on them make insolvency virtually inevitable.

I believe the state of First Allied Corporation explains much about the Glazer family's ownership of Manchester United and the Tampa Bay Buccaneers. If centres with negative cash flow are ignored, the portfolio generates around $9m of pre-tax cash per annum but these cash flows are before any of First Allied's central costs and before tax. The whole business is generating virtually no cash flow at all (and that is before we take into account centres being given short-term support by the parent company). So for a Bucs fan wondering why there hasn't been any investment by the owners after a 3-13 season or for a United fan wondering how the Glazer family is going to repay "their" PIKs, the state of First Allied provides some uncomfortable answers....



UTID said...

More interesting work on our "wonderful" owners, Anders.

Could you tell us when the last acquisition was made by the group? Have there been any at all in 2010?

Also, I presume the properties are structured so the Glazers can just "walk away" without an impact on the rest of the portfolio. Is this a correct presumption?

I suspect that they're the kind of owners that are happy to pack up and get out irrespective of the impact on the asset owned.

andersred said...


Funnily enought they haven't bought anything since 2007! Actually they were still buying after the market had peaked. The only thing that stopped them was the sudden unavailability of credit...

You're right that it's all non-recourse, they just hand back the keys and go.


United Rant said...

... which of course they'd have to do with United unless they pay down the "non-recourse" PIKs by 2017. But of course we all know "the Ronaldo money is there" and there's just no value. FFS.

Saddens me there are still so many United fans in massive denial about what the Glazers are doing to United and the rest of their businesses.

Bucs games blacked out, property biz going bust, too many United fans still believing that the Glazers have United's best interests at heart.

Anonymous said...

Great work again shocking truths,when next finance results out?this week?Please post them

Bill said...

Well done for sticking it to that Glazer mouthpiece "GCHQ" on RedCafe.net. I've noticed one or two similar "astroturfers" on a few United forums and blogs. I can't help wondering if they are all the same Glazer employee.

Anonymous said...

Hi Anders
Just seen that you post on a regular basis on red cafe and just wondering if you can bring your thoughts to the Officalclub forum or maybe they have banned you already

Adi said...

The rate at which United are getting new sponsors, is there a way the Glazers can pay up the debt in long term with the sponsorship revenue?

Anonymous said...

Whats the value of the land and buildings on these malls?
Can the Glazers simply sell them off as land?

Patrick said...

Yes Andy
Made it onto the Red Cafe page at long last only to be thrown of it within an hour,that whole thing is highly censored and supports only onside in the debate and if you go against them then thats it.
The only page where fans from both sides of the debate are not censored is the offical messageboard on the clubs own page and a ask any fan who wants there views to be respected and publised to join that site

Keep up the great work andy and pass on my complaint to the guys at red cafe

Anonymous said...

Funny isn't it. A month (July) goes by without any further defaults and all of a sudden you get bored of your spreadsheets. You've certainly been making up for lost time over the last few weeks! It's pretty obvious that you incuded the May-June figures again, as well as the May defaults, in order to ''sex up'' your latest article. You talk about three additional months of data passing by since your original BBC Panorama article yet conveniently forget to mention that your ''First Allied Corporation watch no 1'' piece included the June filings as well as the May defaults.

As for the occupancy numbers, you state that there was a slight increase in vacancy rates over the last three months from 10.5% to 11.1%. Can you please provide the figures for the monthly change in vacancy rates over those last three months (based on overall square footage of course)?

andersred said...

Hi Anonymous at 12.06

How very weird to post up a comment that is actually a comment (word for word) that someone made on redcafe.net at12.45am this morning.

You can see the original here:


As I said in reply to the original point, the vacancy rate has moved like this:

May 10.45%
June 10.51%
July 10.74%
Aug 11.10%

That's a change in direction from the trend between December and May when it fell from 11.3%.

Try writing your own comments in future please.


Anonymous said...

found this part of an interview with Joel Glazer

At the start of interview Joel Glazer says"All our business interests stand on there on"

Perhaps you could give your view as from reading your blog it would appear they are all linked and need each other to stay afloat

Texas Fan said...

I'm in the commercial real estate business in America, thought I'd make a few comments.

First, I am not trying to defend the Glazers nor attempt to make sense of why the United club has the financial situation that it does.

However, to look at the Glazer's company, First Allied, and try to draw conclusions as to how United is managed is comparing apples to oranges.

The retail shopping centers that First Allied owns are primarily small shops. Those have the greatest amount of space turnover, tenants come and tenants go rapidly. That does have a positive and a negative: the positive is that rents are able to go up when the market is good (anchor spaces are long term leases at set rents), while the negative is there is a cost to the space turnover in dead rent while vacant, allowances given to the new tenant for refurbishment and fees to the leasing staff.

