This page has been archived and commenting is disabled.

PEI 2nd Quarter Earnings Review - Why Aren't Analysts Asking The Hard, Or Even The Obvious Questions???

Reggie Middleton's picture




 

I got this in my mailbox the other day:

How did PEI just refinance the Christiana Center with a $50 million loan when they are carrying the asset at a value of $30 million on its balance sheet?

Refinancing: http://finance.yahoo.com/news/preit-reports-second-quarter-2012-115500466.html 

Asset Value: 2011 10-K

Well, that's a damn good question. If you recall, I went over PEI's portfolio with fine toothed, valuation comb in Q4 - reference When A REIT Trading Over $15 A Share Is Shown To Have Nearly All Of Its Properties UNDERWATER!!!

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names. In putting a realistic valuation on PEI, we independently valued a sampling of 27 of its properties. We found that many if not most of those properties were actually underwater. Most of those that weren't underwater were mortgaged under a separate credit facility.   

PEI Underwater  Overly Encumbered Properties

If you haven't yet read parts one or two or three or four orfiveorsix orseven in this series, its some engaging reading. Trust me! On that note, let's review my observations of the most recent quarter. Subscribers can download File Icon PEI Q2 Earnings Review _July 2012 to view the document in full.

Overall, the quarter has seen better performance compared to the previous ones. However, the negatives are:

  • The higher base rent achieved this quarter was due to a higher occupancy rate while theper square foot rental metrics continued to slide. I don’t foresee this trend reversing in the near future.  As a matter of fact, the likely course of the US, EU and Chino-Japan is that of recession. Reference RGE Monitor’sChristian Menegatti on US:No more risks of stall speed…stall speed is here, recession next?
  1. The US is witnessing 1.5% real growth through Q2 GDP - Sad.
    July ISM manufacturing data (with a headline still in contraction territory at 49.8) confirms last month’s weak reading. Most components moved roughly sideways- the exceptions included a jump up in inventories from 44 to 49 (which should be viewed as a negative development, amid falling new orders and exports) and a step down in employment (from 56.6 to 52).
    Employment is still positive, but note that it is a lagging indicator—the contraction territory reading of new orders and a worsening of export orders lead us to expect continued pressure on the labor market going forward.
  2. The drop economic outlook is most important when viewing PEI’s quarterly results. Despite the fact that PEI pulled some impressive base rent growth, a closer look at said growth is illuminating…

PEI rents

  1. Average base rent (per square feet basis) has decreased

(US$ per square feet)              

June 2011

June 2012

% Change

Malls Weighted Average

32.40

31.74

-2.0%

Consolidated Properties

31.54

30.87

-2.1%

Unconsolidated Properties

41.73

41.23

-1.2%

Same Properties

32.40

31.74

-2.0%

Pertinent observations:

Base rent (on a total rented basis) is growing in 93% of PEI’s properties (@1.17%) considerably slower than average base rent is decreasing (@-2.0%). Moving up 1.17 inches for every 2.0 inches you have moved down results in a lower position – period!

This means that if we revalue the Company’s property portfolio, it should be negatively impacted by lower average base rent, with that negative impact offset roughly 59% by the higher occupancy rate - which has increased. Of course, that still leaves us 41% underwater, doesn't it?

  1. The company has about 10% of its leases due for renewal in 2013, which if impacted by worsening economic condition described above, could negatively and materially impact the Company’s rental income.
  1. We see the Company as marginally being able to meet its debt obligations for 2012, and that’s assuming nothing else goes wrong in a macro environment that has new things going wrong nearly every weak!!! 

I will most likely launch my TV show sometime next week via YouTube as I shop it around to various networks, and I will included significant PEI analysis in the pilots. I welcome one and all to view and participate. Feel free to tell all of your friends, colleagues and associates about the guy kicking Wall Street in the balls...

PEI analysts

Compare everyone above to my analysis of PEI, then feel free to look at our track record throughout this malaise, starting from 2007. As a matter of fact, don't compare analysis, compare me against the entire banking establishment!!! 

