This is part four of my forensic rant on the the dead REIT walking known as PEI. If you haven't yet read parts one [7] or two [8] orthree [9], they are necessary in order for you to get the full picture. As stated in my last missive on this topic, although BoomBustBlog is a subscription research site, I'm releasing this proprietary blog research for two reasons:
- the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and
- this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.
Blog subscribers can access the full recapitalization document here -PEI Recapitalization Scenario [10]. Those who are casual readers, please see below...
I left off demonstrating how PEI only had a mere handful of properties that were able to take on additional debt (assuming banks were to do a halfway decent job at underwriting), and the additional cash available from leveraging those properties would do very little to assist in digging PEI out of the hole. The incremental loans expected to be availed by the Company is detailed below: USD Million
|
Property Name |
Debt |
Cap Rate (%) |
Market Value of Property |
Incremental loan |
New Debt-to-WDV ratio |
|
Exton Square Mall |
68.4 |
6.19% |
98.5 |
30.1 |
82.4% |
|
Moorestown Mall |
55.2 |
7.67% |
66.6 |
11.4 |
101.5% |
|
Patrick Henry Mall |
91.9 |
7.71% |
98.6 |
6.7 |
93.5% |
|
Total |
48.3 |
The Company would be able to get 48.3 mn loan if it goes for refinancing based on recapitalization of its properties - and that's using sky high optimistic assumptions. The Incremental interest due to from the above financing based on the assumption that the lenders would raise the interest on the loans roughly 50 basis-point (bp), roughly US 4.6 mn. The net cash-inflow would be USD 43.8 mn. This is grossly insufficient based on total requirement of around USD 295 mn.
Our analysis was originally performed in the 4th quarter of last year, and since then PEI has raised $100 mln in a preferred offering. A few readers have asked if this alters our scenario, to which I reply - take the optimistic debt refinancing presented above, combined with the $100mln 8% preferred, and an addition $100 mln 8.5% preferred, and you are still observing PEI with a roughly $50mln shortfall and a hell of a heftier debt service to boot. As I said, this is a dead REIT walking!!!
Alternate options
The other options before the Company are as under:
- Raise finance against properties which have no specific mortgage against them. However, we looked at the covenants for loan facilities restricting company’s access to these properties for raising finance. Almost all of these properties have been mortgaged under revolving credit facilities.
- Raise finance against properties that we have not yet valued as part of the current analysis of valuation of PEI. We valued 27 properties. We looked at other properties to assess probability of raising finance against them.
Out of the remaining 19 properties, 10 properties were acquired between 2003 -2005 and the rest were acquired before 2000. The properties acquired between 2003-2005 are likely to have their valuation fallen in line with the valuation we have witnessed for the properties we valued. As such, probability of raising adequate finance on such properties is also quite minimal. The properties acquired before 2000 already have high debt-to-Net WDV ratio and therefore are likely to have less cushion for further debt.
Schedule of properties not valued
Properties highlighted in blue have been mortgaged under revolving credit facilities
Looking at the graphic above, it is plain to see that the company has leveraged its portfolio to the hilt, either through property depreciation or outright equity stripping. Those potential cash sources that were unlevered properties have been wrapped up as credit line collateral, while most of the other properties are dramatically underwater - I mean dramatically. What makes this even worse is that these numbers are from management's proclamations and history tells us (as well as BoomBustBlog analysis) that management's views are usually always much more rosy (read bullshitistically unrealistic) thine own hand borne calculations.
Forecasted Financial Statements
Below are PEI’s projected financial statements for 2012 based on the assumption that the shortfall (though unlikely) is met through additional borrowing and as a result the average interest increases to 6.7% annually.... Blog subscribers can access the rest of the full recapitalization document here - 
PEI Recapitalization Scenario [10]. Click here to subscribe [11].
I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum [12] 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):