Monday, 23 March 2009 00:00

Final valuation numbers on the March Residential REIT are now available for all subscribers

My final valuation numbers and assumptions are now available for the March Residential REIT subject. Enjoy!


Most of the company's properties were acquired recently with nearly 64 properties, or 74% of total properties acquired in or after 2006. These included 40 properties which were acquired due to the acquisition on June 11, 2008. Keeping in mind the lengthy transaction cycle in real estate deals, one can assume that the pricing for the deals preceding the deal closing by 6 to 18 months. This is pertinent in that the commercial and residential real estate bubble peaked between the 2nd half of 2006 and the 2nd half 2007, when the majority of the properties where purchased.

Year of acquisition / development

# of properties

% of total

Before 1999















2008 and later



Total Properties



Under the base case scenario XXX's fair value per share stands at $10.2 and $13.2 under CFAT (Cash Flow After Taxes) and NOI (Net Operating Income) based valuation approach, respectively. Assuming equal weights to both these techniques this translates into weighted average share price of $11.7 representing 39.1% downside from current price of $19.3.

XXX's valuation under bear case scenario is expected at $8.4 based on weighted average NOI and CFAT valuation technique, which represents a 56.4% downside risk from current price of $19.3.

Even under the most optimistic set of assumptions XXX's per share valuation pose a downside risk of 8.5% with weighted average share price of $17.6. Needless to say, I feel XXX is overpriced, and optimism has not been the operative word of the day in recent macro circles!

Refinancing existing loan obligations would be a challenging affair for the company, particularly in view depressing operating performance

Owing to the acquisition, XXX's debt increased to $1.3 bn in 2008 from $0.5 bn in 2007. As of December 2008 XXX's debt-to-FFO was at 28.8x while average maturity of its debt is 4.3 years, clearly demonstrating that the company will have to resort to external sources of funding, most likely borrowing, to meet its financing obligations. In 2009, XXX has debt obligations of $231 mn, with a total of $531 mn payable by 2011. In addition to this, the company has new development financing needs to the tune of $205 mn by 2011 and recurring capex requirement of $28 mn by 2011. Overall AXXXs total funding requirements for re-financing upcoming loan obligations and capex expenditures is about $764 mn by 2011. Despite huge financing requirements, the company's operating cash flows at $33 mn for 2008 was not even sufficient to finance its dividend distribution of $51 mn. With the market's appetite for CMBS securities completely dried up, XXX will have a GGP-style, tough time in raising $810 mn by 2011 - including $303 mn by 2009 alone. If you remember, I made a similar call on GGP late in 2007 (see GGP and the type of investigative analysis you will not get from your brokerage house). As long as CMBS market is hampered as it is, and the regional banks and insurers suffer due to operating losses and hits to their investment portfolios, the traditional and extant REIT business model is broken, and those REITS which binged on cheap, yet excessive debt and/or those who rushed to overpay for properties with compressed cap rates will suffer significantly through value destruction and collapsing share prices. I expect to see the trendline of XXX to start showing more of a correlation to that of GGP's.

Properties purchases made in 2008 seem to be an expensive buy

XXX has grossly overpaid for properties acquired in 2008 and 2007 with an average purchase price of 33% and 48% higher than current valuations, respectively. Of the 44 properties acquired during 2008, 9 properties have LTV greater than 100%. XXX's overall loan-to-value ratio is at 70% under the base case scenario and 77.7% and 62.4% under bear case and bull case scenario, respectively. My understanding is that the refi threshold in reference to LTVs is currently in the 65% range (keep in mind that this is the refi threshold, not the purchase threshold), with banks and lenders capital constrained and under the assumption that rents, valuations and macro conditions will be trending down before things improve. XXX's aggregate LTV in both the base and bear scenarios is well above that, and in the bull (rosily optimistic) scenario barely squeaks by. This is the exact problem GGP ran into last year, and I expect them to file for bankruptcy within a few weeks. With a significant number of properties acquired during the peak of the real estate and credit bubble financed with debt, these properties have quickly fell under water which could further complicate the problems in refinancing XXX's relatively large debt obligations.

I will be releasing an advanced property valuation schedule for Professional and Institutional Subscribers within 5 business days.

American Campus Communities (ACC) Forensic Summary Forensic Summary 2009-03-23 00:21:15 538.57 Kb

Last modified on Monday, 23 March 2009 00:00


  • Comment Link phirang Wednesday, 25 March 2009 00:37 posted by phirang

  • Comment Link shaunsnoll Tuesday, 24 March 2009 22:30 posted by shaunsnoll

    man, the average LTV is really low on this company but only because all those 0% ltv properties, they have some SCARY stuff!!! if you strip out those 0% LTV properties things look much worse for what remains, i wonder what their value weighted LTV is too since they have some of their bigger properties at 100%+ LTV.....

    things do not look good for these guys...

