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....


Friday 20 August 2010

Blacking Out

Is there a skill in the business management of sports teams? The Glazers obviously believe there is and that it's a skill they possess. Here's how they described themselves in the 2006 refinancing document:

The experience and success of the Glazer family in managing a sports club is well illustrated by its ownership of the Tampa Bay Buccaneers. The Glazer family acquired the club in 1995 when it was, at that point, one of the worst performing teams in the NFL both on and off the field of play. Since ownership the Glazers have transformed the business immeasurably:
Sporting success: winners of the Superbowl in January 2003
Financial success: the attraction of new sponsorship and commercial opportunities
Stadium development: now home to one of the NFL's finest facilities [paid for with public money, not by the Glazers. Anders]
Sustained investment in the playing squad
Enthusiastic fan support; seven years of consecutive sell-outs and a season ticket waiting
list in excess of 100,000 people.

Well that was then and this is now.
The 2003 Superbowl win was the last instance of "sporting success", with two lost Wild Card playoffs the only other post season achievements since. Last year of course, the Bucs only managed 3 wins out of 16, their worst season since 1991.
Many Bucs fans blame the poor on-field performance on a failure to make "sustained investment in the playing squad" with the franchise spending way below the salary cap. This summer's lack of big names and reliance on a large numbers of rookies seems unlikely to change many minds on the subject.
Poor performance, under investment and a weak economy have all contributed to the complete evaporation of the season ticket waiting list (sound familiar?). Despite price discounting and the abolition of most seat deposits and long-term ST contracts, only 40,000 season tickets have been sold for the coming season (in a stadium seating 66,000).
As fans feared, the Bucs announced earlier this week their first "blacked out" home game for thirteen years, a preseason against Kansas City Chiefs. NFL rules say that games cannot be shown on local TV within a 75 miles radius of the stadium if the game is not sold out. It's an attempt to encourage fans to go the game (not totally unlike the English ban on the live broadcast of 3pm Saturday football). More blackouts during the main season look certain.
Last season several Bucs home games "should" have been blacked-out, but the club stepped in and bought up unsold tickets and declared the games were sold out. For whatever reason (is there ever a reason to do with the Glazers that isn't financial?), that isn't going to be repeated this year.
Is there a skill in the business management of sports teams? Judging from the Glazers' record in Tampa, United fans will hope it isn't a transferable skill....


Wednesday 11 August 2010

How many shirts Greg? Don’t believe the hype.....

Another year, another three letter sponsor....
So the new season is about to begin and United supporters are getting used to a new shirt emblazoned with the name of our new sponsor. United's appeal to global brands is not in doubt and the exposure the deal will give to Aon is clearly the major plus for the company's President and Chief Executive, Greg Case as he outlined in this press release (edit, the cached copy I previously linked to has gone, nice work Aon, but thankfully Red News published the full release here) which was also sent as an email to all Aon staff when the deal was announced last year:

"The strong Manchester United brand is compelling because it provides Aon with an opportunity to communicate the value we bring to clients on a broader base than we ever could have achieved on our own. We also will have the chance to maximize the value of our partnership in Asia, Latin America and the Middle East as well as take advantage of Manchester United's strong presence in the United Kingdom and Europe."

Not only that, but Greg goes on to explain how United supporters will become Aon's "walking billboards":

"And speaking about that world famous shirt, more than 6 million Manchester United shirts are sold in a year, giving Aon more than 6 million "walking billboards" annually. With each appearance Manchester United makes, they will add to their fan base in both existing and new markets. Starting in 2010 the Aon-sponsored shirt will continue to build equity for our Firm as it increases its impression rate globally."

How many shirts are sold each year? "more than 6 million" says Greg....

Hang on. Nike never reveal how many replica United shirts they sell per annum. The bond prospectus does not contain the number. The only time Red Football Ltd has made it (sort of) public was in the 2006 refinancing Investment Memorandum (page 14`of the pdf, third paragraph):

"Over the first four years of the Nike deal [which commenced on 1st August 2002], the Club sold in excess of 6 million replica shirts, approximately 40% of those sales (including other apparel) were outside of the UK."

So four years ago United/Nike were selling c. 1.5m shirts a year (of which only around 600,000 were sold outside the UK), today someone has told Greg Case that annual shirt sales are running at 6m!

What's going on? A quick call to Nike yielded the response that:

"annual sales are significantly below the number [6m] you just quoted".....

The football "industry" is never more ridiculous than when it is making exaggerated claims about its own popularity and it makes me wonder what else David Gill told Greg Case about the current state of Manchester United. Perhaps he should pop back over to M16 for a fact finding mission. He could take in a match, West Ham is on general sale.....