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Follow me:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 11/29/2012 - 12:11 | 3020613 kall
kall's picture

I am sure this is not the only bad decision them made lately and I am sure this is not the only company making such bad calls. They could use some large order financing to get the support they need and survive this move...

Thu, 08/02/2012 - 13:17 | 2672934 shovelhead
shovelhead's picture

Hehe,

This ain't Pamplona where you can duck in a doorway.

Here at Fight Club, you fuck with the bull, you get the horn.

http://news.nationalgeographic.com/news/2005/07/images/050711_runningbul...

Thu, 08/02/2012 - 13:14 | 2672916 Madcow
Madcow's picture

Fed statements are starting to sound more like depositions. 

 

http://www.scribd.com/doc/101764669/August-FOMC-Comp

 

Thu, 08/02/2012 - 13:46 | 2672492 Disastra
Disastra's picture

@UrbanAnalyst - you have obviously done little to no digging on this busta, but merely pasted bad links and baseless with regard to the subject accounting definitions.

Read the facts......

PEI DEBT MATURITY

24% IN 2012

47% BY 2013

68% BY 2014

$800M of which is asset level mortgage debt in 2012 and 2013

PEI LEASE EXPIRATIONS

945 leases and 36% of 2011 base rent expiring in next two years....take a wild guess at what that does to the company's NOI and already operating loss

3 million sf and 1.3 million sf of non anchor and anchor leases expiring in next 2 years

Macro headwinds, asset and entity level debt maturities and major lease expirations lead to....well.......

PEI is currently trading at a 8.3% cap rate and a $100 million tear in base rent will blow the company up.

 

Tue, 08/14/2012 - 14:53 | 2704602 UrbanAnalyst
UrbanAnalyst's picture

Dear Disastra,

You will of course note that my comments related to the recent refinancing of Christiana Centre, which was ostensibly the impetus behind this Middleton missive. The maturity schedules you list are interesting (though sum to greater than 100% which is interesting), but seem mostly irrelevant given the lucrative financing just signed up (the refi). Outside of a market-wide liquidity crunch I advise to focus more on operating fundamentals than finance obligations.

 

“PEI is currently trading at a 8.3% cap rate and a $100 million tear in base rent will blow the company up.”

 

Do you understand why this comment is hyperbolic/very low probability?

 

Anyone can do 100/8.3% ~ $1.2B ~ equity market cap, that isn’t nuanced analysis. Tell me how base rent declines 34% (100/293.4) when a) as you say only 36% of tenants roll in the next 2 years, and b) you haven’t done a market-by-market tenant rent analysis – retail real estate is of course a local market business.

 

Assuming that tenant revenues are distributed evenly over tenants (they aren’t of course, but we don’t have a tenant-by-tenant roll schedule), this would require 94% (34%/36%) of tenants whose leases are up to not simply have market or affordability-based rent reductions, but to vacate and have that space not be re-leased for >$0. It seems somewhat unlikely given portfolio-wide vacancy stats (93% for 2011).

 

Your $100MM rental revenue decline would of course make more sense on comprehensive tenant rent, making only a 22% (100/449.9) revenue decline required. Then the math above would ‘only’ require slightly over 60% (22%/36%) of tenants to vacate and have the space not able to be re-leased. Does this sound reasonable to you? It shouldn’t.

 

I don’t intend to be inflammatory, but if you insist on avoiding geniunely informed analysis at a granular level then I can only warn you that your expectations (i.e. “blow the company up”) and your resulting returns will likely be disappointing. Do your own work, do more of it, and don’t listen to so many guest posters on ZH.

 

Please note: I have no positions in PEI, nor am I directly or indirectly related to the company in any way

Thu, 08/02/2012 - 11:42 | 2672442 Reggie Middleton
Reggie Middleton's picture

Stick to markets and industries one has expertise in, rather than rolling out generic and simplistic financial statement analysis across industries.

Well, that wasn't very nice of you was it? If you may not have noticed, you are addressing a real estate professional, but we'll move past that.

"When presented with evidence that a lender, with access to due diligence data, recently provided a non-recourse loan on an asset above carrying value (not in reality, see note below), your interpretation is shock and that your analysis is solid?"

