Another month, another First Allied centre misses a mortgage payment

September's shopping centre is "The Terraces at University Place" in Charlotte, North Carolina. It missed its most recent mortgage payment which was due on 11^th September. The vacancy rate across First Allied's portfolio increased slightly compared to August (up to 11.3% from 11.1%). Vacancies rose at seven centres and declined at five.

"The Terraces" has c. 65,000 square feet of shopping space divided into 26 frontages. Five of those lots accounting for 23% of the space are currently vacant. The occupancy rate has gently declined over the last three years (from 85% at the end of 2007 to 77% today), but in recent months the rate has actually ticked up (from 75% in June). So why would The Terraces stop paying its mortgage all of a sudden?

In an interesting piece in the Tampa Bay Tribune on First Allied's problems, Mary MacNeill a ratings analyst at Fitch was dismissive of reading too much into loans going delinquent for a short time saying; "If it's just one month in the summer, that could be just a vacation." I'm happy to agree that in normal circumstances cheques can get lost in the post and payments missed only to be made good by borrowers when the mistake is noted. In the case of First Allied Corporation however, we have the benefit of more information and an extensive pattern of behaviour.

In addition to the Terraces, five other First Allied centres are currently delinquent; two are two months late on their payments, one four months late, and two five months late. None of these older delinquencies has so far proved to be a clerical error. One would imagine such "errors" would be swiftly spotted by borrower and/or lender and corrected. In fact three of the five properties have already been placed in the hands of the "Special Servicer" which works out problem loans. None of these delinquencies appear to be mere clerical errors.

Then we have the four former First Allied centres that we know have already been foreclosed on and seized by the lenders. After these centres went delinquent, they never corrected their missed payments either. They just stopped paying their mortgages and were eventually foreclosed.

Returning to The Terraces, and looking more closely at the data, the reason for the delinquency is quite clear. The original Lehman Brothers mortgage was taken out in August 2005. It's a fifteen year balloon loan with a five year interest-only period. So for the last five years, the interest only payments have been $895,000 pa (including payments on the "B loan"). Now the interest-only period is over and from 11^th September onwards, The Terraces need to make capital repayments too. The balloon payment at the end of the mortgage is c. $11.2m and the total loan $13.34m, so that's $2.08m of capital to be repaid over the next ten years, an additional $208,000 per annum.

Put simply (and you can see the numbers from the CMBS trustee's spreadsheet here), the centre cannot afford these new payments of c. $1.1m. In the first six months of 2010 it only generated $416,269 of cash flow, or $832,538 on an annualised basis.

First Allied and the Glazers therefore have a choice, to support the centre with equity injections in the short-term, hoping that occupancy or rental rates rise, or to stop paying and let the centre go to the wall. Other centres in similar positions (weak occupancy and interest-only periods ending) ARE being supported in some way, they have not gone delinquent yet.

Perhaps I'm wrong about this, and a late bank transfer and an apology will roll out of Rochester to make good the missing mortgage payment in the next few days. Or perhaps, more likely, this is tenth First Allied shopping centre on starting on its way to foreclosure.

A quick comment on the monitoring First Allied Corporation

When I last wrote on this subject, various people pointed out that "walking away" from over-indebted commercial real estate was often a smart move in the current market and didn't prove that the owners couldn't cover the loans, just that there was no point throwing good money after bad. I totally accept and understand this. I have never claimed that the escalating problems at First Allied Corporation somehow "prove" the Glazers have no money, in fact their support for many centres that couldn't otherwise pay their mortgages shows the opposite.

My work on First Allied hopes to demonstrate two things; firstly that their predilection for using high leverage is not supported by much skill in doing so, and secondly that First Allied Corporation generates no meaningful cash flow for the family. This is after all (along with United and the Bucs) one of only three major businesses they own (unless they have lied about their business interests in UK regulatory documents). When thinking about the Glazers, their investment in their sports teams (or lack of it) and most importantly how they intend to service the debts loaded on the Red Football structure, First Allied is a key component and one that isn't producing a penny right now....

LUHG

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....

