In continuing with yesterday's empirical rant Lazy Analysis Allows For Outright Silly Pricing Of Near Insolvent REITS: A Forensic Analysis Of A Prime Example [9] (a must read for anyone with exposure to - or interest in - this company, whether short or long), I continue with the piece meal release of Q4's BoomBustBlog primary CRE short candidate...
PEI's share price has surged despite an absolute dearth of positive prospects for the company....
As a matter of fact, the company has clocked continuous and increasing losses into an ever darkening fundamental and macro outlook. PEI has accomplished a net increase in occupancy due to its strip malls, unfortunately that net occupancy increase comes with a dramatic decrease in revenues - i.e. base rents.
From a balance sheet solvency perspective, one of PEI's primary problems is the average cost of its portfolio and points of acquisition. Net-net, the overpaid for many properties during the peak of the bubble. Now that prices are normalizing (facing reality), PEI faces a dramatic portion of its portfolio underwater. Let's take a look at the mall CRE picture during the bubble...
As you can see, Q4 2005 marks the absolute tippy top of the bubble in terms of rents (which drive prices). Now, let's take a look at when PEI acquired the bulk of its portfolio...
My subscribers and team actually know precisely what properties are underwater and what properties aren't since we actually valued roughly 78% of the properties by hand using discrete, individual and independently derived inputs. I will be releasing both the summary of that exercise as well as some individual property analysis throughout this week.
Of course, if the company acquired the bulk of its portfolio at the peak of the CRE bubble, and rents have basically trended nearly straight down from that point, one need not wonder which direction cashflows are headed, no? As European banks choke on sovereign debt issues and they face a historically high CRE debt rollover period (now that should be fun), and American banks choking from 360 degree fraud (LIeBORgate, Fraudclosuregate and mortgage putbacks) and litigation contingent liabilities on top of having balance sheets full of the stuff that funded companies's CRE acquisitions such as PEI's in the first place, I really don't see who is going to give PEI the cash to dig itself out of the hole. Of course you can always rely on the foolish equity investors, after all, just look at the share price. It's not as if some smart ass blogger or independent investor is going to snatch the covers off to show these guys naked and completely under-endowed, is it????
Despite all of this, the stock is actually close to its highs!
I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum [10] and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.
The complete REIT analysis referred to in the chart can be found here for subscribers [11] (the property by property valuations are for Professional/Institutional subscribers only):
Fire Sale Scenario Analysis
(Commercial Real Estate) [12]- Foreclosure Scenario Analysis
(Commercial Real Estate) [13] - Sample Property Valuation
(Commercial Real Estate) [14] - Cashflows and Debt Preliminary Analysis [15]
Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.
The next installment of the PEI saga (24 hours from now on BoomBustBlog) will go into intricate detail as to the reasons this REIT has close to no way out besides bankruptcy or a foreclosure/fire sale routes. As a precursor to that, we will go over covenant issues, though.
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