So, basically, what you're sayings is that lender's have never lent against a property without doing a thorough enough due diligence to ascertain whether said loan will go sour or not? As in lending to GGP, altA, subprime, etc.??? Because a lender made a loan, the value of a property is now set in stone? Do all lenders truly have the resources to manually vet the value of a large portfolio of properties while at the same time doing a good job at it? Think extend and pretend and if a lender feels it can benefit from suc Not saying that's the case here, but your assetion is ludicrous. The bank says so, so it is!!!!????

Review accounting standards and understand that NBV includes the NON-CASH adjustment for DEPRECIATION, which may or may not bear any relation to the actual structural and maintenance CapEx required for an asset (Note: see page 25 here for evidence of sufficient, though admittedly thin, collaterilization

So, you admit collateralization is thin, so I assume you can admit that dropping rents also reduce valuation, which also reduce the already thin collateralization, no? Maybe the person in the email above was referring to the likely possibility that the NPV of cash flows simply don't justify the loan, and hence is closer (and probably less) than what PEI is carrying on its books??? I didn't write the email, so I don't know. One thing I did know is that this company truly has valuation and cash issues, and you are clearly an insider or someone with a very, very biased perspective.

3) Don't write a missive clearly highlighting your analytical shortcomings and your disconnect with basic tenants of fundamental analysis;

4) Stick to markets and industries one has expertise in, rather than rolling out generic and simplistic financial statement analysis across industries.

Maybe you failed to read the links in the article. See Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? then let's finish this discussion.

Thu, 08/02/2012 - 11:10 | 2672314 UrbanAnalyst
UrbanAnalyst's picture

Dear Sir,

This is a truly stunning piece of analysis from an oblivious charlatan.

When presented with evidence that a lender, with access to due diligence data, recently provided a non-recourse loan on an asset above carrying value (not in reality, see note below), your interpretation is shock and that your analysis is solid? A moderately more prudent "analyst" might take this as a catalyst for internal reflection of the quality of one's conclusions and work generally, particularly if the deliverables are made public.

If we could turn back time here would be my advice to you prior to writing this drivel:

1) Understand what a non-recourse loan is, with a focus on situations involving a single lender and a single asset - securing an asset at 42.7 whlie paying 40 plus costs can often be considered a good idea;

2) Review accounting standards and understand that NBV includes the NON-CASH adjustment for DEPRECIATION, which may or may not bear any relation to the actual structural and maintenance CapEx required for an asset (Note: see page 25 here for evidence of sufficient, though admittedly thin, collaterilization http://www.snl.com/Cache/14111177.PDF?D=&O=PDF&IID=102991&OSID=9&Y=&T=&FID=14111177);

3) Don't write a missive clearly highlighting your analytical shortcomings and your disconnect with basic tenants of fundamental analysis;

4) Stick to markets and industries one has expertise in, rather than rolling out generic and simplistic financial statement analysis across industries.

Thu, 08/02/2012 - 11:58 | 2672516 bigdumbnugly
bigdumbnugly's picture

If we could turn back time here would be my advice to you prior to writing this drivel:

mr urban analyst, i am familiar with drivel.   my comments are usually filled with drivel.   drivel is a dear friend of mine.   that post, sir, was no drivel.

 

...bentsened.

Thu, 08/02/2012 - 12:39 | 2672687 RockyRacoon
RockyRacoon's picture

I'm here to back you up.  With your experience in the drivel department, and mine in drivel analysis, we can tag-team this thing as pure non-drivel.

Besides: "... basic tenants of fundamental analysis."  he writes.   I wonder what those "tenants" are paying for rent in that hovel of an analysis?   He has obviously overshot the tenets of expert drivelation.

Thu, 08/02/2012 - 14:27 | 2673287 bigdumbnugly
bigdumbnugly's picture

yep.  what a piker.

Thu, 08/02/2012 - 10:51 | 2672232 Gold Dog
Gold Dog's picture

Thanks R....it's all a hall of mirrors!

Dog

Do NOT follow this link or you will be banned from the site!