LUHG

First Allied watch - no. 1 in an occasional series

Even the World Cup won't stop this blog from keeping an eye on what's happening in the Glazer family "empire" (more Brittas than Roman).  This is the first of an occasional series of updates about First Allied Corporation using the company's own published vacancy information and the relevant CMBS trustee reports (which are published monthly). Those readers who don't see the relevance of any of this to Manchester United can look away now.

For those who can't be bothered with the detail, the key points from this update are a) another centre has gone "delinquent" (i.e. has stopped paying its mortgage) and b) the First Allied Corp portfolio continues to weaken.

Market trends

Industry data across First Allied's major markets (Texas, greater DC, Georgia and North Carolina) remains quite weak, with property values still declining and only small signs of retail rental rates stabilising.  The charts below (source: Loopnet.com) show some of the trends, First Allied's properties tend to be in "metro" (i.e. suburban) areas:

Atlanta retail real estate prices remain weak

Dallas retail real estate - City recovers, suburbs in decline

Greenbelt MD (greater DC), rents stagnant

Charlotte prices declining....

but rents stabilising

June occupancy data

Occupancy rates across the business are inherently volatile, a single letting or tenant departure can have a material impact on a centre's occupancy.  In the last month, twenty centres have seen their occupancy rise and sixteen have seen their occupancy fall.  Occupancy in six centres has fallen by more than 5% percentage points, and another six centres have seen occupancy rise by more than 5% percentage points.  The large  falls are significantly greater than the large rises:

You can see how these changes knock on to run-rate debt service coverage ratios below (all figures are post interest only periods where these expire in 2010).

New letting activity has helped push run-rate DSCR back above 1x for Frisco Gate and Gleneagles Plaza, with Smoky Hill almost back to this level.  On the downside, River Plaza will no longer be able to cover its mortgage at current occupancy and Stonecrest Park is now at risk.

Trustee reports

The main news from the June trustee reports relate to Ulster Terrace (Denver, Colorado) which has now gone delinquent (last mortgage payment was 11th May 2010) and Lakeview Crossing (Dallas, Texas) where the "Special Servicer" reports "Imminent default due to cash flow problems."  Schoolhouse Plaza (Ohio) remains delinquent for a second month.

Conclusion

There is nothing in the latest data from First Allied or the mortgage trustees to change my original view on the company.  The coming months will see more and more centres run into severe financial problems as interest only periods end and tenant demand and rents remain weak, and the Glazers will have to decide whether to support them financially or let them fail.  There's more chance of the United States winning the World Cup than First Allied generating any significant cash flow for it's owners in 2010.

LUHG

Is Malcolm Glazer a better boss than Tom DeLay?

Edit: 8th June 2010.  If you think I'm being harsh, check out these two comments on this statement from NFL commentators including one of the main sports writers on the Tampa local paper, The St Petersburg Times:

St Petersburg Times
Adam Schein

I couldn't help but laugh at the swift statement issued by the Tampa Bay Buccaneers spokesman Jonathan Grella today. The man used to be press spokesman for disgraced House Speaker Tom DeLay. Plus ca change.....

This is what he said:

"Buccaneers fans should know that the Glazer family is as financially well-positioned as ever before.

"Companies they own generate revenues in excess of $800 million each year.

"Sophisticated real estate experts know that the family's refinancing of their commercial real estate before the global meltdown has proven to be the wise move.

"While First Allied represents only a small portion of their asset portfolio, it continues to generate significant profits, enjoys over 90-percent occupancy, and has long term non-recourse financing.

"This franchise remains committed to bringing the resources to build its next championship team.''

Let's do the paragraphs one by one.
1. On my calculations, the three companies generated revenue of c. $780m (it depends on the exchange rate you use for United), so no missing gems. As someone once said, “Turnover is vanity, profit is sanity, cash flow is king”. Revenues are not profits and First Allied proves it. Old friend of United, AIG, had revenues of $96bn the year it went bust. Anyway, it's interesting that he chose to quote a revenue figure.

2. As these details have never been published before, we must wonder who these "sophisticated real estate experts" are. Maybe the commercial property lending department of Lehmans? Anyway, how wise is it to remortgage in 2005, 2006 and even worse in 2007? Of the 35 remortgaged properties, nine already can't cover their "wise" loans and eleven more will join them when interest free periods end. 