The real estate industry is having a large problem with debt. The lenders made the loans based on income projections that are not accurate today, and the lenders also want to reduce their exposure to defaults by requiring greater borrower equity.

The game being played by owners, such as the Glazers, is to force the lenders to renegotiate the loans under the terms the borrowers want rather than the terms the banks are seeking. The last thing the lenders want is to take ownership of these centers: that requires a huge cost to the lender and a "write down" of the asset on the lender's books.

By stopping the payments on the loans the borrowers force the lender to negotiate a new loan, it's the only leverage the borrower has to use. There are many borrowers who are doing just that, borrowers who are very solvent and have cash to pay.

My bet is the Galzers have liquidity, they are trying to make the leder "blink" in the negotiations on these loans.

andersred said...

Hi Texas Fan,

Thanks for your comment, it's good to have your expert input.

I hope I haven't given the impression that you can read much from the operational management of First Allied across to United.

The Glazer family do appear to favour, in almost all cases, leveraged business models. I appreciate this is inherent in real estate. It seems to me that the First Allied situation shows what happens when you are over-levered at the wrong point in the cycle. Leverage in volatile businesses like English football teams carries cyclical risk too.

I have considered whether First Allied was trying to force lenders to renegotiate through stopping payments as you suggest. I know this is a common tactic across the market. The things that make me think this is not currently the case with (these) properties are:

a) The four centres on which they stopped paying in the past have all gone bust rather than had their loans restructured.

b) Lakeview Crossing (delinquent in May) appears to be heading down the same path, to quote the Special Servicer:

"The file transferred to the Special Servicer on 6/4/10. The loan is here for Imminent default due to cash flow problems. The loan is in monetary default as of 5/11/2010. No payments have been received. Legal counsel will be retained."

b) The occupancy level at Schoolhouse Plaza, University Plaza and Dayton Mall Shoppes is so low that restructuring looks impossible to me. The DSCR on University Plaza is around 0.4x on my calculations for example.

I'd welcome your views on those thoughts.

Looking across the portfolio, there are a number of centres where First Allied must be injecting equity to allow mortgage payments to be met. That would appear to suggest you're right that they are liquid.

I assume you agree that they aren't throwing much cash off the real estate business at the moment?!

Thanks again,


andersred said...

Anonymous at 15:40,

There businesses are all legally separate, absolutely. Each shopping centre is legally separate and ring-fenced.

The way they are linked is through the common owners, the family itself. Basically if businesses are doing badly (like First Allied) then they don't generate cash for the family. If other businesses are relying on the family (for investment in players or to repay certain debts) than they WILL be impacted.

Simple as that really....


Texas Fan said...

I'll address Lakeview Crossing specifically as I have data on that center.

The center went from 100% occupancy as recently as mid 2007 to the current 42.4% occupancy today. The intersection around their center had two new grocery anchored centers constructed- both have small shop spaces in their projects competing with the First Allied center- which added 47,000SF of competitive retail space. The asking rent in the Glazer's center went from $24.50 per SF to the current ask of $18.00 per SF (these are annual rents).

In this case I expect First Allied to "give the keys" to the lender. The center is not worth the amount of debt currently owed, it has negative equity. First Allied purchased the center for $6,320,825in 2005, the debt on the center is $4.752M. The Glazer's have surely lost money on this investment as during their time of ownership the property could not have thrown off an amount of cash equal or greater than their equity ($1.58M).

Their investments in real estate are high risk due to they type of property they have selected. By purchasing centers such as Lakeview Crossing, small strip centers with no major credit tenants, they are subject to the cycles of the local market much more than if First Allied invested in national retailer occupied buildings with long term leases. In the case of Lakeview, and others, their bets have crapped out as we say.

The question I have for you is this: with the revenues of English Football clubs increasing, is the leverage the Glazer's have placed on MU a poor business decision. You state that English Football revenues are "volatile", yet from my view over the past deacde these revenues have steadily increased year after year.

The product on the pitch seems to be at a high level, although as a MU fan second place I know is not acceptable. The club went very far in the CL, was a bit short in the FA...but yet the team seems to be very, very competitive and could very well win up to 3 trophys in this coming season. Clearly this is a result of the players and Sir Alex, not the owners. Yet one must agree that the Glazer's have not made the club suffer due to their business decisions, right?

Thank you for the opportunity to hear your opinion.

UTID said...

@ Anders
Wow, there are some ill-informed individuals on that RedCafe forum.

In another thread in there (All change of ownership and Red Knights related posts here please) a poster called Ciderman talks about United paying a dividend to the Glazers.

Then another called GCHQ agrees with the assertion that this would be the Glazers using their wealth to pay off the PIKs.

