Get Ready for All of the Bad News to Come Out

The company that employs my wife has 150 locations nationwide. Since Covid they are profitable in perhaps 30% in any given month. Granted, they are a start-up “technically” as they were feverishly adding locations since their founding in 2018.

They are in the process of closing 50 locations. They have not payed (commercial) rent or are behind in rent by several months in 80% of locations because the profit from the healthy locations cannot carry the rest.

The whole model was predicated on low interest debt, cheap and aggressive equity capital desperate to find “deals”, and rapid growth. Like much of our economy they used cleaver financial engineering and velocity of growth instead of proving a business thesis and growing from surplus capital/profit as a result of proving the model.

As a consultant myself, I have seen scores of these businesses. All have “very smart” people working there. All have dumped a massive amount of capital into shiny objects, technology platforms, and brand/marketing. Other than a few who can seek shelter behind a balance sheet heavy with durable assets subject to asset inflation, the rest wil die or suffer massive consolidation, retrenching, and/or distressed sales/mergers – which will make the bankers and their distressed investors very happy because it’s all about transactions and liquidity.

The CRE sham is just getting going but benefits from its own too big to fail engineering as we saw last time around. All the securities and derivatives lead directly to pensions and other politically sensitive market makers. It will be something to behold. But then narrative trumps metrics. Until it doesn’t. But their record so far is impressive.