3. I have looked at every shopping centre they own (bar one that had 2008 cash flow of $0.5m) and "significant profit" is not possible. The $9.7m I have quoted is cash flow before income taxes (be they personal to the Glazers or corporate taxes) and before any head office costs (First Allied operates out of three offices and employs such cheap staff as Edward Glazer). The cash flow will fall to just over $7m per annum as interest only periods end, if occupancy rates don't pick up.

The 90% occupancy doesn't tally with actual data. On their website, First Allied like to include buildings they don't actually own, but are on the site. You can see a "142,438 sq ft" centre here (including Walmart). The 90,000 sq ft Walmart isn't owned by First Allied (I checked the county records), so occupancy is 88.3% not 96.5%.

I calculate occupancy to be 86%, but frankly it doesn't matter. The centres in trouble (DSCR below 1x) have occupancy that averages 79%, the one with DSCR above 1x average 94%.

Non-recourse just means that the bancruptcy of a centre doesn't knock on to other companies.  Brilliant.

4. Does being "committed to bringing the resources" actually mean anything?  If you've got resources, why not bring them?

LUHG

Debt Junkies: The true story of First Allied Corporation

Today, in conjunction with BBC Panorama and The Guardian, this blog is publishing full financial information on state of the Glazer family's real estate business First Allied Corporation. Although all information is from verifiable public sources primarily Commercial Mortgaged Backed Security ("CMBS") filings, First Allied's own website and US county and state records, it has never been made public before today.

Analysis of mortgage filings for 63 of First Allied's 64 shopping centres shows the portfolio is hugely overleveraged and that without major improvements in financial performance in the next few months, half the centres will not be able to generate sufficient income to pay their mortgages and therefore risk going bust. I can for the first time reveal that four centres have already gone into foreclosure. The majority of First Allied's properties are currently in negative equity leaving the family little or no room for manoeuvre. Although the US recession and property crash have proved the triggers for this crisis, the root causes are the disastrous decisions made by the Glazers in the mid-2000s as the US property boom neared its height, shattering their self professed reputation as savvy business people.

After years of speculation about the state of the Glazer family's businesses, the evidence I am publishing today explains the real reason behind the Glazer family's underinvestment in the Buccaneers and at United and shines new light on the family's inability to pay off "their" PIKs without using Manchester United's cash.

Given the amount of data I have discovered and analysed, I have created dedicated pages and links on my blog covering various areas:

The four centres that have already gone bust

Download master property and mortgages spreadsheet

Centre Court Shopping Center, Atlanta, GA – a case study of a First Allied centre

Explanation of methodology and sources

Introduction

Having sold all their other substantial business assets (nursing homes, trailer parks, radio stations and controlling stakes in listed companies) in the last ten years, First Allied is the third major leg of the Glazer family's empire alongside the two famous sports clubs. When I wrote about the company before on 9^th March, I stated that as a private US corporation, it would never be possible to obtain any detailed financial information on the business. I am glad to say that I was wrong about this.

In February, First Allied's Crosswoods Commons shopping centre entered the foreclosure process (which was completed in March) and I was able to review the centre's mortgage document which had been filed in the Federal District Court for Southern Ohio as part of the foreclosure process. The case documents showed that the mortgage the centre had defaulted on, although issued by Lehman Brothers in 2005, had been "securitized" and placed into a Collateralised Mortgage Backed Security. Because CMBS are freely traded, mortgage holders whose loans are in such vehicles must report regularly on the financial performance of the property on which the mortgage is secured. When I started to look at which other First Allied shopping centres had mortgages in CMBS, I was amazed to find that loans on 63 of the 64 properties listed on the company's website had been securitized (the final property was remortgaged in January 2008, but the credit crunch caused the market for new CMBS to dry up shortly afterwards and the new mortgage was not securitised).

Using the prospectuses of the twenty four CMBS vehicles which contain the traceable 63 First Allied mortgages, the CMBS' most recent investor reports, information on the company's own website (http://www.firstalliedcorp.com/), county and state records (where available) and First Allied's listings of vacant property (conveniently the company lists all its available space on http://www.loopnet.com/) gives a greater insight into the financial performance of the portfolio than one would expect to obtain from a quoted real estate company.