  • Comment Link shaunsnoll Tuesday, 24 March 2009 20:54 posted by shaunsnoll

    there are 100's of BILLIONS of dollars of REIT debt that will have to be rolled over every year for many years and with the insurace companies off the merry go round, the CMBS market absolutely gone and the banks with their hands tied i just don't see how the REIT sector will survive without MANY of the current REITs gone. phirang, i dont see how the new plans change that myself but possible i'm missing something.

  • Comment Link NDbadger Tuesday, 24 March 2009 09:22 posted by NDbadger

  • Comment Link Reggie Middleton Tuesday, 24 March 2009 01:55 posted by Reggie Middleton

    @ yhong71
    I, too, am concerned about the risk of collusion. I think the political risk of the adminsitration getting caught allowing such collusion is too great for them to consider it, but there are more clandestine ways of allowing in addition to the fact that the administration doesn't have to allow it at all for it to happen. That has been what Wall Streets business model has been since the OTC derivatives market has taken off, finding a way around the rules.

    Let's see what my analysts can dig up in terms of objective findings before I comment any further.

  • Comment Link Reggie Middleton Tuesday, 24 March 2009 01:50 posted by Reggie Middleton

    If the company fire sales properties that are underwater, it doesn't solve the problem. If it fire sales properties above water, and successfully clears the liens on the property, then it pushes the company into valuation band that I suggested. Remember, the share price of the REIT reflects the equity of the properties (asset value less incumbrances) + the present value of future cash flows.

    If you sell off any property, whether above water of below, you eliminate the prospect of those future cash flows hence must remove that from your valuation. If you sell off properties below water, you are still on the hook for the balance of the liens and encumbrances.

    If you sell properties above water but at a discount (ex. firesale) the amount of the discount gets sliced directly off the top of your equity value (ex. share price).

    As I have said in the report, we have been through this scenario before, and it didn't work out well with GGP. In addition, at least in my opinion, GGP has much more marketable properties than this REIT. Look at the graphs of correlation that I have supplied in reference to GDP. We can be relatively certain where enrollment cash flows are going to go, even if one were to be optimistic and assume that we will have explosively expansive GDP next year. Knowing the relationship between GDP and this company's revenues, would [b]YOU[/b] loan it money if you had access to the Fed's cheap money loans, or would you go for a better risk reward ratio?

    As for investing in the debt, I would prefer buying puts on the equity. You get greater leverage to the upside while having a limit to the downside. The stock is at 605+ of its all time high which was achieved during the end of the property bubble. I don't foresee a 2x to 4x pop in this stock at all.

    @ ND Badger
    I am sure our government is on the case in reigning in the financial firms. I don't know if I more pessimistic, or just more realistic, but mostly what I see is Wall Street and banks catching hell from our politicians and bearaucrats as of late:

    Some of the same banks that got government-funded payouts to settle contracts with American International Group Inc. also turned to the insurer for help cutting their income taxes in the U.S. and Europe, according to court records and people familiar with the business.

    The Internal Revenue Service is challenging some of the tax deals structured by AIG Financial Products Corp., the same unit of the New York company that has caused political ire over $165 million in employee bonuses.

    The company paid $61 million last year in disputed taxes stemming from the deals but sued the U.S. government last month in federal court in New York, seeking a refund, according to filings in the case.

    Banks that worked with AIG on tax deals include Crédit Agricole SA of France, Bank of Ireland and Bank of America Corp., according to AIG's lawsuit. The banks declined to comment.

    In general, AIG's tax deals permitted U.S. companies and foreign banks to effectively claim credit in their home country for a single tax payment, partly through the use of an offshore AIG subsidiary. In its lawsuit against the government, the insurer said it was told by the IRS that AIG hadn't shown that the transactions "had sufficient economic substance and business purpose" to justify tax benefits. The IRS declined to comment.

    The tax-structuring operation started by AIG in the 1990s was even bigger than AIG's credit-default-swaps business, according to a person familiar with the matter.

    An AIG spokesman declined to discuss the tax-cutting transactions in detail but asserted that the tax benefits were proper and justified. AIG wants to "ensure that it is not required to pay more than its fair share of taxes," a company spokeswoman said.

