Monday 7 June 2010

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:

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 9th 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 (, county and state records (where available) and First Allied's listings of vacant property (conveniently the company lists all its available space on 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.