Summary of key financial findings 

1. Today, First Allied has total mortgage liabilities of c. $570m, secured on properties with a total estimated value of only c. $556m. This debt has barely changed from the $581m originally borrowed, whilst the value of the shopping centres has fallen sharply from their total appraised value of $744m when the loans were taken out. I estimate that 31 properties, virtually half the portfolio, are in negative equity.

2. Despite generating rental income of over $76m and cash flow before interest of c. $47m the debt burden of interest and repayments is so severe that the whole portfolio is currently only producing $9.7m of surplus cash per annum before tax. This is a tiny sum for what is supposed to be a large and successful real estate business and totally inadequate to even cover the interest accruing on Red Football Joint Ventures Payment in Kind notes or to invest in the Bucs playing squad.

3. Whilst the foreclosure of First Allied's small (10,000 sq ft) Crosswoods Commons centre in Ohio in February 2010 was reported by the US and international media, this blog is today publishing previously unseen documents which show that an additional three centres have already gone bust. First Allied paid $30m, including almost $5m of equity, for these properties in 2003, 2004 and 2005. With such a huge amount of capital already tied up in the centres and with the property cycle nearing its trough, the only explanation for the Glazers' failure to inject further equity into the businesses in order to them is obvious. The family do not have the money.

4. The great majority of First Allied's mortgages (58 of 63) were taken out with Lehman Brothers, perhaps the greatest symbol of the excesses of the credit boom in the United States.

5. The crisis at First Allied is only partly due to the recession in the United States and is mainly caused by the excessive debt the Glazers have loaded onto the portfolio. Having put almost half the portfolio on the market in 2004 (presumably to raise funds for the bid for United), the Glazers made a disastrous change of strategy later that year and started a binge of remortgaging which continued in 2005, 2006 and 2007. During this period, the Glazers extracted more than $115m in equity through remortgaging, less than 20% of which was used to buy new properties. Although the family realised significant profits during the 2005-7 period, because they both bought and remortgaged properties at inflated valuations, the Glazers piled unsustainable amounts of debt on many of their assets and it is this that is now causing such a severe strain on the business.

6. The total estimated net equity value of the current portfolio (valuing centres in negative equity at zero) is only $59m compared to $162m when the mortgages were originally taken out and an estimated $400m+ at the peak of the commercial real estate market in late 2007.

7. An incredible 44% (28) of First Allied's shopping centres have already been placed on "watchlist" by the trustee banks of the relevant CMBS, indicating they believe there is a significant risk of default on their loans.

8. More than one in four properties (17) already has a "debt service coverage ratio" ("DSCR") below 1x (i.e. income does not cover mortgage payments). Unless occupancy rates pick up sharply, these centres are likely to go into foreclosure in the next few months as reserves are depleted.

9. The mortgages on 48% of the portfolio (31 centres) were taken out in 2004 and 2005 and have five year "interest only" periods which expire this year. At current levels of occupancy, 16 of these properties will see their DSCR fall below 1x when their interest only period ends and repayments kick in, meaning more than half the portfolio will be at very high risk of being seized by the mortgage trustees in the near future. Many of the assets remortgaged in 2005 are so over leveraged that they would be unable to pay their mortgages when repayments begin even if they were fully let at current market rents. Looking beyond the current year, a further 9 centres have interest only periods that end in 2011 or 2012.

10. When First Allied took out the mortgages on the thirty three centres either currently unable to make their mortgage payments or which will be in this position as interest only periods end, they had a total appraised value of over $394m and a net equity value of $80m, all of which is at risk of being wiped out.

Thoughts and conclusions

There are some obvious conclusions to draw from this research and also a lot of unanswered questions:

1. Unless someone can point to other assets acquired at the time, the £272m of "equity" the Glazers contributed to the acquisition of Manchester United was at least in part really debt secured on First Allied's shopping centres. First Allied itself was actually a party to the original preference share agreements with the hedge funds. As there is strong anecdotal evidence that loans secured on shares in Zapata (the quoted company they controlled at the time) were also part of this "equity" element, we are left wondering how much, if any, true equity the Glazers ever put in....