    How do you figure this? How much have the previous Gov plans done to help the CRE market? The actual physical RE will be the hardest thing to move due to oversupply, weakened demand due to a downturn in the macro cycle, and illiquidity due to transaction times and friction. You can fake and manipulate values in financial assets for some time, real estate is a totally different animal. I will post some recent NY real estate happenings soon.

    I have put my team onto analyzing the geithner plan as well as the FDIC plan (which is getting a lot less press) and will have some objective info to report soon. As for this particular REIT, think long and hard about whether any news you have hear over the last 24 hours will really do anything to positively effect their perdicament.

  • Comment Link yhong71 Tuesday, 24 March 2009 01:46 posted by yhong71

    sorry, should be private capital 7% above.

  • Comment Link yhong71 Tuesday, 24 March 2009 01:02 posted by yhong71

    hi reggie, regarding this gietner plan... since the private capital consitute 3% and the us govt fund the other 97% through non recourse loan, the banks can do the following:
    1. Provide the hedge fund/asset manager the 3% "capital";
    2. This HF/AM that received the 3%, will then over bid for the toxic asset of that bank.

    In this way, bank benefit immensly, and the tax payer is left holding the bill.
    need your comment on the above.

  • Comment Link NDbadger Monday, 23 March 2009 22:17 posted by NDbadger

    So what do you think Reg, does the new plan make this name a less attractive short?

  • Comment Link shaunsnoll Monday, 23 March 2009 19:30 posted by shaunsnoll

    Moody's issued its March REAL Commercial Property Price Indices ("CPPI") last week. The All Property Type Aggregate CPPI was down 5.5% in January, 19.1% below the level seen a year ago and 21% below the peak measured in October 2007. Moody's report states that, "Transaction volume does not appear to have hit bottom yet." The transaction volume has fallen to levels not seen since October 2003, 80% below the level measured one year earlier. CoStar's COMPs transaction data shows Class A (top quality) capitalization rates from: office 6.1% to 7.9%, warehouse 7.1% to 8.6%, and apartments 5.9% to 6.8%. Citigroup Global Markets Inc. research issued its CMBS Real Estate Update. Given the March 3rd national unemployment rate rise from 7.6% to 8.1%, the CITI report ran some stress analysis based on different levels of unemployment. The results indicated that office and hospitality would be most impacted. More importantly, the report indicates that CMBS is so oversold, that values imply a very high 19% unemployment rate. Therefore, this current mismatch between value and cash flow provides a dramatic buffer for potentially more severe economic conditions. As of December 2008, the below table shows national average historical rent and value changes over the previous five years from the CITI report. The numbers represent all quality levels of property and percentage change will vary based on individual markets.

    Potential good news for borrowers struggling with the "credit crunch" is an announcement by Real Estate Alert that identified 73 active or planned debt funds, up from 54 a year ago. These funds are seeking to raise $48.4 billion of total equity, up from $28.8 billion. As announced in CMA, the "pace of investments has been slow." The debt funds have only invested $4.4 billion of the $23.8 billion currently raised for investment. By comparison, $20 billion of CMBS matures in 2009, which is fractional to the $200+ billion of CMBS financed in each 2006 and 2007. The funds will acquire distressed debt and/or originate new loans. CMA states that many of the fund operators are cautious, fearful that the real estate hasn't hit bottom, as well as the uncertainty about federally sponsored programs to spur loan sales and origination. Another fairly atypical commercial real estate debt source, credit unions have stepped into the commercial real estate market over the past 18 months to take advantage on traditional commercial real estate lender illiquidity, especially on smaller loan transactions.

  • Comment Link phirang Monday, 23 March 2009 19:24 posted by phirang

    after geithner's CRE inclusion.

    you need better contacts in DC, Reggie!

  • Comment Link NDbadger Monday, 23 March 2009 18:54 posted by NDbadger

    I can't believe that the government is going to hand hundreds of billions of taxpayer monies over to hedge funds and isn't going to put limits on executive compensation. They must be crazy.

  • Comment Link tradingbr Monday, 23 March 2009 15:00 posted by tradingbr

    I know at least two companies in chap 11 right that are very solvent yet their debt trades a levels implying little recovery. So it seems that is a better idea to short the debt given that if you are wrong you have a limited loss. whereas in equity, the stock could go up 2-4x if you get one of these bankruptcies plays wrong

  • Comment Link tradingbr Monday, 23 March 2009 14:36 posted by tradingbr

    I'm looking at their 10-K right now and it seems that they cant meet their obligations without selling properties. Some of their credit facilities seem to have rules against this, but is it really resonable to expect them not to be able to fire sale a few properties at all?They might be able to work with their creditors and just fire sell a few pieces to keep the company going

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