They obviously don't know the corporate structure. United could never pay the Glazers a dividend. The dividend would go straight to the parent company RFJV where the PIK debt is held.

The dividend would never go to the Glazers so it would never be them "using their own personal wealth".

Clowns the both of them.

Anonymous said...

I know the Glazers have to make statements on our clubs finances during the course of the bond and the last one you reported in around may,When can expect the next one of these and what do you think it will say

Jaspreet said...

Hi Anders,

I've read much of your blog over the last few days. Thanks for your digging and your insight.

On a different note, I can't really fathom many of the comments that have been left on your site. They seem to be aimed at discrediting/derailing your efforts but without justification... or anything. Guerrilla Marketing in reverse? Have you thought of undertaking a WikiScanner-type analysis of where your comments come from? http://en.wikipedia.org/wiki/Wikiscanner. I should add, I don't spend much time on forums or message boards so I could be way off base.

Incidentally, I saw this proverb the other day and I thought you might appreciate it: "If you think you are too small to make a difference, try sleeping in a closed room with a mosquito."

Keep up the good work,


Bill said...

@UTID - Ciderman, Roodboy and GCHQ: RedCafe's very own three stooges!

Anonymous said...

@Bill - check out RoM on the odd occasion. Someone called Wakey is very similar to the trio you just named...

Patrick said...

A little bit off topic, but if anybody has any Beatles LPs and/or bits and bobs of related memorabilia, please consider mailing them to the address below before Sept. 11.
Please include a note requesting that Preacher Terry put them on the top.

Attn: Terry Jones
Senior Pastor
Dove World Outreach Center
5805 Northwest 37th Street
Gainesville, FL 32653
(352) 371-2487

"Build a bonfire, build a bonfire . . ."

Anonymous said...

@ Patrick ... as we talk about putting scousers on bonfires ,maybe as this church is in Florida ,a certain football-team owning family (which is slowly but surely ruining our great club-look at our bizarre transfers this year) also from Florida would be best placed on top...

Patrick said...

The US shopping mall sector is suffering terrible financial problems across the board; almost every American mall is suffering, not just the Glazers'. The malls rely on filling their lots with retailers, but retailers aren't interested at the moment as the industry has been unfortunate in being one of the hardest hit by the global recession. It's little reflection on the Glazers, but reflection on the industry as a whole. Nobody expected the Glazers' malls to be paying off United's debt anyway - never did happen, never was going to happen and never will happen - it's a complete non-story which has absolutely nothing to do with the club

UTID said...

Well done for copying word-for-word that fool Ciderman's post (http://www.redcafe.net/8543812-post3088.html)

Do you have independent thought or do you just use other people's admittedly awful ideas?

Anonymous said...

Just passing on Facts and truths.Are you just another Sheep?

UTID said...

@Anonymous 11:53
Please tell us these "Facts and truths". I'm intrigued.

If you are Patrick then it's quite ironic because you are in effect Ciderman's sheep by copying his rubbish.

Also, all you are doing is passing on Ciderman's OPINION (i.e. certainly not "Facts and truths").

One point it is good to see the pro-Glazer brigade coming around to is how the Glazers intend to pay off the PIK debt.

It's NOT gonna be the malls. It's NOT gonna be the Bucs. It's NOT gonna be the Glazer's other assets (if they have any).

It IS gonna be Manchester United Football Club.

Anonymous said...

@ Anders...Theres an interesting article on Sky Sports -"'Platini-Rules to end anarchy:"';re:UEFA financial fair play .Apparently , UEFA are now making noises that interest payments will also be taken into consideration when determining a clubs profitabilty .If this happens , United 'might not have a transfer budget given all the debt and interest payments .

Anonymous said...

You have more homework to do. You can bust these people - look at all the LLCs they form to pump money out of the tenants. They own the outrageous 'management' companies that stick tenants with CAM fees. I think employees form LLCs that serve the First Allied properties.
I wish the IRS would take interest.
There's also an unusual linkage between the firm that used to handle their trailer parks in NY and a lawsuit brought on by the attorney general of NY claiming their processors who were to serve the tenants would never serve them and then the lawfirms conveniently got default judgment in NY. The Glazer's long time firm was one of the lawfirms named in the attorney general suit.

Anonymous said...

Hi Anders,

I thought Red Football's latest finanical results had to be published 60 days after end of a quarter (June 2010) so i assumed this would be 29th August (if not 27th as 29th was a Sunday)

Or have i got the wrong impression as I have checked the MU Finance website but it still has Q3 results.


Anonymous said...

@ Kris
June was year end so, per prospectus, results not due til 120 days. They can release them sooner of course but expect by end Oct.

Marky said...
This comment has been removed by the author.