2. Although in Manchester United and the Tampa Bay Buccaneers, the Glazer family own two very valuable assets, they themselves clearly have very little cash. Until the United bond issue, they were unable to take more than a few million pounds in fees from the club and actually resorted to borrowing from it, something that makes more sense now we can see the state of their US business. Forbes estimate that the Bucs have $143m of debt, only $7m below the limit imposed by the NFL and in recessionary times a franchise experiencing TV blackouts and having to cut ticket prices (an anathema to the Glazers) seems unlikely to be able to pay the family any significant dividends.

3. With First Allied contributing so little income, the argument that the United bond issue was undertaken entirely for the purpose of using the club's cash and profits to repay the PIKs is indisputable. There just is no other source of cash flow or assets to borrow against that the Glazers can use. If anyone can suggest a credible alternative view, I am very happy to investigate it.

4. The argument of many fans that the family is under investing in the Buccaneers because of their financial problems (which the Glazers dismiss, claiming they are undertaking a canny but prudent "rebuilding" strategy) is certainly lent greater weight by this research. There seem to be few ways the Glazers could conduct any other "strategy" at Raymond James Stadium as again there is no obvious source of cash for investment.

5. The Glazers are not business geniuses. Malcolm's long term track record is better of course, but since he became incapacitated, the whole structure has begun to creak at the foundations. Adding United's debt (including the PIKs) to Forbes' estimate of the Bucs' borrowing, the mortgages described above, and estimates for the family's residential mortgages, we arrive at a figure of at least $1.8bn of total Glazer family debt. This is supported by $225-250m of EBITDA (depending on how far the Bucs' EBITDA fell last season from the $69m earned the year before), a terrifying debt to income ratio of almost 8x.

6. I can only assume that David Gill and Sir Alex Ferguson have no idea about the true state of the Glazers' finances and believe they really are wealthy and successful. I will be writing (again) to David Gill to ask whether he feels United supporters should worry about the family's ability to repay "their" PIKs in the light of this research.

7. As with United's management, I assume NFL commissioner Roger Goodell's defence of the Glazers during his annual address is February when he said: "I talk to the Glazers on a regular basis. I will tell you that they are sound owners. They are terrific for the NFL and we have not seen that there is any stress that would affect the way they operate any of their professional teams, much less the Tampa Bay Buccaneers." was a product of not knowing the truth about the situation. Perhaps the NFL Finance Committee should look into the situation.

For those of us who have watched as ever more debt is piled upon Manchester United, the story of First Allied revealed in this research has some chilling parallels. First Allied Corp is not a property development company, it is a property speculator, using high levels of debt to try to ride the real estate cycle and enrich its owners. In the same way the Glazers have brought nothing but debt, risk and huge costs to United, they have added nothing to their portfolio of shopping centres, built nothing, created nothing. This would be of less concern if the management of First Allied had proved themselves adept at timing the market, but sadly the opposite is true. Not only did the Glazers borrow too much, but they did so at precisely the wrong time and at unsustainable, inflated valuations.

The more I discover about the Glazer family, the more they seem to be an unappetising morality tale for our times. Their story is one that takes in financial "innovation" by out of control banks like Lehman Brothers, which in turn allows pointless real estate speculation and creates the mirage of wealth creation, before the whole facade starts to crumble. Now we know that we can monitor the performance of First Allied on a monthly basis (and I will be doing just that you can rest assured) as well as the sports clubs, the facade is well and truly down.

LUHG

First Allied Corporation - even worse than I suspected?

About half an hour after posting my look at the Glazers' US property interests, I noticed I'd missed an email from someone pointing out that one of their shopping centers has gone into foreclosure.  The Crosswoods Commons center in Columbus Ohio is only a tiddler, but what's happened goes to emphasise the problems they've got....

"Crosswoods strip center in foreclosure

A strip center in the Crosswoods complex in north Columbus has gone into foreclosure.

Charlotte, N.C.-based Bank of America Corp. on Thursday filed to foreclose on the 20,000-square-foot center at 110-158 Hutchinson Ave. Next to the Marcus Corp. movie theater at Crosswoods, the strip is home to a mix of restaurants.

Bank of America filed the suit in U.S. District Court in Columbus against Crosswoods Commons Shopping Center Columbus Ohio LP, a partnership that includes Rochester, N.Y.-based First Allied Corp. According to First Allied’s Web site, the real estate firm owns and leases more than 6.7 million square feet of retail space in 20 states. The Crosswoods center was First Allied’s first acquisition in Ohio, and the company said it considered it a good deal because it included tenants such as BW-3, Chipotle, Stauf’s Coffee and Panera Bread.

Today, the center is occupied by Jed’s BBQ & Brew, SushiKo, Lotus Grill and Chipotle. Two spots in the center are empty.

Alan Bobrowski, First Allied’s general manager, declined to comment on the foreclosure."

Full story here:
http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=ACBJ&date=20100226&id=11169985

And details on the property on the First Allied site here:
http://www.firstalliedcorp.com/propertydetail.aspx?id=52

LUHG

Running on empty, how bad are things in the Glazer empire?

[Breaking news: Someone has kindly pointed out that one of the Glazers' shopping centers went into foreclosure in February.  Details here.]


Isn’t it strange that the “billionaire” Glazer family have never paid down a penny of the spiralling Payment In Kind (“PIK”) loans that David Gill tells us are the “family’s responsibility”? Even if the successfully concluded bond issue now allows the PIKs to be repaid from Manchester United’s cash flow, it would still make financial sense to pay them down themselves and then pocket United’s dividends. A loan that is increasing by a compound rate of 14.25% pa (soon to rise to 16.25%) is some of the most expensive financing imaginable. You would always pay it down if you could.

What could be going on inside the Glazer empire that has prevented them from doing so?

Now I don’t intend to embarrass myself by commentating on NFL matters, a subject about which I know virtually nothing, but a quick trawl through the US media and various fans’ sites suggest that despite an appalling 2009 season (winning 3 and losing 13, the worse season for the Bucs since 1991), the Glazers are in no mood to spend money on their team. It is often suggested that the Buccaneers were operating $30m below the salary cap last season (an NFL record) and there has so far been little activity during the “free agent” process that started a few days ago. Inevitably, Bucs fans and the local media have questioned whether all is well with owners financially. Attendances were down over 10% last season and season ticket prices have been cut aggressively (we wish).

It is worth remembering that the Glazers’ purchase of United was met with some surprise in Florida. Whilst rich, the family did not appear to have the sort of means required to finance such a large purchase. Indeed, even the publically declared equity element (£272m or $495m at the time) was so large that one local paper (the St Petersburg Times) suggested the family would need to make asset sales to raise the money.  During the run up to the family’s bid for United, there were very strong market rumours that at least some of the £272m “equity” had itself been borrowed.  I have it on very good authority that Commerzbank lent the family £100m+ to buy United shares on the market.  Whatever the truth of the matter, such loans were definitely repaid immediately before the bid, because otherwise the family would not have been able to issue the original “prefs” (the precursors to the PIKs) secured on their equity in the club.  It is my strong suspicion (although I should stress it is speculation) that the family’s property business, First Allied Corporation, repaid the Commerzbank loan using debt raised against its US property interests.  First Allied was a party to the pref agreements with the three original hedge funds, suggesting it was involved in the initial financing of the bid.

Sadly for curious observers like me, there is very little public information on the “intensely private” Glazer family. Their ownership of United and the Tampa Bay Buccaneers couldn’t be more high profile of course, but any other details of their business affairs remain very hard to find. The 2005 Offer Document and the 2006 Refinancing Investment Memorandum both name two major business owned by the family in addition to United and the Buccaneers, these were Zapata Corporation (listed on the New York Stock Exchange) and First Allied Corporation (their private US real estate business).

Selling: Zapata Corporation

The Glazers took a majority stake in Zapata in 1992 (the business had been founded by George H Bush in 1966 as an oil drilling contractor). The Glazers used Zapata as a vehicle for various ventures in the 1990s, including abortive attempts to become a dotcom business during the internet boom (Zapata launched an unsuccessful hostile bid for excite.com). By the time of the acquisition of United, Zapata’s main investments were a 77.5% stake in air bag fabric manufacturer Safety Components International and a 58.1% stake in Omega Protein Corporation, a business producing fish oil and fish meal from the Menhaden fish found off the eastern seaboard of the United States. Having attempted to take full control of Safety Components in 2003 and 2004, Zapata sold its stake in the business in September 2005 to private equity investor Wilbur Ross for $51.2m. The disposal of the stake in Safety Components was followed swiftly by an exit from Omega Protein Corporation, in a series of transactions in 2006. At this point, it appeared that Zapata intended to reinvest its c. $160m cash pile in other businesses. The credit crunch seems to have put pay to this plan, and in June 2009, SEC fillings showed that the Glazers had sold their 51% stake in Zapata (which was by this stage effectively a cash shell) to veteran investor Philip Falcone for $74m (£46m).

Selling: La Bellucia

Zapata Corporation wasn’t the only asset the Glazer family cashed in during 2009. In 2000, one of the Glazers’ companies, First Allied Jacksonville Corporation paid $14m for the historic Palm beach mansion La Bellucia (“Beautiful Lucy”) designed by Addison Mizner and built in 1920 (see photo). Despite its historic status, the Glazer family initially sought planning permission to demolish the property (such respecters of tradition). When this was turned down, a refurbishment was apparently planned, but then in late 2009, the property suddenly went on the market for $27.5m and was sold swiftly to Jeff Greene (a man who made a fortune betting the against sub-prime mortgages) for a very reasonable $24m.

So within six months, the Glazers raised almost a $100m (before tax). We know they didn’t use any of the proceeds to pay down the PIKs, and indeed we also know that in December 2008, the Glazers felt it necessary to borrow £10m ($16m) from Manchester United. These loans were on top of £10m paid since the takeover in “management and administration fees”, and a £2.9m “consultancy agreement” between United and a Glazer company signed in June 2009. The sudden rush for cash by the Glazers in 2009 suggests that things were not going well at the heart of the family business, First Allied Corporation.

Voids and debt: First Allied Corporation

Unlike in the UK, a private US company like First Allied does not have to file any public accounts. Sadly, there is no US equivalent of Companies House. The company’s website does however allow us to look at what assets it owns. The company say it “specializes in the ownership, management and leasing of over 6,700,000 square feet of community and neighborhood shopping centers located throughout the United States.” This 6.7m sq ft doesn’t tally with the list of properties on the company’s website (perhaps there have been disposals), the properties listed total, by my calculation, 5.27m square feet.   This makes First Allied a medium sized player in the shopping center market in the US.  Thankfully, most of First Allied’s peers are quoted companies and this allows us to draw some tentative conclusions about the state of the business.

Looking at the company’s quoted peer group of shopping center Real Estate Investment Trusts (“REITs”), we can see that on average, rent per square foot is $12-13 for shopping centers. So assuming a rental value of $13 per square foot (including vacant lots), this would suggest First Allied generates annual rental income of around $68m. At a typical “cap rate” (the % yield used to value the portfolio) of 7.5% (again derived from the REIT peer group), this suggests a gross property value (before debt) around $900m.

The term “shopping center” in the US doesn’t refer to indoor malls, but rather to out of town “strip malls”, generally a row (or rows) of shops running alongside a huge car parking area. These shopping centers are generally located by freeways in the sprawling suburbs of the US. US shopping centers frequently have an “anchor tenant”, one very large retailer accounting for a third or more of the square footage of a center. The anchor acts as a draw for the center and this gives it significant power in negotiating with the landlord. The anchor would expect to pay less “base rent” than the other tenants, and may be able to negotiate “percentage rent”, rent based on turnover. The success or failure of the center will be closely linked to the success of the anchor, a good quality anchor (such as a Wal Mart) can make a center, whilst a poor quality anchor will make a center unattractive to potential tenants. The photo and diagram below show a typical First Allied owned center (this one is in Greenbelt, Maryland with a total retail area of c.140k sq ft and is anchored by a K-Mart).

An analysis of the sixty five shopping centers First Allied lists on its website show some interesting facts about the business. Only twenty of the centers have anchor tenants, but these account for 55% of the company’s total square footage. Of those that do have anchor tenants, K-Mart is by the far the largest, with seven stores accounting for 14% of the total portfolio (and 44% of anchor space). K-Mart is not a high quality tenant, a discount retailer founded in 1951 (the same year as Wal Mart), K-Mart’s story is one of years of failure and decline. K-Mart (which is now part of Sears) hasn’t reported a year of “same-store” (that is comparable stores excluding openings and closings) sales growth since 2002. First Allied’s over exposure to K-Mart and under exposure to its competitors Wal Mart (only anchoring one of First Allied’s centers) and Target (anchoring two centers) will not have helped during the sharp consumer downturn of the last two years.

The First Allied website shows which of its properties are currently unlet (what are called “voids” in the property sector). First Allied’s overall void rate is just under 9%, which is fairly standard for US strip malls at the moment (again using the REITS peer group as a benchmark). The headline 9% figure disguises a more worrying trend in the 45% of the portfolio that is not anchored by one retailer. The non-anchored centers have a void rate of over 14%, which is very poor by industry standards. Of the 44 non-anchored centers, 14 have 20% of more of their space empty. Void rates around 20% are normally considered to the tipping point at which a center may enter a downward spiral as shoppers are put off by all the empty lots, and more retailers elect to leave the center in the search for better locations.

On the positive side, First Allied’s shopping centers tend to be located in above average income areas of the US. The company does not have huge exposure to California or the south west where the residential property crash has had most impact. The biggest geographical exposure by state is to Texas (around a third of total space). Texas has proved relatively resilient during the US recession, and First Allied’s two largest centers in the state are well anchored by Target stores and have low void rates.

On balance however, the First Allied portfolio shows signs of significant operational weakness. All US retail real estate companies have found themselves under huge pressure since 2007, but First Allied’s weak anchor mix and very high void rate across its non anchored portfolio suggests that income will have fallen more sharply than the industry average over the last two to three years. What does all this mean for the Glazer family’s finances? Well like all real estate businesses, it is certain that First Allied will be significantly leveraged, both at the corporate level and at the level of individual shopping centers. All First Allied’s quoted peer group have suffered balance sheet problems in the last few years as rents have fallen, capital values have fallen and companies have found debt harder to roll over. In the quoted sector, the REITS have responded to these pressures by raising significant amounts of new equity during 2008 and 2009. The table below shows typical debt to equity ratios in the quoted peer group and the scale of the equity fundraising undertaken.

Quoted peer group
			December 2009 $m
REIT	Ticker	Equity	Debt	D/E	09 equity issued	% 09 equity
Developers Diversified	DDR	2,952	5,179	175%	704	24%
Equity One	EQY	1,065	1,200	113%	89	8%
Federal Realty	FRT	1,209	2,013	167%	115	10%
Kimco	KIM	4,853	4,943	102%	1100	23%
Regency	REG	1,845	1,886	102%	608	33%
Weingarten	WRI	1,903	2,532	133%	382	20%

In total, the six REITS have raised $3bn in new equity in the last year, equivalent to around 30% of their existing shareholders’ equity. The vast majority of this new capital has been used to repay existing borrowings.

As a private company, the option of issuing new equity to the market is not open to First Allied. Obviously we have no insight into the shape of the company’s balance sheet, but it would not be unreasonable to assume that First Allied has a “typical” real estate capital structure, with debt representing at least half of gross assets. On the $900m of gross assets estimated above, it is therefore likely that First Allied would have at least $450m financed through debt. Given the high void rate experienced by the company and the weak anchors in many centers, cash flow has probably been well below plan for the last two years or more. Whilst purely guesswork, in these circumstances and (unlike the quoted peer group) without having access to external sources of equity, it seems very likely that the Glazers will have had to put capital into First Allied.

The need to recapitalise First Allied fits entirely with the family’s management of its other businesses. The Buccaneers have been starved of investment on the playing side, at United no attempt has been made to repay any of the PIK debt (and indeed Red Football has been purposely refinanced in such a way to allow the club’s cash to be used to pay the PIKs). The family’s only quoted investment has been sold, as has a high profile property asset, together bringing in almost $100m. Has this money gone to shore up First Allied’s balance sheet? And what of the loans the family took from United? Are they a reflection of the fact that First Allied no longer has the capacity to pay the family dividends to which no doubt they were accustomed during the property boom years?

What does all this mean for United? Well this quick glance at the Glazers’ other interests suggest the family are overstretched and in retrenchment mode. That doesn’t tally with the assertion that the club is “not for sale”….  Perhaps someone should make them an offer.

LUHG